080. Due Diligence as a Passive Investor with Lee Johnson

Connect with the host:

LinkedIn: https://www.linkedin.com/in/brandon-e-jenkins/

Website: https://www.birchprosper.com/

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About the guest:

Lee Johnson is the Co-Founder and Vice President of Value Investment Partners (VIP), where he helps partners grow their wealth using various alternative investment strategies that allow leveraging money and time, conducting and monitoring project due diligence. He has been investing in real estate since 2005 through multifamily, private lending and rehabbing residentials properties. Lee’s focus now is passive investing through real estate syndications and active multifamily investing. His current portfolio spans multiple markets around the country – over 2800 units valued at about $334 million. 

Connect with Lee Johnson

Website: https://www.valueinvestmentpartners.com/

Phone: 571-444-8474

Episode Highlights:

✔️ Understanding the fundamental principles of wealth

✔️ Living out your dreams and your passions

✔️ The purpose of coaching

✔️ Effective wealth and diversification strategies for retirement

✔️ Due diligence as an LP

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💡 Interested in learning more about opportunities to partner in deals as a passive investor? 

★ Join Our Investor Club ★   https://forms.gle/AEpWgPg7krd8YzPU8 

Transcript

SPEAKER_01 0:05

Have you ever considered investing passively in multifamily syndication deals, but you're not quite sure where to start? Well, what if I told you that having an experienced investor to coach you through the due diligence process was the key to safeguarding your wealth? Well, in today's episode, we're speaking with Lee Johnson with Value Investment Partners to unravel the secrets behind real estate investor coaching and the art of passive investor due diligence. These aren't just tools, you know, these are your golden tickets to making informed decisions, minimizing risks, and fast tracking your journey to financial and time freedom. You know, we've all faced the struggle of making decisions without a guide, you know, risking setbacks, and uh obstacles in pursuit of financial freedom and true wealth. But the consequences of underestimating the importance of coaching and due diligence can be profound, including, you know, hindering your progress, extending your journey, and potentially causing you to lose money. Okay, so stay tuned because by the end of this episode, you'll have a toolkit of knowledge to help you supercharge your wealth bidding strategy. Okay, so I'm here to help you improve, and so is Lee Johnson. Here he is from Value Investment Partners.

SPEAKER_00 1:22

Are you a busy professional in the DMV area looking to invest passively in large multifamily syndication deals? Do you want to meet with other like-minded investors of all experience levels to learn, network, and discuss some amazing investment opportunities? Then look no further than the DMV Apartment Investor Community In-Person Meetups. Our monthly meetups offer a space for you to connect with other investors, learn from industry experts, and discover lucrative investment opportunities in large multifamily syndication deals. Whether you're an experienced investor or just starting out, our community welcomes everyone who is interested in growing their wealth through passive investing. Join us at the DMV Apartment Investor Community Meetups and take your first step towards financial freedom today. Visit our website now to learn more and register for our next meetup. We'll see you there.

SPEAKER_01 2:30

What would you do if you had the freedom to pursue the things you enjoy the most? How incredible would it feel to have the resources to pursue your passions fully and live life on your terms? This is Brandon Jenkins, host of the Capital Stack Podcast and principal of Birch Prosper. You might have heard that 90% of the world's wealthiest people attribute their wealth to real estate investing. Well, guess what? It's true. Investing in real property continues to be the greatest generator of wealth all over the world. So join us each week on the Capital Stack Podcast to hear about how commercial real estate group investment opportunities can help you reach true financial freedom and give you your time back. Hello everyone. What's up, man? Welcome back to the Capital Stack. Um, if you're new to the show, welcome. If you're a longtime supporter of the show, welcome back. Uh so we have a great show for you today, folks. Look, as active investors, syndicators, sponsors, general partners on multifamily deals, it's important to have what's called skin in the game. It basically basically means um investing alongside the passive investors or limited partners in the deal. Um, among other things, I think it shows that you know you believe in the value of the opportunity that you uh present to your network. And so um, I'm honored today to present our guest who really believes firmly in that he's he's got a long, uh sort of a strong background, and we'll get into that in a moment. But um, you know, he believes in putting skin in the game, making sure that he's investing alongside his partners, which I think is very powerful. So um it's my pleasure to welcome our guest Lee Johnson to the podcast. Lee, how are you doing today, sir?

SPEAKER_03 4:04

I'm doing good, Mr. Jenkins. How are you?

SPEAKER_01 4:07

Oh, I'm doing well, man. Thank you so much for being here. So, Lee is the co-founder and vice president of Value Investment Partners, they're a firm focused on helping investors build long-term wealth to a diversified offering of value-add investments in growing markets. Okay, you got to focus on growth. I think it's very important. Um, he's been in the real estate investment space since 2005 and has a portfolio of over 2,800 units valued at about $334 million. Okay, so we're gonna talk about that as well because um, you know, these days there there aren't that many people really who have kind of stuck in the business and had success. And so he's been in since 2005. We love to hear more about that. So, um, Lee, look, you clearly have a you know, um, depth of experience in this business. Why don't you share kind of a little bit about your your background and what drives your commitment to uh real estate?

SPEAKER_03 4:55

Well, my commitment to real estate is centered on the fact that someone said this to me the other day is that your children cannot inherit your W-2, right? But also, you know, when you when you think about it from an income perspective, when you are in a W-2 type of situation, the more money you actually make, the more money you're actually gonna give to Uncle Sam. And as a W-2 employee, I just I had run out of ways to basically reduce my taxable income. It was worse when the 2017 Jobs Act went into place, and that basically made it more beneficial to take the standard deduction than to itemize, you know, maxed out the 401k. I started to realize that hey, the more money I make, the more Uncle Sam is going to take. And I had needed to find other investment vehicles that were gonna basically allow for me to grow my income, but would also do so in the most taxed optimized uh perspective.

SPEAKER_01 6:05

Uh, I think that's um I appreciate you sharing it. I think that's very important. You know, it's it's interesting. I like to share with people that um, you know, real estate sort of has five uh you know big benefits, I'll call them, right? And um income, depreciation, equity buildup, appreciation, and leverage. Um, and you know, it seems like the vast majority, not vast, but a lot of people get into a for income. But that depreciation and the tax benefits is a huge reason why real estate is one of the best investment vehicles that there is, um, period. And so I like to hear that, you know, that you kind of you got in because you wanted to find a vehicle that would give you some upside, but that had some that was tax advantaged. Um, and so yeah, I think that I think that's very, very important.

SPEAKER_03 6:47

It's not how much money you make, it's how much money you keep. Yeah. That's that that's the critical ingredient to the formula is how much of that do you actually keep? And that's going to be one of the key ingredients into your wealth building strategy is how much money are you keeping, but also how often is that money going to be turning, right? So money is money only has value or currency only has value because people give it that, right? Now, one of the things that you need when it comes to growing wealth is you need time on your side, right? So every day that a dollar is available to you, it should be working. You worked print plenty hard to grow that income. I think people in their mindsets need to change just a little bit so that they're more focused on how I can grow my wealth, right? Because just the other day we had a meetup, right, over here in Sterling, Virginia. We had a meetup, and I asked some of the attendees why is it that you work? And I got a lot of blank stares. But this isn't a very complex type of question. This is a very simple question. Why is it that you work? And I don't believe a lot of people have come to that story as to why they work. Having spent a tremendous amount of time thinking about that question, the answer for me is people work because they have expenses. They work because they have bills that they need to pay. Now, once they have grown their net worth to the point where that net worth generates a yield or passive income that covers their annual expenses, that removes the need to have to go to work. So as a coach, I ask many of my students, when do you want to retire? Right? And since we're working on the mindset, a lot of them initially say to me 40, 50 years from now, because I'm working with a lot of folks in their 20s and their 30s. I then transition the conversation to say, well, why can't you imagine doing that in seven to ten? Because if you can imagine doing that in seven to ten, that means that the rest of that 30 to 40 is yours to take advantage of the freedoms that are available to you, whether that's time freedom, financial freedom, location freedom. So what we have to do is we have to get people into a position where we're changing their thinking as to why they are looking to do real estate. Because real estate has its ups and its downs. If you ever walked into a hoarder's home, you know that that isn't any bit of fun. It's never fun to walk into a hoarder's home and just see mountains of trash and you know, carcasses from dead mice or dead animals and things of that sort. That's not sexy. But once we start out with, you know, identifying people's purpose and passions, then we can understand well, is real estate going to be that vehicle that they can leverage in order to be able to achieve their goals? I think real estate is because I believe that real est I believe that real estate is accessible to each and every person because my background tells me, you know, I have five siblings, you know, grew up with a single mother. If I can do it, not discounting myself in any regard, but if I can do it, I believe that others can do it just the same. And my passion is to help others to realize that it's possible. That's that's my goal and purpose in life right now, is to help others realize that the dream circle as they grow older, as they mature, shouldn't actually get smaller. Their dreams the dream circle should actually get bigger. You know? You gotta go back to that youth in you, and when you were five years old, you probably dreamed that you could do any and everything that you wanted to do in this world. My question to many is why did that dream start to get away? And I get it. Life can be tough, life can be difficult, right? But I still believe that it's within everyone to live out their dreams and their passions.

SPEAKER_01 12:23

I think that's very, very powerful. And um, and I'll even kind of kind of building on that, you know, I like to share with people as well that listen, um, there's a lot that you can learn from um from a child, or at least from the the perspective that a child has. So not only are their dreams enormous, right, ready to take on the world, uh, but they also sort of wake up every day ready to ready for the day, excited for the day. And they there's there's almost this inherent quality in children that says, you know, they can start new, they can start anew every single day. And um, I just find that to be very, very powerful. And and I I love that you said that you're uh first of all, I love you call it that you call it dream circle. I like that. But it's that that should be growing. Um, you know, and the opposite happens because the more the older we get, and um you know, the more opinions and perspectives that we take in, our dream circle shrinks. Um our our sometimes our our self our our self-worth shrinks, all of these other barriers and things, it's they start to you know come into play, they start to tell us you can't do that. And I and by extension, I also think that's partially why when you ask that question to your um students that when you say, Well, why do you work? Why is it that you can't convince or see yourself retiring sooner? I think that's also because of what we're talking about, which is as you get older, other opinions, perspectives, restrictions, limitations, they start to come into play. And um, and people live by that, you know, without really challenging it or questioning it at all. Um and so I think it's it's it goes to programming, you know. And unfortunately, we're talking about this is the negative side of mental programming. Um, and it can be very dangerous. The opposite is also true. So one of your students, when they um meet you, then you're you're giving them positive, you're you're you're unplugging them from whatever system they've um been plugged into, and you're reprogramming them to say, well, here's here's a perspective that you need to consider, and I'm gonna show you why this is something that works, you know. So um I love that.

SPEAKER_03 14:43

I think I think it all for me, brother. That's a little bit of a lot of things. Oh, yeah, where we just start having a conversation, right? And through that conversation, we are able to identify opportunities, right? And you know, a part of my coaching was positive intelligence, right? And there's a judge, and the judge has saboteurs and their accomplices, right? But on the other side of the judge is your sage, right? And your sage is all about empathy, your sage is all about uh innovation, right? One of the questions that I also ask students is what determines your happiness? Right? Because through the coaching process, right, they will identify that the happiness that they are seeking is actually within them, and it's not anything that's gonna come from an external perspective, it's all right there with them, which to me actually is the beauty of going through the coaching process. Now, you can have a coach for a reason, a season, or a lifetime because that coach is gonna help you to get to a point where you elevate yourself. And at a certain point, you might be through that season when you no longer need that coach anymore and you need to get another coach. A coach is supposed to accelerate you and your learning. And if that's a coach who helps you to believe even bigger than what you thought was possible, right? I'll give up, you know, we were a student of Good Egg, and Julie Lamb did that to me. Right? When I was in the position where I was looking for coaching, I said to Julie, I wanted to be in a position where I could raise one million, two million dollars. Excuse me. And Julie said to me, Lee, just hearing your story in the conversation that we're having, I already know that you can do three or four. And because I went with Julie and Team because we were looking at others, but I went with Julie and Team because she helped me to imagine a vision that was bigger than the vision that I had set for myself. And you know, it was remarkable what we did in the year that we worked with them, right? But also, you know, that's what coaching is all about, and one of the reasons why I decided to become a coach, you know, my thing is not to be a full-time coach, right? Because I'm a business person, my thing is real estate, but I do like helping people, and coaching is that vehicle that I will use in order to help people because a lot of these things people don't know. People don't really understand their tax position, and I had to learn, right? I had to get a PhD from the school of hard knocks just going through and learning. Like in 2014 when we did several flips. Oh, I was dancing until I got my tax invoice. And there was no more dancing. I was like, hey, it's time I gotta write a five-digit check to Uncle Sam. Uncle Sam, you know, God bless him. We have to pay for roads and schools, our military, but I don't have to do more than what my obligation is. Right? I love Tom Wilwright and Tax Free Wealth, where he says the tax code is 6,000 pages. 200 of those pages tell you how you're going to be taxed. The other 5,800 pages speaks to how you can reduce your tax obligation. This is one of the reasons why I believe in having a good CPA. Right? Because if I'm worried about how I'm going to minimize my taxes, then that means that my focus isn't on what I'm truly passionate about, what I'm truly good at, and I can outsource that to someone to do for me and pay them what they're worth in order to get that job done for me. So spending $10,000 to have a tax strategy is okay if that tax strategy is gonna save me $20,000, $30,000, $40,000. And people have to look at that as an investment in themselves as well as an investment in their business. I think people look at it as, oh, I need to spend a certain amount of money. I say that that's the wrong way to look at it. The right way to look at that is that I'm look I'm making an investment into my business, and in doing so, I'm looking on an ROI or a return and it has to make sense. Now, this doesn't mean that every time you make an investment into your business, you're gonna hit that ROI, right? But you have to go into it with an ROI and you have to say to yourself, if I fail, I recover quickly and I continue to grow my business. Failure is a part of success. You cannot have success unless you experience failure. Right? Because you cannot have success unless you leave your comfort zone. Right?

SPEAKER_01 21:55

Absolutely. I I I would agree with that wholeheartedly. I I I like to tell people that um And this is, you know, hey, this has been said plenty of times, but I tell people, you know, that opportunity really is just on the outside, just on the other side of your comfort zone. So where it where your comfort zone is, that's where all this world of opportunity and everything just opens up. And um it and it can take a little bit of work to take that step outside of that zone where you're you feel protected and you feel like you know it's fairly predictable, or at least you think it is, because really it's funny because it it that that comfort zone is still full of holes. But um but but there's the there's the thought that it it protects you, and so um yeah, just on the other side of that, there's some major things that can happen. And you I have to say, so you you went into some things there that are very important that I'd like to sort of touch on. Um, and the first one I'll say is Tom Whewwright's message is super powerful. One thing that he says is that the tax code, I forgot how he phrases it, but he said the tax code incentivizes you to do what the government wants. So if you think about the things that uh this country and any country needs to have done, um, you know, whether it's uh energy, right, whether it's uh housing, and um, and there are uh several other things that he lists out. But if you help the government to provide those things or to improve on those, the government, the tax code will incentivize you. Uh that that in itself is something that when people hear that, if they really take that in, it flips their perspective on its head because what they thought previously was that all this thing is here to punish you. You just said it as well, is uh I think only 200 pages of that 6,000 uh pages will tell you how you're gonna be uh taxed, and then the rest of it tells you you know how to work within the tax code. So uh, you know, this it's again programming, you know, again, it's it's hearing that new perspective, like what you like what you mentioned with Goodig, which they're an excellent outfit, right? Um, and that they that when you spoke with her, she said, Hey, listen, that I already know that you can do three, four. Um, and then I'm sure for you, even hearing that was like, you know what? She's right.

SPEAKER_03 24:06

I can I can. I can. Napoleon Hill said it best anything that the mind can conceive and believe it can achieve. Right? This is one of the reasons why I give back to you know marginalized communities, especially my community, because growing up, you know, seeing George Jefferson being a store owner was odd for me. The programming that I received throughout my youth was go to school, get a decent job, but you know, that was in the 70s and 80s where it was transitioning from a pension type of system over to a 401k type of system. Right? So at that point in time, with a high school education, you would say to yourself, I'm gonna put 30 or 40 years into this business and they're gonna take care of me for the rest of my life. There are very few pensions in the United States today. Everyone, the comp well, even if you had a pension, right? If the company goes bankrupt, the pension gets dissolved for pennies on the dollar, and you're back on your own at the time when you needed it the most, right? Because at that point in time, you should be drawing your social security. You were expecting that your pension was going to be able to pay for you, but now the company basically walks away from you or says to you, here's the 401k. Now, if you read 401k 401 chaos, he even sees using 401ks as a bad vehicle because 401ks are taxed at your personal income level, and his thinking is that if you were to have invested that money, then you would be taxed at capital gains, which is you know over a year, is going to be at 15%. Right? I counter that argument to say by the time I'm expecting to draw from my 401k, my income will be at the lowest level. If I make $12,000 a year, right, in income when I'm retired, then I have done well. But right now, I have said, as part of the wealth growing strategy, leverage that 401k, use it as free money to continue to grow your net worth. There are alternatives for you. Should you say, hey, I can do a drop-down and roll it over into a Roth, yeah, you have to take a 30% hit. But at that time when you have to make that decision, I would assume that you would be making that decision with the best information that is available to you at that time. But if a company is gonna give me a match on whatever it is that I'm putting in, and I understand the time value of money, it makes sense for me to take that money at that point in time as free money and invest it. Right? Yeah. When you look at the capital markets, the stock market has always gone up. And if you're looking at it from a diversification perspective, why not leverage 401ks in the stock market as a part of your diversification strategy to continue to grow wealth? This is why I love to have a conversation with people about 7 to 10, right? Because if they invest diligently for 7 to 10 years, they can get out of that 40-year, 40 hours a week trap. And most people today, if they're a salaried employee, which is my target audience, they're not putting in 40, they're putting in 50, 60, 70 hours a week. And that's unsustainable because whenever you're doing something that much, you're sacrificing something else, and that something else is typically going to be a loved one, a family member, etc. I want people to understand that if they're going to be making those kinds of decisions, that that is the right type of decision for them. And I I would I would be so bold as to say that many people, once they come to the realization of the sacrifice that they are making, that they will then course correct and go into a different direction.

SPEAKER_01 29:20

Yeah, I agree. I agree with that. And I think um, I think that sometimes it takes sort of like what you're doing, is it takes someone or um, you know, I guess in the best case, really, it takes someone to say, hey, listen, here's an alternative, as opposed to sort of like being handed an epiphany is what I like to call it, right? You can either have an epiphany that you reach on your own, um, or you can have someone step in and say, hey, listen, here's another way to do it, but in the worst case, go through some difficult times and see that, oh yeah, this doesn't work. So I think that the way that you're doing it and helping your students and the people that you speak with, I think that's uh probably the best way um to do it, because then they see that without without it being uh something they have to experience negatively on in terms of their finances, then you step in and say, listen, here's an alternative and here are the numbers and here's why it works. Um, so yeah, I think that definitely makes uh makes sense. And this is something that you know, I like to talk with people as well about coaching, mentorship, and these kinds of things because there you get different opinions on that. A lot of people who think, oh, you can find this information online, you can do that. Well, sure, there's a wealth of information online, but what you can't find is experience and accountability online. There's no, you know, you don't find that. Um, because you can sit down and spend hours and gather tons and tons of information, but in one conversation, someone who's been there done that can help uh you know illuminate some things for you. So, you know, again, I maybe I talk about it too much on the show, but I'll keep talking about it because I think it's just that important, the amount of time that you can shave off just by going, you know, having someone coach you, mentor you through it. So I just wanted to sort of share that a bit with the listeners. Um and uh Lee, there's something I wanted to talk about. Your experience, I think we touched on it earlier, not just in the fact that you got started in the business in 2005, but um, you know, also just the perspective that you've sort of shared in different ways to grow wealth, right? So we're in a time in the market where you know everyone who's paying any attention to real estate, they know, you know, hey, high inflation, high interest rates. And and certainly if you're in a syndication space, then you that you know that uh transactional volume has gone down in in many uh markets where that was not the case, say six, eight months ago, um, or maybe a little bit longer than now. Uh but you've seen different um cycles, you've seen many, many phases in the cycle, including including recovery and expansion, right? So, what what do you say to someone who is fairly new to this space, or they're even watching this space, and they say, gosh, it doesn't look so great right now. Maybe I shouldn't stay in real estate.

SPEAKER_03 31:59

Well, there's a couple of things that I would have to say about that. The first thing that I would say is that as you are going through the storm, that's when it's always going to be the toughest. Right? The learnings that I have in front of me says that I should look at challenges and hurdles from the perspective that that would eventually be a gift or an opportunity for me in the future. Yes, I got into real estate. I've been watching real estate since I was in high school, and Carlton Sheets was there, etc. I got into real estate in 2000. Well, I bought my first home, personal home, in 1999, 2000. And I remember when I went to my first HOA, I purchased that house for about $120,000. And I went to my first HOA and I said to the folks at the HOA, why aren't prices going up faster? And they said, it's already gone up tremendously. Right? But that house, when I sold it, I sold it for nearly $400,000. But that then allowed and opened up the door for me to go on and buy to be an investor. And I used the equity, I used the equity from that first purchase to go and buy other pieces of real estate. And of course, I'm here in the Washington, D.C. area. So I'm saying I can't afford to do it. So I went up to Delaware where I had a family member and we invested in some properties. And in 2008, we lost those properties to foreclosure. Right? That's why I always stress to anyone that even if you're going into business with a family member, that you should go into business with that family member with a contract in place. Yeah, because that paperwork in place, paperwork, and you need to do that when cooler heads are prevailing versus trying to do that when things are a little bit rocky or things aren't going as everyone had intended it to go. So that's one thing that I would say. But you know, in 2014, after I after I return from abroad, that's when we got into fixing flips. But fixing flips is great if you don't have a high W-2. If you have a high W 2, and by high W 2, I mean anything over $100,000, especially over $150,000. That means that every single flip that you're doing is now taxed at your personal income level, and that means that you're going to write a check to Uncle Sam. And after two years and you know, several different flips, we moved on to say, well, there has to be some way that we are able to do this the right way. You see Donald Trump on TV, and he's doing real estate, and he he has millions of dollars of write-offs. That's when we moved into multifamily syndication by reading uh Gene Tobridge's book. It's it's a whole different business. Yeah, yeah. That opened up my eyes to syndication. Then I invested as an LP in 20 different deals, right, before I was able to invest on the GP side. So it's been a journey, and I am happy for every single obstacle that I ran into during my journey because it's those obstacles that have allowed for me to get to where I am today.

SPEAKER_01 36:24

Yeah. Yeah, yeah. I would echo that as well. Um, you know, they really help sort of, you know, build and construct and mold um, you know, us into the to the people that that we are, you know, without going through them. And I, you know, what you mentioned it earlier as well, is finding the gift in every problem, I believe is the way you you you phrased it. Um, and I think that's very important, you know, because you know, listen, we all we all have challenges and difficulties that that we face just in general. And so it can be uh tempting to sometimes let those you know engulf us and almost get lost in that problem. But it's much more valuable to sit to say, okay, well, you know, what what was my role? If I had a role in getting into this, what what can I learn from this? Maybe I can make an impact on someone else so that they can avoid this. There's all kinds of ways to find a good in the problems that we all have. Um, so I just feel like that perspective is much more um um useful to us, yeah. You know, and so um, you know, and and I I think that um, you know, for for me, I just I just believe that again, it's we've talked about programming, you know, we talked about um just a lot of things that I think are essential to thrive in this in this space. And I think that in terms of the mechanics, though, of a deal and in terms of the stick-tuitiveness, the the ability to be in the market for a long time, you do have to have sort of an element of risk management and what you do or an understanding of um the downside. Um, you know, and I think that's because you you mentioned also being here, we're we're both in the DMV area. And so there are certain elements that may, you know, work against us or may work in our favor, depending on what our objectives are in the deal. But but I believe we both uh at least have some investments that are outside of the DMV. And so for some listeners, that introduces an element of risk. And actually it does. I mean, I'm okay with saying that, but it's about how you mitigate those risks. Um, and so what what are your thoughts on maybe on that on like risk risk management? Kind of how do you approach that in your in your strategy? Um, and we can even just talk about that with respect to investing, maybe uh, you know, let's say it more than two hours kind of away from where you are. How do you how do you manage that so that it still turns into a win for you?

SPEAKER_03 38:47

Well, I remember the first time I was after reading Gene Tobridge's book, I I needed to go and find some syndicators. Right, and that was 2016 before you know you had funds like uh um Pier Street and FundRise and Realty Shares. And I remember the gentleman who I was working with wanted $75,000 to invest in a deal. So here I was going to take $75,000 of my hard-earned dollars and send it to someone who I didn't know. That would have taken some serious kahunas. So what I did is I found an operator who was more local to me, and I can remember meeting her at a Panera Bread and literally handing her a check or an investment for $100,000. And that $100,000 check went over the table at least five times because I wasn't 100% sure that I would ever see that $100,000 in return. However, what I had done is I had invested within my circle of trust. So everyone who was investing knew everyone else. So people, I had trust in the people who I was investing with. That hundred thousand dollars turned into, I think it was two hundred and twenty-eight thousand dollars in about five years. Right in about five years. So it was my best investment when it comes to investing as a whole, whether it's going to be in equities, stock market, or real estate, preservation of capital is tantamount to anything. Without capital, you are out of the game. So you have to have your due diligence to understand how to invest in a deal. A strong track record of delivery as an LP in any syndication is a strong sign that you're working with good operators. Now, all operators aren't good, but that's one of the reasons why making a small investment with an operator helps you to understand how they're going to treat you. Now, from 2016 all the way probably to 2022, it was a high when investing in syndications. Right? Everything went up. Now we're going through a cycle where interest rates have been raised by 525 basis points, and you're seeing professional banks go under such a signature SVB and First Republic. I would say that if you are going to be investing in anything, you have to pull out your pen and pencil or your Excel spreadsheet to understand how the deal is going to work. I still fly down to the properties that I'm investing in, and I'm okay with doing a tenant walk a property walk. I'm okay with going to the Office of Economic Development or the Chamber of Commerce so that I could understand with whether or not the things that they had put into the operating the um the OM is really there. That the jobs that they're forecasting are gonna be there, right? That there is diversity of employment there, that the rents have been trending in the right direction. All of those things are necessary before I invest in a deal. All of that is necessary. So there's not a checklist that you would say, but you definitely want to look at the MSA before you start digging into the submarket to understand whether or not if that's going to be a place where you want to invest.

SPEAKER_01 43:46

Yeah. I I I definitely think that um we're in a period we've always it it's great that you make make that distinction, right? It's um, you know, if you got started in 2016, or if you were active, actively passive, right, in 2016. To 2022, it was just a time to be in a market to where if you if you invested with an operator who uh, although you might not have known it, was not an outstanding operator, he probably still did fairly well. Um, and so now we're in a tighter environment. And I just had a conversation recently with another, you know, with an investor who said the same thing is that listen, the conversation has has shifted a bit. You know, now the conversation is much more around that risk, uh, much more around the assumptions um that that go into the deal analysis. You know, are you sure that you can achieve the rent bumps here? What are what are the properties in the area um seeing? You know, have they proven your business plan? Has the deal that you're buying somewhat proven the business plan? You know, maybe 10% of the units or something like that are seeing some upside from CapEx. Um, you know, like you mentioned, growth. Is the growth real or are you just putting it on a you know PowerPoint uh presentation saying it's there? It might not be there at all. Um all things that that I believe the conversations right now in the marketplace um that are are leading or lending toward or leaning towards are that it's it's more around, okay. Well, let me take a tighter look at this. Uh and I think that's healthy all around. I think that for on the active side, it's good, it's important for us to understand what the assumptions to back our assumptions. We shouldn't have numbers in spreadsheets that that aren't verifiable. Um, you know, you shouldn't have pie in the sky numbers, your your rent escalations or revenue escalations should be reasonable, and your expense um increases should make sense as well. So, all these things to me, I think, is just very, very important in an environment like we're in now, and they and they really have always been important. Um, you know, and so let's let's maybe talk then a little bit about kind of your deal selection and um and your criteria, like just a philosophically, maybe how how do you evaluate uh potential uh deals?

SPEAKER_03 45:59

Well, we underwrite every single deal that we invest in, similar to if we were the lead sponsor, we're gonna request a T12, we're gonna request the rent roll, we're gonna request all of that bits and pieces of information, we're gonna put it into our own Excel spreadsheet, and we're going to basically interrogate the data, right? To ensure that what was being communicated is actually real, right? Flying down when they're going to do the due diligence makes sense, especially if you're investing a significant amount of capital into the opportunity makes sense, right? But also every six months, my team and I we do an analysis of the MSAs that are showing the correct trends that we're looking for as investors, right? So we do it in January and we do it again in July to make sure that hey, where we are today is not going to be where we are going to be tomorrow. As I mentioned earlier, some people frown upon whether or not if a preferred return is actually a thing. Because even if the property has to hold back on payment, that preferred return says that the LP investors must get paid before the operator. The operator needs to be incented to provide returns in order to earn their compensation, and when they're not doing so, they should only be compensated after the LP investors are compensated because the deal does not happen. So I say make sure that there's a preferred return. Right? And of course, when you're investing capital, like right now, you could get a six month treasury that's recording about five percent. So to your investor, that's risk-free. The United States government, you know, knowing where we are, has never defaulted on its obligation. So if you can get five with a six month, the investment vehicle that you're going to be investing into needs to give you five plus something, plus two points. On top of that, so that means that the minimum investment return that you're looking for, either cash on cash or an IRR, has to be greater than seven. So these are the different types of things and the different types of conversations that one needs to have when they're going into any investment vehicle. Don't be a sheep, right? Because sheep sheep are led to get slaughtered. Make sure that you're doing your due diligence to make sure that you're growing your wealth using risk-adjusted vehicles that make sense for you, right? Because not everybody is a Bitcoin investor. Right? That's just too much risk for certain people. But depending on the different pieces of the conversation, you can have different aspects to it. So I think that you know, you have to be a wise investor when it comes to investing. I don't know who said it, but someone said a long time ago that a fool and their money is soon separated. Yeah, you don't want to be that fool. But even if you are that fool, if you take the sage perspective, you have to ask yourself, rather than beating up on yourself, you have to ask yourself, did I learn anything from it? Right? What is it that I can learn from this experience that two years down the road I'm gonna say thank you? Thank you, God, thank you, Lord Jesus, for for having brought me to that experience because it made me better.

SPEAKER_01 50:46

Yeah. Yeah. I think that's that's very important to focus on in any situation. And what I like to share with people as well, around um, in terms of deal structure, is to ask the sponsor what the objectives are of the structures is there. Because as you'll find um, for people who might not be as experienced in this, you'll find that there are tons of different ways to structure um some of these deals. They usually fall within a certain maybe three general types, right? But but each of them has different objectives, you know, like if they have three different classes of shares that they're offering, then understand what the objectives are of those, you know, why why is there three different ones, or are there three different ones, and what's the point? You know, if it if it has a certain waterfall structure, uh structure, you know, with different types of hurdles, you know, hey, why is that structured that way? And a lot of times, you know, in and just asking that conversation, uh, that question, the sponsors are going to be, you know, more than willing to say, or they should be more than willing to say, because not always, right? That's that's another thing. I I would throw that out really quickly as kind of a red flag. If you have someone who's not willing to sort of um um uh help you understand what the structure of the deal is, or help you understand why they the capital stack is structured the way that is, the type of debt that they have in place, why why did you seek that out, or did you just take what you could get? Um, that's a red flag if you have someone who's not willing to do that, those things. But that's that's what I like to share with people as well. It's like understand the objective of each. Um, and if it doesn't align with what you're looking for, then move on because there'll be cleaning about other opportunities. But at the very least, try to understand why is this structured this way versus some of the other ones that I've seen.

SPEAKER_03 52:24

Can I give you a yes and on that one? Absolutely. Hearing what the operator says is fine. There's tremendous value in whatever it is that they're going to say. But where I see a lot of people get stuck and lost is understanding what's inside of the PPM. Right? Yeah, you will permanently give yourself an orange jumpsuit if you lie or violate what's inside of the private placement memorandum. Yeah, yeah. So I say like literally, Brandon, before when I got started in this, I read about a hundred PPMs on Realty Shares because I didn't have access to operators that I knew to get a hold of a PPM. And that was my education into multifamily syndication. Everybody knows what happened to Realty Shares, it doesn't exist anymore. But I am thankful for Realty Shares at that point in time because it is through Realty Shares that I was able to find available PPMs and read them and get to understand this business. I remember when I met um Ellie Pearlman. Uh I had invested with her a deal with her in Florida. And, you know, she's an attorney, very wicked smart. I went over to her and I said, Wow, I enjoyed reading your PPM and the structure that you placed into it. And she was like, I don't think she had ever met anyone who had come over to her and said that they enjoyed reading her PPM and the structure that she had put into it. There was, you know, greens and blues and all kinds of good stuff that was in there. But what I admired the most was that PPM was drastically different from all of the other PPMs that I was reading. And I wanted I wanted to let her know about it. So that was at the best ever conference, I think it was in 2020, right before the pandemic happened, is when I met her at the conference, and I said to her, hey, that was a beautiful PPM. Right?

SPEAKER_01 55:06

Yeah, man. I have to tell you that uh if you read a hundred different um BPMs, man, then um that that's pretty impressive. Yeah, that and then I hope I hope you had some coffee with you because that's uh No, no, it wasn't overnight.

SPEAKER_03 55:20

It was something that took you know several months.

SPEAKER_01 55:23

Right, and I'm just yeah, I'm just giving you an example.

SPEAKER_03 55:25

But there we're there was no university, there's no course really that says this is what you are supposed to do. Like even making it through Gene's book is hard.

SPEAKER_02 55:39

Yeah.

SPEAKER_03 55:40

Right? It's a very hard read because most of the information that's in there is boring information. Kim Lisa's Taylor's book, How to Raise Capital. It's a very boring book, but you have to get through it if you are trying to understand what this business is all about.

SPEAKER_01 56:01

Yeah, absolutely. I like to tell people that you know, successful people master the boring stuff, you know, um, because that's that's just the truth of it. You know, there's there are a lot of things that um that people don't want to uh, you know, hey, if you if you invest in the stock market and you're and you're sitting around, you know, you're reading 10 K's and 10 Q's. That's not exotic, that's not exotic reading. Uh but but it's but if you've mastered your ability to understand the risks of these companies and there's in the sectors and how they make their revenue and all these things that impact them, then you could have some information that um that will add value to you. So like a stock tip. Yeah, there we go.

SPEAKER_03 56:39

I don't invest off of earnings per share, diluted earnings per share. The key metric that I'm looking for whenever I'm investing in equities, free cash flow. You can't you cannot lie when it comes to free cash flow. Yeah, either you have money that's going in the bank, especially if you didn't get it through a loan, right? Free cash flow is my standard metric. I don't even look at a company if it doesn't have growing free cash flow. Yeah. Right? So, you know, when it comes to multifamily syndication, I walk away from a deal that doesn't have a preferred return. Even if the operator says, but look at the pro forma and and and the types of returns that we're going to deliver to you. Okay, it doesn't have a preferred return. That's my firewall to say, hey, before you pay yourself, you have to pay me as well. We could talk about waterfall structures after the the promote after uh the preferred return is hit, yada yada yada. But I I will walk away from a deal if it doesn't have a preferred return. And since I started out this thing as an LP investor, I have a certain I have a certain way about me that if the LP investors aren't being looked out for and communicated to, because this is going to be the difficult time, right, Brandon? Is when things go wrong, that's when you really get to know what people are made out of. And that communication has to remain high. As a matter of fact, if you were if the operator was communicating once a month when things were going good, they should communicate twice a month when things aren't going good. Just so that they can give their investors that warm sense that someone's looking out for their better interest and trying to ensure that their capital is in the right position.

SPEAKER_01 59:10

Yeah, yeah. I think that in that for me, that was particularly true during, like, say, COVID as well, where where it was just, you know, um depending on the market you were in, it was just bad new. I say depending everywhere, right? Basically, it was kind of a bad uh difficult message, but that was definitely a time to say you need to ramp up the communication because um you know your investors need to know what's going on, and because we know that hey, it's happening everywhere, but please, you know, let us know exactly what's going on with this deal. And even now, um I think now that it kind of also depends on how the deal was structured, right? So if you had someone who got to deal with temporary uh with bridge debt or you know, short-term and they intended to roll it into longer term, then their cash flow might be squeezed depending on when they bought the deal. Um, and then of course, um, you know, if they didn't buy it that way and they had fixed debt going going in, then you might be in a good situation either way. But but uh making that clear to your investors is definitely something that um that's very important. Um, and I wanted to get your take on something, right? Because what you're getting at with the pref uh preferred return, um, you know, it the follow-on question to that would be what what's your thought on like a pref equity slice? Like, are you typically coming in um in that slice or are you coming in at the common equity uh piece?

SPEAKER_03 1:00:34

You're coming in on the common equity, yeah. So, you know, any deal that you know, I I am not, you know, it's like like uber wealthy, right? I'm growing, I'll be there, but you know, there's certain deals where I would have to pass on because I didn't have capital to invest in the deal. Okay, yeah. So, you know, a lot of people are like, How did you invest in 26 deals? I'm a technology professional and I moved through a lot of jobs, but each of those jobs I had 401ks. I took those 401ks and I put those into a self-directed IRA, and then I made investments into 20 different deals. And I learned how each operator interacted with their investors, and I learned from each of them as to well, when I do step into the GP seat, this is how I'm gonna communicate with my investors, right? And show them some love because they took a chance on investing with me by coming into this deal. So I I think I would always be a stickler for the LP because that's how I got my roots into this business, and still, you know, we've been in, you know, 26 deals at this point in time, we're still learning, we're still growing from the entire experience, and I'm appreciative of that. I appreciate the fact that I can actually learn something, like for instance, right now, if all of those people that you were just mentioning who have bridge debt, commercial real estate trades on a certain term, three, five, seven, or ten. And those guys who are in the vortex with a three to five and they need to refinance, if that asset isn't stabilized, they're not going to be able to go into an agency product. Right? But I think right now is the perfect time for people who are coming up into real estate, because now you can probably focus on small balance loans, Freddie and Fanny, and basically be an acquisition machine by acquiring smaller assets. Because the real estate cycle is always gonna have a recession and then a recovery, expansion, then hyper supply. This has been going on since father time. You just have to know how to get into the game to understand the game, be a student of the game, so that you understand where you can get in, and also understanding that preservation of capital is tantamount to everything else. You are on the sidelines if you run out of gas, right? And you cannot win when you're sitting on the bench. That's right. This is possible. If if there's anything that we leave with your audience, it's the firm belief that their dreams are real and that their dreams should be expanding rather than contracting. And if you aren't amongst a circle of people who are helping you to expand on, then you need to get around people who are or can.

SPEAKER_01 1:04:48

Absolutely, absolutely. That's the that's the message right there, because it can that can take you a whole lot farther than you might think. I mean, I think the the impact of just that is enormous. Um, and so, you know, and I like I said, just a powerful, powerful message, um, Lee. And I and and we're kind of we're kind of getting a a close on uh to close, but I did want to ask you something as a follow-on to that, really. So um it someone who's listening to this, and you know, that they they they've heard kind of some things that have really resonated with them, um, but they are hesitant, right? What can they do to take action? This is uh and I'll say this as a passive investor. What can they do to take action to get started in this business today?

SPEAKER_03 1:05:35

Educate themselves, right? Well, we have a library, we have always had a library, but we have also had the internet. Knowledge and access to information is no longer a problem, right? You have to be discerning with the information that you get off of the internet, right? But education of oneself is how to prevent yourself from being taken advantage of. People can say a lot of different things, but the numbers typically do not tell untruths. So the first thing that I would say, you know, is get access to an education for how it is that you want to come into real estate because there are many different vehicles that can be leveraged in order to get into real estate. Either find a mentor or somebody who needs something of value that you can provide. Go and get a book. On this call just today, we mentioned several books from Hunter Thompson and how to raise capital to Gene Chobridge, who talks about syndication, to Kim Lisa Taylor, who talks about you know how to raise capital just the same. Because if you're gonna be in any business, you're gonna have to know how to raise capital. So you have to know how to talk in terms of IRR and cash on cash and things of that sort. But I don't I would say that nothing starts unless you have educated yourself on a room that you're trying to be in.

SPEAKER_01 1:07:51

It most certainly will. And we also mentioned uh Tom uh Willwright's uh material. I think he has a I know he has a book he released not too long ago, I believe it was last year. So so we'll put um put some of that information in in the show notes. And um again, Lee, really, really appreciate your powerful uh message. You know, I th I think that it's very timely because again, this is um, you know, we're in a sort of a phase uh or a phase of the cycle where you know people can get get a little bit nervous, and so it helps to have the perspective of someone who's seen cycles and who has had success in this business. So I really appreciate that. And um, for the listeners, how can they reach out to you and and maybe hear hear more from you?

SPEAKER_03 1:08:30

Um for the listeners, uh www.valueinvestmentpartners.com. Value Investment Partners translates into VIP. You are a VIP when you roll with us. Um, you know, the telephone still works, right? Yes, so 571-444-8474. You know, we pick up the phone. But basically, if you make it to our website, that's how you can get access to our calendaries, that's how you can get access to our history and our track record, that's how you can get access to our blog where we just dump out a whole bunch of information on how this works. Like, you know, as I'm talking to uh you and and your audience about the seven to ten, everyone needs to rethink their employment situation and figure out a path that they can exit that W-2 and 7 to 10. And on our website, we have a blog that speaks to just that and the compounding effect that happens when you're investing in syndications and how that throws off cash flows and distributions when the uh asset is disposed of, and how you can roll that over and over. And literally, if your net worth is very little within seven to ten years, your net worth can be close to a million dollars. And if you were to ask most people if they were to get a five or six percent yield on a million dollars, is that enough that they can cover their annual expenses? And I would say for the average American, if they can grow their net worth up to that level, then they are in a pretty good position.

SPEAKER_01 1:10:39

I I would agree with that. I would agree. Um, so again, and and we'll include that information in the show notes. And look, Lee, brother, it's been um just an awesome, awesome time having this conversation with you. And um, you know, we'll definitely stay in touch, but I thank you so much for adding value to the listeners, to myself. So thank you for for your time today.

SPEAKER_03 1:11:01

Yeah, let's stay in touch and let's keep the conversation going. I'm here for you and you're there for me. Uh, let's continue to help each other to grow. Absolutely.

SPEAKER_01 1:11:13

As always, thank you so much for tuning in to the show today, brought to you by Bridge Prosper. If you enjoyed today's episode and you'd like to learn more about commercial real estate investing, please like, subscribe, and share. And we'll see you again next week. I'm Brandon Jenkins, and this is the Capital Stack, where we help you learn, apply, and prosper.