Our guest for today has started his career as a loan underwriter at GE Capital Real Estate prior to joining Old Capital in 2015, where he is currently the national director. He's often called the professor of multifamily finance, and he has produced hundreds of hours of educational multifamily content on YouTube. And in addition to financing multifamily, he has invested in close to ten thousand units as a limited partner and nearly 30 properties in Texas.
Let’s dive right in and learn from James Eng and how we can understand debt.
[00:01 – 14:08] Opening Segment
[12:39 – 23:03] Using The First Deal To Your Advantage
[23:04 – 28:34] Higher IRR Does Not Guarantee A Better Quality Return
[28:35 – 40:46] The Murky Waters Of Actual Debt
[40:47 – 47:51] Closing Segment
Tweetable Quotes:
“I think if you buy any piece of real estate or invest in any piece of real estate, you know, as an LP, your biggest risk is protecting your principal.” – James Eng
“I'll see a 50-page deck and they'll be half a slide on the financing. And so that's why I wanted to bring it to people's attention.” –James Eng
"I think a lot of times people try to try to look at a deal and sort of figure out, compare the deals, the deals. But there's so much in between." - James Eng
"I'm going one hundred percent on the operator, which I think is important. But sometimes experience operators actually take too much of the equity." - James Eng
Connect with James! See the links below:
Go to their LinkedIn, and Facebook
LEAVE A REVIEW if you liked this episode!!
Keep up with the podcast! Follow us on Apple, Stitcher, Google, and other podcast streaming platforms.
To learn more, visit us at https://invictusmultifamily.com/.
**Want to learn more about investing with us?**
We’d love to learn more about you and your investment goals. Please fill out this form and let’s schedule a call: https://invictusmultifamily.com/contact/
**Let’s Connect On Social Media!**
LinkedIn: https://www.linkedin.com/company/11681388/admin/
Facebook: https://www.facebook.com/InvictusMultifamily
YouTube: https://bit.ly/2Lc0ctX
Our guest for today has started his career as a loan underwriter at GE Capital Real Estate prior to joining Old Capital in 2015, where he is currently the national director. He's often called the professor of multifamily finance, and he has produced hundreds of hours of educational multifamily content on YouTube. And in addition to financing multifamily, he has invested in close to ten thousand units as a limited partner and nearly 30 properties in Texas.
Let’s dive right in and learn from James Eng and how we can understand debt.
[00:01 – 14:08] Opening Segment
[12:39 – 23:03] Using The First Deal To Your Advantage
[23:04 – 28:34] Higher IRR Does Not Guarantee A Better Quality Return
[28:35 – 40:46] The Murky Waters Of Actual Debt
[40:47 – 47:51] Closing Segment
Tweetable Quotes:
“I think if you buy any piece of real estate or invest in any piece of real estate, you know, as an LP, your biggest risk is protecting your principal.” – James Eng
“I'll see a 50-page deck and they'll be half a slide on the financing. And so that's why I wanted to bring it to people's attention.” –James Eng
"I think a lot of times people try to try to look at a deal and sort of figure out, compare the deals, the deals. But there's so much in between." - James Eng
"I'm going one hundred percent on the operator, which I think is important. But sometimes experience operators actually take too much of the equity." - James Eng
Connect with James! See the links below:
Go to their LinkedIn, and Facebook
LEAVE A REVIEW if you liked this episode!!
Keep up with the podcast! Follow us on Apple, Stitcher, Google, and other podcast streaming platforms.
To learn more, visit us at https://invictusmultifamily.com/.
**Want to learn more about investing with us?**
We’d love to learn more about you and your investment goals. Please fill out this form and let’s schedule a call: https://invictusmultifamily.com/contact/
**Let’s Connect On Social Media!**
LinkedIn: https://www.linkedin.com/company/11681388/admin/
Facebook: https://www.facebook.com/InvictusMultifamily
YouTube: https://bit.ly/2Lc0ctX
Anthony Vicino: [00:00:15] Hello and welcome to Multifamily Investing Made Simple podcast, it's all about taking the complexity out of real estate investments that you can take action. Today, I'm your host, Anthony, the CEO of Invictus Capital, joined, as always by Dan. I have no snazzy middle name for you today, Krueger. I don't. Then that's how you get your entertainment. In my defense, people, you don't understand the amount of stress that I am under. I am on perpetual vacation right now. I can't get home. I'm snowed in Colorado. So pity me.
Dan Kreuger: [00:00:48] This is a first-world problem, Anthony.
Anthony Vicino: [00:00:50] Ok, fair enough. Fair enough. All right. So today we have a very special guest joining us in the virtual studio. This is going to be a really interesting conversation because we're going to focus on a topic that doesn't get spoken about nearly enough, especially when it comes to passive investors. So today we have James and in the House and he has over 15 years of experience in commercial real estate lending. He started his career as a loan underwriter at GE Capital Real Estate prior to joining Old Capital in 2015, where he is currently the national director. He's often called the professor of multifamily finance, and he has produced hundreds of hours of educational multifamily content on YouTube. And in addition to financing multifamily, he has invested in close to ten thousand units as a limited partner and nearly 30 properties in Texas. And this is interesting because we and our audience are very much passive investors, people who are looking to put their money to work. So that's working harder for them than they work for it. They're not necessarily interested in going and dealing with toilets and trash. And with James, he's going to bring perspective on two things that I think are really valuable. One is the perspective of a limited partner and so many deals. He has a really good insight into what is best common practices with operators. But then the part that I'm really excited about, and I think you probably are, too, is we're going to talk about the financing and how these deals are actually funded and why that's so important. So without further ado, James, come on through the beaded little beads that hang over the door frame that come through and say hello to everybody.
James Eng: [00:02:23] Well, I usually don't come through a beaded frame, but I appreciate you guys having me on and excited to jump in here.
Anthony Vicino: [00:02:32] So, James, just real quickly, give us like the 15 seconds who who who are you how did you get to where you are?
James Eng: [00:02:38] Yeah, so real quick, I was born and raised in Houston, went to school in Austin at UT, did finance there, started my career at GE Capital. Did there sort of a corporate finance program? And as part of that program, they just sort of rotating you through different businesses. And I landed in the commercial real estate business in 2006 and I was like, I love this stuff and really started underwriting deals. And what I learned was people who owned real estate made a ton more money than the people who are attorneys, doctors, all the other things they tell you to be when you grow up. And so I wanted to slowly move over to that side of the business and start investing in deals. But then thousand nine hits. And, you know, we were Bridgland, edgy capital, and I saw people get foreclosed on. So that was an office, industrial, retail, self-storage, multifamily, all of that stuff got foreclosed on. If you did not put on the right financing. And the two acid types that I saw had the lowest foreclosure rate were multifamily and self-storage. And so in 2013, 2014, I started looking at self-storage in multifamily as two property types that I wanted to invest in personally. And, you know, what I found was that multifamily syndications were the easiest and the most opportunities for me to invest in. And so that's why I started doing it in 2015 and at the same time became a mortgage broker with all capital and started financing properties for general partners, and since then have done close to a billion dollars in multifamily financing. So at average deal size, probably about five million. That's a lot of loans.
Anthony Vicino: [00:04:28] That adds up pretty quickly. So, yeah, it sounds like you have a background in finance, which Dan does as well. I'm curious, is there a secret handshake that you finance guys have or is it cool
James Eng: [00:04:39] That it's not necessarily a secret handshake, it's more of a different language. And so, you know, postcode that no one's doing handshakes right now, and I think it's more of
Dan Kreuger: [00:04:50] You just speak in numbers, speak when you speak in
James Eng: [00:04:52] Numbers and you speak in numbers. And, you know, gee, when I started there, you speak in PowerPoint. And so if you actually mentioned YouTube like post-Soviet. I started doing a bunch of stuff on YouTube. And it is not the sexiest YouTube channel by any means. I am no Mr. Beast, but, you know, 50 million subscribers for you marketing people out there who know him. But, you know, I'll put together a 15-page slide deck and I'll just talk about what's going on in the market. And you have a thousand people watch it. I'm like, that's great. Right? But that's how I sort of communicating in slides and numbers.
Dan Kreuger: [00:05:32] So, yeah, I can relate to that for sure. You mentioned something before we would live here or not live actually the absolute before we started recording that the debt structure is actually the most important part of a deal. And I thought that was that struck a chord with me because I recognized, you know, how important that is because I'm a finance geek like you. But, you know, for people that are looking at potentially investing in real estate as a passive investor, as an LP in syndication, can you explain why that is?
James Eng: [00:06:05] Yeah, I mean, you know, I think if you buy any piece of real estate or invest in any piece of real estate, you know, as an LP, your biggest risk is protecting your principal. And what I'm seeing right now, and I saw it back then, was that if you take on higher leverage, shorter-term loan, you have immensely more risk. And so Howard Marks, which is the guy who started Oaktree Capital, I don't know if you guys are familiar with Howard Marks, but
Anthony Vicino: [00:06:41] I talk about Howard Marks pretty much every episode. So, OK, so we like to you
James Eng: [00:06:45] Guys are so in his book, in his book, the most important thing, he talks about sort of your risk-return ratio. And I think people miss this piece when let's say you take a longer-term Fannie or Freddie loan and you have a 10-year runway on the loan, you know, there your return is not going to be as high as if you did an eighty-five percent loan to cost Bridgland. But then your risk to a limited partner is also a lot lower than you get no principal back, no return of equity back ever if you get foreclosed on. And so I think that is people miss that because a lot of times LPs, they look at one deal and they're like, all right, I've got a fifteen percent IRR on this deal. This one has. 20 percent gives me the 20 right. I've got one hundred thousand dollars, I'm going to choose the 20 percent. Why wouldn't I choose the 15 percent are what people miss? Is the volatility of the return on that 20 percent because the 20 percent IRR might have a bridge loan, might be an 85 percent loan to costs versus the 15 percent are is on a sixty-five percent LTV with a Freddie loan that has a 10-year term. And so you could ride any of the covid Black Swan events that happened in the next five to 10 years out. And the market will sort of come back. And you do not have what other lenders like to call a gun to your head with a maturity risk. And so I think sometimes I mean, I'll see a 50-page deck and they'll be half a slide on the financing. And so that's why I wanted to bring it to people's attention.
Dan Kreuger: [00:08:29] Yeah. I'm so glad you did because you kind of connected the dots with something that we've discussed on our show so much in the past, which is, you know, how do you quantify the risk in a real estate deal? Right. Because it's easier if you're looking at other financial markets like the stock market or if you're looking at a fund because you've got things like the Sharpe ratio that factor in volatility. And so you can see the actual number that measures, you know, what the volatility is like. Maybe there's an expected return of 20 percent, but the volatility is, you know, huge. And so you might be 20 percent. It might be negative 20 percent, maybe 30 percent. You know, that's a huge spread that someone's got to be comfortable with taking that kind of risk with real estate. It's not quite that straightforward because we don't really have, you know, a data point to look at that says, OK, here's the Sharpe ratio. This deal doesn't really exist. But you're saying that looking at the debt and the maturity is probably the next best thing to some kind of Sharpe ratio for real estate investment?
James Eng: [00:09:21] Yeah, I mean, I think a lot of times people try to try to look at a deal and sort of figure out, compare the deals, the deals. But there's so much in between. Right. Like who the general partner is, where the property is, what market it's in, what the debt is on it. There are so many things that you have to take into consideration. And then at the end of the day, you have to decide, all right, I put one hundred thousand dollars in this deal for the next five years and you can only write some hundred thousand dollar checks. And so one of the things Howard Marks says is as an investor, you can stand at the plate and take as many strikes as you want. So, I mean, make sure you see a fastball before you swing against it.
Dan Kreuger: [00:10:05] So sounds like the really the maturity of the loan is something that that investor should be paging through their marketing package and looking for. And, you know, to simply kind of summarize it for people long term, even if the interest rates a little bit higher, even if the IRR is a little bit lower, longer-term debt really is is a low-risk option because it provides the operator and the investors with optionality. They don't get forced into making some sort of move, whether it be a sale or reify at an inopportune time.
James Eng: [00:10:36] Right. I mean, there are definitely some loan products out there where you can get a 10-year term and then still have a flexible prepay. And so that's probably the best of both worlds. But when you do that, you typically have a higher interest rate. You typically have lower leverage. And so for syndicators, that is like a deadly combination. They don't want a higher interest rate and they do not want more leverage. And so from an LP standpoint, though, you know, you're investing in the deal. You know, typically you're trying to get 10, 15 percent IRR. The very worst thing, though, is zero. Right. So, you know, you want to make sure that your principles are protected on the deal.
Dan Kreuger: [00:11:19] Yeah, yeah. I think that's one of the I don't know who said it, but I quoted a lot saying that you know, the thing that separates investing from speculating is making sure your principal is secure. Right. If that's not the case, then you're not investing. You're speculating, which is fine. You can speculate, but people need to be aware that if they're getting into something, then there's a probability or there's a possibility of it going to zero that that is speculative, not REITs.
James Eng: [00:11:44] And yeah, I mean, you know, I think this is I'm not going to say that this is the only year, but there's sort of been you know, Fannie and Freddie last year had forbearance where basically you could take three months or six months and not pay your mortgage payment. And so some people that sort of kick the can down the road, but we're seeing deals this year get foreclosed on. And when, you know, I just saw this quote from Ray D'Alessio on one of his LinkedIn posts and it was like, debt eats equity. And what he meant by that is if you overcover or if you can't sustain your cash flows, then the debt is essentially going to foreclose on you and take your equity. So to just be cognizant of that.
Dan Kreuger: [00:12:36] Well, I'm curious, I don't want to I thought you were going to pop in a second ago, did you have something you wanted to?
Anthony Vicino: [00:12:42] This is all great stuff. You guys are hitting you're hitting on hot cylinders here. I think when we're talking about Howard Marks and risk, in particular, you've nailed it on the head, Dan and James, where risk is a really difficult thing to nail down, even within the stock market. It's actually had a sharp ratio, but it still doesn't take into account these Black Swan events, like James mentioned, with covid like it takes a baseline of volatility over a normalized period of time. But it can't predict as Nassim Taleb says to those Black Swan events that are going to crush all expectations in one direction or the other. And that's where it becomes really difficult with real estate, is what James is mentioning. Veterans like it are actually incredibly difficult to compare a deal from one operator and one market to another deal and another market with another operator. Even if you were to control all variables and say, OK, the same operator has two deals in the same market and you're looking at two different buildings in two different neighborhoods, it's still incredibly difficult to actually actively compare this. So maybe one thing that would be helpful to steer the conversation towards our limited partners or passive investors who are noodling on these concepts, how do they approach this performance from one operator or another operator to say, OK, this is what I should be looking for, this is what I should be waiting? And how do they ultimately make a good qualified decision?
James Eng: [00:14:09] Yeah, I mean, I think I think the first thing is definitely the operator. And, you know, I've met a lot of operators. I've worked with a lot of operators and general partners and I've invested in deals with operators. And I passed on deals six months down the road with the same operator. And I think it's you can't blanket say that this guy has a deal. And I'm invested in every single one of these deals. I have not done a fund. A fund basically is a bet solely on the operator. But I invest in single syndications. And so I look at the operator, number one. And whether in considering the deal and the number two, I look at the property in the market that it's in and, you know, really underwrite that deal as sort of a lender, but then also as an investor. And I think one interesting point, and we're getting into the nuances which I like here, is a lot of times there will be a deal. And let's say the person has two or three deals under their belt. They might take, you know, 10 or 15 percent, you know, of a split or 10 to 15 percent of the equity for doing the deal. Right. I've seen more experienced operators. They might actually find a better deal. Right. They found the aftermarket deal. The broker brought it to nobody to solve the deal. And they buy it on a better basis than a deal that was listed. But guess what? They're taking 50 percent of the deal. Right. And after you compare those to the deal with the person who is a little bit less experienced, but the person that you know just as well, they'll give you a better return. And so I think that's a part that sometimes people miss something more like, all right, I'm going one hundred percent on the operator, which I think is important. But sometimes experience operators actually take too much of the equity.
Dan Kreuger: [00:16:17] Yeah, it's a very, very important point, because we've said it so many times on this podcast that the most important part for the OP is finding the best operators to work with. After you do that, really a lot of the work is done. But it's a really important point thing to point out. We can, you know, relate to this, knowing that in our first deal we structured it very favorably for the LPs, basically because we're trying to build up that track record. So to your point that it's a heck of a deal for those guys? They did great. So, you know, it's kind of a balancing act, I guess, for people is. Yeah, theoretically, there could be a little bit more risk with the new operator because they don't have as much experience, but a reward to so kind of goes both ways.
Anthony Vicino: [00:17:03] So I guess that would be one of the questions I would ask is as you build up this legacy or this track record and people look at you and you're like, oh, that's the great operator in the space, that that's the person you want to work with because they might take a 50 50 split and your returns might be a little bit slower, but presumably, the chances of them delivering on that return might be higher. Is that or is that a false equation or is that a little bit like setting our expectation and wanting that to be the case? But maybe not, actually.
James Eng: [00:17:37] No, I think I think that's fair. I think I think what you'll see is some of the operators, the operator, the operator, almost it's almost like when the listing broker sells a deal, it's typically, you know, here is the whisper price. 10 people come in. Then we have Bessin final and then we have, you know, the final guys awarded the deal. It's very similar in when you go out and raise equity is you know, you have the option, right. As the operator, you know what the deal can you based on your pro forma, what that deal can return if you did the deal for free. Right. But then as soon as you add any type of equity override or split that, you know, it's going to materially go down. Right. And so you're going to have to figure out at what level can I actually get this deal funded. Right. So you have to decide at what level. And so if you can take a 50 50 split after an eight percent or 10 percent preferred return, and that's enough for your investors and they still get to 15 percent IRR, then, by all means, do it right. But it's just making sure that you as an LP understand that that's the return that you're making in.
Anthony Vicino: [00:19:01] Yeah. And that's something that Dan and I we talk about is that at the end of the day, the equity split is kind of irrelevant in the sense that if it's delivering on your return expectations, then it could be ninety-nine one or one ninety-nine. It doesn't matter if your expectation is a 15 percent IRR, let's say, and you only get one percent of the equity, but it delivers that return. We'll do it like that's the that's a great number. But I think we can get lost really easily and saying, oh, this deal is a 70 30 and this one's 50 50. Therefore, because I get 70 percent of this deal, I should do that one, which is a limited way of evaluating the differences.
James Eng: [00:19:39] Right, and I think and I think people as they're as they're starting out as a general partner, you guys did exactly right, is don't come in and try to make a home run on your first deal, like get the first deal done.
Dan Kreuger: [00:19:52] Yeah. So I'm curious, obviously, being a finance guy, I really want to do a deep dive on the debt piece, but I must save that for a follow-up question here because I know that a lot of our people are probably a little bit less interested in that than I am. But I think something that's going to be really valuable for a lot of people who listen to our podcast is that you've got a ton of experience as a limited partner on syndications. And there's a lot of people that I know are listening to this that are starting kind of down that journey right now. And I'm curious what you already kind of talked about, how the debt element is one of the the most important pieces you look at in a deal. Curious if you have any other top three or five tips for people who are maybe thinking about getting into their first syndication, what they should be looking for, what they should prioritize, the debt piece we touched on, what else should people be aware of or should there should they be expecting from a good operator?
James Eng: [00:20:52] Yeah, I mean, you know, when I was first starting, I grew up sort of listening to Dave Ramsey and all those guys. And my first thing was sort of setting a sort of passive income base sort of foundation. And so almost every deal that I invested in the first 10, had an in-place cash flow component at the beginning. So back into the 15, that might be seven or eight percent cash on cash, day one. And then we were going to try to grow that to 10 or 12 percent after rehab and raising rents and things like that. So that was probably the number one thing that I look for. Number two was, you know, I was in Dallas and most of the operators I knew were in Dallas and so I had to go see the property. So I know that's not possible for everybody who's an LP, but just going by the property at least once or twice and just getting a feel for the tenant base, especially if it was going to be like a light value add where we weren't kicking out all the tenants. I just wanted to get a good feel for the tenant base, the area, making sure that there wasn't any major crime at the property. I mean, you can do a lot online nowadays, but there's nothing like going in drive-in property,
Dan Kreuger: [00:22:11] Especially at night to if you're curious about the crime, go try.
James Eng: [00:22:14] So, yeah, good night. Just sort of go see the tenant base and how people are hanging out in the parking lot and sort of what what the scene is. And, you know, the third thing for me probably was just getting to know the operator and having a comfort level with them, whether it was going to their office or meet them at their properties that they already owned. Everybody that I invested in at the beginning, they had at least three or four properties that they had already owned and managed in that metro. And so I could drive those properties like one of the operators. Essentially, before I invested in this deal, I went and drove all 10 of his properties that he owned in DFW before investing with it just just to get a feel for. Because if they bought this property six months ago, this is how the property that they're going to buy is going to look six months from now. Right. And so just getting a feel for how they sort of take care of their properties. Right. So play be the top two or three things that I did at the very beginning. And over time you get a better feel for operators. And so whether it's monthly reporting, whether it's meeting them at the property after a major rehab, those types of things, those build over time. And so you get more and more trust with some operators and less and less with others. And really, I would say it's No. One thing is communication, whether it's good or bad, the more communication, the better. I've never heard an LP complain that this general partner communicates too much.
Dan Kreuger: [00:23:55] Now, what do you like a pause here, see if he wants to pop in with anything.
Anthony Vicino: [00:23:59] Well, just number one on that list of setting your passive income base and understanding. We talk about this in terms of setting your investment parameters, understand what are the minimum thresholds that you're looking for in a deal before you ever talk to an operator before you get a market or even look at a deal, you have to know your risk parameters, how comfortable you are taking on risk and return for your returns. And until you know that number or have a range, it's going to be very hard to go and look at deals because they're all going to look the same. Like how do you that whether or not it works for you or not until you know what your minimum threshold is? So I love it. That and then the going to see the property, I think this is something that people they overlook. It's one of the reasons that Dan and I, invest in our backyard of the Twin Cities because we like to be able to go and touch the buildings and be there if something goes wrong. But for passive investors, one of the strengths of being passive is that you don't need to be that to do that. But if you're the type of person where it's going to help you sleep better at night to actually go and see the thing, it's worth the flight. You fly into that city, spend a day getting to know the operators, go see their offices, tour all the properties. And that's a great way to see underneath the hood because online you can present I could be a princess online. You don't know like I can present whatever I want to. But until you actually see me in person in my tiara, you don't know if it's true. So, like, that's a weird analogy, but somehow it makes sense.
Dan Kreuger: [00:25:30] It doesn't help that your camera isn't on right now because you very well could be wearing a tiara. No, I think that's huge. And I am going to double down on and said, you know, we we don't just invest in our backyard because we just happen to be in a great market. But we actually even if you know, obviously there's hot markets all over the US, Minneapolis, St. Paul typically is not going to be the first thing you hear about when people are talking about the best places to invest in multifamily. It actually is fantastic. But it's not the hottest name out there.
Anthony Vicino: [00:26:03] It's usually number seven or eight on the list.
Dan Kreuger: [00:26:05] Yeah. And you made a point on a previous podcast that no one talks about anything below, like the top three
Anthony Vicino: [00:26:12] Would be fine. If you're not in the top five, you're dead. It's like it's like, OK.
James Eng: [00:26:16] Yeah, it's like Google page rankings, right? You're like seven like no one. No one clicks on number seven,
Anthony Vicino: [00:26:21] You're dead to the world.
Dan Kreuger: [00:26:22] Yeah, but it's I mean, for me, when I first started and I got my first property, there was no chance that I was going to invest in something that I didn't have the ability to drive to within like 15 or 20 minutes. At the most. I needed to be able to get there. And if it needed my attention, if I had to do something that no one else could do, I needed to have that just to make myself feel comfortable. So I think that's a huge a very good step for people because I don't think a lot of people think that maybe they even can. You know, I don't I've been asked maybe two or three times.
Anthony Vicino: [00:26:57] Yeah, very often. Yeah. So if you're listening to this at home and you're considering being a passive investor or you already are, just. No, it's OK to ask if you can go visit the properties. They might say no, but,
James Eng: [00:27:11] Yeah, I mean I mean, the reality is like when a general partner is under contract, you know, they're doing inspections for the lender, they're doing engineering, environmental appraisal inspection. So you can usually line it up where people even post covid, you know, people are going to see vacancy and things like that. It the not a big deal.
Dan Kreuger: [00:27:28] Yeah. You just so people know, you might get a little pushback on something that's still under contract, because every so often there are sellers that are very particular about the fact that the building selling, they don't want tenants to know. So it wouldn't be uncommon for a seller to not want additional people coming through to look at it. So if you get that response, so be surprised. But after it's closed and under and being operated or looking at previous deals, as you mentioned, James, looking at the stuff they already own, that's low hanging fruit right there, there's no reason you should be able to do that.
Anthony Vicino: [00:28:01] Well, then I'd push on that and say once it's under contract, the cat's probably out of the bag and the tenants are probably going to know,
Dan Kreuger: [00:28:07] Well, you know, yeah, these days there are some laws changing. And I think the tenants do have to know at this point. So that's probably a non-issue, at least in our market. But any thought I'd throw that little tidbit in there because that's a little nuance that I don't know. People outside of the multifamily space know that sometimes when the owner signs a building, they don't want some kind of panic, that there's going to be a big shake-up in things. And so sometimes it's a hush that there's a transaction going down. But anyway,
James Eng: [00:28:35] Let's pivot the conversation too I know you guys are awesome, but yeah, you guys are finance nerds. So let's go ahead and let's go into those murky waters and let's talk about the actual debt because this is a topic that doesn't get discussed nearly enough. Specifically, we're passive investors are concerned. So, James, where should we even start the conversation?
James Eng: [00:28:59] So so usually I try to present a slide on this and that sort of think about on the far left side, let's say there's five columns on the far left side is really like where investors typically start, which is like your resource bank loan. And so this is like if you're buying anything probably under, I would say a billion dollars, this is where most people will start. Right. And or if it's your first property. Right. So it's your first property. You're buying a 20 unit, 30 unit deal. This is where most people get their loans. So the resource bank loan is typically five years. It might be for four and a half percent and it might have a twenty-five-year amortization or 20-year amortization if it's an older building. So that's where most people start. If you're a doctor or lawyer account, you can go get that loan. Where most people try to get to is really the next step. So if you move over one column, you're really moving into nonrecourse land. And nonrecourse land is Fannie Mae, Freddie Mac, and they usually start at a billion dollars, the loan amount, and it needs to be stabilized. So 90 percent occupancy for the last 90 days. Those are your stabilized lenders. You can do five, seven, 10, 12-year loans for Fannie Mae and Freddie Mac. And then those go up by one hundred million dollars, property of Fannie Mae and Freddie Mac. And then on the far right-hand side is your nonrecourse bridge. So you're not a nonrecourse bridge is above five million dollars. You need more experience and it's typically three years. Right now, the rates are probably four to four and a half, maybe even some down to three and a half. Three seventy-five, if you're lucky. That's actually what I did a G, so I was a bridge lender for GE Capital, does a three-year terms interest only the whole time, and they can go up to 75, 80 percent loan to cost. And so those are really like your buckets, recourse, bank loan, nonrecourse, Fannie, Freddie, and then a nonrecourse bridge.
Dan Kreuger: [00:30:57] And just our listeners know typically a bridge loan will be used for a property that has some kind of value component so that you reduce your debt service because interest only. So the monthly cost of servicing those mortgages is less if you use a bridge product for the rehab period. And then when you're done with that, you'd slap a long-term fixed debt on there for Fannie or Freddie. Longer immunization, longer-term,
James Eng: [00:31:24] Is that correct? That's right. And so what we're seeing is like if you go back to sort of March 20, 20, when it comforted all the prisoners, went away, recourse bank went away, nonrecourse bridge went away. The only guys who are in the market were Fannie and Freddie. So Fannie and Freddie ended up being like 75, 80 percent of the multifamily lending in twenty like the last three quarters. And they were the only guy at the table in twenty-one. Yeah. Yeah.
Dan Kreuger: [00:31:54] Real quick, how long was that all the way from March through December. Or is it mostly kind of like April, May, June that that was the case?
James Eng: [00:32:03] So April, May, June. Nobody was doing anything. Nobody was buying. Nobody was selling. Just sort of pretty much shut down, we were doing some refinances, but that was about it. Nobody, nobody. Everything was locked down. I mean, April, May, June, you can even come out of your house, so let alone go by a 20 million dollar property. So almost everything was postponed. So we saw a huge wave, sort of Q3, Q4 of twenty in terms of everything had to get out the door, everything that wanted to sell it to the 20 they put out on the market. And so we've seen some of the stuff come back sort of in terms of volume at the beginning of twenty, twenty-one. But what happened is Fannie and Freddie actually put on, they call them covid reserves, essentially anywhere from nine to 12 months. Principal and interest they put on an ID plus they added taxes on insurance on top of the PENNI at the beginning. It's taxes and insurance off probably midsummer of twenty and then now at the beginning of twenty twenty-one, they're saying we might bring it down instead of it might just interest only. So right now it's probably only about two and a half percent of the loan amount, which is not bad compared to in March, and April is about 10 percent of the loan amount that you have to put up close in terms of a reserve. And then you got that money back. If your property was performing after about nine months to 12 months, it's
Dan Kreuger: [00:33:30] And that's fair for our listeners who aren't aware. That's an incredibly inefficient use of capital for an operator. So it's like nails on a chalkboard knowing that you've got to put this capital in escrow and it just sits there. You can't use it to fix up your property. It just's not performing for you. So that was what made the Fannie Freddie option a really tough pill to swallow last year.
James Eng: [00:33:54] It was a tough pill to swallow, but when nobody else is at the table, you swallow that.
Dan Kreuger: [00:33:59] Yeah. Yeah.
James Eng: [00:34:00] So the in Q3, we started seeing more lenders come back into the market. Q4, we saw a little bit more. And then now at the beginning of twenty, twenty-one, they are all coming back. So the bridge lenders are coming back in further. And what that is creating is Fannie Mae came out in February and said, hey, we're going to reduce the reserves. Freddie just came out this week and said we're going to reduce our reserves as well. And so Fannie and Freddie are feeling that pressure in that they are not the only people here to lend. So they're having to back off of those reserves because the bridge lenders,
Dan Kreuger: [00:34:38] They have no reserves, old competition. How long do you think until we get rid of those? I'm sorry, you kind of cut a little bit there. How many months of interest on the reserves the requiring as of today and so on?
James Eng: [00:34:51] Fannie and Freddie, Freddie's about nine to 12 months MBNA, and then Fannie is twelve months. If it's above six million and if it's below six million and loan amount, it's eighteen months, Penni. But both Fannie and Freddie right now are basically putting an asterisk next to that and saying if you come to us and the property is stable and we're seeing we don't have you don't have big delinquency at the property, we could waive it. And so both of them are being a lot more open. We've got to waive it all. Yeah. So they're seeing a lot you're seeing a lot more flexibility. So before there was no AA come to us and ask for a waiver. There wasn't any of that. It was just like, do you want this loan or you don't want it? Right. But now they're being a little bit more open. And so we're seeing people I haven't seen a full waiver of the reserves, but I've seen it go from 12 months down to six months. I o which is a huge difference from some of these larger loans.
Dan Kreuger: [00:35:51] I would bet it's probably correlated to the relationship that the borrower has with. Oh yeah, absolutely.
James Eng: [00:35:57] The bank's experience. Yeah. The more the the the higher volatility it's going to get waived.
Dan Kreuger: [00:36:03] So if you're a newbie and you've never done a Fannie or Freddie loan before, don't count on a full
James Eng: [00:36:10] Waiver if a waiver is not going to happen.
Dan Kreuger: [00:36:12] Yeah. So when do you think what do you think things are going to go back to normal in the environment? When do we are that this summer in twenty twenty-one ones?
Anthony Vicino: [00:36:22] Or is this our new normal?
James Eng: [00:36:24] No. Yeah. To me right now what's changed is instead of everything going so in thousand twenty almost everything went Fannie, Freddie and they were super aggressive. And now a lot of things have shifted back to bridge. And so a lot of people are doing Bridgland right now because of the amount of competition. And so, I mean, it's constantly changing. Yeah, I think what's going to happen is Fannie and Freddie will probably lighten up on the reserves. They'll probably have to start being a little bit more aggressive. So what one thing that we've seen at the beginning of this year, 10 years Treasury was essentially at, I don't know, 90 basis points at the end of twenty and now it's 160. So it's gone up 70 basis points. Two and a half, three months and 10 years Treasury are basically what dictates the Fannie and Freddie rates, and so they have had to come down on their spread. So it's the 10 year Treasury plus a spread that's your all-in rate. And so they've had to narrow that down just to compete with other lenders. And so hopefully we'll keep seeing that gap narrow. But everybody's rates are around three and a half to four percent right now.
Dan Kreuger: [00:37:39] So how should? And how to phrase this when an LP is looking at a deal, how should they be perceiving in this environment the one right now? Maybe this is a little bit to be a little bit too broad of a question, but I'm kind of curious, given the environment that we're in with, you know, bridge deck coming back, Fannie and Freddie having these reserve requirements, how should people feel based on what you said before about some of the inherent risks that you see in the bridge? Should people be turned off by bridge at this point, or is that a means to an end, assuming that in the next couple of years things could get back to normal? As soon as that loan matures, we can hop into a Fannie or Freddie product and be good to go. Do you still see that as a risky endeavor or is it all deal-dependent?
James Eng: [00:38:32] So if you're looking at a deal, I would if the property has if it's more of sort of a yield play where you're coming in, it's a long term hold a cash flows they want and you can put good Fannie and Freddie debt on it and get five years interest only on a 10-year loan and a cash flow of six to 10 percent. I'm taking that deal all day. Right. But if you come in and the Fannie and Freddie loans at 60 percent and you've got one-year IIO and you just can't afford it because the rents are so low, the rents are in the market and you need to put the CapEx, you need to put ten to 15 thousand adore into it just to get the rents to where they need to be. Then that's that calls Herbertson. And so when you put that bristlecone on, I wanted to have a very clear story. So I've invested in deals as an LP where they use Bridgland, but it was a very clear story of I'm going to take rents from nine hundred dollars to eleven one hundred dollars and this is how we're going to terrify. And that eleven hundred dollars rent was already being achieved in that submarket. So I want to see a very clear story on getting that two hundred dollars above. If you're, if you're Brazilian and you're raising rents 50 dollars, that's not enough. You really need to raise rents. One hundred and fifty dollars in clear upside in order to or you're not to be able to revive that virtually.
Dan Kreuger: [00:40:02] Yeah. And I think something else to point out there with that example, the use that's very important, especially for new investors, is if there's an operator that's got a business plan that says, hey, I'm going to take my runs from nine hundred to eleven hundred dollars over this amount of time, if that hasn't been proved out in the market, if they're going to be all of a sudden set in the new market high with this business plan, that's something that you need to be questioning. Because if you know, that might make sense, you know, the other valuation would make sense. If you go from nine hundred to eleven hundred on rents, I guess theoretically you'd get the valuation that gets you the refund you want. But, you know, the question should be is there a market for an 11 hundred dollar rent? Where this property is, if it hasn't been proved out yet, that's kind of a risky endeavor.
James Eng: [00:40:47] So, yeah, absolutely.
Dan Kreuger: [00:40:53] Book recommendation. I always got to do. We've already warned you there are no purple books. Well, there are several in that series. There's one in particular that we're going to try to stay away from. But we are four readers and we need something to occupy ourselves
James Eng: [00:41:10] When I'm going to. I know we haven't really dug into this piece of it. And I think I've become a little bit more of an I've always been a Seth Godin fan, but even more of a Seth Godin fan. So if you're out there on the marketing side, I would say, how about we go out with Seth Godin? And I think in this environment, whether you are a general partner or a limited partner, anybody, I think everybody has to learn some marketing. And I know that's probably not the. And I'll follow up with the second book of this important Thing by Howard Marks. If you're a passive investor, how about that purple call by Seth Godin if you're an LP, the most important thing by Howard Marks. And I think when I read Howard Marks that book. There were probably two or three paradigm shifts, I did not go get an MBA, but I felt like I got an MBA after I read that book.
Anthony Vicino: [00:42:12] It unless it is one of the best books on investing that I can recommend that he has another book on market cycles. I can't remember
James Eng: [00:42:19] Exactly during the market cycle.
Anthony Vicino: [00:42:21] Yep, that's another good one. But, you know, even if you if you're cheap if you're poor if I don't know what you're thinking about investing in apartments, indications, but if you can't afford the book, you can just go to Howard Marx's website, Oaktree Capital, and you can get all his memos for the last twenty five, 30 years for free. So it's one of the craziest values out there. And then Seth Godin, Aikau, another really great book. I think it's interesting, you know, your lender and finance guy and you recognize the importance of the marketing aspect, which I think a lot of people are slow to that realization. But it's critical.
James Eng: [00:42:56] Yeah. I mean, I haven't read a book by this guy, but, you know, the two other guys, if if you're out there in podcast land that I would follow probably are netballer overcount. I don't know. Oh, yes.
Anthony Vicino: [00:43:08] You are speaking our love language. OK, so,
James Eng: [00:43:11] Yeah, I was out there And then you know of I think he quoted Scott Adams in Skill Skills. And you guys familiar with that.
Anthony Vicino: [00:43:20] Yeah. So, Scott Adams, had I read When Bigly and How to Fail at practically everything and still win big. Both are pretty good. Well actually
James Eng: [00:43:30] Yeah. I think one of the things that you know that and it's like you can't do this too deliberately. But, you know, one of the things that I try to do is, yeah, I'm pretty good at finance. Yep. I'm pretty good at underwriting and investing. And then if I am semi-decent in marketing, then I dominate all three. So exactly. You can do that then. Two or three things that you're going to be in the top 10 percent now.
Anthony Vicino: [00:43:58] And for our listeners, they hear us talk about Howard Marks Nabal rather. Can they hear us preach about Narval? Probably too much.
Anthony Vicino: [00:44:07] But if you want me
James Eng: [00:44:09] To add one more guy on there, he's going to keep adding guys.
Anthony Vicino: [00:44:13] James, you're speaking all my love. Like, did you read the book
James Eng: [00:44:17] That I have in front of me right now? And I put it there is Dan Sullivan's latest book. Who not how. Yep. Dan Yeah. OK, so have you read that? Got him. Dan Sullivan. So he runs the strategic coach and his latest book, Runout How talks about just sort of growing. Well, I'm trying to think I mean, as as an LP, this is by far the most straightforward thing in terms of you. You as an LP, I don't have access to 10, 15, 20 million dollars deals. You don't have access to ten million dollars in equity. So you can't go buy a two hundred unit deal. But a two hundred unit multifamily deal is probably the most efficient business out there. And who not how basically says, well, instead of you trying to do that, well, just find a general partner who has that skill set and can go out and do it. And you put in one hundred thousand and you let them run the deal and you sit back and get a fifteen percent, are you? And so, you know, regardless of what position you're in, I think that book is a good one out there as well.
Anthony Vicino: [00:45:22] Yeah. The the co-author on that one, Benjamin Hardie, I know from way back in the day of blogging and it's a brilliant book because so often when we have a problem, we ask ourselves, how would we do that? Like how would we solve this? This came from the book itself when Robert Kyosuke is walking along the beach with his uncle or whoever, and there's something like his dad has reached out point and said, like, how would you solve this problem? Like, most people stop there. But this book really turns out and says, don't try and answer. How would you do it? Ask yourself, who do I know who's in my circle? Who could I reach out to? Who is already doing that I couldn't leverage? And that has exponential growth capacity. Absolutely awesome. So, James, those are meant we have to have you back on the show just so that we can sit here and talk about Narvel and Dan Sullivan and all these people that we loved so dearly. But we want to be respectful of your time and really appreciate you taking a little bit of your day to spend with us. Before we let you go, though, how can people reach out to you if they want to get in touch?
James Eng: [00:46:27] A couple of ways. I mean, our website for the company is all capital and income. You can find our team there and you know all the deals that we closed. If you just Google James doing YouTube or James multifamily or just Google multifamily financing in the YouTube search, you'll find I probably don't I don't know, one hundred and fifty videos or something in the last year. You can, you can find me there and I'll just get my email if that if that's too much work. Email is GMG at all capital and they love it.
Anthony Vicino: [00:47:03] So go and check out James on YouTube to find him on old capital lending dotcom. Shoot him an email trying to get in touch. And again, we appreciate you taking some time. We're gonna have you back on this show here in the near future, I think because I think we've only just scratched the surface of everything that there is to cover here. And for you guys who are listening at home, we appreciate you as always. And we'll catch next week. And.