Dan Handford (03:49):

And we have a lot of other additional speakers. We’ll probably be having between about 50 to 60 speakers that’ll be there speaking on mostly multifamily in apartment syndication. And then we’re also going to have a separate track that’s going to be on alternative asset classes, like your self-storage, your mobile home parks, your express car washes, if you will, hotels, medical office buildings, land entitlements, things like that. That’ll be on a kind of its own separate track during the entire session that we’re going to be adding on that we didn’t have this year, and will allow us to provide some additional content outside of just multifamily. There’s a lot of people in multifamily that think they might be interested in one different alternative asset class or whatever. And this will give them the opportunity to be able to come to an event, network with some really good high level speakers and people and other investor’s. And then be able to learn more and how to improve their game with multifamily and apartment syndication, and then be able to still learn about some of these other alternative asset classes.

Robert Leonard (04:43):

I can only imagine how good this next year’s is going to be. This was your first time doing the in-person one and it was awesome, I had a great time, so I can only imagine how good it’s going to be this time. Isn’t it kind of crazy how I feel like it just ended and you guys are already starting to plan the next one.

Dan Handford (04:59):

Well, I was talking to the team today and said, “We’re already behind for next year.” Even though we feel like we’re ahead of the game from where we were last year, because we made the decision halfway throughout the year. Actually beginning of this year in January 2022 was when we decided to make the June one a live event. We had six months to put it all together. And so now of course we have longer than that, but we definitely need to be putting some things into place to be able to make sure we have a good, great quality event like we did last time. Because this is not one of those types of events where we’re just trying to sell in the back of the room some coaching program that’s a high paid coaching program or anything like that. We don’t sell anything from the stage, except for the tickets to the next year’s event. And that’s pretty much it.

Dan Handford (05:39):

We don’t do coaching, we don’t do mentoring. Our goal is to really just provide a lot of education and awareness around multifamily investing for the active and the passive investor, which is one of the reasons why the tickets are a little more expensive than you might see in an event that’s trying to sell you something in the backend. There’s nothing wrong with that kind of a model, but that’s not what our model is. We want to make sure we have a great quality event and we’re only attracting the top quality people that want to be there and that are willing to pay that extra premium to be able to be at an event like this.

Dan Handford (06:07):

And that extra premium is not there just to make me a bunch of money in passiveinvesting.com. Our goal with it is just to really break even with the event. And this past event, this past year, we lost money at that event. And this one coming up next year, we’re going to probably break even with that as well. And so it’s not like we’re trying to pat our pockets or anything, but it’s just a way to be able to offset some of the cost because it does cost a lot of money to put on a great quality event and to make sure you have some great quality people from a speaker perspective, but also from an attendee perspective.

Robert Leonard (06:36):

What were some of your biggest takeaways from the conference? Was there anyone you met or any specific talk that you heard that really stood out to you and what would you say to somebody who’s listening to this who has been told that they should start attending conferences, but they really just haven’t done it yet. Why might somebody want to attend a conference?

Dan Handford (06:53):

I think the number one reason why you attend a conference like this is to be able to rub shoulders with other high-level investor’s. You can find those people as potential partners on future projects with you, but also be able to find other passive investor’s for your projects as well. And so be able to have that ability to be able to be in the room, because there’s a lot of things we can do virtually. Actually, the MFIN event was done virtually for the first three years and then we decided to go ahead and make it an in-person live event once a year. And the networking virtually is just not the same as being in person. There’s a lot of people I talk to that are looking for partners and to partner with, to be able to start their own apartment syndication business. And it’s a little bit harder to have a deeper relationship with somebody if you’d never meet him in person.

Dan Handford (07:39):

And so for me, even from when I look back before we even started and launched out the passiveinvesting.com brand, it was just me. And then I found Brandon and then I also found Danny and we were able to perform a partnership. But if I wasn’t able to get out of my own comfort zone, go to different events, go to different venues and places to be able to network with other people, I wouldn’t even know that I wouldn’t even have found these partners.

Dan Handford (08:02):

And not only that, most of the passive investor’s in the very beginning that we found were from those live in-person events, being able to be there and you’re rubbing shoulders with them and learning more about their needs and be able to really interact with them and then provide the opportunity for them to interact with me as well. And it allowed me to be able to raise more money that way for different projects. But even from a passive investor’s perspective, it allows you to be able to meet a bunch of different operators out there that are operating and you can learn a little bit more about the business, you could feel more confident when you’re placing capital into a project.

Robert Leonard (08:37):

For me, one of the coolest parts was that I got to meet so many people that were on the podcast. I’ve had a lot of the speakers that you had at the conference on the show in the past, or even just attendees had been either guests in the past, fans of the show, so it was awesome to be able to meet those people in person as well. And so somebody who’s never attended a conference, you’ll get all the benefits that you just mentioned, but you also get… There’s probably a lot of people who listen to the show who have what I call online relationships, whether it’s social media, Twitter, whatever that looks like, that you can actually meet up in person and actually put a face to the name.

Dan Handford (09:09):

I totally agree.

Robert Leonard (09:11):

Back when we chatted on the We Study Billionaires Podcast, we tailored the conversation to a bit more sophisticated investor, since that’s the demographic for the listeners of that show. But this show here is a little bit more tailored towards newer investor’s. So I want to take a bit of time to go through some of the concepts of your business model. And then we’ll get into the specifics of what you’re working on. To start out, give us an overview of what a real estate syndication is and how and why listeners of the show might be able to participate in one.

Dan Handford (09:42):

A real estate syndication, it is where you have multiple people that are coming together to form a partnership to be able to acquire a property. And there’s normally going to be one main promoter, if you will, who’s actually promoting it. And that person would become the GP, the general partner or the operator, they’re all kind of synonymous words, or sponsor, it can also be called a sponsor. And those people, like us, at passiveinvesting.com will go out and we have a project and say, “Hey, investor’s, here’s this project that we have together. We’re trying to raise $10 million to try to acquire this $30 million or $35 million property. And all those investors will invest. And the minimums are usually anywhere between about 50,000 on the low end, upwards to a 100,000, as far as the minimum investment in each one of those projects.

Dan Handford (10:31):

A lot of us don’t have the ability to just swipe a check for 10 million, that’s obviously 99% of us probably don’t, 99.9% maybe, to just swipe a check for 10 million to acquire our own property. So being able to still acquire that property, but on a small percentage basis and still be able to reap the benefits of it is really, really powerful. And it’s what the institutional investor’s do all the time to be able to increase and juice their returns. So for us, as regular everyday investors, being able to go in and invest in a property and still get the nice returns that institutional investors are getting, anywhere between 15%, maybe on the low end, upwards to 25, 30%, is pretty powerful. And it’s one of those things that has really picked up over the last probably seven or eight years since some of the changes were made that allows this type of a syndication to take place.

Dan Handford (11:18):

And it has really transformed the real estate space in a lot of different areas. Obviously with our group, we do a lot of apartment complexes. We usually acquire kind of a B plus or a class A apartment complex. We also do real estate syndications in self-storage, hotels and express car washes. And we also have a real estate debt fund that is a part of our group as well. And since 2018, we’ve acquired just over 1.2 billion in assets and we’re continually adding more assets to the portfolio every single month. And so the whole idea and premise is being able to pull the resources of multiple investors in one project, to be able to take down a project that would be a little bit too large for you to take down on your own.

Robert Leonard (12:05):

I know you’re not a tax professional, Dan, so anyone listening should talk with their tax advisor before taking any action, but what are some of the tax benefits of investing in a real estate syndication? And how does those tax benefits compare to investing in individual properties?

Dan Handford (12:23):

One of the biggest tax benefits of Investing in real estate is depreciation, the depreciation benefit. When we go into a buy an asset, let’s say it’s that same 30, $35 billion asset, we get to do what’s called a cost segregation study. And a cost segregation study, it sounds like a fancy word, and it is, but it’s really basically just saying that we are going to piecemeal, that we’re going to have an outside engineer firm come into the property, piecemeal it down to the sheetrock and the studs and the screws and the flooring and the countertops and the appliances. And we can have what’s called, instead of just straight line depreciation, you can have accelerated depreciation. So straight line depreciation for residential assets is 27 and a half years. For commercials, 39 years. And so because these multifamily assets are considered residential assets, they actually are done over our 27 and a half year lifespan for depreciation.

Dan Handford (13:15):

When you do the cost segregation study, you can accelerate some of that depreciation to the first five to 15 years in front load, the majority of the depreciation, those first few years that you own the asset. And then you also have what’s called bonus depreciation. So there’s three different levels of depreciation. You have your standard, straight line appreciation, you have your accelerated depreciation, and then you have bonus depreciation on top of that, which right now, bonus depreciation is basically 100% of your CapEx spent in the first 12 months can be basically written off, 100%. It’s added to that depreciation table.

Dan Handford (13:48):

That’s one of the reasons why you see a lot of these assets will be over a five year hold period, because you’re going to front load that depreciation schedule to those first five years so you can cash flow off the investment and you get really great paper losses on a Schedule K-1 every year to offset the income that you made off that asset that year, but to also offset other passive income that you have, that’s even outside of your real estate portfolio, that’ll allow you to have those benefits from a tax perspective.

Dan Handford (14:15):

Now, when you take advantage of depreciation, you are doing what’s called tax deferral. It’s a tax deferral strategy. So you’re not eliminating your taxes unless you do one thing, and we’ll talk about that in a moment, but you’re essentially kicking the can down the road as far as you and as long as you can, so that you can defer paying those capital gains. You can grow that nest egg over time, and the more you grow it, the more return you get. And so it’s kind of a snowball effect over time.

Dan Handford (14:40):

Now, the challenge with it is that over time, because you’re using the depreciation, your basis in that property is going down so that when you sell, you have a higher tax burden, because you’re going to have depreciation recapture when you sell, but then you’re going to also have this thing called capital gains. And they’re taxed a little bit differently.

Dan Handford (14:59):

But the nice thing about the depreciation is that as you’re deferring it, if you can continue to defer those taxes and continue to 1031 exchange from one asset to the next, as you continue to build it up, you can now, when you die, you can pass that property to your heirs and the basis of that property resets to the current value at that time upon death. And now you’ve essentially eliminated that depreciation recapture on that property and even eliminated some of the capital gain on that property because it’s being reset to the current value of the property at that time.

Dan Handford (15:31):

Now, wherever that basis is, if anything that grows above that is when you would pay that capital gain or if your heirs use some of the depreciation or whatever when they did a different exchange, then of course they would have the depreciation recapture. But all the former depreciation recapture that maybe brought your basis down to zero would pretty much be eliminated and you’d have what is called that step up basis, so you basically are eliminating that tax whenever you pass away.

Robert Leonard (15:56):

How does the 1031 exchange work for a passive investor? They’re not controlling… Somebody puts money into one of your deals, they’re not controlling that deal. They’re not controlling when that’s sold or how they necessarily handle those funds when it’s sold. So how do they manage a 1031 from their own side, or is it done from the operator?

Dan Handford (16:13):

So it’s mostly done from the operator’s side of things. And it’s one of the reasons why a lot of operators don’t do it because it is more of a burden on the operator to do it. And it is a little bit more work and some paperwork and some little bit of a headache and things like that to do it. But our goal at passiveinvesting.com is to be able to help our investors continue to grow their nest egg. And if we can 1031 exchange and do that and help them out with it, because we’re also helping ourselves out, because each one of our partners, all three of us, will put money into each one of the projects, we want to kick that can down the road as far as we can as well, and so we’re obviously highly motivated to do that.

Dan Handford (16:48):

And so when we go to sell an asset, we give the investors the option as to whether or not they want to 1031 exchange with us into the next asset, and we handle everything from them for that standpoint. Or if they say, “You know what? I’m going to go ahead and cash out and pay my capital gains and move on,” then they can certainly do that as well. So we give our investors the option to either stay in or cash out. And a lot of investors just like to cash out because maybe it’s in an IRA, they need the tax benefits or whatever, so they’ll cash out and then they’ll split that investment up with maybe two different more investments since we were able to grow that investment for them. That’s really the main reasons why you would want to be able to have that as a benefit.

Robert Leonard (17:28):

Is it difficult to do a 1031 exchange at the size and scale that you guys are doing it? And because I ask that because I hear of smaller investors doing it with a, maybe 10, 15 unit apartment building or even maybe a 6, 7, 8 unit and then 1031-ing in that. And I feel like, “Oh, that’s not too difficult,” there’s a lot of those types of properties that they could buy. If you’re buying a 10 unit, it’s pretty simple to buy a 20 or 25 unit to 1031 exchange, but you guys are buying hundreds and hundreds of units. And so with the tight timeline that there is with a 1031 exchange, I’m assuming it’s probably can be difficult to identify a new asset and follow that timeline that’s required.

Dan Handford (18:04):

I would say that for most operators that don’t have a robust acquisitions team, I would say yes it is a bit more challenging for them. And I won’t say it’s not challenging for us because it is challenging for us, but we have those systems in place, that so far up to this point, we have been able to successfully 100% perform those 1031 exchanges. Now, we always tell our investors that it is not a guarantee, so things could happen and we might not be able to effectuate and then you’d be forced to liquidate, you’d have to pay the depreciation recapture and the capital gains. But up to this point because we can control some of the timeline aspects of it before we actually close, we usually have one, we always had one lined up so that it closes shortly thereafter.

Dan Handford (18:45):

And most of the time it’s within a matter of weeks because we can tee time it up from an acquisitions and a dispositions perspective to be able to close on a Monday and then hopefully the next Monday or the next week or few days later, you’re 1031 exchanging right into that next asset. Because you have to consider the cost of capital, not only necessarily the cost of capital, but the lack of return during that time period where it’s being held in limbo until you find the next asset. Some people wait up to six months, because that’s how long you can do is up to six months to be able to a 1031 exchange. But our goal is to try to get those investment dollars working and moving, earning as fast as we can. We’ve been able to successfully find quality assets to be able to 1031 exchange those into and it hasn’t really been a big issue for us just yet.

Robert Leonard (19:31):

Since it requires a like-kind exchange, does it work if you guys are going from an apartment building to a self-storage deal or a car wash? Or does it have to be apartment to apartment or self-storage to self-storage?

Dan Handford (19:43):

Actually years ago, many years ago, they used to do, it is called a like-kind exchange because they used to be able to do 1031 exchanges for things more than just real estate. So you just be able to do it for gold and silver and cars and businesses. And you could do a lot of these types of exchanges, but now everything’s been eliminated and it’s only real estate. And you can actually 1031 from a single family residence into a multi-family, from a single family residence into self-storage or hotel or medical office building. As long as it’s going from one real estate asset to another real estate asset, then you are fine.

Dan Handford (20:16):

The only thing you can’t do is like for the express car washes, when you acquire those, you’re buying part of the real estate and then you’re buying the other part as the business. So you can’t 1031 exchange into the business side of it, it would only be real 1031 exchanging into the real estate side of it. And that’s where things get a little bit tricky and hairy. And so from the car wash perspective, we don’t do any incoming 10 30 ones into those assets right now. That business plan for us, for the express car washes is a little bit different than your typical business plan that we see inside of these other asset classes like multi-family self-storage and hotels.

Robert Leonard (20:52):

Since an investor can only spread out their money and they can only have an individual dollar invested in one thing at a time, of course they can spread it out, but they can only put $1 into one thing at a time, I think it’s important to consider one’s opportunity costs. Like you just said, you have the opportunity cost of money in between deals. How should an investor consider multiple investment opportunities for their portfolio when a syndicator such as yourself and passiveinvesting.com has multiple great investment opportunities? What should investors, specifically passive investors look for beyond just the advertised potential return.

Dan Handford (21:26):

There’s a lot of nuances to these different types of investments. And I get, investors call us up all the time and they’ll say, “Hey, I see you have four different offerings available. I have a $100,000, how should I split it up? Or which one do you think is the best?” And I think all of them are great or we want to be putting them together, so it’s kind of hard for me to decide on one. But I think the biggest key here is what we hear all of the time about investments is diversification. I don’t want all my money inside a multifamily.

Dan Handford (21:55):

I also don’t want it all in self-storage. I don’t want it all in car washes or the debt fund or hotels or even other asset classes that I’ve invested in on my own personal portfolio. I want to have this nice diversification across the board so I can have this blended approach, this blended return profile. And that way if one asset class doesn’t perform well one year it’s okay because I got these other asset classes that are performing well and it lifts the portfolio up if you will.

Dan Handford (22:19):

So for me, I look at it from a diversification standpoint, but then there’s also, I know we’re going to maybe talk about this in a few minutes here, but there’s also some red flags that I look for that help us determine… From my wife and I have just over 70 LP investments with about 18 different operators. And so with our own due diligence that we’ve had to perform on a lot of these different operators and being able to vet a lot of these different projects and deals, is we’ve come up with this kind of red flags list of what to watch out for.

Dan Handford (22:50):

Because I know it’s challenging for new people as they’re getting into the space to learn and know who to vet properly and to be able to see exactly what are some of these kind of flags, if you will, to look for, to go, “Okay, if this red flag is present, this is a dead deal. I’m going to close up my PDF and not review it anymore.” And that’s kind of how my wife and I use that list is as a tool to say, “Okay, if any of these red flags are present, we’re done. We’re not going to look at that deal any further.”

Dan Handford (23:16):

And of course these are not yellow flags because yellow flags are more cautionary flags. These are truly your red flags, which means stop. Don’t go past go, don’t do anything else. Stop wasting your time and turn it off and go to the next one. Having that kind of criteria in place is very, very important to be able to know who you need to be going after. And some of these people, you won’t know until some of the answers of some of these questions about the red flags, until you get on a phone call with them and start asking them or being able to knowledgeably review their underwriting to determine if they’re actually presenting things the way you want them to be presented

Robert Leonard (23:49):

For everyone listening that wants to get the PDF or downloadable version of Dan’s red flags, you can go to passiveinvesting.com/red flags and you can download the PDF and all the info there. But Dan, for those listening today, break down some of those red flags for us, some of those most important ones, and some of those ones that really worry you.

Dan Handford (24:10):

I would say that the one that concerns me the most is, when we always talk about the operator, is the key component, the key stone as to whether or not a deal goes as successful or not. And because that is a key component, one of the things that my wife and I always look for is we want to find an operator that has a successful background in business. And the key there is successful background. Because we all know people who have run businesses before, but they end up running it into the ground. And we don’t want somebody who’s just going to run the property into the ground, who want somebody that knows how to manage the property, know how to put in systems and procedures and processes in place, and know how to manage people. They also know how to manage KPIs, these key performance indicators that allows us to determine whether the property is actually performing well or starting to underperform.

Dan Handford (24:56):

And then being able to look at that information and that data and make some decisions and make some pivots if necessary, to be able to change the trajectory of that particular business, if you will, or property, to allow it to be successful as well. Because there’s a lot of times, you look at even during COVID, that a lot of operators didn’t really know how to operate, didn’t really know how to handle things. And those that knew how to run a business and had that successful background in business knew how to make sure that they properly communicated with their investors about things that were happening. Made sure that they were communicating properly with the residents that are on those properties and be able to perform those properties even better than they actually thought.

Dan Handford (25:33):

That would be one of the number one things. And it’s actually my number one… I wouldn’t say it’s number one on the list because it is my number one, but I would say that is my number one red flag, is making sure that you invest with an operator that has some form of successful background in business. And it doesn’t mean that they have to have owned the business. They could still be in some sort of managerial perspective, but they have to be in some sort of management or leadership position and show that successful track record in order to check that box for us.

Robert Leonard (26:00):

What are some of the other red flags? It might not be number one, might be two, three, or even further down the list. Give us some of the other red flags that you look for.

Dan Handford (26:08):

I’ll give you another one that has to do with skin in the game. We talked about it earlier about how at passiveinvesting.com the three managing partners, we’re always investing in every project. And we typically like to invest at least 10% or more. As a matter of fact, there was a deal we just recently closed. We were raising about 36, 37 million for that one. And the partners ended up putting about 5.2 million in that project alongside of our investors.

Dan Handford (26:30):

And so there’s certain projects like that, that we like to invest even more if we can. Some projects, depending on the available capital, sometimes we can’t put the full amount in, but our goal is to try to be at that 10% mark, because we feel like it gives a great alignment of interest for our investors. Plus we have cash that we want to invest and be able to put in these projects and this is our opportunity to be able to do that. And it also bodes well for the investors to see that, “Hey, these people also have skin in the game and they’re not just trying to put these projects together and make their acquisition fees or whatever it is,” but we’re going to actually put more money and real money into these projects to able to make sure our investors know that we’re fully invested in these projects.

Robert Leonard (27:10):

How do you set those amounts that you’re going to invest in those deals and are there times where you want to put more in than you can? It makes sense from a minimum perspective, you got to have a certain percentage in for a skin in the game that’s just the required amount. But what if you have a lot of investors interested in a deal, but you and your management team are also really interested, you want to put a lot of your own money in the deal because it’s just a really good deal? How do you balance that dynamic? Do you put all of the amount that you want first and then just raise the rest? Or how do you balance that?

Dan Handford (27:37):

We will usually allocate a certain amount on our side first so that we know we have a certain amount allocated. There’s been some occasions where because of the demand we’ve had to give up some of our portion, but for the most part, we allocate what we want up front and then we can raise the rest of it. And then the investors kind of fill it in, and then we basically close it down once we’re full. And so we don’t bring anybody else in.

Dan Handford (28:03):

But there has been an occasion where, you close it down and an investor was upset because of timing issues they didn’t get in or they didn’t get the email alert until the next day or whatever and you had to bring them in for a little bit extra and we had to give up some of ours. We don’t like doing that, but occasionally we do have to do that to make sure that we don’t tick off any of our investors because we filled it up with our own money first, but they also know that we want to make sure we still have that same alignment of interest when it comes to our co-investment.

Robert Leonard (28:28):

I don’t necessarily hear about this as much in the real estate world, but in the stock investing world, I would say it’s pretty common, not overly common, but it is common from time to time for fund managers to return all outside capital because they’ve done so well. And they were invested in the fund and then they just keep their own internal or management team’s money in the fund and they don’t manage any outside money. Could you ever see doing that with passiveinvesting.com?

Dan Handford (28:55):

I can definitely see it happening in the future, but we don’t have any plans for that right now. And where I’ve typically seen that is in these types of investments where you can do a refinance, basically you’re technically kicking out your investors and you’re just maintaining the property for however long you want to maintain it. That’s not our business plan. Our goal is to make sure we can maintain our investors because we know that if we can make sure that our investors are really, really happy, then we can also continue to grow together. Because our goal isn’t just to do this for a year or two or just get to the billion mark in assets under management, which we’re already there and stop. Our goal is to continue to provide opportunities like this for our investors to be able to grow our wealth and our investor’s wealth at the same time.

Dan Handford (29:38):

And so at this point we have not thought about doing anything like that or… We have considered it, but for us we feel like it creates a little bit of a misalignment with the investors to do something like that. But I do know operators that do that. They’ll put us syndication together and then they’ll wait three to five years and then they’ll basically refinance out their investors. Once they’re investors get a certain return amount, the investors are out and they keep that project. It’s not a bad thing, so I’m not trying to say it’s a bad thing for the operators to do that. It’s just a different thing, it’s a different process, a different business plan. And for us, our goal is not just to make ourselves more money and grow our own wealth, but it’s to make sure that the investors that got us to where we are today can continue to see those fruits of our labor and to perpetuity.

Robert Leonard (30:22):

What is your team’s goal at passiveinvesting.com for assets under management? I can only imagine a billion was probably one of the benchmarks or one of the stepping stones for a goal. Is 10 million next, then a 100 million or 50…? Or sorry, 10 billion, then maybe 50 billion, a 100 billion? What do you guys targeting?

Dan Handford (30:40):

I kind of look at it in a little bit of a different light because a lot of times when we look at our goals, some groups will say, “I want to have a certain number of units under management.” Now, ours has never been about the number of units under management. Yes, we did have the goal of getting the billion in assets under management and we’ve reached that within three years, which is really cool to see.

Dan Handford (30:58):

But at this point in time, it’s not really our goal is to get to the 5 billion or the 10 billion mark, really, the main goal is to continue to protect our investments and protect the capital from our investors to have that preservation of capital and to provide great risk-adjusted returns for our investors. And that the primary goal is to grow our wealth and our investors wealth for many, many years. And if that means we’re getting to 5 billion or 10 billion, or who knows, 100 billion over the next several years, then so be it right. But if we ended up only getting to 3 billion, but we’re still accomplishing that goal, that’s really what we’re looking for, is to make sure that we can protect our own capital and our investor’s capital and also make a nice return on it as well.

Robert Leonard (31:39):

I think you guys show a bit of that kind of approach in your conservative underwriting. You stress test your properties at a 60% or less occupancy. You use pretty conservative rental rates and occupancy rates. And then you build into your business plan at least eight months of reserves. So I’d say that that’s pretty in line with everything you just said. But how do you use those underwriting criteria to compete in markets that are highly competitive and full of capital?

Dan Handford (32:08):

It’s very challenging. And I’ll say this year has been more challenging because of the debt market being all over the place. But I’ll say it’s always been challenging, because one of the things that we always do is we always have that cushion in there of operating reserves so that we don’t have to worry ourselves, or investors have to worry about future capital calls and things like that, that can impact the property and affect the returns quite a bit.

Dan Handford (32:30):

And so for us, we’d rather raise that extra money and provide that kind of extra level of comfort and cushion for our investors to realize that we have ample operating reserves on our properties. And we’ve actually been doing that ever since our first acquisitions, because on our very first acquisition, we made the mistake of not raising enough money for that project to be able to complete the renovations.

Dan Handford (32:52):

And so the partners had to come out of pocket and put up our own money to be able to front some of the renovations so that we could continue to perform on that business plan. And we did, we ended up outperforming on that property when we sold it, but we were able to, yes, but we had to, as partners, put money up because of our lack of having enough reserves in there from a CapEx perspective, but also from an operating perspective.

Dan Handford (33:15):

And we didn’t charge the property for that money as a loan. As a matter of fact, the operating agreement says that we can charge up to, I don’t know, probably 10, 15% to be able to loan the property money. But as partners, as the general partners, we didn’t feel like it was right for us to be charging the property money when it really was our fault from the underwriting perspective that we didn’t plan for enough capital from the very beginning.

Dan Handford (33:38):

And at the same time, I never want investors to think that we’re just loaning money to a property just to make that money. Up to this point, whenever we’ve had to do that, we’ve loaned the money at 0% and that’s it, just so we can make sure we can maintain that business plan. That very first asset was the one that gave us the most challenging… That had the most challenging time afterwards from a capital perspective.

Dan Handford (34:01):

But ever since then, we’ve always made sure we had ample operating reserves. So we never got into that position where we actually had to put up money for a property, which it’s good to have of an operator that has the deep pockets enough to be able to put money up like that when it’s net it’s needed and necessary. And I would say that we would do it again, if we had to do that again. But before we even did it, considered a capital call, we would be able to put some of our own money in there first and put it at 0% until we had to sell the property or had enough cash spinning off of it to be able to pay us back.

Dan Handford (34:30):

But that’s kind of one of the other red flags is not investing with a group if they’re not financially stable. And you can tell why without their financially stable or not based on their underwriting. They’re taking their underwriting and they’re giving themselves really high fees in the beginning and they’re giving theirselves big splits in the beginning as well, but they’re also not doing a preferred return, usually means you’re dealing with an under capitalized group that needs that cash to put food on their table. Otherwise, they won’t be able to quit their corporate job or they won’t be able to put food on their table for their family because they don’t have enough money.

Dan Handford (35:03):

And so there’s somebody like that, I do not want to invest in, because if the property does start to go south, I want somebody that can be able to go into that property and help it, keep it afloat. And that’s also why the lenders require us to have these loan guarantees as well because they want to make sure, even though they’re non-recourse loans, we want to make sure that they actually have the ability to be able to put that cash up if the property is starting to underperform.

Robert Leonard (35:26):

Let’s talk a bit about your debt financing. Smaller individual real estate investors are typically pretty limited with their financing options that they have available to them. But large funds such as yourself, where you’re acquiring multi-hundred unit properties, you have access to a lot more financing options, such as family offices, hedge funds, and sometimes even insurance companies. Who does passiveinvesting.com typically obtain its debt financing from and how would you commonly structure it?

Dan Handford (35:52):

So from a debt perspective, it really just depends on who is giving us the best rates, have we had a relationship with them in the past? So there’s been some years where it’s been all bridge financing and no agency debt. And then it’s the time where it switches, where agency financing is better than, from a terms perspective, than bridge financing. And it’s kind of weird how kind of flops back and forth, but you really have to have a…

Dan Handford (36:17):

We have our director of capital markets and that’s his goal. And his job is to go out there and find the proper debt for the proper that we’re acquiring. Depending on the asset, it might be a local regional bank. It could be a larger institutional fund, like a life insurance company or a family office or hedge fund or whatever it might be. And then it could just be the agency debts, where you just are having a lower levered, lower interest rate debt when it comes to the acquisitions on one of these properties. So it really just depends. So it’s never been, this is the thing that passiveinvesting.com goes after. Passiveinvesting.com goes after all debt to determine what’s the best option for that particular property.

Robert Leonard (36:58):

What are you guys seeing change in the debt markets with the current market conditions that we’re experiencing right now?

Dan Handford (37:04):

Interest rates are obviously rising and on the rise. And I think they’re going to probably continue to rise in the short-term. And I think probably it’s going to stay like this for the next probably 12 to 18 months or so, then you’ll start to see it ticking back down to stabilize things after they try to flatten out the inflation curve, if you will. But the terms have definitely changed as well. When you’re doing bridge loans, it’s usually going to be a floating rate and so the spreads are increasing.

Dan Handford (37:31):

And we’re also seeing agency financing, the interest rates are going up, but they’re still lower than bridge financing, but they’re also lowering their LTV as well. And that’s mostly because valuations have been so high and now that debt service cost is going high, it’s causing that loan to value to go down, to be able to maintain that. Usually it’s a 1.25 DSCR the debt service coverage ratio on the different loans that we’re getting for these assets. A lot of those different types of dynamics are some of the things that can affect the price that we’re able to pay for a property, but also the different types of rates or terms that we’re getting from these different lenders.

Robert Leonard (38:08):

How about on the equity side? Is the current environment impacting how you and your team are able to raise capital for your deals? Is it making it more difficult? And are you finding that investors are looking for or requiring different things than they had been in the last six, 12 to 24 months?

Dan Handford (38:26):

I wouldn’t say they’re ever really requiring anything different. I think they’re still staying as the fundamentals of real estate syndication and investing passively. I will say that the sentiment, I think, over the last really two to three months has really started to shift towards a more conservative holding onto their capital a little bit more. And the reason why I say that is, is that we’re still… This year, we’ve raised more money than we have last year and so we’re on track to outperform what we did last year. And last year we raised 196 million in capital from our private retail investors and we’re already past that already this year, but I do think that the sentiment has changed a bit. And in some of our projects, it’s been a little bit slower to raise the capital. We had to put a bit more effort into raising the capital over these last several months.

Dan Handford (39:13):

I think a lot of it has to do with the uncertainty of the market, which is also why we’ve seen an increase in our debt fund. So our debt fund is a more, it’s a liquid investment where, or a semi-liquid investment, you would say, where investors can put their capital into that particular fund, the debt fund, instead of earning one or 2% in a money market right, now they can earn 6% and that can also be compounded. But then they can call their capital back out of the debt fund at any point in time in the future and we have up to 90 days to remove that capital for investors.

Dan Handford (39:45):

And we started that in June 2020 with our own capital, put in seven figures of our own money to start that company and that debt fund and put the borrower facing front together of that called Rehab Wallet. And since then, we’ve now placed over $130 million in loans with that fund. And we actually ended up launching it in October 2020 after we’ve put all the different pieces of the puzzle together, if you will, on the team to support it. And then since then, we have right now around 52, 53 million in that fund, and we rotate that capital about 2.3 times a year. And we’re able to lend that out on short-term six month loans, to be able to provide that opportunity for investors to have that liquidity option to be able to call their capital back within that short period of time. And so we are seeing an increase in investments in that because of the flexibility of having the liquidity to it. And it’s not being tied up into an asset, like you would put it inside of a multifamily self-storage or a hotel asset.

Robert Leonard (40:44):

Is that money typically lent as if you guys are a hard money lender?

Dan Handford (40:48):

Correct. Yes. So these are basically being L out to local fix and flippers and rehabers. They’re going to be buying a home, putting up some money for rehab and then turn around and then selling it. And so all of these loans that we’re giving on these are always first position leads. We’re only giving it to an experienced borrower, so it can’t be a newbie that just learned it from a weekend real estate seminar or something like that. They have to have experience doing this and show that on their track record and then we can provide that loan to them to be able to do it.

Dan Handford (41:14):

We loan it out at 12% plus two points. Like I say, we roll two to 2.3 times a year, and that allows us to be able to continue to provide the compounded returns to the investors, but also to be able to continue to, for those that want the payout, they can have it as well. But for those of people who are want to put their money in for six months, nine months, they can, and they can call that capital back at any point in time in the future.

Robert Leonard (41:38):

With everything that’s going on in the market right now, a lot of investors are finding themselves wondering if they should sell some of their properties or maybe they should hold on to them. How does passiveinvesting.com determine when the right time is to dispose of an asset? What if an asset’s still performing well, but the predetermined hold period has been reached?

Dan Handford (41:57):

Typically, what we’re doing every year on our assets, and it’s usually multiple times a year, two or three times a year, we have our brokers that we bought the properties from that will be given the opportunity to give us a BOV, a broker’s opinion of value. And we don’t only go to that one broker, we actually shop to about four or five different brokers that are in that particular space and have them give us an opinion as to what we could sell that property for at this current time. If for some reason we can sell that property now, and we’ve already outperformed those projections, then we can sell that property instead of holding onto it.

Dan Handford (42:31):

Now, a property that comes to the five year mark that is still not hitting those returns, it’s a matter of looking at the overall metrics to see, “Could we hold onto another one to two years and outperform that property, or do we feel like we’ve maxed the benefit of that property?” Up to this point, we’ve never had to hold a property long enough to get to that point where we’re like, “We’ve held it for the full five years that we said we were going to hold a property.” Usually we’re selling them around that two and half to three and half year mark right now because of how the market has been lately. But there’s a lot of different options that we have from a debt perspective, from a refinancing perspective and from an ability to able go ahead and sell and 1031 exchange and that effect for the investors.

Robert Leonard (43:14):

Myself and a lot of our listeners struggle with focus, especially within real estate and entrepreneurial ventures in general. I think a lot of times people hear about the next best real estate investing strategy or the next shiny object. And so they bounce around a bit without really sticking to one strategy. Your team at passiveinvesting.com is working successfully with multiple asset classes and strategies, we’ve talked about multifamily, self-storage, a debt fund, and even car washes. How do you balance diversification with multiple asset classes versus doubling down and really focusing on what you guys are really good at?

Dan Handford (43:50):

I will say that one of the things that we’re really good at is putting the systems and procedures and processes in place as we add additional asset classes to our portfolio. So when we first got started, and even today, the majority of our holdings is in multifamily. So I’d probably say of our $1.2 billion in acquisitions, about probably 950 million of that is multifamily. And probably even closer to a billion as in multifamily.

Dan Handford (44:19):

And then once we had that perfected, we decided let’s go ahead and add on self-storage because we had a lot of investors asking us about it. “Are we going to be doing something like this?” And one of the reasons why we called the company passiveinvesting.com and not multifamilyinvesting.com is that we wanted to have some alternative asset classes that we could add to the mix of multifamily as we continued to grow.

Dan Handford (44:40):

And so one of the mistakes that I made in the very beginning in business is actually my wife and I also own a group of non-surgical orthopedic medical clinics here in South Carolina, we have four locations. And when we opened it from one location to second location, we made a big mistake and we actually took our eyes off at the main location, took our entire core team and transplanted them into the new location. Guess what? The new location did phenomenal. We were cash flow positive in the first two months and it was profiting like you wouldn’t believe.The problem is, is we took our eye off the main location, the first location, and it started to go down and suffer.

Dan Handford (45:15):

One of the things I learned from that is that when you want to grow from one location to the next, or from one business unit like multifamily, you want to add on something like self-storage, is you got to have a completely separate team that you bring on, right? We actually don’t take our multifamily team and go, “Okay, now guys, we want you to start buying and looking at self-storage.” And, “Oh, we want you to start buying hotels,” we don’t do that. We go, “Okay, multifamily team, you’re doing a great job, pat on the back. All right, let’s go find another team to do self-storage. Let’s go find another team to be able to head up the hotel and the express car washes and the debt fund.”

Dan Handford (45:48):

That way they’re not being spread out too thin and we make sure we have our investors understand that we have attention on each one of these different business units as we continue to add it. It’s one of the reasons why we haven’t gone after all of them from the very beginning. So the very beginning it was multifamily, then we added on sell storage, then we added on express car washes, and also the hotels.

Robert Leonard (46:09):

Is it harder to find the people or the assets to buy?

Dan Handford (46:13):

I don’t know. I would probably say it’s about equal. Assets are definitely hard to come by. And I would say it from a people perspective, I don’t want to say we’ve been really lucky, probably more blessed than anything, that we have a really good solid team. Our team is very great. They all work really well. Our entire team is remote. So we don’t have a high rise, 13th floor or 20th floor or whatever in a Highrise building. We feel like we work better and we can acquire and attract a great quality talent and talent pool by not making them move to where we are. They can stay wherever they are, we can stay remote.

Dan Handford (46:47):

And I’ll tell you that if it weren’t for COVID, I probably wouldn’t have been doing it like this. Because I was a big believer in-person. “You got to be here, I want to have meetings and have that face to face.” And we’ve been able to incorporate some of those face to face things throughout the year as we’re going throughout the year and as we’re doing some trainings and things like that, but for the most part, we don’t see each other during the regular days, during the regular business days or whatever, it’s all remote.

Dan Handford (47:11):

Now, we’re all connected via Teams and we have the ability to have that communication back and forth with each other, very, very seamlessly. But for us, we’re all remote. And I think that’s one of the things that has allowed us to make it a little bit easier for us to attract a good talent pool from across the country, because we have people from all the way to California, to Chicago, to New York, all over the country that are working for us. And we have around right around 40, 45 people that are now working full-time for us, for passiveinvesting.com.

Robert Leonard (47:39):

Dan, for anybody that’s listening, as we wrap up the show, I want to give you a chance to tell everybody listening where they can go to find you where’s the best place to go, passiveinvesting.com? Where else should people find you?

Dan Handford (47:51):

Sure. Yeah. No, obviously you can go to passiveinvesting.com. If you’re interested to find out more information about us, the red flag’s articles on there as well. You can also go there and if you’re interested in passively investing with us or at least reaching out to us and asking some questions to us, our investor relations team is there that can schedule a phone call with you, discuss your investment goals and see if group is the right fit for you.

Dan Handford (48:13):

And you can do that on the website, passiveinvesting.com, the right top right hand corner of the page is a big blue button that says, “Join the passive investor club.” You can click on that button, fill out the form and then schedule a phone call with one of our team members to be able to discuss your investment goals with them. And then the last place you can do it is if you want to just connect with me and then find some more of the content that I put together on a regular basis, you can go to my LinkedIn profile and you can just go to linkwithdan.com. Linkwithdan.com, that’ll just take you straight over to my LinkedIn profile and you can connect with me there and we can have that further conversation from there.

Robert Leonard (48:50):

I’ll put a link to all the resources Dan just mentioned in the show notes, but I’ll also put our other conversation that we had on the We Study Billionaires Podcast as well in the show notes for anybody that’s interested in checking that out too. Dan, thanks again for taking valuable time out of your day and joining me. I really appreciate it.

Dan Handford (49:05):

Awesome. You too. Thank you.

Robert Leonard (49:07):

All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (49:13):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday We Study Billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestor’spodcaster.com. This show is for entertainment purposes only. Before making any decision, consultant professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.