WS1964 What Metrics To Consider For Maximum Cash Flow | Irwin Boris

Are you looking for valuable insights on the current real estate market and how to invest strategically? Then tune in to this episode of The Real Estate Syndication Show, where host Whitney Sewell interviews seasoned professional Irwin Boris.

Irwin shares his  insights into the current real estate market, highlighting the deals with the greatest potential and pinpointing the main challenges operators encounter. He delves into his unique investment philosophy that places a higher value on cash flow rather than overall return, anchored by a rigorous due diligence process. He also offers invaluable advice on reducing risk, emphasizing the benefits of securing fixed-rate debt and the necessity of maintaining substantial reserves.

In this episode, you'll learn how to:

1. Focus on Cash Flow and Mitigate Risk: Prioritize properties with strong cash flow and employ strategies like fixed-rate debt and reserves to manage interest rate fluctuations and unexpected expenses.
2. Conduct Thorough Due Diligence: Understand why tenants might be leaving and pay close attention to lease expirations when evaluating potential investments.
3. Be Prepared and Strategic: Be ready for market changes and bid based on your own analysis, not just market trends. Consider the potential for a slight interest rate decrease later in the year.

For those looking to connect with Irwin Boris, he is accessible through email at irwin@heritagecapitalgroup.net  Additionally, you can find him on LinkedIn, where he shares insights and engages with the community.


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Transcript

Irwin Boris: TPG or Blackstone, and I'm looking at one of each of theirs, and I'm scratching my head, and I'm like, there's no way anyone's going to buy that on a five cap. The broker's saying, well, four years, from now, you'll stabilize on a seven. I don't see it. So there are plenty of deals out there, and you just got to bid with what makes sense. You'd be surprised.

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, our guest is Irwin Boris. He's a member of the Investment Committee for Heritage Capital Group. He advises investors on investments and provides asset management services. 30 plus years experience in real estate investing and real estate finance asset management. Participated as a direct lender, principal investment banker and advisor in five big billion plus real estate transactions. Past experiences include head of real estate for several family offices, supervised audits, and due diligence for real estate accounting firms, and just a wealth of knowledge and experience coming from Erwin over the next couple of days. You're going to hear today, man, so many things that come out from just so much experience talking. from the types of deals they're looking for and why. The metrics that you should be considering as an investor, even as an operator, you need to be thinking about these things that he is mentioning. A number of things that they do during due diligence that were helpful to think through as well. And even challenges, you know, that they're experiencing and that other operators are experiencing that he elaborates on. You're gonna enjoy that episode today. Erwin, welcome to the show. Honored to have you on. I just love the level of experience and expertise that you've developed over so many years. And I'm looking forward to pulling some of that out for our investors that are listening. No, my pleasure. Thanks for having me with me. Yeah, honored to have you. Why don't you give just a minute or so on your focus right now and what you're doing in the industry?

Irwin Boris: I guess I've been doing this a really long time. I had a stint as a practicing CPA, as a banker, an advisor, owner operators, and now I work with family offices and other investors on building cash flow portfolios and helping them with their due diligence. Right now our focus is- largely on- triple net industrial small day flex. We still do look at multifamily but we- even the distressed deal don't make sense right now. And we focus more on you know the long game rather than on churn and burn quick value adds. Because the hardest thing in this business is to get control of the deal and get into it. And so sometimes it's about educating. Investors On why the cash flow man is more than you know total return because- you know if over time you have gotten all your cash out of the biz out of the investment. And you have no equity cash flow is great you can go on compound and reinvested somewhere else so. And we sort of try to re educate people on the tax efficiencies and why cash flow is. Really what you should look for. As a key metric.

Whitney Sewell: Well, I'd love to talk about that a little bit and, you know, let's move into maybe some of the due diligence things that you all do to ensure these things, you know, when you're looking at an asset. But, you know, speak to, you know, talking or educating investors on why cashflow is so important and maybe some of the pushback you receive about that and how you educate them.

Irwin Boris: No, sure. You know, when you look at being the final cake as you're baking it. And look at the ingredients that goes into that recipe. And you know there's a lot of. Ingredients and when you have a lot of cooks in the kitchen so to speak and some of them. Are outside your office some of them are outside influences like- insurance costs- Federal Reserve raising interest rates- finding employees and contractors and things beyond your control. in that recipe, things can sort of go sideways. And so over the years, we've cycled out of our 10,000 units that we built up years ago. We're actually going to contract on the last 448 units in Virginia Beach now with double our money on it. But still, it was a very conservative investment. So now what we look for are deals that could pay at least 8% current in the first year. And we do that by looking for what the current occupancy is, what the contractual rent is, and what the ability to keep the property full is. And by looking at deals that are either modified gross or largely triple net, when we see increases on insurance or payroll costs, or utilities, the tenants are paying those as part of their occupancy costs. We have no risk in that. It may restrict our ability to push rents continuously if insurance went up on a crazy amount. But even when we look back at what's happened in the last 18 months on insurance costs, Multifamily is really taking the hit and I think that's because of the amount of property damage incurred on the residential both single family and multifamily levels by insurers paying out and not so much on. Industrial or flex buildings and things like that. Even on some of the office buildings haven't been affected as much. So we've been lucky. And even though insurance has gone up 10, 12 percent on a portfolio basis, the tenants have picked it up and they know it's only temporary. So that's one of the things that we try to explain to people why multifamily is great. Yeah, you need a place to sleep. But if you really do the research on how many times a deal has traded over the last 12 to 15 years, and in some cases, because I saved these things, I could show you what the business plan was through the operators. It's like, well, how many times can you tell me you're going to put $15,000 of renovations into an apartment? How many times are you going to change a floor or a granite countertop or kitchen cabinets? And when you look at the affordability without forcing a lot of turnover, which is losing income and incurring expense in the apartment world, because you're making tenants, you're spend a larger portion of their net pay on housing, there's a problem. I think it's more of a global social problem than it is you know an individual owner's problem because people need a place to live. But that's why you know it's certain upper upper income buildings the lowest they fill because people could care less what they cost because of their incomes but you know the bread and butter- which is probably set you know sixty to seventy five percent is in trouble. The lower income if it's subsidized those people are fine. multifamily is I think an interesting crossroads and we're gonna wait and see what happens over the next two three years. On on how that market readjusts you know it but things run. Too long. There's got to be a you know a downturn for a period of time or at least a period of stagnation.

Whitney Sewell: Yeah. You know, I, I love your thoughts on, you know, cashflow and the importance of cashflow, even thinking through some of the things that are happening with multifamily right now and, and, uh, that there has to be a downturn. And I want us to get to that in a bit as well. Just so the listeners, I would love your, what are your thoughts on that? Uh, you know, one point you mentioned amongst a few others, you know, like 8% current, uh, you know, the first year, uh, talk about some other things that makes the deal for you right now. Like what are some non-negotiables, uh, you know, as you're, as you're underwriting and looking at assets now.

Irwin Boris: No, sure. We're also looking at lease expirations, like I'm negotiating one, a small deal, only because it's like down the street from something we already own down in Atlanta. And I waited the seller out. You know, he wanted a certain number and I didn't think the deal makes sense, given the relative, you know, it's risk reward. So now that I waited him down, I'm going to go to contract on a 10% return. So in theory, I don't need to leverage, but I will put some money on there. But I'm looking at his lease expirations. And I said, you know, I'm going to have a problem financing because you have a tenant that's rolling in August. And we need to sell for that. So either they're going to renew before we go to contract, you're going to provide a credit enhancement, or we're just going to have a very, very long due diligence period. period that's going to take me up until I see what he's doing. And we figured it out. We, you know, from talking to the leasing broker, we found that one of the tenants next door wants the space. So I said, let's get that amendment signed now. So when I go to the lender, I don't have any financing risk because we're very when it comes to interest rate exposure and debt structures. We don't like bridge financing. We don't like bridge loans or floating rate without full term interest rate caps, which is another thing that has gotten a lot of multifamily people and others into trouble as interest rate risk. So we like to know what the tenants are doing. And we've, in the last four years, five years, in our due diligence, we spent a lot of times talking to the tenants and their facilities people, what the sense of family there is at the workplace. I'm trying to get a sense for what the average tenure is, how long the commute is, you know, do you have team building events, you know, how many people, how many shifts, if it's manufacturing or distribution. And we find that In some cases, if you have 400 people that work there, because it's a big million square foot building, you can't move to save a dollar square foot in rent because you can't replace your workforce. And that's going to disrupt your business. And we even explained that to one of the life insurance companies on a deal we closed back in June. We bought 780,000 feet in the middle of Indiana, and they have 500 people, and they're open 24 hours a day. It's a major distribution hub. You know, if you don't look, you can get hit by a forklift three different directions. It's like a superhighway in there. And the lender's like, yeah, we get it. We love this. We're going to give you a 10-year loan. There's only six years left on the lease. But we know that's the kind of things we look for is why does the tenant need to be there? Could the tenant relocate? What does that do to their workforce? And it's through the years of experience that we've learned To ask those questions, normally in due diligence, you'd say, OK, what are the other vacancies in the market? Could they move 50 miles away to save a dollar? I'm like, they can't move because the people aren't going. So you're not necessarily looking at rental comps or sales comps, although replacement cost is something we like to be comfortable with that we're buying below the replacement cost. But it's more about the people.

Whitney Sewell: Yeah, I love that intentionality of speaking to the workforce, right? Even the question that you said, what's the sense of family, right, in the business or the day-to-day? I think it's a great question. And even thinking through how hard it is for a tenant like that to have to move. And knowing who their workers are is so important, right? Because you know, hey, those 400 employees or a thousand whatever it is that are working in that building most likely are not moving even if it's 30 minutes an hour right away to a different facility.

Irwin Boris: They're not going to change their commute if they can get another job down the street for a dollar more an hour. They're just not doing it. And then sometimes the cost of the relocation I'm an investor in a deal down in Chesapeake, Virginia. And First Data is one of the tenants now. First Data, like you lose your American Express card, you call Amex, they ship your card out overnight. First Data is the one that imprints those metal cards and credit cards and for almost everything, MasterCard, Visa, even the gift cards you find in the rack of the supermarket. building was built around the 15,000 square foot vault. And they have a restoration clause in the lease. They're not going anywhere. You know what it costs to move that, dig that vault out of the middle of a building? So we look at why tenants can't move, things like that. How much equipment do you have installed? And then I always like to know is if you left, I could rent this for more space. I did a sale lease back. We closed in August. The tenant had been in there for 50 years. And I pray they go out of business because if I slice it in three, I get two more bucks a foot. And that sits right off the highway. I had to explain real estate to the lender why I like the building. And then they understood it. So we look at things from many different angles. It's not just one angle. And we're not academics that are going to sit there with a calculator and move the numbers around on a spreadsheet. I learned that if you can't do a deal on something this size, on a piece of paper here, actually I don't know if it shows up, like a napkin, don't do it. Basic numbers should work on a three by five card.

Whitney Sewell: Love that. What would those numbers be that you would focus on right there? Just give us a quick overview if you were looking at something right now in a napkin.

Irwin Boris: I guess quick overview. I'd look at the rents. I'd look at the expenses. I'd figure out what net operating income is. What is my purchase price on a cap rate? What do I think I'm going to finance at? And what's the delta between the purchase rate and the financing rate to figure out what I might get on cash flow? Way back when, seven or eight years ago, when people thought that Raleigh was a tertiary market, we bought a 1,000-unit three-building portfolio on the back of a napkin. We went to somebody's office who was on the second floor of one of these offices over at retail, so the pizza place was on the first floor, their office was on the second floor. They had bought too many deals at once, and they were trying to just shed some so they could figure out how to manage. I'm there with one of the principles of this office and he says I have bought an apartment deal in years my father did most of those we're doing most of commercial now what we all from. I said let's do it back to the envelope I said we're gonna take the red roll. Multiply by twelve. Take off 5% vacancy collection. We're going to use 45% expenses. We capped it at 7%. And I said to the seller, here's the number. He said, great, we'll send you a contract. And the principal says to me, you don't need the computer. You don't need to build a whole big spreadsheet. I said, no, we know what the rent is, what we think we can get on a value add. That's all going to be gravy. We'll figure that out later. I said, you're going to finance it at 4 and 1⁄2. You're going to buy on a 7. You happy with that? He goes, yeah, we're going to get some good cash flow. Wow.

Whitney Sewell: You know, speak to the challenges or if you're having challenges finding new deals now.

Irwin Boris: Well, I guess the apartment deals… readjusted in price yet even some of the distressed deals if someone sent me. A distressed deal in Atlanta it wasn't in the one it was a place of C. plus location he said to me last week. Where the seller is trying to avoid having a foreclosure on his record the sponsor. So they're willing to sell it for a million bucks over the debt. So they're in for allegedly in for a hundred eighty thousand unit and they'll sell for a hundred and ten thousand units. everybody's getting wiped out. And out of the closing costs that million dollars really gonna cover his closing costs. And I'm asking all the questions and I find out that oh yeah there's a Freddie Mac floating rate loan on there. And it's more than a million dollars to replace the interest rate cap. And I'm looking at these renovated apartments, and I'm like, you put a lot of lipstick on that pig. I'm like, you refinished the four-micron countertops. You painted the cabinets. That's not an upgrade. And I don't think you could actually spend $10,000 or $15,000 a year and get a rent decrease in this submarket. And so I said to the broker, let me know when Freddie Mac forecloses on it, because at probably about $75,000 or $80,000 a year, it'll make sense, but not at $110,000. Yeah, and so now what you also see is some sponsors are out trying to raise preferred equity funds to try to rescue their own deal so they don't have those foreclosures on their records so they can go forward. So it's an interesting time in the market. And there's billions of dollars that have been raised by the big name funds as rescue capital. But we'll see what happens with that.

Whitney Sewell: Yeah, no doubt. We're going to see a lot probably in the next 6, 12, 18 months, aren't we? A lot of things happen. And maybe while we're talking about it, Erwin, I always, you know, especially from your experience, I'd love to know your thoughts on the next 6, 12, 18 months in the economy, the market. Because what I, you know, people say, well, I don't have a crystal ball, right? I understand, but what we think is going to happen changes what we do today, right? Or to help us decide what we're going to do. So I just love your thoughts on what you expect and, you know, how that's affecting what you're doing today.

Irwin Boris: I see a lot of new industrial commercial deals, even some office deals coming to market because sellers have determined that they don't know either. And if they've owned it for a period of time, they want to lock in some profit and do something else or like maybe just get out of the game for a while. So we are seeing deals from smaller owners and even some medium-sized owners coming to market, some of them on some really wide cap rates, some have some issues like one deal I'm looking at where there are four tenants in there and all the leases expire in the same year. You're not going to be able to finance it, so I got to figure it. There's some nuances, but you even see some of the institutional deals that are coming to market with, whether it's TPG or Blackstone, and I'm looking at one of each of theirs, and I'm scratching my head, and I'm like, there's no way anyone's going to buy that on a five cap. The broker's saying, well, four years, you'll stay it from now, you'll stabilize on a seven. I don't see it. So there are plenty of deals out there. And you just got to bid with what makes sense. You'd be surprised there. But I think interest rates, maybe you see 50 to 75 basis points sometime in the last half of this year. You know I heard one economist saying that don't be surprised if there's another increase which I don't believe. I think that now they're just trying to see some consistency in the data. And let the markets settle down a little bit. I do see credit spread starting to tighten. With the lenders that are gonna fire everybody. Are they gonna stop being greedy. Of a portfolio lenders hopefully figured out their interest rate risk where now they'll actually come back to the market and provide some non recourse financing. think it's an- what you have cash it's an opportune time to buy right now- and you know. Really wait and see what happens I would take shorter term. You know shorter term debt because I think five years from now. I'd like to think that interest rates are lower- and cap rates to compress a little bit. So it's you know as I said it's interesting time I think eventually insurance costs come down. Payroll is still going to run at a hot don't tell me to reduce payroll costs and anything you're gonna buy. Operating expenses are increasing. Costs of renovations are increasing. And I think as you start to renovate those units, also what people expect for their money, if they can afford to pay the rent, is also going to be a little more challenging.

Whitney Sewell: Yeah. No, I appreciate the detail there. No doubt about it. Uh, you know, knowing those things, you know, even as you look back at how you all bought deals, uh, you know, in years past, uh, you know, before other downturns or this one, uh, potentially, uh, you know, how are you all prepared for a downturn? Uh, anything else that we haven't talked about that's like, man, I'm so glad we did this or, man, you know, we learned this and we're doing this moving forward. Uh, you know, whether it's amount of leverage or whether it's cash reserves or whatever it may be.

Irwin Boris: One thing is, when possible, we always take fixed rate debt, long-term debt. We tried to put a deal on one of these crowdfunding platforms. We were going to try it. And they said to us, you're showing a five-year hold, but why are you taking 10-year debt? I said, well, at 3.5%, 10-year debt, full-term interest only. Why wouldn't you take 10-year debt? Well, what about the prepayment penalty? I said, think of where we are in the cycle. Rates are more likely to go up than down. And we like, and I explained to them, you know, every year we value our properties, we got our opinion of value, because there's always somebody with a 1031 exchange that needs an asset that will assume your debt. And on the deals that we've done that have been floating rate debt, like we did a few with some institutional partners and the lender only required a three year interest rate cap, but we took a full term seven year interest rate cap. It was a marginal increase in cost, you know, three years ago. And they said, well, do you really think you need to spend the extra $250,000? Now they're very happy. Now they don't want us to sell because they're getting 14% cash flow on those deals where the rents have escalated too. So we like to sleep at night. We manage interest rate exposure. And we also do things that there's no domino effect where all the tenants are going to expire in a certain period of time. We like to space them out, you know, so we can manage a commercial rollover. We like to make sure that nothing is cross collateralized, even all the debt on the, you know, because we finance everything separately, all the debt doesn't mature in the same year. So we're not trying to juggle the refinance properties. You know it in any one time- because interest rates are going to go up and down and this way we can focus on on deals. A little better we also were years ago especially with multifamily we it was easy to get 80% sometimes 85% if you figured if they allowed you to put some of the renovation costs on there. Now we typically don't leverage more than 60 or 65% I like to know that. tenanted property I can lose twenty five percent of my tenants and I can still pay the mortgage. So each property is sort of a island unto itself including the reserves you know investors are said to me. We're looking at your sources and uses what's all this- miscellaneous money I said it's for a rainy day like what. I said let's say we have an institutional tenant that requires a larger. tenant improvement package for a longer term lease. I said, you want me to call you up and say, hey, Mr. Investor, you're 10% as your capital call, or else I dilute you down. And God forbid, it's at a point in time where you don't have the money and you have to get diluted down. Wouldn't you rather me have this money? And if we don't need it, return it. Or you have to worry that you don't have it and you lose your investment. people get comfortable when you explain that to them, that it's better to be overcapitalized in a way that are protecting their future. And that's how we like to do it. And also, God forbid, you do have an insurance loss and you have to Get repairs done because maybe their life safety issues or roofing or sometimes you have to get these repairs done way in advance before you get any money from the insurance company, even though they've been to the property with an adjuster. And so we like to get the business back on its feet as fast as possible. So we tend to be very conservative in the way we underwrite and the way we finance.

Whitney Sewell: Is there a way that you calculate reserves, Erwin, or just to get an idea of how much on a property level that, hey, we need this amount, or however you all calculate that?

Irwin Boris: It's pretty much touchy-feely. You've got to feel each asset and what the tenancy is, and what the age of the roofing is, and what you think you might want to do, or what the market is. Sometimes it's an extra $500,000. Sometimes it's an extra million dollars. We have one portfolio, it wraps the Norfolk Airport at 330,000 feet where I think I put a million and a half dollars for unknown tenant improvements and leasing commissions and things like that because with government tenants sometimes you've got to spend more money. It's also a way of mitigating what the lender might require you to escrow on an ongoing basis because that affects cash flow. So if I know the lending over the first five years, the lender may say, well, you have to escrow $50,000 a year for tenant improvements and leasing commissions. A lot of times, so it's $50,000 times $5,000 is $250,000. Sometimes I might just give them $200,000 up front and say, if I spend it, I have to replace it. It smooths out the cash flow to the investor. So sometimes we call capital in advance thinking we might want to structure something like that. Nobody likes to see cash flow go up and down on a property. They say, well, last quarter I got 8 percent. Now I'm only getting 4 percent. You know, it's just easier for investor relations also.

Whitney Sewell: You said that right. No doubt about it. Definitely make investor relations easier. Erwin, I'm grateful for your time. I want the listeners to know we're going to do a couple of segments here with Erwin, and we're going to dive in even in another segment for tomorrow on where do investors go wrong and questions you should be asking as an LP to your sponsors. And even maybe when the deal goes sideways, what should be happening? And so, Erwin, grateful again for your time and what you shared with us today, man. It's so good. Tell the listeners how they can get in touch with you and learn more about you.

Irwin Boris: Sure, it's erwin at heritagecapitalgroup.com. You can go to the website. You can just put my name in the search bar, Google. I do speak at a lot of industry events, a lot of family office conferences. So I'm easy to find. I'm on LinkedIn, Facebook, Instagram. You have a question, ask. I spend a lot of time trying to help people understand where deals went wrong, what they should look at going forward, and really how to build generational wealth.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.