TGCI 212: What goes behind the scenes in Multifamily Aquisitions

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Episode 212: What goes behind the scenes in Multifamily Aquisitions

Copy of EP #18 - 2 Guests

Summary

In today’s show, Pancham interviews Rob Beardsley – principal of Lone Star Capital, and author of “The Definitive Guide to Underwriting Multifamily Acquisitions” and “Structuring and Raising Debt & Equity for Real Estate”.

Dropping out of college was not on his to-do list, but after learning about real estate investing, he knew he made the right choice to not finish his degree and to get started on pursuing multifamily investments and establishing Lone Star Capital with his business partner! Now, he has acquired over $300M of multifamily real estate and has evaluated thousands of opportunities using his own underwriting models.

In this episode, learn what really happens behind the scenes in multifamily acquisitions and acquire essential skills as he shares the importance of the underwriting process and structuring the right debt and equity. Don’t miss out as he’ll also provide worksheets, step-by-step guides, and free underwriting models that could help you get started!

PanchamHeadshotTGCI
Pancham Gupta
Screen Shot 2022-11-01 at 4.49.09 PM
Rob Beardsley

Tune in to this show and enjoy!

Copy of Quote #00 - 1 Guest

Timestamped Shownotes:

  • 0:40 – Pancham introduces Rob to the show
  • 1:54 – On dropping out of college and building Lone Star Capital
  • 6:38 – How business partnerships are similar to romantic relationships
  • 9:06 – Building your underwriting skills and structuring the right debt and equity through his books
  • 13:37 – Understanding debt as the biggest source of risk when investing
  • 17:07 – On looking for new acquisitions amidst current market trends
  • 20:26 – Making investment decisions based on your objectives
  • 29:58 – Taking the Leap Round
  • 29:58 – His first investment property outside of Wall Street
  • 31:05 – What he learned from his investing fears that came true
  • 32:18 – How his investment did not work as expected
  • 35:28 – Patience as an important quality when you first start investing
  • 36:19 – How you can connect with Rob

3 Key Points:

  1. When building partnerships, it’s best if you both have different skills that complement each other instead of having the exact same skill sets.
  2. Identifying quality deals for acquisition and being able to structure the right debt and equity to optimize returns are 2 important skills for a real estate investor.
  3. Understanding debt and the nuances that might make or break a deal is beneficial, and it can be a good approach for passive investors to vet deals.

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Read Full Transcript

(intro)

 

Welcome to The Gold Collar Investor Podcast, with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host, Pancham Gupta.

 

Tom Burns

Hi. This is Tom Burns, author of Why Doctors Don’t Get Rich. You’re listening to The Gold Collar Investor Podcast with Pancham Gupta.

 

Pancham Gupta

Welcome to The Gold Collar Investor Podcast. This is your host, Pancham. I really appreciate you for tuning in today. My guest is Rob Beardsley on the show. Rob oversees acquisitions and capital markets for Lone Star Capital, and has acquired over $300 million worth of multifamily properties. He has evaluated thousands of opportunities using proprietary underwriting models, and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. Guys, this is more from the general partner side of things rather than passive investing side of things. But it’s very important to understand this side. So, I hope you enjoy the show.

 

(interview)

 

Pancham Gupta

Hey, Rob. Welcome to the show.

 

Rob Beardsley

Thanks for having me.

 

Pancham Gupta

Well, it’s been really awesome to have you on the show. We’ve known each other for quite some time now. I’m actually quite surprised that this is probably your first time on the show. You’ve written and just published a book. We’re going to talk about that. There’s so much we have to unpack here. Before we get started, are you ready to fire up my listeners break out of Wall Street investments?

 

Rob Beardsley

Yes, I am. Let’s do it.

 

Pancham Gupta

Let’s do this. Rob, tell us about your background and, more importantly, the person behind that background.

 

Rob Beardsley

Absolutely. So, I grew up in Silicon Valley, California. So, I had a tech influence. But nevertheless, I grew up in a real estate family. My parents ran a residential brokerage firm from home. So, I got exposure to real estate young, but everything was on the residential side. Everything was about a commission or a flip. That didn’t really resonate with me.

It didn’t happen until in college when I was studying computer science — thinking that I was going to go into the startup world — that I discovered multifamily. It resonated me with me so much because it was this idea of taking one unit and going to a hundred and then turning it, instead of a flip, into a scalable, long-term, equity building kind of theme, which really resonated with me a lot more and drove me to actually start my company with my business partner. Here we are today. Having run Lone Star for almost five years, we have acquired over 350 million in assets in Texas. We run our own property management business as well. So, it’s been a great journey so far.

 

Pancham Gupta

Wow. Awesome. I didn’t know that you went to school for computer science. Did you finish a degree, and then right after that you got into this business? How did that come about? You went to school for computer science?

 

Rob Beardsley

That’s right. Then towards the end of my second year, Kent and I, my business partner, we put our first deal under contract together. And so, I left school in that year. I never graduated. I never finished. Then that’s when Kent left his job, as well, as a tax attorney.

 

Pancham Gupta

Yeah, I remember all those days. Because I remember Kent and me quitting around the same time. We started the company around the same time in 2017. It’s been five years. Really awesome to see you guys grow. But talking to you make me feel very old already. You dropped out of college after second year. I’m assuming you started this company around that time. Is that true?

 

Rob Beardsley

Yes. That’s right.

 

Pancham Gupta

So, it’s literally like — your what? If you want to share, it’s okay. 25? 24?

 

Rob Beardsley

Yeah, I’m 25. We started the company officially when I had just turned 20.

 

Pancham Gupta

Oh my god. To anyone listening, if that’s not inspiring, I don’t know what is. So, how’s the journey so far? Do you regret quitting your college, not finishing your degree and going into computer science?

 

Rob Beardsley

Well, so far, no. So far, it’s definitely been a good decision. I’ve gotten so much experience. I looked at it very rationally. I figured that if everything failed, I could just go back to school and pick up right where I left off. I really wouldn’t be worse for wear. So, I didn’t view it as this big risk.

In society, depending on where you come from or your family, it can be a very negative stigma associated with dropping out. My family is somewhat traditional, the Russian side of my family, very education-focused. Certainly, it was tough to let them know that that was my plan. But it was hard to argue to not pursue the opportunity at hand. So, yeah, I think it was a good move because I had a plan.

 

Pancham Gupta

Right. A lot of people who are listening, I’m sure they have questions there, and I have mine. You said that you decided to quit and you talked to your family. Were there any negative mindset around it, for you quitting? Was it all, “Oh, go for it, Rob. We’re rooting for you,” or was it, “Oh, no. Man, you’re making a mistake. Why don’t you just finish?”

 

Rob Beardsley

Yeah, right. Because from someone who is older and more mature, two years to them is no big deal. “Just put this on hold and go two more years.” But when you’re young, two years is a lifetime. Especially when you have a big opportunity, you can’t resist.

I think, all in all, they were very supportive even with their perspective. So, I can’t blame them at all. They were very supportive. But obviously, they had their own feelings about the risks. So, I think they were very supportive. I wasn’t trying to ignore them or be rebellious or anything.

 

Pancham Gupta

Got it. That’s awesome, man. You obviously are not regretting it. It’s been five years into it. You guys created your own property management company now. You’ve written, I believe, two books now. At 25, overall, you’re grand total managing $350 million worth of assets under management. Right? Let’s talk about, how did you meet Kent? You, being at the age of 20. He being, at the age of — I don’t remember what age he was at the time. How did you guys even come together, and him trusting you being a 20-year-old, and you partnering with him?

 

Rob Beardsley

Well, as you may remember, we met through our mentorship group, through Joe. We just came together that way. Both of us were busy with either school or work. So, neither of us were really full-time into real estate yet. But we wanted to make progress. We felt that it would be easier to make progress if we teamed up and leveraged each other’s skills. I had a little bit more time. I was younger and willing to just work really hard to prove myself. I also had more of an expertise and desire to work on the number side of things. He was more so operationally minded and focused. Obviously, with his legal background, he was very good on the legal side of things.

 

So, that partnership came together really well, really naturally. We didn’t even start out with this master plan to take over the world. It was just dating. It was, “Hey, let’s work together. This seems to be working. Let’s get to know each other. Let’s just try to make deals happen.” That’s something that I really like about the real estate business, which is it’s appropriate to do deals together and date. You don’t have to get married right away. So, you can feel each other out over a longer period of time, and then make a big life decision about who you’re partnering with.

 

That fortunately, for us, worked out really well. We’ve continued this partnership mentality as we’ve scaled and hired more people, and done a really good job of maintaining who oversees different parts of the business and not stepping on anyone’s toes, and things like that.

 

Pancham Gupta

It’s always a great reminder to anyone listening that if you both have exactly the same skill set and exact same desire and passion, then one of you is not needed, more or less. So, it’s always good to have complementary skills. In this case, he wanted operationally intensive side of things. You wanted more number-oriented and really business development kind of things. So, that’s awesome.

 

Let’s talk about your — this is a good segue into the multifamily underwriting-related book that you wrote first. Now you have written a second book. Talk to us about the first book and the second book.

 

Rob Beardsley

The first book, which was called The Definitive Guide to Underwriting Multifamily Acquisitions, is a bit of a mouthful. But it’s really a step-by-step guide through our underwriting process, which underwriting is just simply the financial analysis of acquisitions.

 

To me, that was a really important book because I was essentially writing it to my former self. When I first started in the business, I was seeking some guide or some easy, straightforward manual to learn how to evaluate acquisitions. There just wasn’t anything like that. So, that book, to me, I felt was filling a really good gap in the market. That book, it turned out to be a big success. It did sell really well and is still selling really well. People reach out all the time about that, that it’s exactly the thing they’re looking for when they’re looking for it. It’s not this massive book, right?

 

Pancham Gupta

Yeah, to put it differently, anyone listening, underwriting could sound like a big word. It’s really just a way to figure out how to — does it even make sense based on the parameters you want to put in, whatever investment that is? That’s what we, as general partners or any operators, do really to make sure that the numbers are working.

 

Anyone who’s listening, they probably always look at it from the passive investment side of things. But this is more of our world, like the general partnership world, where in order to make sure if the deal numbers make sense, what do we need to do? I’m sure you’ve heard of this term. People are saying numbers don’t make sense, or your numbers don’t work? What does that mean? The entire process is called underwriting. Probably, there is no other book in the marketplace on that subject, which really is written by a person, a 20-year-old Rob Beardsley. Right? Is that true?

 

Rob Beardsley

Yeah, that’s right. If you are looking to get started in the business, it’s not the most basic book. A lot of people reach out and say it’s very advanced. So, it’s not necessarily the very first starting point. But it is, at the end of the day, a very good place to really build your underwriting skills. What’s interesting about the book is, even some passive investors read it and enjoy it, because it gives them a look behind the curtain and gives them a good perspective, what you mentioned on what we do every day, as far as looking at property and evaluating whether the numbers make sense or not, like you said.

 

With that in mind, just to transition to the new book here, it’s called Structuring and Raising Debt & Equity for Real Estate. This book, the idea behind it is to build on the first book’s topic, which is identifying quality deals for acquisitions. The question is, well, what do you do after you find a good deal? It doesn’t just close itself. It doesn’t just produce returns on its own. So, the key to that is actually structuring the right debt and equity to optimize the returns, and provide a good deal for your investors and for yourself. Whether you’re reading this as an LP or a GP, you can definitely learn a lot as far as what to look out for in the right debt, based on the right type of business plan and asset, as well as actually how to go out and raise debt and equity for your next deal.

 

Pancham Gupta

Right. So, can you talk about — in this book, this is like the second step. Step number one is doing underwriting, looking at the deal, and making sure the numbers work. Now you’ve checked out the box of numbers work. Now you want to raise capital and also get debt on the deal, which is also an input into the first step, which is underwriting. You have to make some basic assumptions on the debt. But now you’re really structuring it, really figuring out what kind of returns that this deal would generate, and how you can amplify them and return it to the investors to structure it in a way so that it meets the objectives of your investors.

 

From a passive investor point of view, what are they going to get after they read it, if they read this book? Talk to them. How is it helpful to them?

 

Rob Beardsley

Yeah, that’s a great question. Well, in my opinion, the biggest source of risk in the types of deals we do — which are multifamily value-add acquisitions — I’d say the biggest source of risk is the debt. As a passive investor, if that’s your biggest risk, it’s very helpful to understand debt and understand the nuances and terms that can make or break a deal depending on your preferences, your risk tolerance, and what you’re looking for.

 

In the book, I talk about the different loan products available. As a passive investor, being familiar with the different loan products and loan terms, and the way that they are underwritten from the lender perspective, it can be very helpful to get you comfortable with a deal or to show some risks of a deal and say, “You know what? Actually, based on these numbers and these calculations, this leverage for me is too high.” That can be a good way as a passive investor to vet a deal if that’s what they’re looking to dive into doing. I would say, definitely, there’s a lot for the passive investor to learn on the debt side.

 

Pancham Gupta

Yeah, sure. A lot of my listeners, they are engineers by background. They like to dive into numbers. Sometimes it’s way too much. I guess, for them, these books would definitely be very helpful. So, do you also provide, as part of this, a worksheet, or a spreadsheet, or an example that they can walk through?

 

Rob Beardsley

Yeah, but that goes back to my first book, the first book about underwriting. We also make our underwriting model available for free download on our website. So, the best way to go about it is to have a copy of the model and then a copy of the first book, The Definitive Guide to Underwriting Multifamily Acquisitions. Put those two together, and you can work through any deal you’d like.

 

Then we also make all the models for the deals that we’re acquiring available as well to our potential investors and our existing investors. So, anyone who comes to us and wants to learn more about a potential deal that we’re acquiring and want to partner with us, we provide them our base model for them to examine, manipulate, so that they can learn more about it.

 

Pancham Gupta

Okay. Great. The model that you use for actual deals is the same spreadsheet template that you actually give out as part of the book?

 

Rob Beardsley

That’s right.

 

Pancham Gupta

That’s pretty awesome, right? Someone can learn all about it using your book, and then look at your deals using that, and ask you all the questions that you have put together in the book that they should have asked all the operators. That’s pretty awesome. How can they get this book, Rob, if they want to get it?

 

Rob Beardsley

Yeah, so, the first book — I mean, I don’t want to confuse people. The first book, you can find it on underwritingmultifamily.com. Then the second book is structuringandraising.com. Then, of course, if you don’t want the books and just want the free model, you can find that on our Lone Star Capital website, which is LCSRE.com.

 

Pancham Gupta

Awesome. Well, cool. So, this is good a segue into your business. Now given that, let’s talk about current market and where we are today. Everyone has been worried about interest rate going up and up and up. 30-year mortgages, the last I heard, was inching closer towards 7.5% which is unheard of for people especially your age and also, I would say, my age who may have bought their first home. They may not even have heard of this high of a mortgage. I know it was 2000 when it was so high.

 

With the rates being so high, inflation peaking for our generation — I don’t know whether it’s peaking or not. Everyone thinks it’s peaking. We’ll find out. — fed tightening, quantitative tightening going on, and all the things that are happening, Ukraine war and geopolitical risks, what is your take on buying assets right now? Are you sitting out, still looking actively? What’s your take?

 

Rob Beardsley

Well, we are very actively looking for new acquisitions. I think it’s important to do that because it keeps our finger on the pulse. Even if we don’t think that there’s a very high chance of buying something right now — which I can get into more in a second — I still think it’s really important to be underwriting deals every day, putting in offers, giving feedback to brokers to let them know here’s how we’re seeing the market.

 

That does two things. It provides them feedback, and then they can give it to sellers. That way, that can help sellers readjust their expectations to the market feedback. Then also, if the brokers disagree with our feedback or something like that, or they want to provide their own insight, then they’re more than welcome to do that. Who knows? Maybe they can convince us or something. We can go buy a deal.

 

So, yes, we are active. But finding a deal today is very difficult. It is a broken market right now. Because, like you mentioned, interest rates have moved so quickly. However, sellers’ pricing expectations haven’t moved quickly. So, that’s a much longer process because that involves human psyche, emotional psyche to move pricing, right?

 

If you own a $50 million property right now, and all of a sudden people come knocking on your door and say, “Hey, that’s actually worth $40 million,” that is a big, big shocker to the system. So, you’re going to sit there and say, “No, it’s worth $50. It’s worth $50.” You’re going to hang on to it. So, we’re seeing a lot of sellers resist right now. Even if they’d like to sell, they don’t want to sell at the prices that buyers are willing to pay. That gap right now is creating a difficult market right now.

 

We are, like I said, bidding every day. But we’re sticking to our guns and being more conservative, and making sure that if we do find a property that we like today, it really is a no-brainer deal, that we’re not going to get into trouble with if there’s a recession or a decline in performance over the next couple of years.

 

Pancham Gupta

Right. So, that’s a good point. We are in the exact same board. Let me ask you. This is myself selfless question. Some listeners may get benefit from this also. Say, when the tides are rising, when the market is going up crazy, you have a deal at $100 today. Two months from now, it’s going to be $105. You better buy it now. That’s what was happening. It’s not easy to get a deal under contract, but it’s easy to make a decision to buy if you happen to win out of 50 offers that all the properties are getting.

 

But in a declining market, where the sellers are getting readjusted, where you know that today it’s 100 but tomorrow you may be able to get it for 95. Your business plan might be to hold it for seven years, put a fixed rate on it and add value to it. We all know if the cap rate expands by a quarter basis point, no matter how much value you add, it’s going to even out or even worse off from where you are at at that time.

 

So, how are you thinking about that scenario? I know you’re putting in offers. But obviously, there is a huge gap, and it will take some time. How do you think about that scenario?

 

Rob Beardsley

Well, it is very difficult, from an emotional standpoint, to be bidding on deals right now and be stretching to try to be the winning bidder. Because you know if you just wait, you probably will be able to get that deal at a lower price later. So, it is tough to play that game. I think, at a certain point, you have to ask yourself, am I being too greedy? Because if you like that deal at a certain price and a certain return before, then why don’t you like it at that price in return now? Adjusted for interest rates, obviously. So, that is one question.

 

At some point, you have to make the decision to buy without predictions or assumptions about the future. If you like it, you like it. You need to buy it. Because there’s no guarantee that prices will be lower. Yeah, everybody agrees, for the most part, that prices will most likely be lower in six months to a year than they are today.

 

With that being said, I think on the flip side, those same people that think that probably are also the same people that think that prices will be higher than today in three to seven years. It’s a big range, I know. But the point being, like you said, if you have long-term vision, if you have staying power, it really doesn’t matter if the property’s value goes down in six months or a year, because you don’t have to realize that loss of value. You can hold through that period, cashflow, and be fine.

 

Pancham Gupta

Yeah, you just have to make sure that you wouldn’t go under water. You don’t have to have a capital event in the middle when — you’re well-capitalized, basically. You don’t have to buy a cap or refinance. Take, for example, buying a lease up deal right now would be a nightmare, because you would not get fixed financing. You would have to get a floating rate debt or a bridge, very high interest rate. But you still have to give them an exit in two or three years there. Who knows where the market would be? Right?

 

Rob Beardsley

Yeah, and like you said, the exit is the most challenging part about it. Yes, higher interest rates are tough. But the exit is the hardest part. Because what you don’t want to happen is use an expensive and high-leveraged bridge loan, and then need to pay off that bridge loan but you don’t have enough value to justify a new loan to pay off the old one. Now you’ve got a problem. You have to do what is called a ‘cash-in refinance.’ You have to make a capital call. Those are all things that we want to avoid as much as possible.

 

The point that you made about the high interest with bridge loans is, I don’t know how people are getting deals done with bridge loans today. Because they are just so expensive, and they used to not be that way. The price difference between a 65% loan and a 75% loan was almost the same at the beginning of the year. Now, today, towards the end of 2022, the price difference is very big. It could be two percentage points different. That makes a big difference.

 

So, yeah, I definitely agree bridge loans are tricky. But the one point you made about floating rates; I actually have an interesting potential counterpoint. The interesting thing is, the problem that we are finding ourselves in for deals that we purchased before this interest rate regime change is that the market was projecting rates to stay flat. The Federal Reserve promised. They came out and promised that they were going to keep rates at basically zero for the next two to three years. Of course, the market believed them. The projections were very low rates for the next two to three years.

 

Looking back, we made the mistake of believing the market and believing the projections, and using floating rate debt. Then what happened was, our projections were flat. Reality was steep. Now we’re battling and digesting these interest rate changes across our portfolio for the deals that have that exposure. However, the same, arguably, may happen in reverse, where today we have a situation where we’re approaching the end of the tightening cycle. The market usually does at the end of the tightening cycle is assume that rates stay high for longer. Let’s say, again, two to three years. However, history has showed that we actually usually hit the end of the tightening cycle. Then in roughly eight months, we begin a pretty rapid decline in interest rates.

 

Again, projections are flat high. But in reality, they go lower quickly. So, I’m not saying that what we’re projecting is going to happen. We obviously continue to project what the market says, whether that benefits us or hurts us. But that is an interesting way to look at the potential future of rates, and how you actually may not be crazy to float today in some cases. I do think floating rate debt is very tricky, especially when you talk about interest rate caps. I don’t know if you want to get more into those. But it is a difficult time to say, the least.

 

Pancham Gupta

Yeah, I think we don’t have to go into interest rate caps. Basically, the idea is that what’s happening in the marketplace — I know you’re in Texas market for the most part. We are in Florida and North Carolina. We are seeing the same thing. We are getting so many off market deals where the brokers don’t want to list because they know the seller is unrealistic. They don’t want to do 20 tours, and then find out the deal is not happening. The numbers don’t work out. There is such a huge spread. That’s pretty much true in Texas as well, right? There are very few actual listed deals. The number of off market deals are just a crazy number. Cool. Well, thanks, Rob, for all that. Anything that you would like to add before we move on to the second part of the show?

 

Rob Beardsley

No, I think that’s pretty much it. Obviously, we got pretty technical here.

 

Pancham Gupta

Yeah.

 

Rob Beardsley

As you can tell, I get excited about going deep. So, if anybody is interested in going deep with me, then I recommend checking out either the books, but definitely the new book which we talked a lot about today — Structuring and Raising Debt & Equity for Real Estate. You can find that on structuringandraising.com

 

Pancham Gupta

Sounds great. Well, we’ll be back after this short message.

 

(break)

If you’re an accredited investor and have been thinking about putting your money to work for you, then I have good news for you. I have created an investor club which I call the Gold Collar Investor Club. I will be putting together investing opportunities exclusively for the group. These are the opportunities where I have done the due diligence for you and will be investing my own money alongside you.

 

If you are interested, please sign up on thegoldcollarinvestor.com/club. I repeat, thegoldcollarinvestor.com/club. I will reach out to schedule a 30-minute phone conversation to discuss your investing goals once you sign up. This can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some passive income. In case you are wondering what is an accredited investor, accredited investor is someone who has earned more than $200,000 as filing single or more than $300,000 filing jointly for the last two years. Another way to qualify as an accredited investor is if your total net worth is more than $1 million, excluding your personal home. It includes your stocks, 401Ks, IRAs, cars, et cetera —just not the equity in your personal home. If this is you, I would highly encourage you to sign up.

 

(interview)

 

Pancham Gupta

So, Rob, let’s move on to the second part of the show, which I call Taking The Leap Round. I ask these four questions to every single guest on my show. My first question for you is, when was the first time you invested outside of Wall Street?

 

Rob Beardsley

Well, the first time I invested on Wall Street was a bit embarrassing. But basically, while in college, I was so excited about investing into real estate and wanting to get cash flow and passive income. My friend and I, I convinced him to buy a house with me in St. Louis — sight unseen for $40,000. I know you already know how the rest of the story goes.

 

Basically, it went horribly. We had a bad tenant. They trashed the place. They never paid rent. It was a nightmare to deal with. Being a landlord from afar is very stressful, and not the best way to go. So, I learned my lesson. We fixed up the property, and sold it for a loss. That was a good lesson to learn.

 

Pancham Gupta

Yeah, that was in college. Mainly, those two years when you were in college? Okay. So, at the age of whatever, 19 or 20, you did that. Did you have any fears that you had to overcome when you bought that place?

 

Rob Beardsley

Yeah, I had a lot of fears. But as you can tell, I overcame them and bought the property, which I never should have.

 

Pancham Gupta

Because all of those fears came true.

 

Rob Beardsley

Right. Exactly. The learning lesson there wasn’t so much of overcoming fears. It was — I don’t want to say listening to fears, but not getting carried away in excitement. A lot of people discover something new, which I think it is really exciting to discover different investment opportunities outside of Wall Street. You get, “Oh my gosh. There are all these cool strategies. This is how the rich get richer. This is the game for me.” Then you want to jump in and invest all your money right away. But the real way to go is to play it slow, network a lot, learn a lot, dip your toe in, and take it slow. So, that’s the lesson from that experience.

 

Pancham Gupta

Yeah, I can’t agree more with you. I’ve had my fair share of $40,000 homes. But luckily, they all went fine. Obviously, there were challenges in the middle. I didn’t lose money on any one of them, but it was all very hard to manage.

 

So, my third question for you is, can you share with us one investment that did not go as expected? Is it that one, or do you have — if it’s the same one, that’s fine. Otherwise, if you have anything else you want to share?

 

Rob Beardsley

Yeah, we can pick a different one. A real deal. Because I don’t really count that as a deal. It was an experiment. In our real business, obviously, we’ve had challenges as well. I’m just picking out one of our properties that we took over. There were a couple of mistakes we made. Or the mistake we didn’t make was identifying the opportunity. We had identified a great opportunity. There’s a lot of value-add, and there was opportunity to raise the rents and to improve occupancy. What we didn’t factor in properly was understanding the transition and turnover period required in getting to those higher rents and getting to that higher occupancy.

 

So, we didn’t factor in the fact that there was going to be a lot of turnover, where we’re going to have to evict a lot of tenants because they weren’t paying. We had to deal with the poor reputation of the property that attracted poor quality tenants that did not pay, caused crime, and hurt the reputation, and scared off good quality.

 

So, it took us a lot longer to get our business plan done because we didn’t anticipate for that point. So, that was a big learning lesson for us to understand, that you don’t simply take over a deal and then march steadily to your end goal. You might have to take some step backwards. You might have to go down an occupancy before you go up. That was a good lesson for a deep value-add deal.

 

Pancham Gupta

Yeah, you’ve touched on so many good things there. We had a similar deal. We have that now. We stabilized it, and we bought it right at COVID. We bought it, and the COVID hit basically. We had a similar value-add story. One thing that we learned from that was, like you mentioned, when the occupancy drops because you have to evict all the non-paying tenants. Although we couldn’t evict them because of the eviction moratorium, there was another issue for 10 months.

 

But what happens is that not only that your occupancy is getting hurt, your revenue top line is hurt, but your expense line is more than normal as well. Your CapEx budget is more than normal as well. So, you have to put more money into the units because there are more units available. You have to do a lot more to get the units actually rented. Maybe more marketing expense. Maybe run some concessions. So, it’s a downward spiral. You have to really take control of it very, very quickly. Otherwise, it can get really dirty very quick.

 

Rob Beardsley

Right. Definitely.

 

Pancham Gupta

All right. Well, you do these things and you learn, right? That’s the only thing that we all get out of that bad or not so good investments. My last question for you, Rob, is, what is one piece of advice would you give to people who are thinking of investing in Main Street that is outside of Wall Street?

 

Rob Beardsley

I would say, I would echo the comments I said earlier, which is when you first learn new information about an opportunity to invest on Main Street, you can get very excited and get carried away and want to act very quickly. But I think patience is a very good thing.

 

If you think about investing, one of the best things you can do for your investment strategy is to have patience and think long term, and not try to get rich quick. Because if it sounds too good to be true, it probably is. So, really, actually, glorifying getting rich slowly and being patient actually will serve you best in the long run.

 

Pancham Gupta

Great advice. Thanks, Rob, for that. So, if people want to connect with you and want to find out what you’re up to, and maybe discuss some of the contents of your book, how can they connect with you?

 

Rob Beardsley

To learn more about what we have going on, you can visit LSCRE.com. That stands for Lone Star Capital Real Estate. That’s LSCRE.com. On the website, you can get the free download of the underwriting model that we discussed today. If you want to connect with me directly, I recommend connecting with me on LinkedIn. I post every day, and I’m active. So, just shoot me a message on LinkedIn if you want to connect.

 

Pancham Gupta

Awesome. Thanks, Rob, for your time.

 

Rob Beardsley

Thanks.

 

Pancham Gupta

I hope you enjoyed what Rob had to share regarding underwriting and really structuring and raising equity. You should really get his books if you want to understand this and understand the business and how the back side of things, what goes behind the underwriting, and raising and structuring multifamily deals.

 

So, with that, I want to sign off. If you have any questions, don’t hesitate to email them to me at p@thegoldcollarinvestor.com. That’s P—as in Paul—@the gold collar investor.com. This is Pancham signing off. Until next time. Take care.

 

(outro)

Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook @thegoldcollarinvestor. The information on this podcast are opinions. As always, please consult your own financial team before investing.

Copy of EP #18 - 2 Guests

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