Kyle Ransford is the CEO of Cardinal Investments, which focuses on value-add repositioning to achieve cash-out refinances. In this episode, Kyle discusses his firm’s strategy for getting investors 100% of their capital back in two to three years and how they approach underwriting to close on the best deals.
Kyle Ransford | Real Estate Background
- CEO of Cardinal Investments
- Over 50 apartment buildings
- Eight commercial non-residential properties with two in development
- Based in: Los Angeles, CA
- Say hi to him at:
- Best Ever Book: Getting to Yes by Roger Fisher and William Ury
- Greatest Lesson: Don’t underestimate costs, and be realistic about timeframes and capital needed to execute deals.
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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm here with Kyle Ransford. Kyle is joining us from Los Angeles, California. He is the CEO of Cardinal Investments, which focuses on value-add repositioning to achieve cash-out refinances and hold for cash flow. They have over 50 apartment buildings in their portfolio currently, and eight commercial non-residential properties, with two of them in development presently. Kyle, can you tell us a little bit more about your background and what you're currently focused on?
Kyle Ransford: Yeah, we're currently focused on making value-add investments where we can make some dollars on them, and then turn that into cash flow for us and our partners. We primarily focus our investment partners on smaller family offices and individuals, heavily focused around the tax advantages that are available to that crowd that go along with investing in real estate.
Slocomb Reed: A couple of questions, Kyle. Why is it that you all focus on family offices?
Kyle Ransford: Our investment size is half a million to 5 million on the equity side, and then the corresponding debt that goes with that. So that tends to be smaller family offices. We like that deal size, because there's less institutional competition in there, and we find the returns are better. And I just prefer working with individuals, more so than institutions. And then the strategy aligns more with individuals to hold assets for a long period of time, versus institutions that are generally needing to be in and out of assets in five to seven-year periods.
Slocomb Reed: I very much planned to ask you about your hold period, and a couple other nuances to your business model, Kyle. When you say smaller family offices, I'm really asking for myself, my own curiosity here - how do you quantify that?
Kyle Ransford: It's really individuals. Most of our partners are individuals that are making a strong W-2 living, but don't have any tax write-offs, and we're helping them to achieve write-offs. So somebody that has a W-2 - we have people that have W-2s in the $400,000 range, up to the $3 to $5 million range; those individuals have a hard time with creating deductions that go against their income. So we're working with, generally speaking, families of that size.
Slocomb Reed: Gotcha. So the equity component of your deals, the entire equity component tends to be around half a million to a million, and you are raising that - can I guess - around $50,000 at a time, from individual investors?
Kyle Ransford: Our equity investments raise is from half a million to 5 million.
Slocomb Reed: Gotcha.
Kyle Ransford: So we'll do a couple of deals -- we tend to do about 10 deals a year. We'll do one or two deals where we will syndicate such as you're suggesting, and we'll take $50,000 to $250,000 per individual. We also do a lot of transactions where we have one individual investor in the transaction, and we're really working to manage that person's or family's real estate allocation, no different than if they went to a wire house like a Merrill Lynch and said "I need equity in bonds and stocks, and so forth." And we're just the real estate component to that. So then we're executing on strategies that fit their overall life goals of where they're trying to get to, hold periods that they're interested in, and so forth.
Slocomb Reed: Kyle, you've alluded a couple of times, and it's in your bio that you are going for longer than average hold periods. So I want to ask, most of the time when we on the Best Ever podcast at least hear value-add reposition, we are looking at a business model where the partnership is looking at a roughly five to seven-year hold period, with a preferred cash on cash return during the hold period, and then a targeted internal rate of return upon disposition, upon sale, after that five-ish years. It sounds like that's not your game plan. Can you start with that as a baseline? ...five-year hold period, increase the NOI, and sell, and talk about how your strategy is different?
Kyle Ransford: Yeah, a hundred percent. So most of the market in the syndication world or the private money world is using some version of that. Often it goes because of how the syndicator wants to realize their profits. So if you reposition something strongly, you turn around and sell it quickly, the IRRs are higher in the first couple of years, and you give the investor back their capital, and then you ask for their capital back. What I've discovered or come to realize over 25 years of doing this is frequently I have an investor that gives me 100 bucks, we go do a value-add reposition, we sell it in two years, we give them back 200 bucks, and they go, "Oh, that sucks." And you go, "What do you mean, it sucks? I just gave you 100% on your money in two years." And they go, "Yeah, but you sold it on December 31st, or January 1st, and [unintelligible 00:05:44.20] tax you would have been better for me. Now I've got a tax bill, and I've got the money back, and I've got to reinvest it..." So those strategies are heavily driven on syndicators kind of living off the big pops, and so forth. We have a portfolio of real estate that keeps our lights on, and what I've found is to be as a better real estate investor is our strategy becomes - we'll do that value-add reposition, but then we'll look to refinance capital. And we look to get 50% to 100% of the initial capital out in two to three years, is kind of our target on all investments. And we think of it a little bit more as a strategy you might have if you went to Vegas, of "Hey, I started with 500, I got my 500 back, and now I've got some more money." We're trying to return the initial piece of capital to the investor quickly, and then suggest just holding on to it and living off the cash flow from those assets going forward. That's why we seek out investor types that have more of that gameplan in mind.
Slocomb Reed: Kyle, I'm getting very excited to try to summarize your business plan after I ask a few more follow-up questions, because it sounds very similar to the way that I have invested thus far, and what I will want to do as I scale my own portfolio. Let me say first, since you're not planning to sell, you're probably not using an internal rate of return metric. So let me ask, what do your returns look like, and what does your GP/LP split look like, both prior to the return of the LP's capital, and afterwards?
Kyle Ransford: Again, our splits and structure ends up a little bit unique because of those longer periods of time. We do also certainly look at what a five-year IRR would be on that investment with a hypothetical sale. So we're evaluating investments against each other in the same way that you would in other places, to make sure we're making quality investments. However, what we're working with is situations where we can both take tax benefits and return capital to investors. So as an example, at the end of last year, on December 26th, we got a call on somebody that wanted to sell something by the end of the year. We bought a property for exactly a million dollars, so the math is easy. They happened to carry 85%, so we put $150,000 down. That individual partner of ours gets the tax benefits from that. In the case of the tax benefits that have been available through the Trump tax legislation, they were able to get a $476,000 deduction on their taxes that year, which resulted in about $180,000 in cash savings that they otherwise would have paid in taxes. And when they filed just recently here in March, they put $150,000 down.
Then our split between -- the investor is they've already returned the majority of their capital through the tax savings, but our splits are the investor gets the decisions on when to refinance, when to sell, and taking all the capital out and do distributions. We don't take any capital until they've returned 100% of their initial investment. So the first $150,000 in this example, will go to that investor that comes out of the property either through a refinance at the end of two years and a reposition, or the cash flow on the asset.
Once the investor has gotten all their money back and the tax savings - in this case, the tax savings are going to be double their investment size, but generally, we find it to be about a third. So the investor has gotten about 130% to 150% of their money out of the deal, we then split 50/50 on a go-forward basis.
One of the other major differences from the more market structures that you were alluding to earlier is our investors have control. So we've agreed to manage that asset for them for a lifetime, and they have the decision power on "Okay, it's time to sell. We want to sell and exchange, we want to sell and not exchange" or "We just straight want to buy you out of this investment."
Slocomb Reed: You let your LPs buy you out of an investment?
Kyle Ransford: Yeah. That's in the document, that anytime that they decide that we're not the right management group going forward for them, there's a structure in place there where we can unwind our investment piece. So we determine a price between the two of us, and then they would have the ability to take us out, take it to a management company, manage it themselves, do whatever they please.
So the value of control is a significant piece to our investors. But most of them are looking for a long-term hold period in the end anyhow, and making sure that they have the control, that it doesn't get sold either at the wrong time for them from a tax perspective, or when they don't want to sell it. I think they find that very valuable. It's a little bit more akin to managing separate accounts for somebody. We work with our partners significantly. Many assets -- we do a value-add reposition in order to have the promoter and the investor get a reasonable rate of return in call it the teens; you have to try to be making in the 20s on that investment. That prohibits a lot of investments in Southern California, I call it the buying the apartment in Santa Monica. That's not going to have a lot of cash flow; it's going to have some upside, it's going to have good upside over the long haul, but not a lot of cash flow along the way. You rarely see these in a syndication opportunity, because the returns generally aren't designed for both parties to make enough money to make them worthwhile.
Our structure allows families that want to choose different kinds of real estate, and oftentimes we're looking for specific investments that fit their portfolio, that fit their overall financial plan of "I'm trying to create this much cash flow, or this much time, or this much upside." People have different financial targets and goals at different places in their lives, and we're trying to help them add the real estate that manages to those targets and goals.
Slocomb Reed: Kyle, you said something early on that I want to return to... And that is that the way the vast majority of commercial real estate syndications are structured is designed to advantage the syndicator, or the person who's putting the investment opportunity together. In a lot of ways, frankly, that makes sense. They're the one who's putting together the investment opportunity, so of course, they should be creating something that works for them... There are a lot of components to that more typical deal structure though, that you all don't do... And it sounds like, the way that you're presenting it, it does give significant advantage to your LPs. There's something in there for you as well though that I want to point out. You're not the first person I've interviewed on this podcast with this deal structure, and in a joint venture ownership structure, I've done the exact same thing myself twice now. So I'm fairly familiar with the general outline of how these partnerships are put together.
A typical syndication is going to involve acquisition fees and asset management fees. That acquisition fee is designed to compensate the syndicator, the general partnership for work that has been done to create the investment opportunity. When the acquisition fee is paid, no returns have actually been delivered. All that's happened is that real estate has been acquired, and everyone has yet to execute on the business plan that actually delivers returns. So Kyle, let me ask, do you guys have acquisition fees, asset management fees, things like that?
Kyle Ransford: Generally, our fees are -- we have a couple different nuances to the structure. Occasionally, we'll take an acquisition fee... But we don't have asset management fees, we don't have construction management fees... There's property management fees, but there's not your typical fee structure. And again, it's a rare case where we take any acquisition fees. We're taking a far more piece of the backend. We feel our structure is more designed where we end up in a partnership where you have to get all your money back before we're getting paid. We're asking for 50% in the backend, instead of 20%, 30%; that's kind of a more typical structure in other investments. But we're willing to -- in some cases, for quite a long time... And we're willing to give you the control of when we get paid and when we're doing distributions from the investments. So we tend to think that these are a little bit more aligned; the incentives and goals are aligned to "Until there's money made, we're not making anything." So we're working for free until you've made money. When we start making money, then we're making money together.
Generally speaking, we find the structure is if there's a 17% IRR, if it's above that, well, we're doing a little bit better, because we're taking 50%. If it's below that, you're doing a little bit better, because we're not taking all the money out early.
The other problem with some of these structures is there's splits going on in certain cases to the promoter prior to the individual getting their capital back... And it also works well for us, in the fact that if we do a value-add reposition in two years and we give you 100% of your money back, almost every time our clients are like "Well, that's great. Let's take that money and buy another property." So we try to get our clients to split their investments up into four, and then we're finding one of those four investments is refinanced and is covering the next one, and we start getting paid once it's refinanced or they've gotten 100%.
So it's a little bit different and nuanced, where we're trading the upfront fees and the ability to sell the properties quickly, and realize the gains, for a bigger piece of the back end, that's maybe much later in time. We think that's generally a good trade for our investors, and I generally say to people, "You'd rather have more certainty to getting returns up to 17%, and us taking less of that, and if it's over 17%, you should be more willing for us to share, because generally speaking, we've outperformed other investment returns for you." So our thought is it's a little bit more aligned.
The place that it's really more aligned, and the real value though is the tax side. Because if you buy something and sell it in three years, you have to recapture the depreciation that you may have taken. Where if you own it for a lifetime, and then you can exchange into something else, your kids get the stepped up basis, you never pay the tax return on that. So you know, the example we talked about earlier, which was a premium version of that, where there was $160,000 saved in tax on a $150,000 investment - well, if we sell that in year two, because I make my money by selling it, the investor then has to repay that tax savings that he had. So we're able to use the tax code to double the returns for people, and we think that that's far more advantageous for all parties considered in the end. And that's why we tend to have these longer-term hold concepts.
Slocomb Reed: For the active investors, syndicators out there, there's one more thing Kyle is saying that I want to make sure you hear before we transition this conversation. When investors like Kyle, other investors I know who do investments like this one, and me, when we have this 50/50 deal structure, with all dispersals being 50/50 after investors have had their capital returned to them, there's no pref anymore. There's no waterfall, there's no target IRR. Your investors have all of their capital back, so everything is straight line 50/50. Cashflows are 50/50, gains from the sale are 50/50... And the fact that the cashflows frankly are 50/50 after investors have all their capital returned to them is one of the things that makes this viable for investors like Kyle and me, is that those cashflows will end up being significant over time. Kyle, do you agree? Am I on the right page here?
Kyle Ransford: Yeah, you're absolutely on the right page with that. Again, the wrinkles that we've added to that is giving the investors control, so that at any point in time if they decide they're done with us having 50%, if they want to remove us, they have those abilities, and we're happy to do that at any time and move on. So the investors get control of when they get their money back, and most importantly, they get control of the tax situation. Because when they sell and realize those gains, or sell and exchange, it's the most valuable piece. In a 50% tax bracket, if I can save them all the taxes, the taxes are what pay me. So in many of these cases, you're trading out the partner paying taxes to the government, or paying us to manage the real estate portfolios for you, with the same dollars that you otherwise would have paid in taxes. So again, that's why we become heavily involved with our clients on looking at ways to minimize their tax bill and redeploy those investments in real estate. So the tax part becomes really important part of that investment. But even the structure that is a 50/50 after a return of capital structure on its basis - you're trading dollars today for dollars far into the future; we continue to think the biggest challenge for investing is investment losses, and you want to first protect getting all your capital back, and then worrying about the upside to that. So we continue to believe that's a better structure than having significant fees go out the door prior to returns happening.
Slocomb Reed: Kyle, have you had your investors buy you out of any deals yet?
Kyle Ransford: No.
Slocomb Reed: That sounds expensive, because they've already got all their money back, so they're on that infinite cash on cash return, or however you want to say it. I would imagine that most investors wouldn't find that favorable, needing to put that kind of money into something after they've gotten their cash back out.
Kyle Ransford: Yeah, generally speaking, someone would do it when there's a refinance available, and you can recap the property and use those funds to do it. The thought process would be obviously if they're buying our half out, then we're not getting any of the half going forward. But historically, our investors have said, @Well, let's take the money, and instead of buying you out, let's go buy another one.@ This has worked really well. And most of our investors are excited to get annual tax savings that match something of their other ordinary income and reduce those, and then have the properties appreciate, refinance them to get the capital to buy another one. So most of our guys are having success there.
And to your point, the more successful we are, the more expensive it is to buy us out, in one regard... But I always say don't think of what we're making, think of what you're making, and make sure that the returns are high-quality for you after fees. Any of these structures, you need to be analyzing them, "What are my risks of losing capital? And what are my returns after fees?" And the IRR is a very effective way, even with this structure, for an investor to analyze "Was that a good investment for me?"
Slocomb Reed: Kyle, I'd like to put some real numbers to this deal structure here in a couple of different ways. First, let me ask, how do you identify which deals will be the right ones for your firm and your business model?
Kyle Ransford: I'd say our underwriting is pretty similar to all underwriting in real estate of what's a good deal, regardless of structure. The difference that it probably drives us to a little bit more than others are where are properties where we can add the value, which is generally increasing the income enough to execute a refinance. Investors will value from us, and we keep ourselves to how well did we do on returning the initial piece of capital in a short period of time. So we're looking significantly for transactions that we think can return 50% to 100% of the initial capital through a standard bank refinance in two to three years. So we tend to gravitate towards transactions that have more of that matrix per se than a transaction that's great, it's going to return 12% cash on cash for seven years. That's good, but it's harder to refinance that quite quickly.
Slocomb Reed: I'd like to answer my own question here and get your feedback on my answer, Kyle... Doing these kinds of - and if we can use the Bigger Pockets terminology, the BRRRR type deal...?
Kyle Ransford: Yeah.
Slocomb Reed: I personally end up more attracted to more distressed properties. And I have purchased and executed on some pretty distressed stuff, like 60% of physical occupancy, 38% economic occupancy on day one... Because of how much of the force appreciation potential was available in the first 18 months, which meant that a property like that could lead to a juicy cash-out refi. If that makes sense. Do you find yourself acquiring properties experiencing more distress than most syndicators?
Kyle Ransford: Not all syndicators sort of play in the BRRRR kind of thing, so the value-add space... But within the value-add space, I think everyone's generally looking for those types of matrix. We play in a rent control market in the multifamily space, so we're largely looking for those types of economics through the rent control system. In our commercial space - same thing. We're looking for ways to improve properties to increase cash flow to do that. But our commercial space is a very A, A+ market, where we're looking for those dynamics of upside through rental abilities to increase rents through beautifications... But those are not necessarily distressed scenarios. Our multifamily, I would describe as a little bit more in that world indoor, where the rents are limited due to current rent control tenants.
Slocomb Reed: What markets do you guys invest in?
Kyle Ransford: At this point, I've invested in all kinds of stuff. I've bought islands in Fiji, and built buildings in New York in my career. At this point, we're focused on LA County multifamily, and generally the South Bay of LA in the commercial space. We're the significant buyer of properties in Downtown Manhattan Beach.
Slocomb Reed: Gotcha. Last question before we transition the episode - you have around 60 properties in the portfolio right now, including a couple that are currently in development. Given how important the cash-out refinance is to your business plan, I do feel compelled to ask - how many of those properties have been acquired since interest rates started hiking up last year?
Kyle Ransford: We've closed on something last week. We've got something we're closing on... We'll have acquired five properties in the last year, since interest rates started to move; so we're still active. There's definitely a disconnect between buyers and sellers, so we're looking for situations where sellers are definitely going to meet the market. Oftentimes, that's trusts and estates situations, various situations where they're going to meet the market of what the sale is; it's generally a better place for us to hunt right now.
Slocomb Reed: Recording in Q2 2023. What are you projecting interest rates to be two in three years out when you're looking for your refis?
Kyle Ransford: We'd like to project a stable place. So we're generally using a five to five and a half percent on five to seven-year money in two to three years. So we like to not get too thoughtful about interest rates going one direction or the other at various times. Now, obviously, this last year has been an interesting one, because you most certainly needed to look at what the rates were likely to do. But our general philosophy is we try to listen exactly to what the Fed is predicting, and not the noise, and we find that the Fed has the best information of actually what they plan on doing, and that that's the best place to move. There's always sometimes considered Black Swans or events that people wouldn't have recognized that change that, such as the failure of SVB recently... But again, as we project, we try to listen to what the Fed's gonna do, and generally project flat interest rate environments. But more directly, we're using five to six as a refinance rate, two to three years out.
Slocomb Reed: Kyle, that makes a lot of sense. Are you ready for the Best Ever Lightning Round?
Kyle Ransford: Yeah, let's do it.
Slocomb Reed: We don't have much time left, so I'm only going to ask two questions here. What is the Best Ever book you recently read?
Kyle Ransford: One of my favorite books that I recently read is "Getting to Yes", just because I think it's such an interesting way to think of how to work more positively with people, and control conversations with outcomes that are a little bit more in the direction you're running to. So I've found that super-interesting, and not generally the way that people think.
Slocomb Reed: Kyle, I'm gonna ask three questions. Thus far with this investing model, what is the biggest mistake you've made and the Best Ever lesson that resulted from it?
Kyle Ransford: I think the biggest mistakes that get made in investing, in life in general, and these sorts of things is to underestimate costs, and try to squeak by with just enough equity when it's really not enough equity. I think running out of money is the biggest mistake that you can make in this space. So not being realistic about timeframes... Timeframes that end up costing more money, I think is one of the lessons learned from growing up in this business; probably learned a few times along the way. But that'd be my number one, is running out of money ends up with bad returns, because you're not well capitalized, because you weren't willing to have the right conversations early on, or along the way... And hope is not a really good strategy when you're investing.
Slocomb Reed: Kyle, I have to ask - when is it that you did that? When is it that you undercapitalized, and what happened?
Kyle Ransford: Our biggest challenge in real estate came into the '07 crisis, where we had a couple development deals that we were probably slightly undercapitalized. We also had the failure of our banks, that froze the lines when we were midstream in development... So the '07 period was dramatic for lots of people, for lots of reasons. Being undercapitalized there, when you ran into a problem... We literally ran into the problem that our bank went bankrupt. CIT was taken over by the government as well, and we couldn't draw on the loan. And if we had had some more significant capital reserves - we were 96% complete on this building. Having more capital in place there...
The true contingency is is usually wiped out long before you get to a place where you need a contingency. So that time period was my biggest learning lesson in real estate. Who your bank is really does matter, and making sure that you always have enough money to complete what you started is probably my number one piece.
Slocomb Reed: What is your Best Ever advice?
Kyle Ransford: My Best Ever advice is buy and hold. As real estate investors, you start thinking, "Oh, we're so smart. We know what's going on. Oh, here's what's going on with interest rates, and the Fed, and so forth." Certainly, in my younger years I knew all the answers to that, at all points in time, and so forth. I've made most of my money in real estate by being long in the years that you wouldn't expect to make money. [unintelligible 00:30:40.23] the beginning of the pandemic, who would have known that the very beginning of the pandemic would be the ultimate buying time? You should have ran out and bought everything that you could have bought, as they locked everybody into houses and nobody could leave, and no one knew how they were gonna get their checks next month?
The time periods where rents go up, and therefore values go up, or interest rates go down, and therefore values go up, are too difficult to try to predict. But if you're in the market, and you have good assets, and you do good management, then you catch all of those periods.
Slocomb Reed: Last question, where can people get in touch with you?
Kyle Ransford: We've got information on our website, CardinalInvestments.com. Kyle [at] CardinalInvestments.com is my email. 310-780-9955 is my phone number.
Slocomb Reed: Those links are in the show notes. Kyle, 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.
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