Omar was working for a large company, helping raise $3.7 Billion as an analyst during his time there. Today he takes what he learned there and applies it to his own company and real estate syndications. Omar branched out to do his own syndications, along with a partner, they are also building an underwriting software to give institutional underwriting to the average Joe’s. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Omar Khan Real Estate Background:
- Manager at Boardwalk Wealth with 10 years of investing experience across real estate and commodities
- Developing the next generation of multifamily, self storage and mobile home park underwriting software
- Based in Dallas, Texas
- Say hi to him at https://www.boardwalkwealth.com/
- Best Ever Book: Thinking Fast and Slow
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Omar Khan. How are you doing, Omar?
Omar Khan: Hey, Joe. Great honor to be here.
Joe Fairless: Well, I’m glad you are on the show. A little bit about Omar – he is a manager at Boardwalk Wealth. He’s got ten years of investing experience across real estate and commodities. He is based in Dallas, Texas, and you can learn more about his company at BoardwalkWealth.com. That’s also a link in the show notes page. That being said, Omar, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Omar Khan: Well, you’ve done a great job, so I’m just gonna add on some stuff. You’re a big inspiration for me, so we run syndications. I’ve done about 3.7 billion dollars of capital financing and M&A transactions. I’m Canadian, I moved down in the U.S. three years ago, so I advise a lot of high net worth individuals and entrepreneurs on real estate portfolio allocations.
Apart from that, my partner [unintelligible [00:02:00].24] a software that is just specifically catered for syndications in multifamily, mobile home parks and self-storage facilities. That’s basically going to be [unintelligible [00:02:09].04] you’re gonna get institutional quality underwriting.
Joe Fairless: Cool! So I can’t ignore anything with a B – billions. So 3.7 billion – will you elaborate on that, just so I can understand the context?
Omar Khan: Well, these are debt and equity transactions, as well as M&A transactions, both in real estate and commodities… Oil and gas primarily.
Joe Fairless: Oil and gas primarily. And what is your role in those transactions?
Omar Khan: I was the lead analyst and manager running those transactions. One was a debt refinance. We did that, and that took into account a couple of things, but the oil crisis three years ago – we had to basically selectively go out to the market, raise money to our investment bankers; there were a lot of strategic reasons, so I was leading that charge.
On the equity size, similar to that, we raised equity as well, and on the M&A transaction side, because I worked for a bigger company, selectively we would choose to acquire both refining assets, upstream assets and downstream assets in oil and gas. And then on the real estate side, I raised capital for about 80 million dollars [unintelligible [00:03:07].18]
Joe Fairless: Got it. So real estate side – you raised capital, 80 million dollars. Where did that 80 million dollars come from?
Omar Khan: Where did that come from? Well, that came from a lot of people. [laughs] Lots of people, high net worth individuals and entrepreneurs.
Joe Fairless: Was that for your company, or was that for the company where you were a W-2 employee?
Omar Khan: No, that was for other people’s projects; I was a capital raiser.
Joe Fairless: Got it. So for example, how would that be structured? Will you elaborate on that?
Omar Khan: Well, typically how we structure it is the same in the LLC and the LLP scenarios that you have in your own deals. A lot of my Canadian investors are primarily Canadians, and international people, because I’m from Canada, so we’ve got a lot of that… So when I was coming to the U.S. three years ago, that’s kind of how I got started. I didn’t have a good enough network in the U.S., but slowly that’s developing, and that’s how we do the work.
Joe Fairless: So you personally have raised 80 million dollars?
Omar Khan: I personally participated in 80 million dollars’ worth of transactions. I’ve raised about 4 million dollars.
Joe Fairless: Oh, got it, got it. Sorry, I misunderstood. I thought you said you’ve raised 80 million dollars. Okay, so you’ve participated in 80 million dollars; you have raised 4 million dollars. Got it. Okay, so you have raised 4 million dollars, and you said you were a lead analyst on a bunch of deals… That was as a W-2 employee – is that correct? Okay. What did you learn from that that you are applying to your real estate underwriting for your own stuff?
Omar Khan: Well, what I learned from that is that the level of granularity, the level of detail and the level of sophistication one needs when they’re running big transactions is a step above just the usual sort of “I’ll do analysis on the back of the envelope”, because there’s lots of moving parts, and a lot of these moving parts, a lot of balls are up in the air. You don’t really know how people are going to react, how the situation is going to develop, so what you basically need to do is have a plan, A, B and C, before you even do something… And you have to be confident enough in your own plans, but you have to be willing enough to know that if things don’t work out, you can basically switch gears pretty quickly.
Joe Fairless: Will you elaborate on that, just to crystallize in my mind a little bit what that means?
Omar Khan: So what that means is that when the oil prices went down 3,5-4 years ago, what was happening is that a company that I was working with (a 20-billion dollar company), in the Canadian space it was number three or four if you think about it in terms of their total production capacity; so apart from the financial aspect of “Hey, we can go out and raise money” and all of that kind of stuff, the bigger thing that we had to basically figure out was 1) what was our opinion? Was it just a temporary downside in prices, and prices are just gonna come back up, or was this a secular decline in commodity prices? And if it was a secular decline in commodity prices, because our operations are long-term in nature and we need long-term financing, what we had to do was secure more long-term financing, so we can avoid — as prices are going down, nobody’s gonna lend to us, so we should [unintelligible [00:05:58].06] but other than that, what we also had to start doing is thinking “We’re first out of the gate, we have a first mover advantage.” So if I go out as a company, we can go out and raise a billion dollars – that just means that when our competitors go out into the market, not enough people will buy their stuff, because there’s only a finite amount of capital to be allocated to a certain space at a given moment in time.
So there’s financial reasons, but there’s also a lot of strategic and qualitative reasons one has to look out for when engaging in these size of transactions.
Joe Fairless: Okay. It definitely makes sense. So when you now apply that to underwriting real estate for your own deals, how is that applicable to the latter?
Omar Khan: Well, how that’s applicable to the latter number one is that right now we’re seeing that — we’re not as big as you, obviously, so we’re not the first people that the brokers call… So for some of our brokers [unintelligible [00:06:51].05] Dallas, Houston, San Antonio, and we’re looking at Atlanta… What’s happening is that a lot of prices are being paid which frankly do not make sense to us for a given market… So what do we have to do? We have to look at two or three things. Number one, we have to be patient for the right deal. Number two, we have to maintain discipline, and number three, what we have to do is ensure that we’re continuously in touch with brokers, so the relationship is maintained, while we are doing all this stuff at our back-end.
A lot of this stuff — for instance, even just optimizing our processes, automating a lot of stuff within our company to make sure that when we do get the right deal, in the meantime we’re not wasting any time. We are still moving in the right direction, but we’re waiting for the right deal.
Joe Fairless: In terms of deals, what have you personally purchased?
Omar Khan: Personally – the Houston deal is done; that was about 243 units, and now we’re actually looking for another deal, either in Houston or in San Antonio.
Joe Fairless: Got it. So you were on the GP side of a 243 unit in Houston?
Omar Khan: Yeah, my partner was, actually. That’s how we’re partnering up.
Joe Fairless: So you and your partner were on the GP side of a 243-unit?
Omar Khan: Yeah.
Joe Fairless: Cool. Congratulations on that closing. So what was your role in that?
Omar Khan: Two roles. My partner was basically just putting up his net worth, and I was providing a lot of the financials, underwriting a lot of that kind of stuff behind it, just to make sure that when he was investing his money, he knew where it was going, it was a good enough deal for him, and it fit the parameters that we want.
Joe Fairless: And when you do that analysis, what are some tactical things you can tell us you did, that listeners can then apply to their underwriting?
Omar Khan: More than the underwriting, what we started off was a submarket analysis, by looking at the jobs growth, the employment growth, the demographics, all of that stuff. Then when we took it to the underwriting aspect of the game, what we wanted to basically figure out was not just a precise number, so let’s say x.xx IRR. What we wanted to figure out was what were the chances of us losing our money, or rather, how bad would things have to go for us to lose our capital, and how can we manage that situation?
Once we ran a lot of stress tests, we did a lot of sensitivity analyses, when we figured that out and we were okay with the risk, that’s when we decided to go ahead.
Joe Fairless: So specifically what metrics do you look for when you’re looking at how bad would it had to be?
Omar Khan: Cashflow metrics primarily. I’m basically looking at debt-service coverage ratios, I’m looking at liquidity to see for instance “Can we pay out the investors at the time that we’ve told them we’re gonna pay it out?” and “How much more margin of safety do I have?”
As an example, if I have to pay out $100,000 this quarter and I only have, say, $105,000, that’s not enough margin of safety for me, because things can go south. So looking at those sorts of things and realizing “Well, is it comfortable enough? Are we okay with it?” and then working with our property managers and our other partners to make sure we’re all on the same page and we’re not all looking and thinking about things differently.
Joe Fairless: What is the baseline cashflow metric that you look for?
Omar Khan: Baseline cashflow metric – I’m looking at it first primarily from the perspective of a lender, and I’m basically seeing debt-service coverage ratios. Because if I keep paying their debt and everything else [unintelligible [00:09:53].21]
Joe Fairless: And what number do you look for there?
Omar Khan: At least a minimum of 1.35-1.4, in that range.
Joe Fairless: And in terms of liquidity, what do you look for?
Omar Khan: I need at least 10%-15%, ideally 20% margin of safety built in on a stabilized asset.
Joe Fairless: On a stabilized… 10%-15% of what?
Omar Khan: 10%-15% of whatever outflows of cash [unintelligible [00:10:19].06]
Joe Fairless: Okay. When you apply the lessons you learned from the 3.7 billion dollars worth of transactions where you were the lead analyst on those deals, and then you’re now applying it to real estate transactions, what doesn’t transfer over from your previous experience?
Omar Khan: Well, first of all, I think there are a lot of cross-transferable skills. Where it doesn’t maybe transfer over is the fact that at least in the space that we are in, the [unintelligible [00:10:53].11] there’s less institutional players there, whereas in my earlier job it was all institutional. But what does translate over is the fact that you need to be in-depth, you need to be granular, and you need to be very sophisticated in the way that you look at things.
Joe Fairless: As far as being very sophisticated in how you look at things, what are some tips you can give the Best Ever listeners for how to do that on their deals?
Omar Khan: As an example, for instance, a lot of deals that we look at [unintelligible [00:11:17].16] when they’re underwriting, they’ll only provide you, say, an annual level of detail… And I understand that you’ve gotta put it in your investment summary, but as soon as you start asking people about, say, “Can you provide me the monthly details?”, a lot of people don’t have it. I’m sure smart folks like you have it, but a lot of folks don’t have it, because their models are very simple; they’ve just simply copied over somebody’s model.
Or for instance when people say “We’re gonna implement RUBS” as an example, first they were gonna come in, and currently the property is at 40%, but they wanna take it up to 70%. So one of the things we look at is that people immediately start assuming that from month one I’m just gonna be 70%-75%, whereas what actually happens in real life is that there is a ramp up, right? You go slowly.
Then on top of that, what we also see is that a lot of times people are basically massaging the numbers, basically how aggressive they are in their rent roll, how much they curtail or manage their expenses… Basically, they’re trying to massage their numbers to hit some sort of cash-on-cash target, a preferred return target and an IRR target. So if you go back and you look at the monthly results, you see how aggressive or non-aggressive they are.
Joe Fairless: If we’re looking at financials and we’re looking to see if they are massaging the numbers to hit a certain metric, what’s something we can specifically look for to determine that?
Omar Khan: Two things right off the bat you can specifically look at is how aggressive they are with their rent rolls. Actually, three things – how aggressive they are with their rent rolls, how aggressive they are with their rehab projects if it’s applicable, and then on the exit, what kind of exit cap rate are they using. I prefer 50 to 200 basis points higher on a typical 2-5 year [unintelligible [00:12:55].13], but everybody has a different assumption.
Joe Fairless: 50-200 basis points higher… That’s a decent-sized range of what the exit is… How do you determine if it should be 50 versus 200?
Omar Khan: That depends on the strength of the market. As an example, if you bought in the last three years in Dallas… Or Richardson – if you bought in Richardson or Garland, you can get away with 50 to 100 basis points, because the market is very strong, with good demographics, diversity of economy and all of that stuff. But let’s assume you’re buying in more of a cyclical sort of market. Maybe Houston is a bigger example, but maybe in El Paso; that’s very oil and gas-driven. There you might wanna expand your exit cap out to 150-200 basis points to account for all the risk.
Joe Fairless: As far as — you mentioned about how aggressive with the rehab projects they are… Will you elaborate on that?
Omar Khan: What I’m seeing primarily is that a lot of folks on their first or second deal what they’re doing is let’s assume they put a 150-unit asset under contract, and they say “We’re gonna renovate 100 of those units, and we’re gonna renovate that in the first 6 months, or 12 months, or 13 months.” First of all, I feel that yeah, you could potentially do it, but there’s a lot of moving pieces, number one. Number two, if the rest of your underwriting is predicated on the fact that you’re very aggressive, so in 12 months you’re gonna upgrade 120 of these units and then you’re gonna start getting all these rent premiums, you’re going to build a margin of safety.
As an example, if you assume you’re gonna renovate all these apartments in a 12-month period, maybe you should underwrite for a 24-month period, give yourself some of that room. In reality, if you get more money coming in earlier, nobody’s gonna complain.
Joe Fairless: And then as far as the rent growth, how do we determine if they’re being aggressive or not there?
Omar Khan: In most [unintelligible [00:14:43].19] people assume anywhere between 3% to 6%. I would ideally like to look at anywhere between 2% to 4% just to be safe, but a lot of times what I’m looking at, just to fit the numbers, people are going above the 5%-6%, and what they’re primarily doing is looking at the last two or three years’ worth of high rent growth and big [unintelligible [00:15:02].06] and assuming that’s gonna continue forever, whereas that’s not really the case. The last 2, 3, 4, 5 years are the exception to the rule, not the rule.
Joe Fairless: And that’s on stabilization, right?
Omar Khan: That’s on stabilization, yeah.
Joe Fairless: And what about the renovation period where they’re assuming rent growth? What should we look at there?
Omar Khan: Well, there I would actually err on the side of caution, number one, because that’s also dependent on your rent roll and how [unintelligible [00:15:24].14] But I think the bigger thing to focus there would be how aggressive you are on your rehab plan. If you’re a newbie or you don’t have the experience like, for instance, you guys do… Again, like I said, err on the side of caution; if you or your property manager thinks you guys can do it in 12 months, I would underwrite a lower rent growth on a 24-month period, just to give yourself room to breathe.
Joe Fairless: Great tips. Very applicable, and the Best Ever listeners can certainly just take this and go help assess different opportunities, both from a passive investor’s standpoint, but then also from an active investor standpoint, putting these deals together.
What’s been a challenging project that you’ve been a part of?
Omar Khan: A challenging project that I’ve been a part of was this Houston deal. The challenge was more around understanding the market demographics, number one. We did our research, we were getting some [unintelligible [00:16:18].02] on the communication frequency that we wanted and the property manager didn’t want. Because we were partnering up with some other people – some of these were really experienced people – we wanted to be on more of a frequent communication in the first 12 months, so more like, say every two weeks, or every week, whereas the property management team wanted more at the three or four-week mark.
We basically had to sit down and come to an agreement, and we did agree on the two-week period, but that was more around the asset management, the property management, as opposed to the [unintelligible [00:16:43].24]
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Omar Khan: Patience is a virtue.
Joe Fairless: How does that play itself out in your approach?
Omar Khan: How that plays out in our approach is that we have an investment criteria, and from time to time, as the market changes, we might have to modify it… But the bigger deal is holding on to your horses and not chasing after every deal that comes across our desk, because we know the market is hot. The bills are only as good as what the market is. So if we hold our horses, we stick to our criteria and we don’t try to over-engineer or [unintelligible [00:17:17].00] hopefully we’ll be coming out pretty in the long-term.
Joe Fairless: What is your investment criteria that you mentioned?
Omar Khan: 15% to 18% IRR. 8% ideally preferred returns, and around 8%-9% cash-on-cash.
Joe Fairless: And that 15%-18% IRR – is that project-level, or is that to limited partners?
Omar Khan: That’s to limited partners and net of fees.
Joe Fairless: Got it. So the project level would be low twenties at minimum?
Omar Khan: At a minimum. The spread has to be — that’s a good point you raised. For us, between the project and the LPs, the spread has to be at least 5% at the minimum.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Omar Khan: Yup.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:18:03].09] to [00:18:40].08]
Joe Fairless: Alright, best ever book you’ve read?
Omar Khan: This is basically Thinking, Fast and Slow by Daniel Kahneman [unintelligible [00:18:43].22] They’re basically behavioral economists, and they basically talk about how people actually react in situations, as opposed to how they should theoretically react.
Joe Fairless: Oh, I would just eat that up. I’m definitely gonna read that one. Thanks for sharing. What’s the best ever deal you’ve done that we haven’t discussed?
Omar Khan: I think the best ever deal — I wouldn’t call it a deal, but the best ever agreement I came up to was convincing my wife to marry me.
Joe Fairless: [laughs] Fair enough. I’m certainly not gonna have any follow-up questions there or ask you why… What about a mistake you’ve made on a transaction?
Omar Khan: The mistake I’ve made on a transaction is that, for instance, I wasn’t very patient, and in the hurry to do a deal and to just get that notch under my belt, I overlooked a few big things around due diligence. Basically, I didn’t do my whole operational due diligence; I did a lot of the financial due diligence and I thought that was okay, and that I learned the hard way not to do in the future.
Joe Fairless: What specifically from an operational standpoint got overlooked?
Omar Khan: What got overlooked was the fact that basically there were some foundation issues, and there were some septic tank issues that me and my partner should have looked at, but I [unintelligible [00:19:48].15]
Joe Fairless: Similar property, but a different one that you come across tomorrow, who do you bring on to help assess those things?
Omar Khan: That’s a good question. I’d have to reach out into my network to see who’s good at all this managing the foundation and septic tank issues, because that’s something we do or wanted to do… But we overlooked that little aspect and bought ourselves a deal where we shouldn’t actually be operating that side of the asset. So I’d have to look into my network and ask a couple of people… But I’d primarily wanna ask Reid; he’s done a couple of deals and he’s an engineer, so I could leverage him.
Joe Fairless: Best ever way you like to give back?
Omar Khan: We actually run and contribute to a few charities; one in specific is in San Antonio. I’m forgetting the name of it, but I read about it in the newspaper… A really big property developer had a daughter with special needs, but they couldn’t really find any amusement park that catered to special needs children. The guy, basically as his legacy, has built out a special needs amusement park for kids, and people from all over the world bring their kids in. It’s a great place.
Joe Fairless: That’s beautiful. Is that in San Antonio?
Omar Khan: Yeah. Sorry, I’m forgetting the name… It’s Happy-something. I should know this.
Joe Fairless: That’s alright. I think that’s enough for a Google search; it’ll be pretty easy to find. Best ever way the Best Ever listeners can get in touch with you?
Omar Khan: They can e-mail me at Omar@boardwalkwealth.com, or they can go to our website, www.boardwalkwealth.com.
Joe Fairless: Omar, thank you so much. You gave some helpful tips on underwriting, especially for passive investors, but also active investors, as I’ve mentioned earlier… The things to look at that are more sophisticated when we’re assessing an opportunity. One is making sure that the monthly details and the underwriting is there (not just annual). Two is making sure that the RUBS are done gradually; there’s a ramp-up time versus you bought it, and “Congratulations, now everyone’s on the RUBS program starting day one.”
Three is looking at the numbers in detail, and you gave three additional things there. One is how aggressive are they with rent growth; on a stabilized property you like to see 2%-4% rent growth, versus 3%-6%. The second thing is how aggressive are they with the rehab projects, and third – what does the cap rate look like? Making sure that it’s at least 50 up to 200 basis points higher than what the going in cap rate is, so that the market is projecting to be worse when you sell, and not the same or better.
Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Omar Khan: Thank you very much, Joe. It’s a great honor. Have a good one.
