The Hidden Risk Breaking Apartment Deals with Paul Shannon

 The numbers may still look good on paper, but one overlooked shift is quietly destroying apartment deals behind the scenes. 

Apartment operators aren’t just fighting interest rates anymore. Rising costs, stalled rents, lender hesitation, and affordability pressure are changing what actually works in multifamily investing — and many investors haven’t adjusted yet.

If you’re trying to buy, refinance, or survive this market cycle, this conversation breaks down the risks most operators are still underestimating.

Ready to go deeper than podcasts and start analyzing real deals with experienced multifamily investors? Join the Tribe of Titans community and connect with operators actively raising capital, acquiring properties, and navigating this market in real time.

Tribe of Titans Multifamily Community

In this episode, Brian Briscoe sits down with Paul Shannon to unpack what’s really happening inside today’s apartment market — from collapsing refinance assumptions to why some operators are choosing to sit on the sidelines entirely.

They discuss how macroeconomic uncertainty is impacting underwriting, why concessions are quietly crushing returns, and which multifamily asset classes may actually perform best over the next few years.

What You’ll Learn

•  Why some experienced operators completely stopped buying deals 
•  The hidden underwriting assumptions breaking acquisitions today 
•  How geopolitical events rapidly changed refinance outcomes 
•  Why C-class apartments may be riskier than many investors expect 
•  The surprising reason B-class properties could outperform this cycle 
•  How lack of liquidity trapped many multifamily investors 
•  What today’s concessions are signaling about the market ahead 
•  Why diversification became a survival strategy instead of a growth strategy 
•  How inflation and tariffs are changing value-add business plans 
•  The framework Paul uses to decide when to buy — and when to wait

Paul Shannon

Paul Shannon is an experienced residential real estate professional, capital allocator, and former co-host of The PassivePockets Podcast.

As an active multifamily investor, Paul has built a strong track record grounded in results and integrity, with hands-on experience in underwriting, acquisitions, capital raising, property management, project management, and asset management. He is also a licensed Realtor.

In addition to his active investing, Paul has participated as a limited partner in 45 passive investment deals across multiple real estate asset classes, capital stack positions, and private equity opportunities.

Paul currently serves as the Managing Principal of InvestWise Collective, where he helps investors diversify beyond traditional markets through passive real estate investment opportunities.

Learn more about him at: https://www.investwisecollective.com/ or https://passivepockets.com/podcast/

About the Host

Brian Briscoe is an apartment operator and founder of Streamline Capital, focused on acquiring and operating multifamily properties in the greater Salt Lake City metro. He hosts the Diary of an Apartment Investor podcast, where he shares real-world operator insights and decision frameworks for aspiring multifamily investors.

If this conversation resonated, there’s more happening inside the Tribe of Titans. It’s where serious investors move beyond surface-level content and into real discussions that drive action. Visit https://www.thetribeoftitans.com/ to learn more.

Transcript

Welcome And Why This Show Exists

Brian Briscoe 0:06

Welcome to the Diary of an Apartment Investor Podcast, the show where we cut through the noise and talk about what it actually takes to build a real multifamily investing business. I'm Brian Briscoe, apartment investor, operator, and founder of Streamline Capital. And this podcast is built for the aspiring apartment investor who wants more than just theory. We talk about raising capital, closing deals, managing assets, and making the decisions that separate dabbling from building something that lasts. Now, if you're serious about taking the next step, this conversation continues inside of the Tribe of Titans multifamily investing community where investors work through real deals together with live discussions and direct support. So let's get into today's episode. Welcome to the Diary of an Apartment Investor Podcast. I'm your host, Brian Briscoe. Really excited for today's show. I know I always say that, but you know, I really am. We got multiple guests and good friend of mine, Paul Shannon, on with us today. So, Paul, welcome. Thanks, Brian. It's good to be back on the show. Nice to see you. Good to see you too. And more for the people listening than for you, Paul. But I mean, Paul's been on the show many times, a lot of really good episodes. So if you want a lot into his backstory, you know, just search on your podcast and find some of that. But if you can give us like the 30 to 60 second version of your backstory, and then we'll just start talking about what's happening now.

Paul Shannon 1:25

Sure. Yeah, I've been investing in commercial real estate since 2016 as a limited partner. Got into single family and small multifamily investing actively at about the same time. Started getting some interest in doing syndications as a general partner around 2019. And now we have a multifamily platform that we raise capital for. We operate multifamily properties here in Indiana. I still invest actively as a limited partner as well to diversify my portfolio by sponsor, geography, asset class, debt maturity, just different strategies. I'm really just interested in the space and appreciate all the benefits that uh different asset classes within commercial real estate give me. So that's a little bit of my background. I'm a little bit of a hybrid, and through those experiences, I've gotten pretty involved with the subsidiary of bigger pockets called Passive Pockets, which is the niche of real estate that's focused on real estate private equity and how to become a better limited partner. So I'm full-time in this space and just really have a passion for it and a student of the game.

Brian Briscoe 2:23

Awesome. Awesome. Well, thanks for that. You know, speaking of passive pockets, I know you were a moderator at the Passive Pockets conference.

The New Multifamily Headwinds

Brian Briscoe 2:30

A couple things you talked about, you know, debt funds was one of the panels, and the other one was just like macroeconomics. Let's talk a little bit about macroeconomics right now. You know, what's your take on, you know, what's happening in the country globally and how that affects multifamily?

Paul Shannon 2:45

Sure. Let's rewind till about January of this year, right? I felt like there were a lot of caution flags, maybe yellow lights, let's call them, where multifamily had experienced 12, 18 months prior to that time, expenses that were blowing out your spreadsheet, right? We had tax increases that were very unpredictable. We had insurance costs rising, particularly in places like Texas and Florida, but really across the board, property insurance all across the country was rising. You had labor, supplies, material costs accelerating. It made for a very rough road to understand, you know, what are my input costs going to be here? How do I underwrite these scenarios five years into the future? How do I underwrite a value add deal when this administration is talking about tariffs? And every day it seems like there's a flip-flop on what was said yesterday. Unpredictability was very high.

Brian Briscoe 3:35

Yeah.

Paul Shannon 3:35

And then you had a scenario too where rents were soft, right? We saw that rents ballooned out and were growing at a fast pace, 21-22. Some thought that that would last forever. It certainly did not. And we found ourselves in a you know situation where in many markets supply was a concern. You know, the deliveries were not being absorbed as quickly as units were coming online. That created a scenario where there were a lot of concessions and rent growth stalled out. Some places it went negative. Certain places it held up a little bit better than others. But again, very difficult to predict where things were headed. So looking at it from January 2026 perspective, I was thinking, hey, this is actually a pretty good time to acquire. I think a lot of folks that were in the space maybe five years ago are on the sidelines now, or they're dealing with the assets they acquired during those times and trying to keep them afloat.

Brian Briscoe 4:24

So they're not actively acquiring. And looking at what you just said about forecasting into the future, imagine the people that are holding. This is what you were alluding to. You know, people who are holding properties right now are seeing income lines go down and expense lines go up. And like you just said, a lot of them are pausing on acquisitions to focus on managing. So anyway, go ahead.

Paul Shannon 4:46

Correct. So it's in my view, it's like, hey, you know, I'm a smaller operator. Now is the time to really push on the accelerator. We've been really, really patient, avoided a lot of the time period where acquisitions were being acquired with floating rate debt and really aggressive assumptions, et cetera. And we've got an engaged investor group. So that's what we did for almost a year. We've acquired 350 units uh between A, B, and C class. But then obviously the war in Iran came up, right? And whatever certainty we felt like we had, you know, internally at our group, as far as how we could underwrite, it sort of went up in smoke at that point. It was like, uh, okay, well, you know, this potentially could create a scenario where gasoline oil prices go up quite a bit. Uh, the Strait of Hormuz is closed. That's where a considerable amount of the world's fertilizer comes from. Fertilizers and input to agriculture. So wheat, uh, corn, any grains, any food potentially could be at stake here for rising costs, which puts downward pressure on pretty much every segment of the population. Yeah. And we started to worry about what does that look like? You know, if wages can't keep pace with inflation,

War Risk Treasuries And Frozen Deals

Paul Shannon 5:55

how does that impact our underwriting scenarios? And that was some of the talks that we had at the Passive Pockets conference. Now, whether you believe the war is, you know, the day we're recording this is May 7th. We've got some maybe positive news that the negotiations between Iran and the US and the other parties involved are going relatively well. Maybe, maybe this is all for naught, we shouldn't worry about it. But that is one of my concerns as I look at A, B, and C class, is like what class of tenant, what class of property is gonna hold up the best in all these uncertain elements swirling around. So I don't want to suggest that you should necessarily time the market, but I think the takeaway for me at this last conference was that you want to be more aggressive at certain times when you feel like you have the right tailwinds at your back, right? At other times, there's strong headwinds that are blowing right in your face. I thought that that was like 2022, where it's like, hey, you we should just sit down here, let's wait, let's see what happens, let's put our pencils to the side and kind of let this play out a little bit more. And in those scenarios, you should just pencils down and just sit it out, right? So I think if you look at like a sliding scale of zero to 100, if the tailwinds are blowing at somewhere between 25 and 75 percent, you should go, right? And if you want to play in that kind of standard deviation, if it's at the extreme ends of either end of that, 75 to 100 or 0 to 25, those are the times where it's like either it's too frothy or there's too much uncertainty and you want to kind of sit it out. So, where do I think we are today? I I still think it's a pretty decent time to acquire if you have a longer-term horizon and you have investors that understand that the returns that were generated back in the uh you know, 2018, 2019, 2021 period are not realistic to today's fundamentals. So if you can really identify the risks, spell them out, and protect the downside, I think it's a decent time to buy.

Brian Briscoe 7:41

Yeah. I agree with the properties that I own. We're definitely feels like we're still experiencing headwinds. I think we're at kind of like that inflection point, you know, where the winds are changing. I own a lot of properties in Salt Lake City, and I I never thought I would see rents go down in Salt Lake City, but they have, you know, 10 to 15 percent and concessions are crazy. But two months ago, we actually started raising rents for the first time in about two years. You know, I'm starting to see a little bit of that shift going, you know, to where now we're not having to lower rents to keep people where we're we're still putting in almost a month of concessions right now, but uh you know, now it's a month of concessions and we can start gradually bringing our rents up. I think Salt Lake City, where I focus, we're seeing kind of a little bit of a change from you know, headwinds to hopefully tailwinds. So but yeah, I appreciate that. And coincidentally, today's May 7th, you mentioned that. And when you mentioned that, I just you know, I'm like, that date sounds familiar. May 7th was my very first day on active duty. I showed up to boot camp on May 7th, 2001. But so anniversary for me. But 25 year anniversary today. 25th anniversary, yep. And I completely forgot about it until I heard you say May 7th. I'm like, why does that date sound familiar? But anyway, yeah, the Iran thing, man, I mean, that had a lot of effects on us specifically. You know, we we had a property that we were about ready to refinance and numbers looked really good, but lenders got skittish, you know, and uh, you know, what we saw is, you know, lenders were were starting to thaw, they were starting to be a little bit more aggressive with their underwriting. I mean, you're you're talking about some of the things that you know operators look at and you know, question mark on on how to underwrite things. You know, when lenders have question marks on how to underwrite things, they get more conservative and they draw back, right? But uh we had a property that we were looking to refinance, and you know, we went from roughly low $9 million loan, which worked great for us, to low $8 million loan over that two-week period after the Iran war started. You know, part of it was fuel costs went up. Yeah, as you mentioned, that affects almost everything, you know, on your um on your expense line. So between the different underwriting standards and oh, by the way, the uh five, seven, ten-year treasuries, which these loans are based on, also went up 30 to 50 basis points, depending on what day you look at them as a start point. But that little Iran war, which I'm with you, I hope it ends soon, but uh that had a much larger effect, you know, on very short-term stuff than I would have imagined.

Paul Shannon 10:25

But yeah, unquestionably, and and you make a great point there. I mean, that that's something I didn't mention about. Acquisitions that are in the pipeline start to look a lot different when the tenure jumps from right around 4% up to 435 or 440, and deals that pencil before don't anymore. And we had a similar situation where we were in LOI and were negotiating the PSA, and that broke out, and we started to see the the seller dragged their feet, and eventually it was a became a short sale back to the bank. And the bank, I don't know if they didn't want to pay the commission to the broker, which we had found the deal through or what, but they wouldn't engage with us and they may have taken the property back to save the commission. I don't know what they did, but we ended up not getting that deal. But uh, we were at a point where we're like, you know, I don't think we want it anymore. You know, it's it doesn't look the same on paper as it did a month before. It seems like a lot of stuff happens. Transactions can happen at about 4% when the tenure's floating around that number, yeah, stuff starts to open up. And when it floats up considerably from there, transaction volume just dies off. And we've seen our pipeline really significantly fall. If you're a seller, you're thinking, unless I'm forced and I have to sell, if I got a maturity date coming up, or whatever the case may be, there's a personal situation with the partners or whatever, why would you sell? Right. So people just don't end up putting their properties on the market and everything kind of shuts down. So anything that is listed too, I still feel like there's enough buyers on the sidelines where you get a lot of competition for you know the slim pickings that you have. So it's an interesting dynamic now. Very, very interesting market that's very fluid.

Brian Briscoe 11:55

That change for us, you know, when we went from you know a nine million dollar in proceed to an eight million dollar in proceed, you know, that's the difference between let's refinance and carry, and or do we really want to put you know a bunch of money into this one to keep it going? So it was, you know, uh kind of a game changer for us, just that timing right there. There's one property we have that we'll be selling right now because that refinance didn't work out. Now, of course, if the war ends and the treasuries come back down and gas prices come back down, we still have a little window to try to make it work. And then to your point, you know, we've got two other properties with uh early fall uh maturity dates that are only on the market right now because we have maturity dates coming up. And so you're absolutely right. You know, if you don't have a really good reason to sell right now, why would you? You know, and that's that's kind of what we're seeing on the buy side as well. There's just not a lot of stuff sitting on the market because it's not a great time to sell, which means it

Diversification Hard Assets And Inflation

Brian Briscoe 12:55

is a great time to buy, probably. I agree. Yeah. Looking forward, what does your crystal ball say? You know, you were talking about, you know, headwinds, tailwinds, you know, and not just multifamily. I know you're involved in other asset classes as well. You know, what are you looking into the future? What are you excited about uh as far as investments go right now?

Paul Shannon 13:13

Good question. Uh, you know, the crystal ball is certainly foggy. You know, I've been predicting that we'd have a recession since like 2022. I think I gave like a webinar presentation to a group of investors how to weather a recession with your portfolio. And I guess I was right that there was going to be a recession in commercial real estate, but the broader economy has been just absolutely humminal here. So the SP today is at an all-time high. But you know, what goes up must come down. And we know that this investing world is a cyclical space and there will be a recession at some point. I thought that, you know, what I said before about fuel costs going up and that impacting agriculture and food eventually in the grocery store would potentially put like you know a lot of downward pressure on the consumer. And I think eventually we may see that there's segments of the economy that are doing really well, like tech, but mainstream businesses. I don't know. Maybe we'll see that this can be held off for a lot longer than than I initially predicted in 2022. That the economy is so distorted right now because of all the money that's flooded into the system to keep it afloat. It's on it's unprecedented. We doubled M2 money supply back in the COVID days. And I don't know if that effect has really truly played out yet. So what I do know is that we've got $40 trillion in federal national debt, right? Yes, and that number continues to go up. It seems as if the administration is you know more concerned about keeping the stock market elevated than it is about you know operating a balanced budget. So that's one data point to consider.

Brian Briscoe 14:37

And that's one thing that I'm I'm most concerned about. If you kind of look at what's happening globally, you know, a lot of countries are divesting uh uh out of the US bonds. You know, there's a lot of countries that have U.S. bonds, and we've seen gold go from 3,000 an ounce. I haven't checked it in a week or two, but uh 4,700 today. 4,700. Okay. It was it hit 5,000 for a brief period, but you know, most of most of that's occurring because other country treasuries are divesting dollar and investing in gold instead. So that's something that you know what's happening in Washington is really affecting the global markets, and it's gonna have an effect on us too.

Paul Shannon 15:19

Yeah, nobody knows, but I I think if you study history, you study financial history, you can kind of see that these types of things work themselves out in massive long-term cycles, right? Ray Dalio wrote a book recently on the changing world order and talks about how money is tendered and how you know gold has always been for 2,000 years kind of the the fallback when fiat currency falters. And I think we see remnants of history in today's world and what's happening with our currency. We still have the reserve currency of the world, but if we ever lose that, our standard of living as a country will be impacted. But what I'm doing to hedge that scenario and what I believe is that none of us own enough hard assets. And I include real estate in that that argument. So I'm trying to find inflation protection and hedge against inflation by buying tangible real assets that in most cases produce income, like real estate. But outside of real estate, I'm investing in gold, silver, I've invested in agricultural commodities. So I think those types of assets are are really interesting in today's world and are sort of a beta against you know the stock market and what happens there. I'm still invested in public markets. Uh, I'm not one of those people that mistrusts the market. I take it for what it is. It's a you know, it's it's somewhat gambling. There's people that are shorting it. There's always there's a there's a bid and the ask, there's a buyer and a seller on each side, and you got to pick your side. And sometimes you're gonna win, sometimes you're gonna lose. If you're a long-term holder, you're probably gonna make out and you know, and and get the average. I think there's a case to be made for diversification across public markets and private markets, and in private markets and real estate syndications and that part of private markets, there's a case to be made to diversify amongst different real estate asset classes with different sponsors. And so it's really about just spreading out the bets and making sure that I'm not super hyper concentrated in one specific deal or one specific market or one specific asset class where, you know, I just want to stay in the game. I know I'm gonna take some losses, and I'm probably not going to have as big of wins uh because I'm not taking that hyper-concentrated bet where it could go really well. Uh, but I'm also not gonna have those really big losses either. And I just kind of want that steady linear path of net worth to accumulate over time and be able to stay in the game.

Brian Briscoe 17:37

So yeah, you may you make a really good point and one that that resonated with me. Going into this multifamily downward cycle that we hit, 2022, I was hyper concentrated in commercial real estate. And my goal was to, you know, start diversifying at the time, but I think I did too little too late, you know. And so I took a big hit just because, you know, multifamily took a big hit. But now I'm diversifying as well. And it's it's something that uh the other thing that uh and this is this is one of the the not so great things about commercial real estate is the lack of liquidity. Those were the two big pinch points I've had, you know, being hyper concentrated into one area. But yeah, going forward, I've already made a couple of rules for myself. You know, since I am, you know, a multifamily guy, I'm I'm lead sponsor in deals and I'm investing in everything that I'm doing. You know, one of my rules is that's the only multifamily I'm investing in. Whereas a couple of years ago, I was putting money with other operators when I had it and letting it ride. But yeah, that's my goal over the next couple of years is to restart diversifying again. I think I went from fairly diversified but small portfolio to a very hyper-concentrated portfolio. And now I want to get back to more diversity. And speaking of, you know, you mentioned gold and silver. That's one thing that I've always loved. You might not let's see, get get this in the light. I've always collected silver coins, you know. I've got a couple within arm's reach of where I'm sitting right now. But uh I've I've got several thousand dollars worth of silver, but you know, that that doesn't move the needle much. That's like collection, but that's one thing that I've been ramping up right now on too, even though silver's, you know, both all all the precious metals have taken a hike right now, you know, ramping up on collecting

Liquidity Mistakes And How To Fix Them

Brian Briscoe 19:20

things like that as well.

Paul Shannon 19:21

So those are hard assets. Yeah, you mentioned something about liquidity that I think is interesting because it came up at the the passive pockets conference I was just at, and how when the syndication world took off and people had somewhat of a shiny object centrum, they were looking to allocate, right? And they put all their money into all these deals that are illiquid, and then they realized that there was a big opportunity cost to that. Or maybe they, you know, don't have the reserves that they thought they did. They have capital calls in their portfolio, or they've had principal loss and they don't have the same liquidity as they might if they were in public markets or had access to line of credits or those types of things, so or had somewhat more liquid positions like debt funds where you can redeem out theoretically and get your principal out and rotate into something more aggressive. So I've been looking at that more carefully lately too. Um, just making sure that I have either cash, cash equivalents or access to cash in some way for either opportunity costs or the rainy day that I don't see coming because we're all prone to mistakes. We all make assumptions when we we make these investments and they don't always go as planned. So having something to fall back on is reassuring. And have a pos having a portion of your portfolio be almost an insurance policy, I think is a safe way to play it. But that's come up a lot lately in my circles with LPs and just you know investors in general, that liquidity is far more important. You don't realize how important it is until you don't have it and you need it.

Brian Briscoe 20:43

Until you don't have it. Right. Yeah. And I mean, I I I started, you know, very liquid with a good chunk of reserves, but I have two employees and several properties that have had capital calls. And so when you have a couple of years where multifamily is not doing great and you're hyper-concentrated and multifamily, there was a slow burn on that. And I've learned a lot from this. And I think, you know, looking back three, four years ago, I thought, hey, everything's roses. This is awesome. And uh now I'm going back to what I should have been doing from the beginning. Sometimes conventional wisdom, you know, diversification, sometimes that actually uh makes sense, right?

Paul Shannon 21:21

So well, Warren Buffett doesn't think it does. Doesn't he say that uh diversification is just for people who don't know what they're talking about? I'm like, well, that's me, I guess, because I'm not willing to have that kind of conviction, that's for sure.

Brian Briscoe 21:32

True, true. You know, he's made a lot of quotes. You know, something that I attribute to him that may not have been him is you build wealth through concentration. And you maintain wealth through diversification, right? I think he said something about along those paraphrase along those lines, yeah. Yeah, but he's been hyper concentrated. You know, his model has been the same for you know 50 or 60 years. He buys businesses with strong funds. Fundamentals that are, you know, happen to be at a really good price. And he's also set his favorite hold periods forever. A lot, a lot of those things translate really well to multifamily, but a lot of lessons learned when things go out. Another favorite quote of mine from him is when the tide goes out, you find out who's swimming naked. And I think that's been very apparent here recently, too. So yes, indeed. Yeah. But mention a couple of properties you bought or partnered with people on in the last couple last year or so. A class, B class, C class. Tell us a little bit about those, why you like those properties. Tell us what that looks like right now.

Paul Shannon 22:35

Sure. Yeah, I'll try to give you the cliff notes as to what we were attracted to and then you know some of the different challenges we face within each property. So the A-class properties outside of Louisville, Kentucky, 2023 vintage, 183 units. The plan going

A Class Vs B Class Vs C Class

Paul Shannon 22:50

in was we can get this at a discount to replacement cost. It has strong fundamentals and in-place cash flow. We had positive leverage, which was a term that you couldn't use for a couple of years. We thought that with the tariff situation happening, this is May of last year, 2025, the tariffs and the uncertainty around that, we didn't really had to worry so much about labor and materials and input costs because it wasn't a value add project. It was already there, right? But the risk was that there was a lot of deliveries in the market. And we were going to have to fight with competing properties on qualified tenants. So there was a lot of concessions, and you know, we saw that right out of the gate and we lost some occupancy. The prior owner had put tenants in that weren't necessarily as qualified just to get the occupancy up for the sale, which we anticipated to some degree, but we didn't really know what kind of arena we were stepping into, I guess, from a competitive standpoint. And it was a battle. We just got up to 95% occupancy very, very recently this year. We're off pro forma, you know, by 10 or 15% because of concessions, frankly. Uh operating costs have been held in check really, really well, and are what we anticipated, but it's been the top line that's been a bit of a challenge to get going.

Brian Briscoe 23:58

So concessions, man. I saw a report on Salt Lake City, and average concessions were 18%.

Paul Shannon 24:06

Wow.

Brian Briscoe 24:06

No, nobody underwrites, you know, 18% on concessions, but uh the last year average concessions 18%. And granted, it's it's the brand new stuff that's kind of uh you know skewing the numbers. Yeah, the concessions, man, they're big everywhere.

Paul Shannon 24:22

So um but with that property, what's interesting is that the the the rent to income ratio in the area based on AMI is pretty low. So there's affordability to push rents a little bit farther. Now that we've seen some of the units absorbed with the competitive set, I think it's about time. You mentioned you you started to raise rents in Salt Lake City for the first time in a couple of years. We're, I think, almost there where we can start to drive that needle again. We have to be because we're in on into year two on a five-year business plan, and we're gonna have to figure something out. So that's been the challenge of that property. So that's the A class, B class was uh a different story. 90s build, no real value add to speak of. The operator was a retail like strip center operator, and they got caught up in the the multifamily mania and bought a few properties, I think six or seven. This was their farthest property from home uh in Indiana. They they were out of Georgia and they just decided it's time to go, it's time to cut the property was 98% occupied, no new supply in the market, steady rents, not a lot of opportunity to push rents higher based on the income situation, but without many other choices from a tenant perspective as to where they could live, and this being probably one of the nicest communities and well-maintained communities in the area, we liked it as sort of a coupon clipper. It was going to be a cash flow play, not a huge IRR, but we just go in, we take care of some of the maintenance and keep it consistent and run it really well.

Brian Briscoe 25:49

Without a value add, you know, I scratched my head. I'm I'm looking for 90s value add opportunities. Was it recently renovated or just very well maintained?

Paul Shannon 25:58

It's very well maintained. It has not been recently renovated, probably about 15 years ago. There were some updates done. But the thing is that we found in some of these markets in our local area is you can go in and you can put a new kitchen in, cabinets, counters, you can put a vanity in the bathroom, you can upgrade the flooring and give it fresh, modern, agreeable gray paint. And tenants don't care. They might like it, but they're not willing to pay an extra even 50 bucks for it. So if you talk about doing an eight to 10,000 renovation, you know, you need to get higher rents than 50 bucks to make it make sense. And it just doesn't. So we can keep heads in the beds at a lower price point, keep it affordable for the market, and not spend that money and just operate better and try to focus more on the expenses, the living experience for the tenant and retention. So it's more about operating than it is about pushing some business plan renovations and such. So that's been the plan there. And it's it's relatively uh fresh on the books. So we don't have a long uh runway to see like what this will look like a year out from now, but we're exceeding pro forma on that deal after year one or after quarter one. So that's the B class, that's pretty right down the fairway. And then we've got a C class property. This one's a little bit smaller, 56 units. This one was somewhat of a distress scenario. So the seller was out of the West Coast, they bought in Indiana five or so years ago, they had a maturity coming up. Uh, they bought at you know, a basis that wasn't realistic for what today's stuff is trading at. Yeah and they let it go a little bit. There was some deferred maintenance. Uh, it was pretty well occupied, about 85%. So we just reset the basis and reset the debt. And we got a good terms. We bought it for uh basically what they had as an unpaid principal balance left on the deal. We financed it through uh a local credit union uh that we we've worked with plenty of times in the past. And you know, it being a smaller deal at 56 units, it you know, it wasn't uh agency ready. We may eventually refinance into agency at some point, but it was perfect for a local banking relationship. And we've just gone in and we've cleaned up a lot of the deferred maintenance that's been sitting around for the last two years. We had some non-paying tenants, we're still working through workouts with some of those folks. Some folks are you know deciding to leave uh or have to leave. And you know, we're finding that in that market that's Evansville, Indiana, rents about 18 months ago are what we're getting now again today, after seeing a dip of about let's call it eight to 10% during that 18-month period. So we're back on track. We're you know spending a lot right now, but I think we're gonna start to see our PL smooth out. I guess my concern with that property is that we're pushing the affordability ceiling. You know, they're all two bedroom units, and there's a fair bit of two bedroom units that are vacant right now. And I think given the opportunity, some tenants are taking a one-bedroom instead of a two-bedroom to save the roughly two to three hundred dollar difference in rent. So, you know, what we talked about before about gasoline prices and food prices and inflation picking back up, I think that's definitely the most sensitive group out of any of the three aforementioned asset classes that we're gonna have to keep our eye on because you know, that's the group that you're gonna start to see economic vacancy rise, not just physical vacancy with uh nobody living in the unit, but tenants that aren't making payments that can't afford to make payments. I read a post by Jay Parsons recently that highlighted that there's, you know, these A-class tenants, there's like I mentioned about our property near Louisville, they've still got some opportunity to pay more rent to get to that kind of 30% of income goes towards rent ceiling, uh, where it starts to become less and less affordable. Some of these C class tenants around the company Jay cited are paying 80% of their income towards rent before even factoring in utilities, et cetera, et cetera. That's not happening in my market, but I thought that was an astounding figure because obviously that's not sustainable and they have very little left over for food or anything. So I think the affordability gap continues to grow, the wealth gap in this country between the haves and the have nots. Yeah. And that's really something, you know, I think we've known uh for quite some time, and and uh multiple administrations have kicked the can down the road or tried ineffective methods to fix that is something that we really need to figure out here because it makes no sense, an underwriting standpoint, to build C class today unless you're getting significant grants and city money, ready money, almost for A-class too in some markets.

Brian Briscoe 30:18

So you know, and the problem with the grants that you get is they come with strings attached. And this sometimes the strings attached, you know, I I've looked at several properties that were built with these strings attached. And when I start looking into what it takes to actually manage them, you know, it's like I don't want to deal with that. But yeah, there's a lot of great points to unpack there. You know, fuel prices go up from I think we were paying 280, 260 at the pump, and now we're like 430 where we're at. So we we've gone up, you know, a buck fifty in gas prices here. A lot of the C class tenants have very thin margins, you know, and that's just very indicative of that C class, you know, where where they're sitting right now. And so there is a significant effect of rising gas prices. We've got one property right now with several open two bedrooms because people don't want to pay that two bedroom premium. And it's exactly what you said, you know, it's it's resonating. It's like, yeah, we we have we see that happening right now where they are getting pinched. And so, you know, there's lots of things that are pointing towards, you know, multifamily taking off, but the economic issues, you know, a lot of things that are happening I think in Washington are affecting, you know, negatively affecting what we're doing right now, you know, the tariffs, all that stuff negatively affecting, you know, it's affecting prices, it's affecting inflation, it's affecting the pocketbooks, and now people can't pay as much for rent, which I think you hit the nail on the head there.

Paul Shannon 31:45

It's affecting value at business plans too. If you're an apartment operator, I read that tariffs have created uh roughly a six percent increase on kitchen cost inputs. So we're talking about on the aggregate, if you take cabinets, countertops, appliances, everything that goes into remodeling a kitchen, yeah, it costs now six percent more than it did last year due specifically to the tariffs. So those input costs, you know, if you're going to take that business plan approach, you ultimately are passing that on to the next tenant. And if they can't afford it, that business plan doesn't work anymore. We have seen that most value add business plans don't work uh over the last few years. But I've heard the term we're in a decaf stagflationary environment. So this is where it's not quite, you know, full on panic mode yet, but it seems as if growth and wages are sort of faltering slightly potentially, and costs are going up significantly. And if that extends out that trend into the future for quite some time, uh, that's not the best economic environment to be operating in. So we'll have to uh we'll have to be careful. Yeah.

Brian Briscoe 32:47

Yeah. You know, you mentioned the the cost going up. It goes back, if you're in acquisitions mode, you can't use last year's cost models either. We did a renovation, we're actually we purchased a value ad just over a year ago, and we are renovating our last unit right now. And our general contractor, I mean, every general contractor puts a little bit of fluff in the numbers. And they they told us, you know, hey, we we've been able to hold these, we've been able to hold these. And obviously a big disclaimer up front, hey, if if prices go up, we're gonna have to, you know, change some things here. But they've been able to hold firm. But if we were to do that same renovation today, you know, we couldn't use the same, the exact same numbers. And so, yeah, going forward, there still are a lot of question marks, you know, on a lot of things with the underwriting, a lot of things with the acquisitions. Uh much rather have a clear path forward. But uh, you know, now there's a lot of navigation that's happening, a lot of being a little bit more selective with assets.

Why B Class Leads Right Now

Brian Briscoe 33:40

Let me ask you one question, then and then we gotta we probably ought to start wrapping up. You mentioned A class, B class, C class. You you purchased one of each and recently. You know, if you had to pick one to hang your hat on for the next couple of years, you know, where would that be? I would probably pick B.

Paul Shannon 33:56

I think that's uh right right in the middle, right down the fairway is the analogy I used before. You know, some of the the stresses, uh the the income, rent to income ratio uh issues that the C class space has and the deferred maintenance and just the older property problems, I think, uh, unless you can find something that's really distressed where you've got a basis that you can reset or you've got you know significant upside in rents because it hasn't been touched in you know 30, 40 years. It's just not as attractive of a proposition today. A class, I'd say in general, it just depends on where you're located in the country. You know, Austin is still seeing a lot of supply that's being worked through, and it's very difficult there to you're certainly not going to be able to push rents in Austin. It seems like maybe it's trough, but rents have come down considerably and they're not going up right now. And there's other markets that are like that out there. So that'll eventually work itself out. Some of the pressures that you talked about about, you know, contractors being able to hold pricing, and a lot of them haven't been able to hold pricing, especially on new bids. And, you know, these new development projects just don't pencil at all. So there's a lot less coming out of the ground today. And we've, you know, you've heard the headlines like yeah, the supply has been in excess, but with no new stuff coming up, you know, it unless somebody's got a real competitive edge uh as a developer to put product out right now, uh, there's just a lot less. So eventually that's gonna, I think, benefit existing owners. But I think A-class still, you know, because of the affordability difference between uh the haves and the have nots, the haves still have some room to pay more for rents in some of these markets. I think it's just very market dependent. So A-class could be the answer to your question depending on where you are. But I think where I am, I think B class makes a ton of sense because they're tenants that the retention is a little bit better. Uh, they have solid jobs. Some of them have jobs that aren't as susceptible to being replaced by AI, for example, as maybe even A-class tenants, um, the white-collar workforce. Some of these are, you know, HVAC technicians or or whoever, right? I mean, and and some of those jobs are irreplaceable by AI, at least in today's standards. Yeah. So we have humanoid robots running around. But I think that B class, just like when you're in a recession, B class tends to do pretty well overall relative to other uh asset uh or property class types. I think B class is a solid play right now.

Brian Briscoe 36:18

Yeah. You know, and I I I tend to agree. I mean, I'm just generalizing, you know, um, I've owned a lot of C class in my life, and you mentioned older properties tend to have problems. You know, there's uh that there's one property right now where we've got a backhoe that's you know digging up next to the foundation because we have, you know, a couple of leaks coming into certain units that's causing lots of problems. That's a lot more common. Uh, this is actually a 60s built property, so it's older than I am, but uh there's a lot of things your C class C class properties have C class problems is how I always phrase it. And C class tenants have C class problems. The B class properties that I've owned, when people leave, it's normally because they're buying homes, right? And if they're able to buy homes, they're much better off economically than your average C class tenant. You know, the way I look at it is your average C class tenant is a renter by necessity. And your average A class tenant is a renter by choice and lifestyle, right? It's kind of how I look at things. But yeah, I think that there's a lot of goodness for B class. We're just shifting our buy box. You know, we if if if we're buying C class, we want it to be top of the market C class, where with a little bit of polish, we can maybe move it from a C plus to a B minus. But yeah, there's a lot of goodness there. But uh I I think in Salt Lake City we're we're kind of moving into a B class, light value add type, you know, buy box right now for much of the same reasons. So um, but you are absolutely right, it is very location dependent. We're dealing with similar issues as Austin, just not to that extreme. You know, a lot of A class being built, which has depressed a lot of the market. But uh you mentioned uh the future, you know, multifamily under construction. I think it was from a Jay Parsons post, but I literally had that graphic up on my screen when we started. But you can see a downward trend from the peak. I think the peak, well, looking at the graph, the peak was mid-2023 of apartments under construction. But you know, to your point, you know, a lot of the headwinds for multifamily operators, the people that buy existing like me, are also exist for the for the people who are developing. You know, they're dealing with the high interest rates, they're dealing with you know price uncertainties. And so that's going to affect you know the properties that are gonna be delivered in the next two to three years. So yeah, anyway.

Paul Shannon 38:41

Well, all that said, I think that you know, every property has a clearing price where it becomes a good deal in any market, no matter what's going on. So it's it's about relationships, patience, finding inefficient markets, having an unfair advantage, all those things can trump any of the other data that you see on a macro level. So you got to keep at it.

Brian Briscoe 39:02

That reminds me, I went to a conference about a month and a half ago. I I kind of have a policy of if people ask me to speak at a conference, I go, right? And so one of these conferences tied to a coaching program asked me to speak, and and so I went, and somebody that some of the guys there were asking about, you know, 10-minute underwriting tools. They were asking me, what do I do on a very first pass to see if a property is a good deal? And my answer was it has nothing to do with the numbers. You know, I look at the property, I look at where it's at, and I ask myself, do I want to own this property? And then I underwrite it to figure out at what price does this property work for me and for my investments, you know. And so I like how you said that. There's several of the coaching programs that have these, you know, back of the napkin analyzers or a 10-minute analysis tool. I've never really bought into that, but everything works at a certain price. Almost everything uh works at a certain price. And, you know, if you can find something that works at a price that a seller's willing to let go of a property at, boom. There you go. There you go. Anyway, I got uh lunch with a buddy here soon, so I'm gonna have to call it quits now. But Paul, thanks for coming on the show. Very much appreciate your time. One last question, and that's how can listeners learn more about you?

Paul Shannon 40:22

Yeah, I appreciate it, Brian. It's good to be back on with you. Good to see you. Uh, thanks for having me today. Uh, you can find me at investwise collective.com. That's my company. And then put out a lot of content on LinkedIn and I'm in the archives quite a bit at uh at passivepockets.com and on the Passive Pockets podcast.

Brian Briscoe 40:41

Awesome. Awesome. Well, hey, thanks a lot. Appreciate your time. And for those listening, the links that he just mentioned, they're all going to be in the show notes. So click the link. You gotta you gotta follow him at least on LinkedIn. You know, he's he's got some of the most insightful posts I see in a in a given you know period of time. So definitely follow Paul on LinkedIn. And anyway, Paul, once again, thanks a lot. Good to see you again. Thanks, brother. Hey, I hope you got a lot from today's conversation. Uh, if you did, make sure to subscribe so you don't miss future episodes. We're on all major podcast platforms and YouTube as well. Now, if you're ready to move from listening to actually doing, check out the Tribe of Titans multifamily investing community. That's where investors go deeper with live discussions, real time QA, and practical support around capital raising, finding deals, asset management, all of it. All right, you'll find everything you need at thetribe of titans.com. That link's in the show notes, tap it, and we'll see you there.