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- [00:01]
David Green
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs, and everything in between. This is the show where we pull back the curtain and show it to you, too. So if you want to build wealth through real estate or you just love learning about it, you found your home. What's going on, everyone? Welcome to the David Green Show. I'm your host and this is Real Talk Real Estate. Today, I'm bringing in the big guns. My good buddy Andrew Cushman. You've seen him on the Bigger Pockets podcast, you've seen him on my social media. And if you're investing in real estate with he and I, you probably have seen us together on Zoom Calls. Andrew is my partner in the multifamily space. We buy apartments together. We often raise money and let other people get involved in those deals. And in today's episode, Andrew and I talk about the bloodbath going on in the multifamily space. If you're not a multifamily investor, I think you're going to really like today's show because we break down some of the concepts that you've heard other people talk about but maybe felt stupid about. When you were at a real estate meetup or a cocktail party and people held up their pinky with their shot glass and said, oh, yes, we've got a wonderful noi and the cap rates have compressed and I just can't understand why other people aren't making moves and taking action. Well, now you're going to understand exactly what some of those phrases mean, how multifamily is valued and the fundamentals that go on in it. So you could decide if that might be an investment that you want to get into or if you'd prefer to stick to residential, but at least know what's going on in that world. We're going to talk about the economy, the Fed raising interest rates, how that's affected multifamily real estate, and most importantly, what to do if you're in a syndication or you own some of these assets, you're losing money and the operators are asking you to put even more money in. That's called a capital call. We're going to talk about that today and give you some advice for what to do if you're in that situation and how to avoid being in that situation in the future, if you like. Today's episode. Please consider leaving me a five star review wherever you listen to podcasts because frankly, it's monumentally huge when it comes to getting the show out there for more people to hear. All right, let's get to Andrew. Andrew Kushman, high C, the walking calculator, the computer that wore tennis shoes, the hybrid athletic freak with the mind of a cyborg. Welcome to Real Talk Real estate.
- [02:20]
Andrew Cushman
Well, good to be here, David. Although one correction. I'm the computer that wears flip flops or barefoot.
- [02:26]
David Green
I would totally expect someone like you to correct me and make that technically sound. Thank you, technical Timothy, for getting that right.
- [02:33]
Andrew Cushman
I don't want to disappoint you.
- [02:35]
David Green
The computer, the war. Flip Flops is here today on Real Talk Real Estate to talk about the multifamily bloodbath that's going on in the industry. We typically talk about residential real estate because that's what most people get into. And you sort of hear like rumors of what's going on in commercial, like Game of Thrones, like the White Walkers are out there, winter is coming. But you don't actually know what's going on unless you're one of the few people that are in that space. So I got you in here today. For those that don't know, Andrew is my partner in multifamily real estate. So we buy apartment complexes together. We occasionally come across a deal that we open up for other investors. So at the end of the show, I'll give you a link where if you're interested in investing with Andrew and I, you can go and you can sign up to do that. But today we're going to be talking about what the hell is happening in the industry. You ready to do this?
- [03:20]
Andrew Cushman
Let's go.
- [03:21]
David Green
Andrew, before we get started, tell us a little bit about your career and your credibility as a multifamily investor.
- [03:26]
Andrew Cushman
Well, kind of like beauty, credibility is in the eye of the beholder. But been doing you used to be a chemical engineer and then quit that to do house flipping in SoCal for a few years. That was just another brutal job. So my wife and I transitioned to apartments full time in 2011. And I've been doing done about almost 3,000 units worth of acquisitions. And that's as us finding the deal, us running the deal, us disposing the deal. And that's not counting something that we just invested in passively or something like that. So, yeah, we've done a little under 3,000 units in the last decade and a half, all in the southeast US and it's been a really good business and despite all the turmoil, the current portfolio is actually in great shape. So I feel like we've been fortunate to have had some good mentors and made a few good decisions.
- [04:19]
David Green
A few good decisions. I'd say that's an understatement. You're a very, very modest and humble man. Andrew is a badass multifamily investor. And that has never been more apparent than now when everybody else seems to be losing their shorts. And Andrew stuff is still doing pretty, pretty good. So let's start off by just explaining what are syndications in the first place and how are they structured?
- [04:42]
Andrew Cushman
So a syndication, it's kind of like if you wanted to go cruise the Caribbean, you're not going to go spend $2 billion and buy the Princess of the Sea and then go float around for two weeks and be done. Rather, what you're going to do is you're going to find a operator who specializes in cruises, owns one of those ships, knows how to run it, and then you're essentially going to, with thousand other passengers or however many people fit on those things, pool your money. And by everybody pooling their money, you get to cruise around the Caribbean and enjoy the benefits of the boat, enjoy the benefits of the trip. And then if the operator, the owner of the cruise ship does well, they get the benefits of hopefully making a profit on that. And so that's kind of what syndication is. It's saying, look, there's a 200 unit apartment building, the thing costs $25 million. Very few people can buy that on their own. So what you do is you say, all right, I want to invest in this. So I'm going to find somebody who their specialty, the thing they are best at is buying and operating these huge properties. And then I'm going to take a little bit of my capital, invest that with them along with, I don't know, a hundred other people, and pool that capital. And then it's the operator's job to acquire the property, to operate it well, which is where all the real money is made, and then eventually dispose of it and then send the ongoing and then final profits to the investors. So again, if done right, everybody benefits from something that otherwise none of the parties would be able to do on their own.
- [06:20]
David Green
It sounds similar to how stocks are structured. You've got a company that has a board of directors and executives in charge and they are an expert in whatever their field is and they want to raise money from other people that don't know anything about that business. But that they believe in the company and they believe in the leadership. So when you buy a stock, you're giving your money to that company and you are participating in the profits that they get. Or I suppose you'd be participating in the losses that they take if the value of the stock goes down. Now, syndications are different in the sense that your ownership isn't really valued like a stock is, but overall isn't a similar structure.
- [06:55]
Andrew Cushman
I'd say it's more analogous than most people think. Because when you're investing in a syndication, you're not going on title. There's not 100 people on title to that apartment complex. There's an LLC that goes on title, and then every investor is buying shares of that LLC, just like you buy shares of a stock. The main difference is multifamily or even almost any other kind of syndication is typically a private offering. So, you know, and that's not registered with the SEC or anything like that, or very limited registration. So it is. It's quite analogous in that you're buying shares. And just like with a stock, as a limited partner or equity investor, if you invest $10,000 in Google and Google gets sued and goes bankrupt, the worst that can happen to you is you lose your $10,000. You're not liable for Google's antitrust activities or anything like that. Same thing in a syndication. That's why it's called limited partner is. Generally speaking, the worst thing that can happen is you lose 100% of what you invested if the whole thing goes down the toilet, but you're not exposed to any other liability like the, you know, the lender's not going to come after you for their losses or anything like that.
- [08:08]
David Green
So for those that want to invest in multifamily, in apartment complexes, in some kind of a commercial project, this offers them a chance to do it without being on title, without having to qualify for a loan and without the expertise. But they're gambling on the fact, or I should say they're betting on the fact that the operator is making good decisions with their money. Right?
- [08:25]
Andrew Cushman
Yeah. And a lot of people get worried about, well, this deal says this or this, the returns are going to be this and this other deal says the returns are going to be something else. And, well, I like this property. Looks nice. Whatever. Then by far the number one thing you are betting on is that operator. A lousy operator can take a fantastic deal and run it into the ground. A great operator can take a challenge deal and turn it into a great one by far. Yeah, the deal matters. Yes, the returns matter. But what matters more than the projected returns is the actual likelihood that you're going to get them. And that is highly dependent on the operator you choose.
- [09:07]
David Green
Yeah, now that's a great point because for the last 10 years or so it seemed like most people were getting the returns that were promised. And so everyone was competing for the money that was out there. So they started promising higher and higher returns as they're trying to get money from investors. And there's really no penalty for saying you're going to do something and then not doing it, other than the fact that the person might not invest with you the next time. But when everybody is promising returns and they're not able to provide them, sort of all the same position. So why don't you talk a little bit about a history of the monetary policy that we've seen the last decade or so and how that has affected the multifamily market.
- [09:44]
Andrew Cushman
Yeah, well, so the Federal Reserve was created in 1913, but no, that goes back I guess a little further. So what's happened the last 10 years is I'd say from 2017 to maybe 2022, it was kind of like spring break in Fort Lauderdale. And now we're in the hangover period. And a big reason for that is monetary policy. Over the last decade, from effectively after the great financial crisis all the way up to, I don't know, something like 2017, the federal funds rate was near zero. And that's what most bridge loans are roughly based off of. And then 5 and 10 year US treasury yields were low and declining over that period. And that's what almost all of the rest of loans are based off. So you had an extended period of low and or declining interest rates. When Covid hit, they dropped to just the federal funds rate basically dropped to zero. And so what we had was a extended period of economic growth, which is when rates should be higher. But instead, because of globalization and a host of other factors, rates were coming down. And then once we got post Covid and we effectively had zero rates or free money, that was actually, it was a party at the time, but really it was the death knell for real estate and commercial real estate in particular, because with free money everyone was just running out and paying anything they the seller, seller wanted for assets and just assuming, well, it'll be, it'll be worth more next year or I can sell it to someone, you know, sell it to the greater fool. And then once the Fed rapidly increased rates from near 0 to about 5.3. All of a sudden the music stopped. And not. It wasn't like one chair got removed, like half the chairs got removed. And so now you've got all these properties that people overpaid for, over leveraged, they have negative cash flow. And the unique thing about commercial real estate that's different from residential is residential like my mortgage. I locked it for 30 years. I'm sitting here going, dang, my health insurance premiums are more than my mortgage now, right? In commercial real estate, typically you have three years, five years, seven, maybe 10. Once in a great while you can structure something longer. So what happened is all the people who are getting drunk at the party in 2021 and 2022, their loans are coming due this year and next year and oops, they can't refinance because values have come down 20 to 30%. Interest rates are far higher than they were when they underwrote everything. And so they can't refinance, they can't sell, and have a bit of a problem.
- [12:36]
David Green
Wanted to take a quick break from today's show to tell you about the the One Brokerage. The One Brokerage is a mortgage company that originates loans for real estate investors all across the country. If you're looking to finance real estate, this is the place to go. We can do conventional loans with great rates, amazing service, super fast turn times. We've got skilled loan officers and access to tons of products. FHA loans, VA loans, conventional loans with 3% down, investment property loans, primary residence loans, secondary vacation home loans, DSCR loans, bridge loans, commercial loans, and more. If you want to get connected with the loan officer from the one brokerage, email intakehewnebrokerage.com and if you'd like me to connect you with someone personally, I'm happy to help. Look me up on Instagram. I'm avidgreen24. Let me know you'd like to talk to someone at the One Brokerage and I'll make the connection myself. All right, let's get back to the convo with Andrew and I. Yeah, so let's talk about that a little bit. Because a lot of residential investors bought a property, rates went up. They don't care. Their rates stayed the same. I imagine people would be assuming commercial real estate's similar if you bought the property when rates are low. Well, how did you overpay if it was cash flowing? And why is it not cash flowing a couple years later?
- [13:46]
Andrew Cushman
Two reasons. One, many deals or many buyers overpaid because the price of commercial real estate is everyone Talks about NOI and cap rate and all these technical terms I like to throw around to sound smart, and those are important. But a huge piece of it, even though it kind of shouldn't be, is the cost of debt. And the cheaper the debt, the more people are willing to pay, because let's just say a real apartment complex produces $100,000 in net income a month. Well, if the cost of Your debt is 50,000 and under 1 scenario, and then in another scenario, the cost of your debt is 20,000. Well, if the cost in the scenario where the cost of your debt's 20,000 or your cost of your debt's lower, you're willing to pay more for that property because the cost of the debt is lower. And so that's what happened, especially from end of 2020, 21 and 22 is the debt was so cheap and people were structuring it so that you had artificially low interest rates that they were willing to overpay because they could say, well, I can still get some cash flow. And so, okay, it kind of worked for a couple of years. But then what happened is most of those loans were what we call floating rate bridge loans, meaning every month the lender looks at now sofr, which is, you know, which is basically considered pretty close to the federal funds rate. So it's, you know, it's whatever the, whatever the Federal Reserve says the overnight rate is, that's SOFR is generally pretty close to that. And so then the lenders add a spread to that, maybe 3% or 4%. So when SOFR was at zero and the lender's adding 300 basis points to it, your interest rate's 3. Awesome. Well, guess what happens when now SOFR is 5. All of a sudden that interest rate is 8%. And a property that cash flowed fantastic with a loan at 3% is now upside negative cash flow with a loan at 8%. And by the way, that loan comes due in a year. And oh, by the way, when you bought it, you took 80% leverage, meaning 80% of the value of the acquisition you got as loan. And oh, the property is now worth 25% less than it used to be. So the value, the balance of the loan is higher than the value what the property is worth. And in real estate you can often say, well, hey, I'll just wait until the price goes up. You can do that with a house, you can't do that with an apartment complex where you only have a three year loan and it comes due.
- [16:31]
David Green
That right there is the point. I Wanted everyone to notice because I think when you're not used to loans with balloon payments, when rates go up, you go, oh, bummer, I can't buy more real estate. You don't think about the fact the real estate you already own is going to have to be refinanced. That's why we often use this phrase, musical chairs. Because in musical chairs you're fine when the music's playing. At a certain point the music stops and you have to find a seat. That's kind of like your loan coming due in this analogy. So you buy an apartment complex, you get a three year period of time before the loan has to be paid and due. That's called a balloon payment. You typically sell the property to someone else, or more commonly, you refinance it with the new loan. Maybe you get five years, maybe you get seven. Hey, if you were really smart, you could have got 10. But most people were somewhere in that 3 to 5 range. Well, if you bought it at a 3% interest rate and it cash flowed really good, but then the note comes due and rates are at 7 and a half or 8%, your debt service is doubling or coming close to tripling, which means your cash flow is eroding. And that's what you're describing. This is catching a lot of operators and investors in a really bad position.
- [17:32]
Andrew Cushman
Yeah, and that's not just giant properties. I mean, that could, that could be a 5 unit that someone bought or a 10 unit. It applies rise all the way down to any, basically anything greater than 4 units. This is the case. So it's not just, you know, the big operators like, oh, I don't have to worry about it if I'm not huge. It's, it's anyone, five units enough.
- [17:51]
David Green
There we go. It's commercial financing. So you also mentioned a couple of phrases there, NOI and cap rate. Just so the people who aren't used to this can follow along with us. NOI stands for net operating income. And the cap rate is basically a metric that we use to describe the amount of demand in a specific area for an asset class that functions as an income stream. Now, when we are calculating the net operating income of a commercial property, it's kind of like when you're calculating the ROI on a residential property, but when we're doing residential analysis, we include your debt payment in your expenses. So we would say, what's your mortgage, what's your tax, what's your insurance, and what's your maintenance, your vacancy? Well, with commercial properties, we don't include the debt payment in the NOI calculation and that's because the interest rates move around all the time, so it's not going to be the same. We try to get as many fixed variables as we possibly can when we're calculating it so there is no interest rate involved in the noi. However, we basically let the interest rate affect the cap rate. So generally speaking, when interest rates go down, demand goes up and then with that the cap rate is going to go down and when interest rates go up, the opposite happens. Is that a way that you would look at it Andrew, or you have a different way of understanding it?
- [19:09]
Andrew Cushman
Yeah, I mean that's, I mean NOI is exactly what it stands for. It's net operating income and the debt. So the debt is not part of operating the property.
- [19:19]
David Green
Right.
- [19:20]
Andrew Cushman
In the commercial, as single family real estate investors, we tend to kind of mentally package up the property and the debt as one thing because that debt really could be attached to it for 30 years in many cases in commercial world they're really divorced and so separated. We, you look at the property and then the debt is a completely separate thing partly because some, if someone's going to come buy your property, they're going to do their own thing with debt. They don't care what your debt is. They're just going to look at the operations of the property. So yeah, you're, you're right, it's net operating income, how much income is generated by, you know, me running and operating the property. Then after that, then you deduct the cost of the debt and then that gives you in capex capital expenditures and a few other things and then that gives you the free cash flow which interestingly enough, you can have a property that has positive net operating income but actually bleeds money because there's capex expenses and debt that's being taken out after that, but it might often not shown on the P and L. And then in terms of cap rate, you're the first one that I heard say this years ago. But you know, it stands for capitalization rate. And you know, basically the idea being how fast you get your capital back. If you buy a property and it has nothing to do with the debt. If you buy a property for a million dollars and that property produces $50,000 of net operating income a year that you can take, you know, 50 divided by a million, that's a 5% cap rate. And you know, that's how you calculate it. But what it really means, and this is the part that David, that you said years ago That I really liked is all cap rates really are, is an indication of market demand for a type of income stream. And I'll give you a really good example. If you're going to buy a brand new class A apartment building in a great area of Atlanta, cap rate might be 5% for that even today, because there's a lot of demand for that and people see it as a safe investment and a relatively low risk way to get a 5% call yield. If you were to go to the other side of Atlanta and buy a big 1968 property in a rough part of town, cap rate on that, if you can even find a buyer, is going to be 8 or 9%. And you're like, wait a second, it's just an apartment complex. Well, the reason it's higher is because the income stream off that asset is much riskier and takes a lot more effort to get. Therefore the market values it less. So the higher the cap rate, typically that usually means the higher the market is demanding the cash flow to be make it worth your while, to make it worth your while. And it's basically it's a measure of risk and demand for an income type, which is why when things get difficult, cap rates go up because there's more market perceives more risks in that income stream.
- [22:27]
David Green
And a lot of people understand cap rates almost the opposite of what you said. They say, well, a high cap rate is good, a low cap rate is bad. Because they're looking at cap rate as if it's only the return on their investment, Though it does refer to the return on your investment in a sense, if there was no debt, a lower cap rate means more people want it. So there's competition to buy it, which pushes the price up, which pushes the return down. When cap rates get high, what that's telling the market is nobody really wants this. So in order to convince you to buy it, I got to make the cap rate higher, which means I have to sell it for less money. And when interest rates were low, everybody wanted to go buy apartment complexes. Now when you combine that with the fact that not only were rates low, but money was being printed like candy and Halloween. And so everybody had money and it needed to find somewhere to go. So it's all flooding into apartment complexes. That creates competition. That's pushes cap rates down. Tenants are getting raises at work. The economy is booming because of all this money that's been put into it. That means that rents are going up. That makes it even more desirable. That pushes cap rates down. You had every single Thing that I could possibly imagine working in favor of apartment complex and multifamily and commercial operators in general, and that was keeping cap rates very, very low, meaning returns were very low. However, a lot of people were still doing okay because rents went up more than what they thought they would, or rates went down even more after they bought it. Now, as you mentioned, the music stopped at a certain point when the Fed raised interest rates and it changed everything. How did that raising of interest rates affect the demand for these things and the cap rates? And what is the state of the market that we're in today?
- [24:08]
Andrew Cushman
It basically, the transaction market has ground to a halt. It's probably, you know, more frozen than my grandmother's hip. Because what happened is the. When the Federal Reserve very rapidly rose, you know, increased interest rates, suddenly buyers that were underwriting a property with a 2 1/2% interest rate and saying, okay, cool, I can pay this now their interest rate's 8% and I can't pay anywhere near that. And so for a while we were putting in offers. On average we were 25 to 30% below what the sellers were asking. Now, since then, the Fed has not changed rates or lowered them at all. However, the yield on the 5 and 10 year US treasuries has come down from a high of about 5 down to about 4 right now in the 10 year. And again, many mortgages in the commercial world are based on that. And so that has closed the gap a little bit. But we are still, in terms of the number of units transacted and the amount of dollars transacted in multifamily, we are just under the low set in 2014. So it has not been this slow in over a decade in terms of multifamily transactions. And on, you know, to bring it down a little bit, our team, we have analyzed over 700 deals and not successfully been able to buy one. Our last acquisition was in early 2023. And it's not that we are scared to buy. Actually, I think it's a great time to purchase and even better time is coming. It's just sellers are still looking in the rearview mirror at 2021 and early 22 and too saying, I want those prices. And buyers are like, yeah, well, if you can somehow get me that debt, then it might happen. And then also there's some economic concerns like, hey, rent growth has flattened out some markets, it's down, unemployment's going up. Are we getting into a recession or not? So there's a lot of factors that are really just the Markets has ground to a halt. I think that's going to very much change by 2025. A lot of these properties that we talked about earlier with too much leverage and too high of interest payments are going to get forced to come to market either by the seller or by the lender taking it. And that's going to provide some opportunity. I do know, I firmly believe price declines are over for multifamily, at least in class B and A, which is the kind of your middle class to upper class properties. And anything that you buy now and that you still own in 2027, 8, 9 is going to be worth a heck of a lot more at that point.
- [26:54]
David Green
Why do you believe price declines are over?
- [26:56]
Andrew Cushman
Two reasons. Number one, despite the headlines, operations in multifamily are actually still quite good. 75 to 80% of our portfolio last quarter set all time records for collections and not net operating income. Now the difference is we probably had to work twice as hard as we used to to get that, but we're having to do more marketing, more follow ups. I mean it's harder but it's still working. So if the net operating income is going up, then really and everything else stays the same, the value of your property actually goes up. Well, wait a second. So why have prices come down again? It gets back to the interest rates. The cost of the debt has gone up so much that buyers just can't afford to pay what prices were at the end of 2021 when the cost of debt was artificially low. And so the real price is down again, 20 to 30%. Also the class C stuff, the stuff that's older in rougher, lower income neighborhoods, those are the people who've really been affected by inflation and are seriously struggling. And many of that demographic could barely make ends meet to begin with. And then the cost of groceries doubles and triples. So there's a lot of delinquency and trouble there. So there may be some room for price declines in that segment because there's very little demand for those assets. So with that context, the reasons I think price decline in class B and A, which again is kind of like your middle to then upper class apartment complexes, why I think price declines are over is because, number one, the number one reason for prices coming down was not operations, it was interest rates. Because interest rates went up, prices came down, they move inversely. Interest rates have not only stopped going up, they've come back down some. And so with net operating income staying the same or increasing, you have to have interest rates stay high. Or go higher in order to drive prices down further. So I don't think I'm not going to predict where interest rates are going to be, but they've already come again. The 10 year, which is probably the most important one for multifamily, has already come down from five to four and that's taken a lot of pressure off. So it's hard to see pricing coming down more unless the 10 year treasury goes back to 5 or higher. The second reason is more anecdotal, but to me this is actually one of the most important things. Almost every property that we have looked at that has been marketed or that saw a got exposed to a significant buyer pool that was a class B or class A, you know, stabilized deal or basically think of it kind of a clean property. Like if you're listening to this podcast, you would consider living there, right? Any property like that has had 20 or 30 or sometimes even more offers from buyers, demand is off the charts for those assets because when nobody's selling, that means nobody's buying. And so yeah, there's gonna be some pent up deals from sellers who are eventually gonna have to sell. There's also a ton of pent up demand. You know, I was hoping to acquire four to six properties this year. Right now I'm at zero. So guess what I'm anxious to do buy some of these deals. And so the demand is, you know, any, any wave of deals that comes to market is going to easily be absorbed by the demand out there for them. So, you know, could prices fluctuate a couple percent? Absolutely. Do I think they're going to go down much more? No. And I would add another further caveat. Even if they did, it isn't going to matter. If you buy something that's worth 10 million today and it drops 10% next year, it's worth 9 million, but then in 2029 it's worth 15. Does that dip in the middle matter? It doesn't. The value only matters when you're buying, refinancing or selling. So if you have a long term plan and you have sufficient cash flow to ride out any bumps in the middle, then you're going to succeed.
- [31:14]
David Green
The fact that you just mentioned that the best assets that people would want the most in the best areas are getting that many offers tells me there's still a lot of capital out there that needs to find a home. It's like a pressure. It has to go somewhere and it doesn't want to go into the C or D class neighborhoods that maybe it was willing to risk when you had every single wind at your back. But now that you're in kind of like, well, we're not on a downhill run where it's really easy, but we're not really uphill either. We're sort of just flat. I'm just only going to where I feel safe. It makes it hard for me to see that you're going to see prices cut in half like a lot of people are waiting for. I do think that would have happened if the Fed wouldn't have printed so much money. Well, I keep saying printed, but they just basically increased the monetary supply. But that's what makes me think you're not going to get these amazing deals that everyone's expecting because there's so much private equity, there's so many hedge funds, there's so many really big players out there that can raise money very easily competing with these assets, that prices can't go down because somebody's going to buy it if it gets to a certain point. And that brings us back to the structure of a syndication. That's one of the things that makes raising money very easy, is if I don't know much about apartment complexes, but I can hire a lawyer to draft up legal documents and make a syndication. I can raise money from someone and go buy some of these assets. Now, as long as the market cooperates with me and I make a lot of stupid decisions, I look okay. But when the market stops cooperating with me, I get exposed as being an inexperienced operator. Maybe another way to look at it is in smooth seas, everybody looks like a good sailor. But when the storm hits, that's where you see who's experienced. Now, we're not going to say any names here today, but this is real talk real estate. And we pull back the curtain and we get real. I've got a lot of examples, but I bet, Andrew, you have even more. Let's talk a little bit about what you see happening from the people, you know that invested in syndications, not yours and other people's syndications. You put your money into an apartment complex, and then that apartment complex is not operated well and it starts to go bad. What happens then?
- [33:15]
Andrew Cushman
So that's what's unfortunately happening in a lot of lot of syndications nowadays, especially ones that were put together in 2021 and 2022, where, you know, again, it was either an inexperienced or irresponsible operator. And, you know, it's. Man, it used to drive me crazy. Everybody and their mother would get on podcasts or blogs or whatever and talk about their conservative underwriting. And just once I was just like, man, would someone please get up there and just be honest and be like, yeah, we're actually really aggressive. We're planning on 8% rent growth for the next five years. No way in heck that's going to happen. But that's how we're underwriting. So that's what happened. And so what's happening now is a lot of those deals are going bad and there's a bit of a correlation. Again, we're not going to name names, but, you know. Well, actually, you know, I can name names on the good side, I guess. Right. You know, guys that have been around for a really long time, especially the ones that are like, you know, 20 years or 15 years or even 30, most cases they're doing just fine because they knew better.
- [34:31]
David Green
Yeah. They didn't go into the sea with a ship that wasn't prepared for the storms, even though the sun was out and it looked fine. They were prepared for the worst, like you said.
- [34:40]
Andrew Cushman
Right. And then, even then, I mean, not every deal from 2021 and 22 is bad. And I'll, I'll give you an example. We bought at the time was our biggest deal ever in 2021 at kind of at almost the height of the, you know, about a year before things peaked, it was off market. So we actually got a great deal. But, you know, we looked at interest rates, and I did not predict the Fed was going to raise rates. 500 basis points. Like, there's just no way. I thought that maybe we're going to.
- [35:08]
David Green
Raise them that suddenly.
- [35:10]
Andrew Cushman
Yeah, I was thinking, well, maybe 100 or 200 basis points over the next couple of years or something like that. So we did not predict this. But what we did do, you said, well, wait a second, interest rates are at all time lows. So strictly from. Without trying to predict the future, statistics says that if I go five years out, the odds of rates being higher will be greater than the odds of rates being lower. Like, it's that simple. Therefore, we should lock this in. So we've got, we bought that asset with a. We have 3.79% for 12 years. So, you know, some of the neighboring properties are now paying 6, 7, 8%. So not every deal that was, you know, done at that time frame is bad, but many of them are because of the irresponsible underwriting. And so what's happening now is a lot of these deals are in trouble. Generally speaking, the newer the syndicator, the faster they grew and the flashier their social media marketing, the higher percentage of the deals that are generally in trouble. There seems to be a very direct correlation to that. I could mention, you know, five names that probably every listener would know where I know that they have deals where there is zero equity left. Some of them are finding creative ways to kick the can down the road so that no one realizes that for a few more years. A few of them have just gone to foreclosure and some of them are doing capital calls, and a couple of the more responsible ones are just are putting in their own money to rescue the deals. But that's what we've gotten to today.
- [36:58]
David Green
That's what I want to get into with you now. What is a capital call? And then what do you do if the syndication you're in is calling for your capital?
- [37:08]
Andrew Cushman
A capital call is a section of the operating agreement in PPM that until recently, nobody paid any attention to. But if it was a legitimate set of documents, it was there the whole time. And basically what it says is if the deal gets in trouble and the sponsor needs more money for it, they can reach out to the investors and say, all right, you invested 100. Everyone who, or, you know, everyone who invested whatever your investment was, we need an additional 25%. So if you invested 100, we need another 25 from you. Doesn't matter that your stocks are down or you had to, you know, buy a condo for grandma or any of that. We, you need this money. Well, what if as an lp, you don't have it or you're not willing to put it in? Well, then there's penalties. Depending on how the documents were written, at minimum, your position is going to get diluted. And then in addition to that, you may forfeit certain amounts of distributions, you may forfeit other, other rights. And so it's actually going to be quite punitive if you don't participate. And so then the next question is, well, all right, should I participate at all, regardless of what the penalties are? Because if the threat is, hey, you might not get your distribution, but the reality is you're going to lose all your equity anyway, that's not much of a threat. And so the question that's really coming up now because unfortunately, a lot of investors will email me capital calls and deals and like, hey, should I participate in this? And not. I mean, the bottom line is, you know, as I say, two things. Number one, do you still believe in that sponsor and their ability to operate the deal? And then, number two, is the deal in a position where you're not throwing good money after bat. I'll give an example. If you're in a deal where the value is 10 million and the loan is 10 million and the monthly mortgage payments are twice the net operating income, so it's bleeding money every month and the sponsor is like, hey, we need more money to build up to create reserves so we can pay the mortgage for the next 12 months. If it was me, I'd be pretty hesitant to participate in that because it would seem like the odds of me ever getting any of my equity back are really, really low. On the flip side, let's say you've got a deal where, you know it's currently worth 10 million and the loan balance is 7 million and it's a good property in a growing area. The sponsor has operated it right, but the debt is about to mature and needs to be refinanced. And the lenders are saying, well, hey, we're, number one, we're being more conservative with how much we, you know, how much of our loan balances are. And then two, interest rates are higher. So we're only going to give you a 65% loan. So that means the new loan is 6.5 million, which isn't enough to pay off the existing one of 7 million. If otherwise the property is doing well, and otherwise the sponsor is doing well, that is a capital call I would participate in because number one, there's still equity in the deal. Number two, again, I believe in that sponsor. Number three, there's a high likelihood that a few years from now I'm going to get my original equity back plus a profit. And number three, and this one's, sorry, I lost track how many fingers I had. I think I'm actually on number four or five. The final one, let's just go with that, is it solves the problem once and for all. You're not just hoping things get better in a year. Hope is not a business plan. If putting in capital fixes the problem, meaning that high interest rate floating rate loan is gone. Now the property has a fixed rate loan. We can operate this profitably for the next five years and then sell in a much more favorable environment. That's something I would probably participate in, but something where there's no equity left, the cash flow is negative I wouldn't participate in. And here's another huge red flag and this is really, really common today. You see a lot of operators going out and getting often third party preferred equity, which most people don't understand, really realize what that is. But it's equity that's preferred. And like, okay, Andrew, you can't use the same words to define the word, right? Well, it's exactly what it sounds like. Meaning that new equity takes preference or priority over the original equity. And so you've got a deal that doesn't have much value left anyways. The operator goes and gets a few million dollars of preferred equity from an outside party. Oh, and by the way, that's at 15 or 16% return is due to them. They throw it on there and say, oh cool, we solved it. You're not going to get foreclosed on. If I was an LP in that deal, I'm going to look at that and say I probably have about a 3% chance of ever getting my equity back because that preferred equity is going to suck every dollar of cash flow out of that property. It just took away several million dollars of equity. And really the best case scenario is probably if you sell for a profit five years from now, hopefully there's enough to pay off that new preferred equity and the original LP equity. And then that third party preferred equity, it comes with strings and hooks and all kinds of booby traps. I have seen situations where that third party preferred equity had it in their agreement, but that they didn't like how the operator was operating the property. So they actually, by contract, they were allowed to do this. They came in, took over the properties, bought the existing LPs out for about a penny on the dollar and said, this thing's ours now. So if I see third party preferred equity or rescue capital, that's a huge red flag. And if I was an lp, I probably wouldn't be putting it in unless it was money that the sponsor itself was pulling together and that the sponsor is participating in. That is a different situation. But once they're out getting third party rescue capital, if it was me, I'm out, because I'm probably already out. I just don't know it yet.
- [43:41]
David Green
All right, let's see if we can break down this enormous sandwich that you just presented us of multifamily knowledge, that was really good. When your investment is not doing well, meaning it's not generating enough income through rent to pay for the debt service, or it needs more repairs than were accounted for, something's going wrong. The operator will go to the limited partners and say, hey, your investment's at risk. We could lose the investment or we might have to sell and there's not enough equity to pay you back. So you might get some of your money back, but not all of it. You might get none of it, depending how bad it is. But if you put more money in this deal, we might be able to save this. And they ask you for what is called a capital call. That's calling for more capital. Hey, I need some more cash here. You have to make the decision as the limited partner. Do I want to put more money in a deal that could just be I'm losing even more? Or would the money I'm putting in essentially plug the leak and then we're going to be okay? We bail out the rest of the water from the ship and we go back to doing our right here? You're saying some of the things to look out for are if there is preferred capital that's being brought in here, which is like, hey, we don't think that our limited partners are going to want to participate. So we're going to go, in a sense, like, sell shares in this asset to new capital partners that get to come in on top of the LPs. Is that correct?
- [45:00]
Andrew Cushman
In front of the LPs, yeah.
- [45:02]
David Green
In front of.
- [45:03]
Andrew Cushman
Okay, yeah, that's.
- [45:06]
David Green
That's legal. And the operating agreements, that allows them to just push out the original people and come in and offer a higher rate of return to new partners if they need.
- [45:13]
Andrew Cushman
Depends on the operating agreement. Some of them, it's some of them. Some operating agreements will already have that in there. Others would actually require. So for me to do that based on our operating agreements, I would actually have to go get a vote of our investors and have a majority approve it. So other operating agreements may not have this. That's actually a really good question, is, you know, if you're an LP in an investment, you're like, wait a second, I'm not sure about what's going on here. You should have a copy of the operating agreement from when you originally invested. Go take it, and if not, request it, but go take a look and see what's actually allowed here and what's not. And is the operator following that? If they're following the operating agreement, good. If they're not, that's another red flag.
- [45:58]
David Green
All right, I'm going to ask you for some stories, Andrew, without saying names. Do you know anybody in any of the circles that we run in, circles you run in on your own that has invested in a syndication and has been told that they're going to be losing their money?
- [46:13]
Andrew Cushman
Yes, I know quite a few people who have been told that they're going to be losing their money. I know quite a few who have received an email with like three sentences that's like, hey, we need another 25% and if you don't do it within 30 days, we're going to lose the deal. You know, I've had investors tell me I'm in eight others and eight, eight other deals with other operators and six of them have done capital calls and the other two have stopped distributions. So unfortunately, yeah, there's a lot out there. There's been some pretty high profile foreclosures where the lender has already taken the properties back. There's going to be more of those. There's been a lot of kind of behind the scenes. And this is part of like everyone's like, oh, where are the deals? We were all, we were expecting the deals this year, me, myself included. Part of the reason that hasn't materialized is because the banks have been doing, you know, we call it extent, somewhat cynically called extend and pretend, but you know, modifying loans or letting people extend for another year or somehow one way or another, finding a way to give, give owners an extra six months or a year or so. And a lot of that has been going on and so deals that we're in quite a bit of trouble. It hasn't come to light yet. What's interesting, stat this year, 2024, I've seen several different sources say that of all the loans that are maturing this year in commercial real estate, 40% of them were extended from 2023. And most of those aren't going to get extended a second time. Banks have realized interest rates probably aren't coming down as much as everyone was hoping. And some of the special servicers that I know, and a special servicer is kind of the intermediary between the lender and the owner. The bank says, all right, this thing we're probably going to need to foreclose. So special servicer is going to take it over for us. They're going to manage it for us and then hopefully dispose of it. The special servicers I know and the people that are in that business have told me that their volume of phone calls they're getting are going up significantly. And they're being, you know, one of them told me that they're their, their lending partners told them to go ahead and staff up now. So again, I don't think that's going to be enough to overwhelm the demand for the assets, but it's definitely going to pick, pick, pick up the volume.
- [48:47]
David Green
So these are people that a lender calls if they're thinking, hey, we're Going to have to foreclose here once they take title. The bankers don't know what the hell to do with this thing. They don't know how to operate it. So this is like a pinch hitter that you throw in there to manage a property until you can get it stabilized and sold to a new investor.
- [49:02]
Andrew Cushman
Yeah, I mean, basically what's happening is the bank is saying, all right, well, the current owner is not operating it. Well, we might as well hire somebody that we at least know has our best interest in mind. And. And, yeah, you know, contrary to. It's often contrary to, you know, common belief, lenders do not want these properties back. They. They are not skilled at operating them. They don't want to be skilled at operating them. It's not their business. So, you know, they'll do it when they have to. But again, they typically bring in special servicers to handle that whole process for them.
- [49:36]
David Green
So I know a lot of people in syndications right now that are getting really bad news. A lot of them, in fact, I get a lot of these phone calls. I know people that are involved in hotels where they raise money to go build hotels. And the city officials slowed everything down a lot. Permitting issues became a problem. The inflation that we have absolutely devastated the construction estimates. They thought materials would cost a certain amount. They thought labor would cost a certain amount. And it ended up being a lot more than what they budgeted for. And you can blame it on the operator. It doesn't really matter whose fault it is. You're stuck. You put 100 grand into this thing, $200,000 into this thing, and the only way to save it is to put more money into it. But like you said, if you keep putting money into it, what if the permitting process never gets approved or another two years goes by and you don't want to put more money? And so for those that are in syndications, do you have any advice for them on if they should just chalk up some of their money as a loss, if they should try to stick with it and write it out as long as they can? And then once we've covered that, let's talk about how they should pick operators in the future to avoid being in these bad situations.
- [50:42]
Andrew Cushman
If you're an lp, really your position is you're doing both of those options at the same time. Cause if you put in 100 grand into a deal, again, one of the benefits of being an LP is your max liability is 100 or whatever you put in. So if I was in some challenge deals as an lp, My mindset would be, well, I'm going to. The money's already in. I can't get it back at this point. I'm going to ride this out for however long it takes and hope it works out, but mentally, I'm going to write it off and anything I do get back, I'm going to see that as a kind of an unexpected, pleasant surprise down the road. So that's kind of how I would approach any challenge deal at this point. And what was the second half of that question, David, again?
- [51:34]
David Green
Well, in the future, people are still going to have opportunities to invest and they're going to want passive income because everyone keeps getting told passive income is the way to go. And a syndication, one of your only options of legit passive income. I've given you a lot of money and you've done really well with it. It's been passive income. What do people do when they're faced with this decision of, I want to invest my money because I need to, because inflation's eroding it, but I don't want to lose it all. And I have trust issues now because all of these influencers that I saw on Instagram that said, give me your money and I'll make you a millionaire lost it. And by the way, those people skate away oftentimes with no recourse. They lose all your money. They didn't put any money in the deal. As amazing as this sound, they can sometimes make money on deals that go bankrupt because they collect acquisition fees when they collect all the money, and other little things like that. And then the asset goes into foreclosure and all the investors lose their money. But the general partner or the operator here, they can walk away with money. So what advice do you have for those that are stuck in this position where they have to invest somewhere but they don't want to lose their cash?
- [52:37]
Andrew Cushman
The number, there's a ton that goes into this. But the number one thing that I look for because I actually am invested in syndications outside of my own business, because I have some accounts that the IRS doesn't allow us to put into our own deals. So I have to go outside how I chose the people to invest with for those funds is number one, by far. I vetted that operator. I got a ton of references of not. I didn't reach out to that person and say, hey, can you send me some references? That's a good starting place. And if that's the only option you have, do that. But then when you talk to that reference, say, hey, who else should I talk to that knows this person? So, like, for example, David, if I'm, you know, if you and I just met at a meetup or I've been listening to your podcast for a while, I'm like, you know, I'm going to invest with David, and I say, hey, David, can you send me some references? And you send me four names. I'm going to call those four names, but then I'm going to ask each one of those four people, hey, who else do you know that I should talk to about David? That way I know I'm talking to somebody who wasn't handpicked by David because almost no one is dumb enough to email out bad references. Every once in a while it happens, and you just got to. You got to sit back in an amazement that really, like, you sent me this person. But if at least you know, you're getting a true, honest, or most likely getting a very true, honest opinion if you take that second level reference. So, but number one is vet the person. So, like, again, whenever I've placed funds, I asked around and said, hey, who do you invest with? Who have you had good experience with? And then, you know, certain names would keep coming up. Then I would ask people, hey, you know, what's your experience with this person? I would talk to that sponsor, find out about their business model, look at their track record. And not just, like, over the last five years, because the last 10 years made all of us look. Almost all of us look brilliant. All you had to do is buy something, maybe operate it halfway decent, and if you held on long enough, it was profitable. So I'm not just looking at a spreadsheet that says, hey, in the last eight years, we've sold a few deals that were 30% IRR. Well, great. Almost everybody did. Were you doing anything before that? Tell me about your most challenging deals. What happened? Why did they go bad? How did you handle that? What was the final outcome? That's actually one of my favorite questions is, what's the worst deal you've ever done? Why? What did you do about it? And what was the final resolution again? Number one, you're betting on a sponsor. I won't get too deep in the weeds. But you really want to find out what their underwriting is like. Because once you get down to the deal level, one of the most important things is what assumptions is the operator making? It's a big difference between them as sponsors saying, well, I'm assuming 3% rent growth versus I'm assuming 7% rent growth every year, which 7% is way above average, not particularly likely to happen. And so if you're looking to place money, you've gotten yourself comfortable with the sponsor, now you're looking at the deal. You want to ask, well, what? And this, unfortunately, for some reason. Well, actually not for some reason. I think we know the reasons. This stuff is typically not put in the marketing packages for the deals. So you're probably gonna have to ask for it, maybe even ask for the underwriting. But you just want to look at the assumptions and say, are these realistic when we underwrite? Or if I'm investing in somebody's deal, I want to see an assumption that, to me has an 80% likelihood of happening. So, you know, if I'm looking at rent growth assumptions in, I don't know, Atlanta, and someone's underwriting says, hey, three years from now, I think rent growth is going to be 3%. And then another deal says, operator says, I think three years from now, rent growth is going to be 9%. They could both be right, but which one's more likely to be right? Well, the one who said 3%, because that's closer to the historical norm in the historical average. So if I'm vetting a deal, I want to know what assumptions went into making those beautiful returns that are on the front page of the marketing package, and are those realistic? And this is part of the. Once you invest, it's passive, but that doesn't mean it's not active work upfront. You want to say, okay, this operator is assuming 3% rent growth. How likely is that? And just Google again, if this is an Atlanta deal in Atlanta, look at, okay, rent growth in Atlanta for the last five years, what has it been? Then Google projected rent growth, Atlanta, the next five years. And if the data you pull up says, okay, you know, it's supposed to be 4, you know, projections are 4% for the next whatever amount of years. And your operators projecting 3%, okay, they're underwriting responsively. But if you pull up data that says, well, it's projected to be 3 or 4% and they're underwriting 7, that's going to be a problem because that means there's very low odds you're actually going to hit the returns in the package. And then now you need to ask yourself, well, what else have they assumed that might not be likelihood? The most common one that I see today, getting back to our cap rate discussion, is sponsors. Assuming that the future cap rate that they sell at is lower than today's cap rate and Interestingly enough, the exit cap rate is the biggest lever a sponsor can pull to make a spreadsheet hit the return that they want to have the spreadsheet say they're going to get. And if a deal, you know, let's say you're buying a property today at a 5% cap rate and you assume, okay, you know what, five years from now, I don't know what's going to happen. I'll probably sell at a 5% cap rate. Reasonable assumption. No one really knows where they're going. A safer assumption would be say, well, you know, I'm going to sell at a 5 1/2% cap rate. I'm going to, I'm going to assume they go up further and if the deal works with even higher cap rate, then that's a pretty solid deal. But we're seeing a lot of is sponsors saying, all right, well I'm buying out of five today and you know what, I'm going to assume the market's better in five, I'm going to sell at a four and a half percent cap rate down the road, which makes a great sales price, which makes for a great internal rate of return, which makes for an even better average annual return, which isn't even a real metric, but everyone uses it now because it makes things look better and it looks like a great deal. So that's the other. If I was going to look into two things, it's the exit cap rate assumption is that aggressive and are things like rent growth too aggressive? And actually we could do a whole full day class on this. But those are the two of the biggest ones.
- [59:40]
David Green
Good stuff. All right, when you're looking to buy a deal yourself, what are you typically looking for?
- [59:48]
Andrew Cushman
That is a process that we've refined so many times over the years. And that I feel like is we really get that down to a science. We have a screening process where, you know, number one, we won't, you know, typically we're looking for something that's 1990 and newer because once you get older, and again, not that, and I'm not telling people, example, don't go buy older stuff because there is opportunity there, but it's harder to insure, it's more expensive to run. It's often lower income neighborhoods. So, you know, we're looking for stuff that's 1990 or newer. That's a bit of a business decision. More importantly, we are look, the two most important things are we are looking for submarkets that has above average population growth because the number one determining Factor of the success or the direction of rent of your property are people moving in or moving out. And if more people are come into the area than there are units, then demand and rents are going up. If people are leaving and demand is going down, your rents are going to go down over time. So, number one, we want an area that's got above average population growth. We want an area where the median incomes are strong and rising and our rents are affordable. What does affordable mean? People have different types of definitions, but a good rule of thumb is if a family can spend 25% or less of their income on rent or housing, that's affordable. So, okay, great. Andrew, how do you screen for that? Well, if you're, you know, if David, you come to me like, hey, I'm buying this apartment complex. Is it affordable? I'm gonna say, well, what's the rent? You're like, oh, well, I'm gonna do a little bit of renovations and my rent is gonna be $1,000 a month when I'm done. Cool. So $1,000 a month times 12. $12,000. $12,000 is 25% of what, $48,000. So if that apartment complex is in a neighborhood where the median income is 48, then that means the median person, the median family, can spend 25% of their income on your apartment complex. Therefore, that makes it very affordable. And you are going to have a very deep and wide renter pool and plenty of demand for your units. You want your units to be affordable to the people who are either already in the area or moving to the area. Like, if you only. And there's a ton of other stuff we screen for, you know, crime, flood zones, you know, all kinds of other stuff. But if you were only going to pick two, the two most important are population growth and the median income. Slash affordability.
- [62:26]
David Green
I love that rule of thumb that you gave. So if the average income is 48,000, they can afford 25% of their income on rent. So 25% of 48,000 is 12,000. That means they could spend about $1,000 a month on rent. So if you're looking in, the thing has to make 1200 bucks a month in order for it to make sense. You put yourself in a pretty bad spot here because not a big percentage of the population is going to be able to afford that. So they're not going to be able to apply to live in your apartment. They're going to be looking for something cheaper. Or you're going to have to take risky assumptions with your underwriting Right.
- [63:01]
Andrew Cushman
And everyone in California who's listening to this is laughing, going, yeah, right, 25%. So again, that's why it's a rule of thumb. You also have to compare it. What's, you know, factor in what's normal for your market. Right. In California, I think, like, it's something like 60 or 70% of people can't afford housing and they're spending more than half of their income on housing. So, you know, and which is part of why I don't buy anything in California. But, you know, in the Southeast, where we're investing, generally, if you're in that 25 to 30% range, you're safe and affordable. And again, it's not a hard cutoff, you know, if, let's say our rent is 33% of median income, but otherwise it's a great property and the area is growing and all that. Yeah, we would still do that. But it's just a good rule of thumb to kind of, you know, back of the napkin figure out, hey, is this affordable to a lot of people or not?
- [63:55]
David Green
Yep. I'm all about those rules. We don't make decisions on these, but we do make decisions on what we're going to put more time into based on those.
- [64:04]
Andrew Cushman
That's exactly it. That's why I called it a screening process. Like, if it doesn't meet these rules of thumb, I'm not even going to look at it. But if it does meet all these rules of thumb, oh, now I'm going to spend more time on this.
- [64:15]
David Green
And that's why we're sharing it. A lot of people will hear about a rule of thumb and they'll criticize the rule of thumb as if it was being told that you should make a decision on it, which is a straw man argument. And it's annoying. It's like I watched a video about me the other day where someone said, David Green doesn't like cash flow. He's an equity investor, not a cash flow investor. And that is not true. I have never said that. I've just said cash flow isn't going to make you rich. Cash flow is a defensive metric designed to maintain a property while the equity grows. By the way, this is a residential argument, not a commercial argument. Commercial properties are valued based on their cash flows, which means equity and cash flow are tied together. Residential properties work differently. But the whole argument that made them look smart and me look bad was based on something I never said. Right. And the same thing happens with this rule of thumb. On the other hand, we don't want you analyzing every single thing that crosses your path completely when you could have screened it out much earlier. Unless you're new and you need the repetitions. But once you're. It's like little kids need practice tying their shoes. But if you're 34 years old, you don't need to tie a shoe just for the practice of tying it. You got better things to do in the day. Any other rules of thumb like that when it comes to commercial properties, multifamily properties that you can share that people should look for?
- [65:26]
Andrew Cushman
Yeah. Although, hold on, I don't want to let that slip, but I think that's a sign that you've made it. When you're getting. When you're getting fake rebuttal videos on the Internet, I think that means you've made it. I have yet to get fake rebuttals. Yeah. So, you know, other rules of thumb. You know, I mentioned crime. We will not buy in anything but low crime neighborhoods, I can tell you that. But the challenges go basically, you know, I mean the reality is in many areas, especially urban areas, not so much in rural. But generally speaking, median income and headache factor are inversely related, meaning the lower the income gets, the higher the headache and the challenge in operating. And so if you buy a property in a high crime area, number one, it's just me tougher for you to manage it, you're going to get more of those phone calls. In my early days I had some properties like that and every time my caller ID showed a number from, you know, from our team at that property, I was just like, oh crap, what is it now? You know, we bought one property before we had these screening procedures, Right. Ask me how I got the screening procedures that we bought in a rough part of Fort Worth the weekend we took over, there was a convenience store next door. Another red flag by the way, where some, let's just say non sanctioned wholesalers were hawking their wares, got into a disagreement with some of their customers that turned into a fistfight which somehow ended up climbing over our fence into our property, which then resulted in two homicides with guns, four stabbings and a few other assaults charges the first weekend we owned it. Right.
- [67:21]
David Green
Great example of why we have cap rates. Because if you're only looking at the money, just a spreadsheet, hey, 8% over here is the same as 8% over there. And 8 cap is a cap. No, no, no. There is a difference with making 8% owning a property on the beach in Malibu versus what you were describing. It's a much harder lift to make that 8% and a much worse experience in these neighborhoods. Right?
- [67:44]
Andrew Cushman
Yeah. No, no amount of dollars from that property was worth the mental and emotional cost. Own it. So number one, it's going to be much more difficult for you to manage. Number two, then candidly, this is a big one. I think people completely miss this. It is really difficult to get good team members and good staff to manage it for you because a really good manager who has experience, knows what they're doing, cares about the people, cares about the property. They can go get a job at the brand new construction class A, you know, five miles up the street and by the way, get paid a lot more and not be scared coming into work, not have to deal with people, you know, I can't pay my rent because of this and this and crime and all that. So it's really hard to get good team members at those properties. And then a third one, and this has become a much bigger issue lately. It can actually be nearly impossible to get insurance for those properties. And then if you do get insurance, what the carriers do now is they exclude violent crime. So let's say there's an assault or shooting at your property and I've seen this happen to so many operators, unfortunately, then the victim or the victim's family sues you as the operator or the owner of the property because the shooting is your fault. Because one of your streetlights at the other end of the property was burned out and that created a dark, unsafe environment. Never mind that the guy who shot the person was the former drug dealer, slash, you know, divorced, whatever, that doesn't matter. But your streetlight being. And this, I know this sounds obnoxious, but I've seen that exact kind of thing happen where some an owner is getting sued because the shooting was their fault because of something like that. And the insurance carrier is like, nope, we excluded that. We're not defending you, we're not covering that because the insurance carrier is going, ah, we don't like this area and we know this is going to come up and we're not going to underwrite it and cover it. So it's really hard to get good insurance for those properties. So the temptation is. And again, I did just talk, I did this too as someone newer. Everyone goes and buys these properties because they're cheaper and they're easier to get. Well, why? Because no one really wants them for a good reason. Again, not that you can't make money in those assets. We did. I know lots of people I know I actually have a friend who specializes in that stuff, and he absolutely crushes it. But I know how much work and stress that he goes through. I'm like, I just don't want to do that anymore. So if you're an lp, that's another thing to look at too, is like, well, what kind of asset is this? If it's a 1968 property in a rough part of Dallas or Houston or Atlanta, there's higher risk there. Where if it's, you know, 2005 built, A minus, which means nice but not overly nice property and a good part of Houston or Dallas or Atlanta. Yeah, the projected returns might be less, but you're also getting a lot less risk, probably.
- [70:50]
David Green
Yeah, yeah. In fact, the highest returns are almost always associated with higher levels of risk. That's something you just need to accept in life. And the lower returns are often going to be associated with a more enjoyable experience, which equals less risk. And I think the wise investor understands that. And the fool tries to force a way to get the higher returns and the low risk or ignores the fact that the higher returns are going to come with more risk and frankly, more need for skill. If you want to go out there and you want to catch that crab and the crazy Alaskan waters, you better know how to navigate that boat when those huge waves start coming, because that's where the big money is.
- [71:27]
Andrew Cushman
Yep.
- [71:27]
David Green
All right, Andrew, thanks for your time today, man. I really appreciate it. If you guys, this is your first time hearing Andrew. He's one of my best friends, awesome guy, the person that I trust with my money. We buy apartment complexes together. And if you'd like to invest with Andrew and I, you could go to davidgreen24.com invest could also get the information out of the show notes here and you can get put in touch with Andrew and I and when we come across a deal that we like, we will let you know and you can partner in that. Andrew, where else can people follow you if they want to learn more about you?
- [71:58]
Andrew Cushman
You're never going to see me dancing on TikTok or doing anything fancy on Instagram, but I do post on LinkedIn. So please connect with me there. And if you comment and I reply, that is actually me replying. It's not a VA in the Philippines or AI or a chatbot or anything like that. So, yeah, Please connect on LinkedIn. I look forward to having some conversations. And then, yeah, if you want to talk further, there's some ways on our website to set up a phone call and all that. But LinkedIn is. LinkedIn's the best.
- [72:28]
David Green
Awesome, man. All right, so link up with Andrew over on LinkedIn.
- [72:32]
Andrew Cushman
I see what you're doing and if.
- [72:32]
David Green
You don't mind, please. That's what I'm here for. That's why I'm the host. And if you don't mind, please leave me a five star review. Wherever you listen to your podcast, those do us a huge, huge help getting the podcast in front of more people. I'm David Green. He is the computer that wore tennis shoes and together we are multifamily investors trying to help you build wealth through real estate. This has been Real Talk Real Estate and we will see you on the next show. Thanks for listening to Real Talk Real Estate. If you would like to be featured on the podcast, I love to have you visit davidgreen24.com Ask and submit your question there. Also, please do me a huge favor and share the show with someone that you love that you think would benefit from his message. And make sure you're subscribed to get notified for future episodes. If you want to reach out directly, you can also DM me on Instagram or social media and check out david green24.com.