July 22, 2022

JF2880: How the Changing Economy Is Impacting Capital ft. Greg Lyons


Former college basketball coach Greg Lyons and his brother, Tim, are both licensed capital raisers who got into multifamily syndications at the onset of the pandemic. Today, Greg is principal and managing partner at Cityside Capital, where he raises money for established multifamily and self-storage operators across the U.S. 

In this episode, Greg shares why he decided to become licensed, the fluctuations in capital he’s seeing as a result of the changing economy, and how he thinks multifamily can weather an impending economic storm.

 

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1. Becoming a Licensed Capital Raiser

After Greg and Tim completed their third deal, they realized they had a talent for capital raising. Greg says they became licensed capital raisers because, “for the most part, we wanted to sleep well at night.” 

They joined a broker-dealer that focuses on multifamily and self-storage. The company provides consistent deal flow, as well as third-party due diligence on each operator and deal, which enables Greg and Tim to focus on satisfying their investors’ needs. 

 

2. How the Changing Economy Is Affecting Capital

Many investors need to find a place to park their capital right now, but because the stock market is currently somewhat volatile, investing in real estate is becoming an even more attractive option, Greg says. And because inflation rates are making it hard for first-time homebuyers to afford a house, the demand for multifamily housing is increasing. 

“Being in multifamily, I think we’re well-positioned going into even an economic downturn,” Greg says. Since rent growth will keep pace with increasing interest rates and expanding cap rates, multifamily properties will likely continue to increase in value despite the negative factors that might be affecting them, such as the cost of debt. 

 

3. Facing an Impending Economic Storm

While multifamily rents have been rising at astronomical rates, Greg knows it won’t last forever — at some point, they will level off. “We’re not going to see 20% growth or 15% growth,” he says, “but if we can get a more normalized 2%, 3%, or 4%, I feel like multifamily can weather the economic storm that may or may not be coming.”

 

Greg Lyons | Real Estate Background

  • Principal and managing partner at Cityside Capital LLC. As a licensed capital raiser with Series 82 and 63 licenses, Cityside Capital raises money for established multifamily and self-storage operators throughout the United States.
  • Portfolio:
    • GP of 16 multifamily properties totaling 5,836 units
    • LP of 2,063 units over 10 properties, plus an office building and a retail center
  • Based in: Charlottesville, VA
  • Say hi to him at:
  • Best Ever Book: The Wealthy Gardener by John S. Soforic
  • Greatest lesson: Take action! I was a partner of a 77-unit condo development in Boise, ID, right before the Great Recession that didn't work out. It took a while to find my way back into the real estate world, but I'm thrilled with the progress I've made over the last couple of years.

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever show. I'm Slocomb Reed, and I'm here with Greg Lyons. Greg is joining us from Charlottesville, Virginia. He's a principal and managing partner at Cityside Capital LLC, which raises money for established multifamily and self-storage operators across the United States. The current portfolio - Greg is a GP of 16 multifamily properties, totaling over 5,800 units, also an LP in another 10 deals, totaling over 2,000 units. Greg, can you start us off with a little bit more about your background and what you're currently focused on?

Greg Lyons: Well, thanks for the intro. So happy to be here. I've been a long-time listener, and this is just fantastic. I am actually a recovering college basketball coach. When I left the University of Virginia, all I wanted to do was coach basketball, and I coached at University of South Carolina and American University in D.C. until we had our first child in D.C. And making $35,000 in Washington, D.C. does not go as far as you think.

Slocomb Reed: Yeah, I believe it. So what got you into multifamily syndication then?

Greg Lyons: The pandemic got me into multifamily. My brother and I, who's a New York City fireman - we joined forces right when the pandemic was happening, and we wanted to be in multifamily. We looked at a bunch of different avenues in real estate, because there's a million different ways to make money, but we kept coming back to multifamily. And originally, we were going to be owner-operators, but we just kind of fell into raising capital, and we just kept coming back to it, and we had a knack for it. And that's when we became licensed capital raisers.

Slocomb Reed: Gotcha. I saw in your bio that you have a Series 82 and a Series 63. So I would say the majority of people who are raising capital or doing investor relations for syndications and commercial real estate are not licensed. Why did you decide to do that?

Greg Lyons: For the most part, we wanted to sleep well at night, and we joined the broker-dealer that we're with because they focus on multifamily and self-storage operators. And we can only raise money for those operators that are on the broker-dealer platform... Which is fine, because what our broker-dealer allows us to do is our broker-dealer does all the third-party due diligence on each operator and every deal. They have to do a market study, they actually have to go to the property... We have a third-party underwriter, we use CrowdCheck... So a lot of the due diligence that investors have questions about are done by a third party. So we don't just take the operator's word for it, but we actually do our own due diligence.

So what we have is deal flow. So my brother, Tim, and I - we don't have to go visit the different sites, build the relationships with the different people... Our broker-dealer brings us deals. We get to concentrate on what our investors want, whether that's a market, multifamily, self-storage, so we could satisfy our investors' needs.

Slocomb Reed: Did you start raising capital after getting licensed, or were you doing it beforehand?

Greg Lyons: No, we did a couple of deals beforehand, and that's where we found that we had to knack for it. After our third deal, we then became licensed.

Slocomb Reed: Gotcha. Okay, so a question that I want to ask in a couple different ways... What I really want to ask is have you changed the way that you talk about or communicate opportunities now that you're licensed? The other way to ask that question, Greg, is now that you are licensed and affiliated with a broker-dealer, are there limitations on the way that you can present opportunities that other capital raisers don't have, who are unlicensed?

Greg Lyons: Yeah. Due to limitations, we can't predict outcomes. We can't give people equity multiples. We can give them a range. So you could ask about the limitations when offering deals.

Slocomb Reed: Gotcha. So it's primarily being licensed. What I'm hearing you say is that being licensed means you're more heavily regulated.

Greg Lyons: Yes.

Slocomb Reed: And the advantages that you've found is that getting your licenses allows you to work with this broker-dealer that focuses on multifamily and self-storage, which means the deal flow is constant. You get to focus on raising capital.

Greg Lyons: Right.

Slocomb Reed: We're recording this in early June 2022. In fact, it was just yesterday that the May Consumer Price Index numbers came out for six point something instead of eight point something from April... But the question here is, given what's happening in the economy right now, this episode will air probably early July. So I don't know what will change between recording and airing, Greg, and Best Ever listeners, but based on what's going on in the economy right now, how are you seeing fluctuation in the capital that you're raising, the investors that you're working with, by comparison to earlier, during the pandemic, when the sky was still the limit, cap rates were still compressing and everyone was seeing juicy returns?

Greg Lyons: I think they need to find a home for their money right now, and the stock market is a little bit volatile right now, so finding a home that they can make a return, but where they can keep their money safe and they don't have to worry about just getting 20%, 30% wiped out... Because investors are investing in a hard asset, and that's really important when they're trying to maintain their wealth.

Slocomb Reed: Gotcha. So Greg, there are a couple of different things happening in commercial real estate investing right now. One of them is we're seeing increased interest rates, and it appears, especially starting in some of the hotter markets, especially parts of Florida, that cap rates are expanding to meet increased interest rates. There's a possibility that we're seeing a recession or a shift in the market. At the same time though, we've seen record profits in multifamily and self-storage syndication. We've seen a lot of deals sell recently with higher equity multiples IRRs than were expected. So here you have all of these investors with capital and an understanding of being a passive investor and apartments indication, primed, ready to go, and an economy that is not matching their demand. Deal flow is relatively low. It sounds like it isn't for you. But there are not enough deals out there for the capital, but also, we're getting into a part of the market cycle where I would imagine a lot of investors have serious question marks. While they need a place to park their capital, they also may have concerns. How are you seeing that dynamic play out - the lots of capital looking to be deployed, but also how they're reacting to the fluctuations in the market?

Greg Lyons: The fluctuations in the market, the rising interest rates is one of the reasons I kept coming back to the multifamily sector. As interest rates rise, and of course the inflation, all asset prices have been inflated, especially with single-family homes. What that's really creating is a renter nation right now. A lot of the first-time home buyers can't afford a house. They could probably could have afforded a house in early, late 2021, early 2022 when the interest rates are lower, but now with interest rates ticking up, they can't afford the monthly payment. And then they're having trouble coming up with their down payment, because asset prices and inflation have just grown the price of a home. So the renter nation that's being created right now is a demand that we're not even satisfying with the amount of apartments and units that are available. So being in multifamily, I think we're well positioned going into even an economic downturn, especially because people need a place to live. Food, clothing, and a place to live are three things they usually take care of right away.

Slocomb Reed: Let me jump a couple of steps ahead here, Greg... It sounds like you're saying that rent growth will keep pace with increasing interest rates and expanding cap rates too, so that multifamily properties can continue to increase in value, even though there are other negative factors affecting them, particularly the cost of debt. Is that what you're saying?

Greg Lyons: Well, I would love for multifamily rents to keep rising at the astronomical rates that they have been--

Slocomb Reed: Right.

Greg Lyons: ...but they're not. And there's going to be a leveling off at some point and we're not going to see 20% growth, 15% growth. But if we could get a more normalized 2%, 3%, 4%, I feel like multifamily can weather the economic storm that may or may not be coming.

Break: [00:10:54] to [00:12:41]

Slocomb Reed: I know that your licensure limits you from making predictions, so I'm not going to ask you to predict what's coming in this storm, Greg... But I do want to ask - you're an LP in some deals yourself; are you changing what you decide to invest in personally right now?

Greg Lyons: Well, with any deal, I'm always going to take a look at the operator, the market, and what are the market fundamentals. Is there job growth? Is there population growth? So stuff like that. I'm not going to stop looking at those important factors. Am I looking at deals with a more discerning eye? Yeah, probably. Two years ago when multifamily was the hottest thing, people were throwing money into deals. I've always been a little bit more conservative with the deals that I invest in. I think that's only going to continue as we maybe see a slowdown in the economy.

Slocomb Reed: Gotcha. As a GP, is there a shift in deals that you all are bringing to market that you're raising capital for? Is there a difference in the range of equity multiple or IRR, that you guys are expecting?

Greg Lyons: For the most part, we really offer our investors value-add opportunities. So typically, in any deal that we were doing, cash flows in year one were usually not exactly where the preferred return was projected. So our investors are kind of used to it, but 3%, 4% and 5% - that's really the reality of where we are with multifamily deals at this point. So are investors thrilled about getting less than their preferred return? No. But when you're doing value add, you are usually taking occupancy down 10 percentage points to 85% maybe sometimes, just to get those units renovated. So the preferred return is going to accrue anyway. So our investors are pretty used to what they're looking at with these deals now.

Slocomb Reed: Gotcha. Are there any other hurdles that you're facing right now with raising capital?

Greg Lyons: Actually, with raising capital now, a lot of people are selling assets across many different asset classes - office, medical office, multifamily... And what people are actually having trouble with is placing their 1031 money. And that's where Cityside Capital has stepped up to help a bunch of different 1031 investors. Again, with the deal flow that we have, everyone's a great 1031 investor days one through seven in their identification period. Usually days 39 through 45 it gets a little bit more tighter, and that's where we have the deal flow. We could have maybe one, two or three deals that investors can take a look at and say, "Yes, I want to identify this as my 1031 home." So we've actually had a lot of success in the 1031 arena here recently.

Slocomb Reed: Given the deal flow that you have through your broker-dealer, how do you qualify the deals that you will raise capital for?

Greg Lyons: It really goes through our third-party check of everything. We have a third-party underwriter, and that person really does a deep dive. And there's a checklist. And if there's too many no's on that checklist, our broker-dealer won't even show us the deal. And is that happening? Probably a little bit more often than not now. So there's a filter that a deal has to get through to even make it to Cityside Capital for us to offer to our investors.

Slocomb Reed: So anything that your broker-dealer has vetted and brings to you and you're raising capital for, or are you choosing amongst those deals?

Greg Lyons: Even when the deals come to us, they've passed the sniff test, they've passed the third-party underwriting, we decide which deals we want to raise money for. And we don't do every deal, just because either our investors may not want that particular market, the cash flow may not be as great year one... So we decide which deals to put out, that we think our investors are going to be comfortable putting their money into.

Slocomb Reed: Gotcha. Greg, remind me - you started raising capital for syndications during the pandemic. You've been doing this for a couple years now.

Greg Lyons: Mm-hmm.

Slocomb Reed: What has been the steepest learning curve for you thus far? What has been the thing that you came into raising capital for syndications, the thing that you identified that you either didn't understand or needed to improve on the most, and how did you develop that skill?

Greg Lyons: Well, when you're raising money in a pandemic, there's so many unknowns. And I kind of feel like we're going through another unknown period again with the economy being a little bit shaky, interest rates high, inflation high. So we've really learned on the fly to adapt to any situation. And the learning curve has been, we haven't really known a stable, great market. Did it turn out that the pandemic multifamily shot up and was doing great and everyone would put their money into it? Absolutely, but we were still in a pandemic, so we haven't really even known a stable market. So we have a lot to learn. We're always learning about different markets and ways to raise capital, but we are probably pining for a normal time to raise money, and we'd be just as happy raising it then as the crazy times we find ourselves in now.

Slocomb Reed: Greg, are you ready for the Best Ever Lightning Round?

Greg Lyons: Well, let's do it.

Slocomb Reed: Awesome. What is the best ever book you recently read?

Greg Lyons: I read The Wealthy Gardener by John Soforic, and it was fantastic.

Slocomb Reed: You know that's on my list. What did you get from that book?

Greg Lyons: The way they wove the guy's life into the fable that they had going concurrently. It had just so many life lessons that I felt like I was highlighting the whole book.

Slocomb Reed: Nice. What is your best ever way to give back?

Greg Lyons: I coach a ton of youth baseball, basketball, anything like that in the Charlottesville community. And coaching has always been a passion of mine. And to get the best out of boys and girls as they're coming up through sports is just something I love to do.

Slocomb Reed: Thus far in your commercial real estate investing career, Greg, what is the biggest mistake you've made and the best ever lesson that you've learned from it?

Greg Lyons: Well, the biggest mistake I made is not finding this business sooner. Not only am I enjoying it, but I'm growing my own net worth every single day, I'm having my money work for me... So I wish I would've started sooner.

Slocomb Reed: In your real estate investing career, Greg, what's the biggest mistake that you've made on a deal?

Greg Lyons: Well, so far it's been timing. I joined my father-in-law and brother-in-law in a condo development company in May of 2007. So we all know 2008 and 2009 was not exactly good to the condo market, especially in Boise, Idaho, but I learned so many lessons about business and perseverance and fighting through tough times. When you see the underside of the real estate market, it changes you. It makes you more conservative as an investor, especially when you are putting other people's money into deals.

Slocomb Reed: What is your best ever advice?

Greg Lyons: Education times action equals results. When you're sitting on the fence, take some time, educate yourself. Books and podcasts is a great way. Surround yourself with the people that are doing it. If you see a syndicator, if you see a capital raiser, if you see someone that has 10 duplexes, get yourself in those circles and learn from those people, because education will lead you to take action, and that will give you your results.

Slocomb Reed: Awesome. And Greg, where can people get in touch with you?

Greg Lyons: You could always find me at citysidecap.com, and you could go there and download our eBook, How to Break Social Norms and Become an Extraordinary Investor, or you could reach me at greg@citysidecap.com.

Slocomb Reed: Awesome. Those links are in the show notes, Greg, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five-star review and share this with a friend that you know that we can add value to as well through this conversation about raising capital during the pandemic and now in the economy of 2022. Thank you, and have a best ever day.

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