Shawn Griffith is managing director at TWT Multifamily, which syndicates value-add multifamily in DFW and other markets in Texas. In this episode, Shawn discusses the major tax benefits he’s seen in his several years of investing full time, the technology he’s using to manage deals and stay in touch with LPs, and how motivations are changing for investors in his syndications.
Shawn Griffith | Real Estate Background
- Managing director at TWT Multifamily, which syndicates value-add multifamily in DFW and other markets in Texas
- Portfolio:
- Three properties, 303 doors
- $30M in AUM actively owned
- 14 current passive deals and three more full cycle
- Based in: Denton, TX
- Say hi to him at:
- Best Ever Book: The Power of One More by Ed Mylett
- Greatest Lesson: Not raising enough capital upfront so there was a significant reserve fund.
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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 today I am here with Shawn Griffith. Shawn is joining us from Denton, Texas. He is a managing director at TWT Multifamily, which syndicates value-add multifamily in the Dallas, Fort Worth area and other markets in Texas. Their current portfolio as general partners includes three properties totaling 303 units, and 30 million in assets under management. He also has 14 current passive placements, and three other placements that went full cycle. Shawn, can you tell us a little bit about your background and what you're currently focused on?
Shawn Griffith: Sure. Thank you, Slocomb, for that nice introduction. We are multifamily investors. We syndicate, we also do some development. We're focused in the Texas markets, predominantly Dallas and Fort Worth, Tyler and Longview. We're actively looking right now, but as I'm sure a lot of our listeners out there know, a lot of looking and not much funding.
Slocomb Reed: Yeah, that does make a lot of sense. Your three assets in the GP portfolio currently - when did you acquire those?
Shawn Griffith: My wife and I started passive investing about 12 years ago. Fast-forward to November of 2020, we were sitting around the kitchen table, talking about finances and what retirement was going to look like, and realized that the bill of goods that Wall Street and corporate America had sold us wasn't quite all it was cracked up to be... So we looked for something else to do, and for us, the answer was syndicate real estate. We started that a little over two years ago, dove in headfirst. It took us about nine months to get our first property under contract, and then after that, we got the second and the third. So it's all been within the last two years that we've picked up three properties.
Slocomb Reed: So mid-2021 to early 2022.
Shawn Griffith: Right.
Slocomb Reed: In the good interest rate days.
Shawn Griffith: Oh, yeah.
Slocomb Reed: Nice. So with those three properties, I introduced you as a value-add guy. Are you underwriting to a relatively five-year hold, with a targeted IRR equity multiple upon a sale in about five years?
Shawn Griffith: Yeah, that's our typical approach. Obviously, everything depends on the property. We all know every deal is different, but that's the target going in, is a five-year hold. Ideally, we double our investors money in two years, and hopefully we can squeak out some cash flow along the way, although that's getting harder and harder to do.
Slocomb Reed: Shawn, here we are on one of the top five real estate investing podcasts where we have three or four guests a week, at least, who are impartment investors, with the majority of them involved in the value-add business plan. I still want to ask you though, specific to Shawn Griffith, why is it in late 2020 that becoming a general partner, syndicating deals like that - why was that the right fit for you?
Shawn Griffith: Well, my wife and I, like I said, we looked at retirement and said, "Hey, we've got to do something to change up our retirement." And for us, the answer was real estate, because we already had 10 years experience as passive investors. So we thought, "Well, that's just natural for us to take what we've learned during that time, and apply it to an active role." And the tax benefits are really good, too.
Slocomb Reed: Can you speak on those tax benefits a little bit more in detail?
Shawn Griffith: Absolutely. So my background is I'm a business and data analyst. I've been doing that for years. I had retired from Southwest Airlines back in 2014, and then I took some contract work, went back East, helped take care of my dad for a couple of years... That all finished up, dad passed away and we ended up coming back to Dallas doing contract work. And I told the contract agency a little over a year ago, I said "Hey guys, I've got to stop working, because my CPA says I need to be a real estate professional this year." And of course, they gave me these blank stares like "Huh?! What? What are you talking about?" So I had to explain to them. They'd nod their head, kind of that slow nod, like - yeah, they're nodding, but they really still don't get it.
But anyway, we were able to pay zero in personal income taxes last year, which was awesome. And for some of your readers that that might shock, the companies that I created paid tens of thousands of dollars in county property taxes, and the employees that we employed - I don't even know what the number is on how much they paid in personal income tax and other taxes. So we're out there doing what the government wants us to do, which is create housing. And we get the benefit of that.
Slocomb Reed: Create housing and create employment.
Shawn Griffith: Yep.
Slocomb Reed: To the point that you were making, Shawn, part of the reason that your economic activity is tax-advantaged is because you are creating W-2 incomes that are taxed as ordinary income for other people. So not only a housing provider, but also an employment provider, and both of those things, as you said, do generate taxes.
You were talking just a minute ago about how deals are fewer and farther between... Tell us what that looks like right now. Are you holding to the same underwriting criteria that you had when interest rates were half what they are currently? Are you investigating any particular niches that could develop higher returns? Are you still underwriting deals right now, or are you sitting it out for now?
Shawn Griffith: That's a great question, Slocomb. Thank you. We're still underwriting. I know some people that are pencils down, they're not looking at anything... I'm doing a lot of looking, I'm just not doing finding. But one of the things we've done recently is we implemented some tighter criteria on our screening mechanism. So we are actually underwriting fewer deals. We're still looking at the same number of deals, it's just that most of them don't make it through our initial screening criteria, because we've tightened up -- for example, one of the things we tightened up on was our expense ratio. If the expense ratio is too high, we don't even bother looking at it. And that's after we validated the expenses against what's expected in the area.
Slocomb Reed: Shawn, I'm not entirely sure how to ask this question... I want to ask it about two different groups of people. The first is your passive investors, the people who come to you to be limited partners in your syndications. Are you experiencing a similar level of motivation from them to get capital deployed in value-add multifamily syndications? And then similarly, what are you feeling about your personal motivations to get another deal under the belt, in the books, and acquired?
Shawn Griffith: Those are great questions also. As far as my passive investors, I would say it's a mixed bag. I have some investors that pretty much every time I have a deal come out, I've got a handful of them that as long as they have funds available, they're usually the first ones in. Now, I've got a few other investors that have pulled their foot off the gas, and they've gotten more cautious. Every investor, every GP has a different set of risk tolerances and criteria that they feel comfortable with. And if the deal doesn't meet their criteria, for whatever reason, because of economics, or whatever their personal justification is, I don't try to change their mind, because it's their criteria. I'm just bringing the deal, and I'm saying, "This is the deal. If you want to invest in it, great. I'm happy to have you along. If it doesn't fit your criteria - well, that's okay. There'll be another one down the road."
Now, as far as my personal motivation for getting into a deal, if I come across a deal right now that really is a good deal, not just any deal, it has to work; the numbers have to pencil out. It has to be conservative. Then we'll get into one. Our goal is to get into two more by the end of the year. I feel pretty strongly that in the next three to six months there will be more downward pressure on pricing, especially in the Dallas, Fort Worth market. We've already seen about a 15% softening in prices. I expect probably another 10% or so, more or less, depending on who you talk to. But we're looking at this going into getting properties and we're planning on holding for four to seven years. Our business plan is that five-year hold. Did that answer your question?
Slocomb Reed: It did, and it makes a lot of sense. Shawn, I want to put something out there to get your reaction to; not thinking about or speaking about any particular syndicator. Actually, let me take a step back. TWT Multifamily, Shawn - are you and your wife the complete general partnership, are you co-GP-ing these deals with other people? Are there other members of your team?
Shawn Griffith: I'll answer that question with a statement and then follow up. I always tell people, "You can do real estate by yourself, but you'd be crazy to." We always partner with people, and I do that for several reasons. One, I like to go on vacation. You can tell by my background, this was when we were down in Antarctica - we love to get out and travel. And if I am the only GP on a deal, I don't feel right leaving the country. Yeah, I can attend meetings virtually from almost anywhere, ad I even attended some meetings while I was in Antarctica. But I need to be close to the asset if I'm the asset manager.
Slocomb Reed: Shawn, if I can ask, how big is your team, and what is your focus? What are your primary responsibilities within that team?
Shawn Griffith: I'm a big proponent of having a team; the team is dependent on the property. So if it's a smaller property, we'll bring in fewer people. If it's a bigger property, we might have to bring in more people, depending on everybody's individual net worth and liquidity, and everything to meet the loan requirements. We do have a couple of heavy hitters that we've got a really big property we can bring in, but they come at a price. So usually, we stay away from the really big properties because of that. But there's typically two to three of us that are the core team, and we are the signers on the loan. So one of the things that I do is I'm a loan guarantor. I will not do that. I don't sign just as a KP; I need to have a piece of the GP, just because of legal counsel, and my CPAs have all said if you're going to put your net worth at risk, you need to have some controlling interest.
Break: [00:11:43.22]
Slocomb Reed: Shawn, given the uncertainty of the economic future and what's happening with interest rates and things like that, what is it that you're doing to stay in front of your limited partners, maintain that open and regular communication with them, and make sure that your relationship with your LPs continues to flow through uncertain times?
Shawn Griffith: Wow, that's a great question. You always have these great questions. That's one of the things I love about the podcast. I guess probably in addition to the monthly reports that we send out on our properties, we do -- anytime there's special events, like my one property that has a roof issue, we're going to be sending out a notice to all of our passive investors telling them we're planning to do a roof claim, and here's what we've done etc. Lay it all out for them. One of the things that really helps me do that - we have all of our investors in Cashflow Portal, and one of the features in Cashflow Portal is I can type up one email, push a button and it sends it to everybody.
Slocomb Reed: Nice. Shawn, thank you. Let me get back to a sentiment that I was about to reference before I asked that question. I have a lot of friends locally and across the country who are involved in multifamily syndication, and real estate syndication more broadly... And here's a feeling I'm getting from -- if I were taking a pulse of the room, if I were taking a pulse of the Best Ever Conference that we had just a couple of months before this airs, if I'm taking a pulse of the conversations that I have with a lot of syndicators and a lot of limited partners, part of it is - and this is the reason I was asking you about motivations... Again, I'm not asking for a direct answer to this, but whether or not this is a sentiment that you're feeling as well in the marketplace. Shawn, there's a lot of capital still out there looking to be placed in tax-advantaged ways, part of that being people who missed their 1031 exchange window, but can still get in 2023 80% bonus depreciation out of the cost segregation, and they'd much rather do that than have a massive tax burden. There's a lot of LP money out there looking to get into deals. And that's one of the things that's getting deals done right now, is the tax incentives of some people with capital who have realized gains recently have, to get that deployed.
The other thing is, with the market tightening up as much as it has, with the volume of listings from brokers diminished, the volume of closed transactions diminished, there are a lot of syndicators, general partners who were planning to rely on acquisition fees and asset management fees to cover their livelihood until they were able to go full cycle. And now that they are facing the possibility that the properties are not going to be worth what they projected one, two and three years ago, and cash flows are not what they had expected to be - the GPs are not seeing any cash flow from these deals, because it's all going into the preferred cash on cash return for LP. There's a lack of acquisition fees to go around, and asset management fees are just not designed to be all that significant unless you're dealing with massive properties. So there are syndicators who are hurting for deals right now because they're not as able to sell to create those nice liquidity events for themselves as well as their LPs, and because there just aren't enough acquisition fees that go around, and there aren't many deals. And to your point earlier, the deals that are there just don't pencil.
I'm seeing that there's some motivation from a lot of syndicators, especially value-add multifamily investors, to continue doing deals right now on the GP side in order to generate some fees, and on the LP side to get those cost segregations to get through a 1031 exchange because of what they sold five months ago. Are you getting the same feeling from the room right now, the conversations you're having, Shawn?
Shawn Griffith: I think, in essence, yes. I'm hearing that there is a fair amount of pent-up LP money from various sources. As far as GPs struggling for the day to day because they're not having those liquidity events - I'll be the first one to jump in and stick my hand up and go, "Yeah, I suffer the curse of the real estate investor." I look good on the balance sheet, but my liquidity sucks right now... Because about the time I get a pool of money together, I go "Oh, look, a shiny deal over there."
Slocomb Reed: I resonate with that as well, Shawn, for the record. Go ahead.
Shawn Griffith: So just to answer your question, I think the general sentiment is there's a growing expectation that there will need to be more deals done by the end of the year, for a variety of reasons, most of which you touched on... And I don't disagree with any of those. I think there's definitely some GPs out there that they need the cash flow from the deal, which aren't cash-flowing; they need a liquidity event from a property to sell, and properties aren't selling, or at least not at prices they want... So those that can wait are waiting, and then think there's going to be some fire sales toward the end of the year, just because people got in trouble and got in -- as I heard one person say, they got ahead of their skis, and properties are starting to go under because a variety of reasons. People either didn't manage, couldn't manage, whatever the reason, and things went off the rails. And now it's going to be up to the rest of us to try to come in and pick up the pieces and put everything back together. You don't want to ever see a syndicator go under, because we're not that big a family. We all pretty much know each other, and it's something you don't wish on anybody, but when it happens, it's business; you step in And then you take advantage of it if you're in a position to do so, and you pick up the pieces and put everything back together again and move on.
Slocomb Reed: Shawn, that makes a lot of sense. Are you ready for the Best Ever lightning round?
Shawn Griffith: Let's do it.
Slocomb Reed: What is the Best Ever book you recently read?
Shawn Griffith: Recently, I just finished "The power of one more" by Ed Mylett.
Slocomb Reed: Nice. What is your Best Ever way to give back?
Shawn Griffith: Wow... My Best Ever way to give back - I like to bring new up and coming general partners in on the deal. So obviously, we've already developed a relationship, and we've gotten to know each other, and I know that they're active and doing what they need to be doing... So when the opportunity comes up, for instance they bring me a deal, or I have a deal and I think it would be a good fit with them and their criteria, I try and pull somebody in and help bring them along.
Slocomb Reed: Nice. Shawn, thus far in your commercial real estate investing, what is the biggest mistake you've made, and the best ever lesson that resulted from it?
Shawn Griffith: So I think the biggest mistake that I've made was not raising enough capital upfront, so that we had a significant reserve fund. On my very first property we had some planned capital improvements, and we raised that money... And we raised a little more, just as a - I'll call it my "Oh, crap" fund. In retrospect, I would have raised more, especially since it was an older property, because we've ended up needing it.
Slocomb Reed: Shawn, what is your Best Ever advice?
Shawn Griffith: My Best Ever advice is make absolutely sure you vetted your partners, because you're getting into a business with them for at least four or five years. And you want to make sure that these are people that you can have not just the happy conversations about, "Hey, we're going to do a distribution, and everybody loves that", but you need to be able to have the tough conversations, like "Hey, guys, we've got to come up with $150,000 to pay the deductible on this insurance claim. Where's that coming from?" And you've got to be able to have those kinds of conversations with the partners as well. And at the end of the day, you still want to be able to be friends with these people. So you have to make sure everybody's of that same mindset, that this is business, and you need to be able to have these tough conversations if it comes up.
Slocomb Reed: Last question... Where can people get in touch with you?
Shawn Griffith: Oh, that's easy - twtmultifamily.com, and then just click the Book a Call link.
Slocomb Reed: That link is in the show notes. Shawn, 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 episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.
Shawn Griffith: Thank you, Slocomb. I really appreciate you having me on the show, and Best Ever is definitely up there in my top three or four podcasts. It's a must listen to.
Slocomb Reed: Thank you, Shawn.
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