What if you could unlock the hidden potentials of real estate syndication? Picture yourself delving deep into the intricacies of SEC 506B and 506C syndications, learning the criteria for becoming an accredited investor, and exploring vineyards, emergency clinics, private practice medical offices, and more as possible investment opportunities. This is the journey we embark on with real estate guru, Kishan Golla, who graces us with his wealth of experience from over 25 deals, and more than 4,000 doors in the commercial real estate market.
As we navigate the world of real estate investment, we also confront its inherent challenges and risks. Kishan generously shares the realities of evolving interest rates, fluctuating insurance costs, labor and payroll changes due to the pandemic and their implications for your return on investment. We tackle the nitty-gritty, from the importance of investing in landlord-friendly communities to the potential returns an investor can expect and the average life cycle of a syndication.
We conclude our insightful journey with Kishan by discussing diverse investment options and considerations: single-family homes, self-storage, and medical syndications. He reveals critical tax implications in retirement investments, and how to structure a deal to avoid UBIT and UDFI taxes associated with self-directed IRA investments. As we wrap up, one thing resonates: the paramount importance of honesty in syndication. Join us on this exploration and let Kishan's expertise guide you through the rewarding landscape of real estate syndication.
RECN Facebook page https://www.facebook.com/groups/5670625079733713
Kishan Golla
Email kishan@vetexequity.com
Phone (620)-704-1690
What if you could unlock the hidden potentials of real estate syndication? Picture yourself delving deep into the intricacies of SEC 506B and 506C syndications, learning the criteria for becoming an accredited investor, and exploring vineyards, emergency clinics, private practice medical offices, and more as possible investment opportunities. This is the journey we embark on with real estate guru, Kishan Golla, who graces us with his wealth of experience from over 25 deals, and more than 4,000 doors in the commercial real estate market.
As we navigate the world of real estate investment, we also confront its inherent challenges and risks. Kishan generously shares the realities of evolving interest rates, fluctuating insurance costs, labor and payroll changes due to the pandemic and their implications for your return on investment. We tackle the nitty-gritty, from the importance of investing in landlord-friendly communities to the potential returns an investor can expect and the average life cycle of a syndication.
We conclude our insightful journey with Kishan by discussing diverse investment options and considerations: single-family homes, self-storage, and medical syndications. He reveals critical tax implications in retirement investments, and how to structure a deal to avoid UBIT and UDFI taxes associated with self-directed IRA investments. As we wrap up, one thing resonates: the paramount importance of honesty in syndication. Join us on this exploration and let Kishan's expertise guide you through the rewarding landscape of real estate syndication.
RECN Facebook page https://www.facebook.com/groups/5670625079733713
Kishan Golla
Email kishan@vetexequity.com
Phone (620)-704-1690
Hey everybody, this is Mike and Steve from the Real Estate Community Network podcast. Make sure you go like us on Facebook. We have a Facebook page.
Speaker 2:Real.
Speaker 1:Estate Community Network, pa. It's growing. Every day I see new members.
Speaker 2:Yep, a lot of good action going on there. I kind of like that, steve.
Speaker 1:Every day I wake up I'm like you got five new members, you got three, you got two, you got one. So make sure you like us on that. Follow our podcast. You can follow it on any platform we're on. There'll be links at the bottom of the show. I listen to it on Spotify. Some people listen on Apple. We're also on Amazon. Listen to us. So today we're going to be talking to Kishan Gola. How are you, kishan? How are you doing today?
Speaker 3:I'm doing great guys. How are you? Thank you for the opportunity.
Speaker 1:Yes. So today we're going to be talking about real estate syndication and this guy is yeah, first, kishan, you know what we're going to do. We're going to let you do a little intro about yourself Because, like I said earlier, it's just you just have so much going on and there's so much about you, so maybe just give us a little background on how you got involved in real estate or whatever you'd like to tell us about real quick.
Speaker 3:Sure. Hello everybody, all the listeners, happy Friday. And we? I've been in real estate since 2011. I have been in started my real estate career from 2011 single family business and then I started learning syndications and I passively invested since 2012 onwards. I've seen the returns. Then I went as a sponsor from 2017 onwards. So till date as a sponsor, I've been a 25 deals sponsored with my partners, a total of 4,480 doors. We have done 13 full cycle syndications. That is close to 1,800 doors. So I did my masters in United States here from Pittsburgh State University, kansas. I've been in IT for ever since I graduated and I work in IT cloud solutions for the last 16 plus years. I'm married. I have my wife, work at a hospital and I have two kids. One is eight year old and another one is 10 months old.
Speaker 1:I saw one going to school.
Speaker 3:now we live in Daniel Pennsylvania.
Speaker 1:I'm sorry, I'm sorry I said, I saw the ones going to school today or yesterday.
Speaker 3:Yes, yes, yesterday, yesterday. He's third grade and another one is at home, so we have a helper. We have a helper at home.
Speaker 1:You're a busy guy. 4,000 plus doors.
Speaker 2:Now what is full cycle syndication? That's from purchase to sale.
Speaker 3:Yes, from acquisition to implementation of the business plan and sell it for profits. Sometimes market performs what you underrated and market have some unknown things, and at times you have to sell it off for no profit. So I'll give you all the details. Today I'm somebody who can tell that not everything we have done we gave a great return. Some of the deals have not given any returns.
Speaker 1:So let's, before we get going deep, right, can you explain what syndication real estate is and how it works? So, for the new people listening, or just people that are interested in syndication but really don't understand it, can you explain what it is?
Speaker 3:Sure, syndications are like you buy a bigger size property, not with your money. You put some money but you raise money from others In real estate. People call it, as other people, money OPM. So you could do syndications anything. You put 20%, 10% lenders require. Some lenders force you and respond that you must put at least 10%, but some lenders are flexible. So when I'm talking about when the times were really great in commercial running, not today. Today the lending world has completely changed. So you could do syndication anything. So I've seen people who does syndications on vineyard varieties, syndications on emergency clinics, syndications on private practice medical offices, a lot of things. So syndication is a concept which can be implemented into any model of business, as long as you are open book and you keep informed with SEC.
Speaker 3:Okay so there are two types.
Speaker 1:Dad, I'm listening.
Speaker 3:Any deal you can class can be classified into two types. One is SEC 506B. You cannot accept anybody or you cannot solicit anybody, or you can only solicit somebody who. You have a personal relation with them, at least you know them a month or 30 days or more. So that is called SEC 506B. And SEC 506C is publicly, you see on the social media Facebook, instagram, you know TikTok, you name it like. You know on the billboards while you're driving on the freeway.
Speaker 1:So they could just like hey, they could just talk about it, I could ask people.
Speaker 3:Yeah Right, they can advertise anywhere, anywhere, anything, and but you, not everybody qualified to invest in that, because there is a criteria you have to be accredited. So that brings up a question what is accredited means? I can define three simple steps. One if you are a single, you must be earning more than $200,000 for last two years consistently. Then you are accredited. If you are married, do the joint filing taxes in your household, which income should be more than $300,000 for last two years consistently. If you are a business owner, let's say you don't work for anybody and you don't have anybody like that. If you are a business owner, your assets minus mortgage should be more than a million dollars. So this is the three criteria.
Speaker 1:Okay. So that's why probably a lot of people do the 506B.
Speaker 2:I hear like the other day we were at a meetup.
Speaker 1:So we're not going to say the meetups name, but they were. They were doing a 506B, correct?
Speaker 3:Yes, so it's 506B, but 506B deals. While raising you are not supposed to do a new people presence. Okay, yes, you should not even talk about it. Number of doors, location none of them, you should not talk about it. Okay, it's a very sensitive topic.
Speaker 2:Okay Now you mentioned at the meetup we did a month or two ago, which are the videos out there on our YouTube channel, that there was a sophisticated investor category, that one of these you could be not accredited, but you could be a level below that and be, I guess, sophisticated investors. The term yes.
Speaker 3:Is that just what you're saying? There are two types of investors accredited, non-accredited. In some attorneys, some industry jargon, they call it as, instead of non-accredited, they call that sophisticated investor. Sophisticated investor could be anybody who does not fall under accredited investor category.
Speaker 1:That makes me sound smarter. Now, how much is sophisticated?
Speaker 2:No, but sophisticated can only do 506B. They can't do 506C?
Speaker 1:Yes, because they're not going to fit in that range.
Speaker 3:Now also, I would like to add you one more point to that as a sponsor. Let's say you, me, we all sponsors. We are putting a deal together, raising a capital. We cannot accept unlimited number of sophisticated investors. You can only accept 35 sophisticated investors in any deal. Let's say you want to raise a $4 million. If you put each person 100,000, then 35 people, 3.5 million, you get it, and rest of the 500, for the $4 million you're raising, 500 has to come from accredited investors only.
Speaker 1:Okay.
Speaker 2:Okay, All right, and that's for either C or B deals. So I'm sorry on the B deal there has to be Only B. Only B, okay, only B.
Speaker 3:C, you can accept anybody. Let's say you have a friend who is a millionaire, who has been a single guy spending more than $200,000 every year. Last two years married couple. They've been earning $300,000 household income for last two years. Let's say they don't know how the deal goes right. Hey, we can only invest $10,000. Will you accept it? Yeah, we can accept it because there is no limit, because the deal is structured as a SCC 506C. So remember B for B in person, c for public.
Speaker 2:Okay, and I assume these are the ones where you have the private placement memorandums drawn up, with all the so this has to be registered with the SCC before you put it out there.
Speaker 3:Yes, okay, yes, so there is a steps. The syndication attorneys does it. Once you declare a deal 506B, let's say you could not able to raise the money, right, you want to convert into 506C. If you have a choice, you can convert it and reach out to a much broader perspective, much broader audience of investors right.
Speaker 3:But if you know, let's say you thought, hey, I'll go publicly, I will advertise everything everywhere, I'm declaring my deal as a 506C For any reason. Let's say you know you have an investor who is not accredited but he has a lot of money. You want to put all the money you want to convert into 506B. That's not allowed. You cannot do that.
Speaker 2:Okay, okay, fair enough.
Speaker 3:Fair enough. So B to C you can go, but C to B you cannot come.
Speaker 1:Yes, no-transcript.
Speaker 2:Yeah you have to tear the deal apart and start over. I got to start all over again.
Speaker 1:Yeah, life's been horrible. So let me ask you something. What are the benefits of investing in syndication real estate compared to other forms of real estate investment? Is there any difference?
Speaker 3:See, there is. See, when it comes to scalability, economies at a scale, right, tax benefits. These syndications are for people, not for the people tire kickers. Okay, so some people are like you know they, they hustle themselves, they. You know whatever, they save the money, they invest in single family and do the fix and upper, fixer and upper things. This is not the category for those kind of investors. Right, the reason is, once you invest it, you don't have a controller. You have to wet the process. You got to know the sponsor well. You know their track record, how they have done in the past, right?
Speaker 1:Yeah.
Speaker 3:You can look at their previous deals, how they perform it, and look for the sponsors who are open about it, who take. You can tell what worked, what did not work, what were the lessons learned. Right.
Speaker 1:Yep.
Speaker 3:So and then the advantage is money when, when you put with you invested, the good sponsors, who has track record right, you have a choice of getting a good tax benefits, k1 losses, paper losses people call it as right and then you know money will be working for you while you take your eyes off. And that is how the concept came in and you go in any. It depends upon asset class, what you invested. But the concept is you know you pull the money and invest it and let the sponsors do his job and get all the tax benefits and you get the cash flow quarterly and sometimes the preferred returns right. They, if they can't deliver it quarterly, they deliver it regularly. If not, they deliver it at the refinance, if not at the time of the sale. They pay that you know, 8% or whatever they promise it per year and rest of the equity gain on sale.
Speaker 1:Okay, so so what are tax benefits like? So tax benefits Because you might have, you might have you might have 50 people in here, so we all get to share in that.
Speaker 3:Yeah, sure. So let me give you an example. Let's say we are buying a $10 million property, Okay, so the property value is 10 million and we are raising a $3 million capital, which is 30%. Right, I'm talking about 70%. Loan is provided by the bank, or, you know, Fannie Mae or Bridge Loan Lender, right, these 30 investors. So you have a choice. Now what you do is we hire a consultant called cost segregation experts. There are many, as you guys have done some. You know, a month or two months ago there was cost segregation expert in your area, right Adam Strauss.
Speaker 3:yes, Right, right. So we allocate a money about $15,000 to $15,000 an average depends upon the deal size. We, this cost segregation expert, will come and look at the property, all the details. They divide the property into land, buildings, doors, any mobile parts, windows, carpets, plumbing, light fixtures, you name it. They divide into million plus parts, the whole property and do the depreciation and bonus depreciations and accelerated depreciation. They do that and let's say they come out like you know, hey, this property, we can give you depreciation of $7 million on this right. Wow. So first year, you know, you invested, as an average investor, invested $100,000. So what? We say that, hey, with all these cost segregation losses, your investment value is at $30,000. Remaining $70,000 is at loss paper loss, not actual loss. Yes, yes.
Speaker 3:So we pass that K1 on each individual investor that is a CPA involved. Cpa does a cost segregation. You know. Look at this cost segregation study and apply these losses to the LPs, limited partners and general partner. Okay, interpartment means who invest the money, who does not get involved in asset management or anything. General partners are who are found the deal, put together the deal and do the asset management actually involved in the property.
Speaker 1:And that just gets forward to my accountant.
Speaker 3:Yes. So we will issue the K1 and we give to the limited partners and you take that K1 and give to your accountant and say, hey, I invested $100,000, you know $70,000 last. Can I apply it towards my other income? Let's say you made another fix and flip, let's say $30,000.
Speaker 1:Sure.
Speaker 3:Another fix and flip. You made a $50,000, right, you made that and you know. Then your CPA look at it, said look, here is your income, here is your income from other things. Right, they always look at it. This is a passive loss and they always look at it is there any passive income to offset it? That means you lost it. Did you made any money similar like this? So then let's say you made a $40,000 at somewhere as a passively. Okay, you made a $40,000 and here you lost $70,000, you still have to pay taxes about $30,000.
Speaker 1:Okay, so I can wash it off on other investments.
Speaker 3:Other investments where you are not actively involved. You are passive, right. Well, can I take this?
Speaker 1:So if I had more rental, if I had some single family rental right, so and there is a tricky question right this CPA can answer more.
Speaker 3:I'm not a CPA, but you can always consult your CPA. So if those properties are not actually managed by you, you can write off. So I get investors last lot of times ask me hey, I made a stock market $100,000, can I write off $70,000 here? Well, you better ask your CPA.
Speaker 2:Yeah, all those questions go back there. You know what kind of deals can be syndicated, Because I just came across and we talked about the South line, a mobile home park deal that looks pretty good and has four acres of empty land. Would that be something that we would talk about syndicating? Or is that not really mobile home parks aren't like the category that works for that, or something?
Speaker 3:Anything can be syndicated. This is a concept you can apply mobile parks, offices, lands, you know, as I said, emergency clinics, medical offices, vineyard wineries and some CBD oil. I know a lot of people do that too.
Speaker 2:Oh, wow.
Speaker 3:Yeah.
Speaker 2:That's a growing industry right now and you? Oh yeah, that is growing industry, unfortunately.
Speaker 3:So what can we do right?
Speaker 1:But that's what we can do. We can make money off it, we can syndicate it.
Speaker 2:It's a bubble right until it pops.
Speaker 1:So how do you select properties for syndication yourself, or what do you look for?
Speaker 3:Sure Right, first thing, first what we look at it, we make sure that the state has no involvement or rent control. City and state don't have rent control, so eviction process are easy. These are the things and, more importantly, landlord friendly, not tenant friendly.
Speaker 2:Okay, you mean in terms of the community where it's located? Okay, yeah, that makes sense.
Speaker 1:Yeah, Community where located, city where located state where it is, so we go ahead.
Speaker 3:So that's what it is. Well, is it not possible doing you know states where it's not landlord friendly? It is possible, but you just need to have a different infrastructure for it, different resources you need.
Speaker 2:Yep, and of course you know, if it's not a landlord friendly community, those of us who've owned in those communities would wonder why you're even thinking about it.
Speaker 1:But that's, it has to be really worth it to be in that world. We do see a lot of people like coming from New York anyway, you know, because they are not friendly.
Speaker 2:No.
Speaker 3:Right and you know I'll tell you the ground reality. Today, as we speak, atlanta is to be a great, great market for multifamily deals. Not anymore. Atlanta has been struggling now because evictions usually in 2018, 19 pre-COVID times Any tough tenant you can evict in at the max three months. Today it's nine to 12 months time.
Speaker 2:Wow, that, which and that's. That's exactly been the problem in a lot of communities. I remember 30 years ago my mom in Boston area would take two years to evict a tenant Meanwhile, no money. So now, when, when you mentioned some deals don't go as planned, you know our most syndications and I realize everything is individual and everything is deal specific and none of this is actually related to a specific deal Somebody might do, but typically are you saying, hey, give me a hundred thousand dollars and I guarantee you'll make at least 8%. Or are you saying, give me a hundred thousand dollars and you might make 40, you might make zero. Like, what's the if somebody were to invest in your one of your syndications? Typically, what's the? What's the floor of, how much they're going to get a return off or how does that?
Speaker 3:work. So here's the thing as a sponsor what have been sponsored all the deals I tell people every investment comes with a risk. Okay, yeah, there is a no word called guarantee. You should not use it. It's against the SEC rules and regulations.
Speaker 2:Okay.
Speaker 3:And the SEC is there. Is there a 506 B rule B deal or 506 C deal? Okay, the reason is you cannot guarantee anything on it. That just against the whole market, Right? That's not allowed here. So, in, on an average deal, an investor could make 78% cash on cash, which is you know, you don't. They don't need to pay taxes on cash on cash, and there is a possibility that anywhere 10 to 12% appreciation for a year, Right? So there are deals where, in you know we bought it in. I'll give an example we bought a deal in June of 2018. We, we owned it until January, February of 2021. We are still in COVID times. We sold it and then we made a returns of like it. That is the deal consistently delivered 8% every quarter, and then I think it was about three years. We owned it three years, four months, something like that. So we got a 24% returns on the cash on cash. Then we delivered another I would say another 74% appreciation for two years. So 76%.
Speaker 3:So, overall, we delivered 110% returns in 3.4 years time.
Speaker 1:Well, so if I put a hundred, I walk out with two something, yeah, around 220.
Speaker 3:Yeah, that's all right, right 220, but that's great 210 actually, so that's great.
Speaker 1:You're right. I'm sorry.
Speaker 3:Yeah, so not every deal works like that. So there are deals we bought right before COVID. When the COVID happened, everything has changed. Those are the deals, the best deals in our portfolio. The market has changed and evictions became tough. Business plan implementation has become tough and the money is draining out. So, when we are not getting enough rent growth and evictions are becoming tough and we still need to keep paying mortgage at the higher interest rates right, I'm talking about this. I'm talking about the times where, before, the interest rates keep hiking up. Before that, I'm talking about it.
Speaker 3:When things were 2%, so last 16 months, last 16 months, 11 times interest rates has been grown.
Speaker 2:Yeah, this is the same times where we are now.
Speaker 1:Yeah, I just saw in the news today they're talking about raising it again.
Speaker 3:Yeah, I mean before year, before end of the year. The one is upcoming and there will be one more.
Speaker 2:Yep, yep. And now you mentioned three years on. That one deal Is three years typically the life cycle for kind of the average one we actually plan for.
Speaker 3:You know recent deals, what we have done, it's about six years. We scope it. Before COVID we used to put the project scope of five years, but after COVID we made every projects, what we have closed six years. So if we either five years or six years, meaning what is that meaning? Right, so it means everything could go wrong, but this is the project timeline. We are hoping to own it, but we may exit earlier. If the things are looking good, we may exit earlier. I'll give you another example we have.
Speaker 3:We bought a property right in the COVID 2019, november, I think so in Dalton, Georgia. It's right in the COVID and we raised about a 3.5 million and we owned the property for 15 months and property did really well I said management was done very well on that property In 15 months. We the cash flow was always tight, right, cash flow. We were not able to give it deliver it quarterly, but the property value appreciated. And when we are not able to deliver cash flow, we simultaneously shop for, hey, what would be the if we sell the property? We always check with the broker. There is, like you know, bov broker opinion value right. So, broker, look at the financials and say look, you guys bought this property for 11 million, I can get you for 17,. You know, I can get you guys about $18 million, about $18 million.
Speaker 3:Wow, Well, we in the five years, if you implement the business plan, that property is supposed to go to about 17.3 million or 17.5 million. You said, well, we would like to see offers.
Speaker 1:Yeah.
Speaker 3:So our broker went and bought an offer $18 million. So sweet so. I don't think anybody an average, right yeah, nobody argues yeah.
Speaker 1:I don't think anybody argues.
Speaker 3:Good to write. You know, some of the investors were like is it real? Is it even real? I said, well, it is real because your money is real, so right. So we sold the property in 15 months and we delivered 91% returns.
Speaker 1:Well, I'm sure everybody was happy.
Speaker 2:Right.
Speaker 1:I'm going to demo some money to you, right?
Speaker 3:now actually, as you're speaking no, no, no, no, no, no, no, no. Okay, so how do you?
Speaker 1:mitigate all the risks for investors and syndication? Like I mean, do you go through a whole like I guess it's the process of picking out the property and making sure it's landlord friendly and all that, but is there other stuff that you got to? Really, you know you're taking my money.
Speaker 2:Right.
Speaker 1:So what other risks are really there?
Speaker 3:We explain to every investor. Look, in our PPM document there'll be 40 different, 43 different places. An average PPM document goes from 120 page to 140 page document depends on the property size and location and all the things right. 43 to 44 different places. It mentioned it is a risk, right? So we explain them. Look, we are going into this market and this is the market where we have an idea, where we have a stronghold and property management company and our team and we have a previous success. Would you like? You know? These are the known factors, these are unknown factors. If you are okay with the known factors, if you are okay with the unknown factors, you can come and invest. Otherwise, we don't want to. You know, we don't want to twist someone arm and get into the deal. No, we don't do that. I personally have told many people if you have saved all you have saved like $50,000, $75,000, you want to invest in this. No, please don't do it. Don't do it because things could go wrong.
Speaker 1:Yes.
Speaker 3:Yeah, right. So if you have a disposable income, you want to take advantage of the tax benefits. This is a kind of asset class you can invest.
Speaker 1:So this is not for the beginner.
Speaker 3:No, it is not for the beginners. If people say you know beginners can invest, you can invest, but you have to assume that you put the money out there and think that it is at risk. I won't call it as a loss, but it is at risk.
Speaker 1:Yeah, you got to think that if I'm going to give you $75,000, I'm not getting it back. That's really got to how I got to think.
Speaker 3:Yeah Right, you got to think.
Speaker 1:Right, that way I'm not worried.
Speaker 3:Yeah, that way, even things go wrong, you can sleep.
Speaker 2:Yes, Can retired funds invest and do they have to be accredited? Like if somebody has 100,000 in their self-directed 401K but they're not an accredited investor, can they still give you that or?
Speaker 3:Yes, they can invest it. And in fact, when I met Mike last time, I want to do a session for our audience, especially in a mountain top region, a real estate network. I want to show many people think that self-directed IRA is the best, but actually not. You can still invest your retirement money, but self-directed IRA is very, very expensive because it comes with a heavy tax. So tax hit.
Speaker 3:Let's say I'll give you an example. Let's say you have a money in a self-directed IRA, custodian your retirement money, all the employers who work. Let's say it is $100,000, you have it, right? Is it okay for you guys to run through an example? Quick example yeah, go ahead. Right, so you want to invest in one of our deal and we don't mind. It is like 506B. You are, let's say you are not accredited. We will let you in, your sponsor will fill that. I mean as a sponsor. We will allow you. But the documentation, you fill all your details, but except your assistant, you put the self-directed IRA company EIN number on it because the money is coming from there, right? So it will be like so, self-directed IRA slash Steve Franco, right?
Speaker 2:Yeah, yeah.
Speaker 3:Right, steve Franco, that's FBO for business owner, steve Franco, that's how it is, right. Right, so we accept the money and let's say, the 100 became, you know, in three years time, another 100. I'm taking a good example. Okay, that's a good one.
Speaker 1:He's smiling right now.
Speaker 3:Right. So we, when we sell the property and let's say we delivered cash on cash for you quarterly, let's say for two years at least right, the money will not go to you, it will go to self-directed IRA slash Steve Franco for FBO, steve Franco account. Okay, so you won't get tax for cash on cash. Either it is in savings money or self-directed IRA money. But let's say we delivered about $24,000 for you for 8% at the rate for three years, right? So at the time we sell the property we gave, we are delivering about 76% appreciation on the property. So when we sell the property we give your 100 back. It will go back to your self-directed IRA account. The rest of the $74,000, $76,000 money is equity gain on sale, right? So most of the people think that okay, since it is IRA money, it is go back to that, right and I don't need to pay taxes. Wrong?
Speaker 3:There is a catch in that that is called, since you know here in the self-directed IRA situation here who is the owner, you who is the custodian. The self-directed IRA is a custodian, so they have an obligation. They go and report to the IRS saying that look, so once a account holder invested and they made a money and, as me, administrator of the IRA account, right, so we are giving you know they need to pay taxes. 20, there is a tax called UBIT unrelated business income tax. Some IRAs called UDFI unrelated debt financing income.
Speaker 2:Okay.
Speaker 3:You heard these two.
Speaker 2:Yep.
Speaker 3:I'm sure you keep hearing these two words. Both are saying so. How do? How much do I need to pay taxes depends upon how we structure the deal. If we bought the from the lender 70% loan and 30% down payment in the capital, we raise it and you'll be paying accordingly on the money 70, $76,000 you paid. You know we gave you as appreciation. You will be taxed around 25 to 30% taxes.
Speaker 2:Okay, and is that the same? I'm self directed 401k, not self directed IRA. Is it pretty much the same? The same ballpark for the self directed 401k crowd.
Speaker 3:No, so you're? You're talking about 401k plan. That's a different. That's what I want to ask Mike and said look, mike, I have a lot of knowledge on this, even though I'm not a self directed administrator or anything like that, but there is a best way you can do it using. There is a call qualified retirement plan QRP.
Speaker 2:Okay, which. I think, I remember you talked about that at our last meeting. Yeah, and he wants to, he's going to come and meet up on this one.
Speaker 3:Okay, good, yeah, right, we, because it's a topic is, like you know, very, very interesting. There are steps. You need to do it and I have done it and I have recorded all the steps and I have helped others to do it. So if you do as a qualified retirement plan investment, you will not have a new bid or UDFI, you pay zero taxes.
Speaker 2:Okay, that's going to be a good meetup. Let's definitely set that up.
Speaker 1:Yeah, we were going to set that up. Actually, I asked them to do it at our at a expo. Yes, that we're bringing that to the spring, but that's fine, that's a whole nother top. So let's, let's keep on syndication. No, so as an investor, what do diligence that I do to pick a sponsor? Or what am I looking for besides a great track record, you know? I mean like yeah so.
Speaker 1:I want a guy that's done two or three, or do I want to guide this? Of course I want to guide this 25, but help me out here. You know what I mean.
Speaker 3:Yeah, sure, could you repeat again your question one more time? Basically, how do you?
Speaker 1:so how do I pick the right sponsor or the or the rights indication to get into?
Speaker 3:Right. So what with the sponsor, who have done experience, who have have experience, who have seen the markets ups and downs? Who have, who have experience on, like you know, deals which have done great, which have not done great? Right, yes, there has to be that experience If a sponsor is giving you all good stories. Yes, and so you know people. People don't tell what deals went wrong, what deals what you know, what they promised and they could not deliver it.
Speaker 1:Kishan, they're not all like you, just you know yes, I noticed that the other day when me and you met.
Speaker 2:I think, I think that's pretty much this point is it if they don't tell you that things have gone wrong in their history?
Speaker 1:then they're hiding something and I don't think he's really anything bad.
Speaker 3:No, I don't have bad.
Speaker 2:You have an awesome track record. He has good and less than good. Yeah Right, it's okay.
Speaker 1:The bad news is I got you 8% return.
Speaker 2:Right.
Speaker 1:And I sold it fast. Then we got you another 91%.
Speaker 3:Yeah.
Speaker 1:Okay, great.
Speaker 3:Right. So there are deals we give a zero returns. The reason is things do not work out, so we gave a principal back.
Speaker 2:Right.
Speaker 3:Okay, if I got my money back.
Speaker 1:That's that's great.
Speaker 2:I can get my shirt on.
Speaker 1:I'm good, yeah, yeah.
Speaker 3:Right. So there are sometimes people lost in a principal, also in other deals where I have seen, yeah, so those are the, I'm sorry.
Speaker 2:Of course it happens. Sometimes you walk out and that happens right.
Speaker 3:Everything cannot go what the way it is. That's what I said. Like you know, the moment you invest in any deal, you have to think it like you know. Okay, it is at risk. I, you know, even the the does not come back and I can sleep peacefully. That's how the investor has to be, that kind of mindset. It's not like you know something. Okay, you know that money, only that you know. I saved this money for my kids college education. Don't do it.
Speaker 1:Right, yeah, yeah, that's because I wouldn't do that.
Speaker 3:Right, I would tell the guy no, right, so you have to be so to answer your question. Good, bad ugly, all the stories they need to be able to share. Yes, the open book? Right, they should give you references that. Hey, you can talk to them. You know, here are my investors. In the past they have done, you know, references. Talk to them, if possible. Go and visit the property, right, don't say that you are busy. You know it could be one weekend, one weekend tour. Go and visit the property, yeah, because they're under contract and you can ask the sponsor. Hey, can I go and talk to I won't go and talk to the leasing office, our property manager. Hey, we are investing, we are buying this. Right, you don't do that.
Speaker 3:You just go on as such, right. So if you're, putting up 100,000, any property manager.
Speaker 2:yes, If you're putting up 100,000, take a weekend and fly down to look at the property and know that it exists, sure I'm not buying a swamp land.
Speaker 1:Can I ask you something, kishan? I know you're not an account book. Can I write that off? If I go, if I go down and look at it and then I give you 100 grand. I wonder if I can write that expense off.
Speaker 3:Yeah, you can write the expenses. Yes, you can write the expenses.
Speaker 1:Because I see you travel a lot. Everywhere, you're always somewhere with 100 buildings behind you, I travel a lot, I know you do.
Speaker 3:Right. So on average my yearly travel expenses anywhere $15,000, should only $1,000.
Speaker 2:And I have to say, with the amount you travel, how are you getting tickets so cheap? Yeah, that is cheap. I was like you're spending that a month.
Speaker 1:Every time I look on Facebook he's like somewhere else.
Speaker 2:Yeah.
Speaker 1:Like wait, he was just here with me yesterday Remember the last time we did the meet up with us he's like listen, I gotta go, I can't stay too late, I gotta go to Texas tomorrow.
Speaker 2:Yeah, right.
Speaker 1:Yeah, that's great. So, what else am I with this? So you're telling me I don't want to pick a guy that did one syndication right, I don't want to sponsor that, even though he brought such great returns because he could have got lucky. Lucky yeah, so I'm going to stay away from it.
Speaker 3:And also look at the sponsor. Is you know somebody from the sponsor team who is the boots on the ground? Very, very important. Yes, the sponsor. Living in California and managing a property in Texas is not a viable option.
Speaker 1:Okay.
Speaker 3:Okay, Because anybody you know, everything looks great on the paper but in reality you got to be boots on the ground. Yeah Right, so I can buy a property in somewhere in Louisburg and Bloomberg in when I'm sitting in San Antonio, Texas. Okay, it takes me a full day to get there to bloom in a Bloomberg and Louisburg right.
Speaker 3:PA right? No, we don't want to be. It's always always. Who is doing asset management? Does he have a experience doing an asset management? What property management company is using right this property management company? What are the other properties that are managing it right? Who is the lender?
Speaker 2:So so, so. So, to kind of turn that around, you're based in Danville. If you're sponsoring a deal in San Antonio, the best question, one of the questions to ask you as the sponsor is okay, who is your asset manager in San Antonio man that's going to run the deal, who is?
Speaker 3:you know how do we use the boots on the ground?
Speaker 2:Yeah, who have you found to advise you? Because even if you fly to San Antonio once, you don't know the market. You need somebody who's down there to say well, you're on the wrong side of the train tracks, you don't want to be buying on that side of the train tracks, or whatever it might be.
Speaker 3:Right, right.
Speaker 2:Yes, so, so, so is that. And now is there a cost load to that, is it? And I guess what I'm asking you, obviously, is a cost load to everything. But is it okay, mr Investor, you made a 71% return, but we're going to hit you for another 25% in costs, or are you? Or are all the costs built in? And when you say, mr Investor, you made a 71% return, that's net of everything here, we're giving you 71% return. Like, basically, are there additional costs that the investor needs to look at? Or is it? They write you a check and you write them a check back and their CPA takes care of the rest?
Speaker 3:So, to answer your question, when the project returns right, it is, after everything, taken care. So right now, you know, 70% of the deals in market different markets it's not about one market, one sponsor are in trouble. You know the reason why. The reason is interest rates has changed and when the interest rate changes, mortgage payment changes and your expenses changes and your returns are slimmed down, now it's like very, very slim right now, and we have seen this pattern. It's been a last eight months. We never we haven't acquisition any property.
Speaker 2:Because it's hard to find something that makes sense with these crazy interest rates and everything else.
Speaker 3:And it's not about the deals are not. The deals are there, but the problem is when does this interest rate stops? You can you know? I'll give you an example. You know, if you go to any coastal cities, such as a car, proscyst, you know, miami, miami or nearby the lakes, any property right?
Speaker 3:Yeah let's say on a I'm just throwing a number, right, you, we have a our insurance provider who can give us a best quote. Let's say on a property I'm just taking a small example okay, so it does not really reflect to the property size and doors. Let's say, on average, you pay $80,000 on the property, the insurance cost, right so. But our insurance provider said, look, things can go wrong anything. So your insurance on the property is $95,000. That's a max. I am projecting because I want to be overestimated than underestimated. Okay, so well, we underrated for 90. With whatever he gives the number, we are underrated $95,000. But in reality the insurance cost went to $30,000. Okay, yeah, so I'll give you another example. I have a group who owned a property in Carpacusty, texas. The property pays about $600,000. It's a big-side property, really big. So that was $2021 taxes. Okay, $2021 taxes. Take a guess. I gave you an analogy and take a guess.
Speaker 1:I'm not good at guessing, Steve Gess.
Speaker 2:If you're paying that in your insurance, your taxes are going to be at least that, probably twice. That is what I'm guessing.
Speaker 3:Okay, so you're really generous Steve. So you are saying like 1.2 million.
Speaker 1:Yeah.
Speaker 3:Okay, I take that number, but here is what happened with all the storms, hurricanes, all the cars and things happen around the coastal cities now in America. Now that property insurance code came as $3.6 million.
Speaker 2:Now, does that include the flood part of it? Was that a total, including your flood coverage or hurricane coverage? Everything Same thing same insurance, nothing different.
Speaker 3:It was $600,000 before 2021 and 2022, the same insurance came as $3.6 million.
Speaker 2:So all of a sudden, that doesn't look as good, what do?
Speaker 3:you do. You cannot, because everything you see it's not the COVID has ruined the commercial real estate, it's the effects after the COVID, yeah.
Speaker 1:Wow.
Speaker 3:So labor cost went high. On average we used to renovation for $5,000, good renovations, decent renovations, to increase the rents.
Speaker 1:Oh per door.
Speaker 3:Correct Per door right, Because we buy materials bulk and property management companies big right. So bulk $4,000 to $5,000 is good enough. You have all the fuel to move forward. But today that cost went to $7,000, minimum.
Speaker 1:That adds up.
Speaker 3:And that adds up and the payroll cost. There is a cost to the payroll for the property management company, right, and on average hourly wages been increasing okay, and insurance cost went high. On average insurance cost in any city right now at least 25% to 30% increase. You look at the properties in Houston. My goodness, it went like a crazy right now because they have the short lines right, so late properties. Their insurance has increased too right. So lakeside properties I'm talking about right Coastal line, sure, definitely increased. So evictions became tough and you know, as stable markets like Atlanta they gave you example we could able to evict in three months time at the most toughest tenants Today, easy tenants nine to 12 months time.
Speaker 1:Boy.
Speaker 2:That's right.
Speaker 1:So you got to hire just bouncers or something to throw them out. Hey, you're leaving today.
Speaker 2:We're going to take care of it and let the rest of it take care of itself. Security are leaving today.
Speaker 3:Yeah Right, so after the COVID effect, things have changed forever.
Speaker 1:And you've done a lot of deals.
Speaker 3:Yeah Right, how many have you?
Speaker 1:done About 20 something right.
Speaker 3:So far I have done as a co-sponsor you know you can call it sponsor 25 deals, yeah, so that's a lot, that's a lot yeah 4,000 plus doors is a lot.
Speaker 1:You know, I probably complain about 10 doors, right, so wow. So I mean you really know the market, you know the areas, because you've been in a lot of states, correct?
Speaker 3:So, then, why don't you get?
Speaker 3:off the coastal market, then Right, we don't have any properties in coastal markets, but I'm giving you the ground reality. We have properties in Memphis, tennessee, in Georgia, five different markets, like we had. We have some markets still Atlanta, savannah Georgia, val Dosta, dalton, brunswick. Brunswick is a coastal city. Savannah is also okay, but thank God, like you know, we exited the Brunswick Savannah before doing the COVID time in 2021. We exited, we made a money in Brunswick Georgia, but we never made any money on Savannah Georgia. Savannah Georgia is great on the paper, but you will not make any money when you go to the ground reality yeah right, right.
Speaker 3:So anyways, in Texas, we own property in Lubbock, waco, texas, dallas, fort Worth, houston, and we also own a property in Iowa, Des Moines, iowa.
Speaker 2:Okay, yeah.
Speaker 1:What do you think is the hotspot now?
Speaker 3:Right now, I think for the next to you there's none Right now. You know, right now the situation is everybody is on the hold right now, Everybody holding the breed for the next six months.
Speaker 1:Yeah, so people that are in this indication deal. Now. You could be a little worried.
Speaker 3:Oh, that could be a little. It's scary. It's nice If you're saying a lot more worried.
Speaker 1:There's much from 600, 3.6 million and taxes going up. Property management is going up, lumber, everything's going up. Cost of employees to work Nobody wants to work. Construction guys, Right. So what advice would you give someone considering investing in syndication right now for the first time?
Speaker 3:I would say Maybe hold off. I would say I'm sorry.
Speaker 1:Maybe tell them to hold off right now, or I don't know.
Speaker 3:Yes, I would highly recommend not doing anything is something doing good for yourself.
Speaker 1:Go buy yourself a car, yes, go buy, you'll get something At least you can drive around.
Speaker 3:At least like some. I know some investors. They always call me hey, you know you have a great track record. You have delivered in the past. I would like to you know, I have a. I have a $200,000, $100,000. I investor called me here I have a half a million. I could have loved to invest. I said please, you know, thank you for having a trust, but right now we are not doing any deals because first thing first. Even if I have a deal or somebody, bring the deal to co-sponsor with me. I check things. Do you have?
Speaker 3:a rate cap on the property or not. Do not go and invest in a property where people assume and write, such as interest rates are not going. Oh, we are already a peak, peak, peak, it's not going to go high. I personally talked to many, many other investors when they brought to me that, hey, do you think? You know I'm not investing with you, but you are my good friend? One of my friend, the close friend, would like to invest, but he's a deal he brought to me and I look at it and I said, look, he assuming the interest rates are going to be the same and he never have any cap rate cap on the property, right? No, don't do that.
Speaker 1:So that means like there's insurance on it or something, or it can't go past a certain number or is it like the?
Speaker 3:lender's rate cap. Yeah, that is called rate cap Rate. Cap Cap rate is different rate cap is different?
Speaker 2:Is it an insurance policy that gives you rate cap or is it the lender says, we're not going to go more than this.
Speaker 1:It is kind of insurance policy.
Speaker 3:So you pay. It's kind of insurance policy.
Speaker 1:The sponsor is paying for it, or everyone's paying?
Speaker 3:for it. Yeah, sponsor pay hefty amounts $300,000, $400,000.
Speaker 1:Some properties I've seen Like the way the rates are going up. Right, If I joined the syndication, what 16 months ago? It went from 4% to 8%.
Speaker 3:Who knows what it's going to be? It's already 10% passed.
Speaker 2:Oh, I thought jumbo loans were smaller numbers. They're bigger numbers, okay, never mind. Yeah, so I guess now, if someone has those kinds of a couple hundred thousand dollars and now isn't the time for a syndication, do you see anywhere that you're putting your money, or are you just kind of keeping it liquid and letting it play? Do you see other sectors that are worth considering if it's not syndications, or is it just time to wait and see and kind of give it a rest?
Speaker 3:I personally this is not against anybody. This is my opinion is my opinion. I would go and invest in single family. Why not take some trips right?
Speaker 1:Hey, you're taking business from me and Steve, don't do that.
Speaker 2:We'll take the money.
Speaker 3:Single family investment right. It doesn't matter.
Speaker 1:Interest rate goes up, so is the house price. It's crazy, yeah right.
Speaker 3:So many people argue with me and say that, oh, that's not scalable, this, and that we have seen much scalability and much worse in the market so far. So I would take the single family investments. Let's say you want to buy something, a lance, you can invest too. So I would not especially listen to people that hey, it's inflation, you're $100,000, it's losing $7,000 and all. To me it does not make any sense. What if you invest in something and everything is at risk?
Speaker 1:That's right. So you're at $1,000 and $100,000. Yeah.
Speaker 3:Right. So if that's all I have Right, single family still slower and smaller, that's fine. But at this time, doing nothing better than doing a single family, I would say I would do the single family business, why not?
Speaker 2:I mean. The one thing that I've always said to people about small unit residential rentals is it's the diesel engine. It might only make you $100, $200 a door after everything is all netted out, or $500 a door or whatever, but it's consistent because there's always going to be. If you pick the right residential rental, there's always going to be somebody wanting it. And you know what? If you've got something affordable, if you bought the deal right, you're always going to rent it for enough to pay your mortgage, so you're probably never going to lose on it.
Speaker 1:Refinance in a couple of years.
Speaker 2:Yeah, Right, you can kind of hang on. You can buy the house, date, the rate, logic kind of thing, but yeah so and now have you done anything? I mean, we've talked a lot about residential multifamily syndications, but have you seen or looked at syndications in sectors like self storage and sectors like medical? And I mean, do they kind of play out the same way as far as how you research them? Obviously the sector is different, so the research is a little different. But have you looked into other sectors like that? He's done medical.
Speaker 3:I've seen multiple variety of syndications. I've seen ATM machines syndications. I've just heard about those.
Speaker 2:Okay, Well right.
Speaker 3:So ATM machines, car washers, I've seen golf courses, I've seen the truck stops on the freeway. Yeah, truck stops like travel centers, syndications, I've seen it. Okay, Do you find any?
Speaker 2:of them more attractive than residential right now? Or is it more about the rate than it is about the residential that is making you?
Speaker 3:hold up. Well see, at this point I say myself, we don't know what is in it, right, yeah, Am I being truthful?
Speaker 1:Yeah why, not you better be Instead of lying.
Speaker 3:no, I know it all. Yeah, I say we don't know what is in it. So we went into multi-family big scale and, not knowing this, interest rates are catching up like this. So at this, that's what I said in the beginning of the podcast all investments comes to the risk. Yeah. And I guess there's no such thing called. There is no risk.
Speaker 2:And I guess that's the other important thing is to find a sponsor like yourself who's honest enough to say, listen, I know multi-family syndication. I may not be if someone brings them, I'm just going to pick on you for this. But if someone brings you a self-storage syndication, you may or may not be the right person with that knowledge base. You may say, hey, that's not a sector that I know. I've read about the sector, I've seen it. Maybe I've put some dollars in it, but I'm not the king of that sector. And to have a sponsor that's honest enough to say, listen, that's not me.
Speaker 3:Whatever?
Speaker 2:Right.
Speaker 3:So I would honestly tell people that, look, I would rather be honest upfront rather than sugarcoated, and later on means the worst.
Speaker 3:I would not do that and I tell, look, it is what it is, and I am not expert. There are so many landings come to me so many, I stop counting it Especially Austin, dallas, fort Worth, other parts of North Carolina. So many land syndications come to me. Because I lived in Dallas, fort Worth about nine years, I have a personally lot of circle there. People come for advice. So, hey, what do you think about this? 130 acre you know syndication, I'm investing. What do you think? They said well, I can't think of anything because I don't know what is in it. I've seen some you know syndicators back in 2022, feel like you know, man, we know we are getting squeezed every dollar, what we put it, all the reserves, all the interest rates, all the taxes and everything. We feel like you know we should have not that.
Speaker 2:OK.
Speaker 3:OK, let me talk. What kind of returns do kotlin employees have? How about we set up aAny этого Moment, but I don't know what we're going to see. You know, take a risk and regret. Yeah, go ahead and invest, why not? Right? So it's all depends upon you. What kind of mindset you live day to day.
Speaker 2:Yeah, exactly.
Speaker 1:Yeah. So once again, like you're saying, if, if that's all the money you have, don't jump in. Don't even jump in a real estate. Let's see buying a house to live in.
Speaker 2:That's the biggest lesson that I've even told, on a much smaller scale, a lot of my investors is if this one property is all you have in the universe, that you're investing in this one property, this probably isn't your play. You know, if you can afford to whatever, whatever your investment is, if you can afford to lose it, you know if you only have 50,000, you can afford to lose maybe a hundred thousand syndications. A 50,000 syndication May not be where you want to be. You may want to be in the pick up a house for 25,000 and you may want to play that because you're the end of the day. If it's gone, at least you're not dead. And, like you say, don't play with your children's college fund because, oops, it could happen.
Speaker 1:I yeah, I guess it's about it, did you? There's anybody you want to Throw a name out there, anyone that you ment towards you, or anything like any of your groups, or anything you want to promote?
Speaker 3:Well, I have my mentor. Yes, name is a think about a fan. You know his name is Mark Kenny from think all day family. I've been with him from since 2017.
Speaker 1:So he's started. That's the group that made you the person you are, and syndication, yeah syndication right, yeah and I have.
Speaker 3:You know, when I went to my mentor, we have done, you know, just like anybody background check and all those things. I've done it, I've seen it right. You know, at the end of the day, you better take some risk, right, not everything will work out, but you have a time to take some risk, and I have done it. I've been a part of the group for good six years, so hey, I'm thankful.
Speaker 1:I remember when I met you I saw that bag. You know we're in a bag.
Speaker 3:Oh, yeah, yeah, yeah, but think multi-family think multi-family, who is this guy?
Speaker 1:And then you got up and say I'd like to just introduce myself, I got 4,000 plus. You know I've done about 4,000 doors, I'm like. And now? Now this thing makes sense, so now I'm googling it, I'm like, oh, that's, he's in this group, yeah right. And then we became friends and me, you and Jennifer.
Speaker 3:Jennifer is a great resource. Yes, yeah, that was, that was a good, that was a good meetup. But yeah, so thank you man, I just I just you know I'll you is.
Speaker 1:Can I put some information on the bottom of the the podcast so our people can reach you?
Speaker 3:Sure sure you can put my information Um phone number yeah yeah, okay, Sean Gola at Kishan at VTex equity calm.
Speaker 3:Yep and you can put myself on number two, six, two, zero, seven zero, four, one, six, nine zero and People can reach me out. They have any questions, anything, what they're looking at it. We I know in ever since I moved to Danville Pennsylvania it's been a more than a year I moved here. I spoke at your event, I met us a couple of people at Kevin Moles event, jennifer's event in William Ford, right, yeah, so Steve was a guest. Yes.
Speaker 2:Buried in in lending calls from that. I'm trying to catch up now. It's still yeah, so at least so Kishan is.
Speaker 1:You know he's open to anyone has any. Uh, if they're ever thinking about syndication or something like that, I'm gonna call him. And this he's a. He answers the phone. Yeah and I know he's. He's made a lot of money doing this, but he still works right, and, and, and.
Speaker 2:Every single time you ask him, he's very you know, gives you the answer. But then I'll he's honest, Well it doesn't always work, but he was typically what you're looking for and I only trust Kishan now. I know yeah.
Speaker 1:Thank you guys.
Speaker 3:Yes, you're a great and, by the way, yeah, my mentor group, the group I'm part of it. They do quarterly events In person events. This year, that is, event is coming up in November.
Speaker 1:Mm-hmm.
Speaker 3:They call the think multi-family fire summit. People who want to get involved, all the things and all they can always get they go on their website and you can always ask me any. You know I always have a referral code. I'm happy to give you a discount. Get your referral code so that you know you guys can have fun and go and explore it out.
Speaker 2:Yeah, I'm me and Steve have been talking about this, so yeah, yeah, definitely send that over, because I'm actually thinking about going, yeah.
Speaker 1:Yeah, sure, all right, so we're gonna wrap it up here. Thank you, kishan. Thank you, steve. Thank you for everyone listening to the real estate community network podcast. Please go check us out. Like us on Facebook real estate community network PA. Follow our real estate community network podcast on Spotify, apple, amazon, on all of them. They're all out there. Go check it out.
Speaker 3:Thank you, everybody talk to you soon, bye, bye, thank you.