February 17, 2019

JF1629: Passive Investing In Commercial Real Estate #SkillSetSunday

Today we’re welcoming back James to share some passive investing knowledge with us. He recently wrote a book on the subject, and has spent a lot of his real estate investing career dealing with passive investors himself. If you are a passive investor, you’ll want to tune in and hear how to vet sponsors, deals, and other aspects to evaluate before handing over your hard earned cash. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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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.

Well, I hope you’re having a best ever weekend, first and foremost… And because today is Sunday, we’ve got a special segment for you called Skillset Sunday. The purpose of Skillset Sunday is to help you hone or acquire a skill that you might not have had before, or to the degree that you will have honed it after this conversation.

Here’s the skill – our Best Ever guest today has recently published a book on passive investing in commercial real estate. In fact, it’s called “Passive investing in commercial real estate: Insider secrets to financial independence.” So here’s looking at you, passive investor; we’ve got some information for you that will likely help you make better decisions – or even better decisions, I should say – on what you choose to invest in.

With us today to talk about that, James Kandasamy. How are you doing, James?

James Kandasamy: Hey, I’m doing very well, Joe. Thanks for having me back on the show.

Joe Fairless: Yeah, my pleasure. Nice to have you. You mentioned “have you back on the show” – Best Ever listeners, episode 1273 James was interviewed and he gave his Best Ever advice; that’s 1273, titled “Deep value-add apartment syndications”, and James was gracious enough to talk about how he is getting off-market deals and closing on off-market deals, and his whole approach. He went through that approach in detail. If you are an active investor, I highly recommend listening to that episode, 1273.

James is the owner of Achieve Investment Group, he’s a multifamily sponsor owning approximately 1,000 units in central Texas, focused on value-add deals, and as I mentioned, he recently published the book “Passive investing in commercial real estate: Insider secrets to financial independence.”

With that being said, James, since you already went over your background in the previous episode, we won’t touch on that as much… How about let’s just dive right into it – how did you structure your book? And then we’ll take it from there.

James Kandasamy: The way I structured my book – it’s a very good read in terms of it’s exactly like you’re having a conversation with me. The reason I wanna do that is because I’m an engineer, [unintelligible [00:04:35].14] very well, but I chose not to do that, because a lot of passive investors are not engineers, they’re not gonna be going into bullet by bullet, right? So the way I structured it – there’s seven chapters in this book, with all the key information that a passive investor needs to know to get started and to be a smarter passive investor. It’s a very conversational book, and we [unintelligible [00:04:57].29] right now, and we’re getting very good reviews from the seasoned passive investors.

Joe Fairless: So it’s giving tips for secrets to — as you said, you have insider secrets for financial independence… What are some insider secrets that you can share with us?

James Kandasamy: Yeah, absolutely. Some of it is like “How do we get started?” There’s a lot of ways to get started. Some people get started in commercial real estate, especially where we focus – multifamily syndication – just because they were introduced to a group, but that is not the only way to get started. There’s a lot of other things where you can get started. You can get started in online forums, like Bigger Pockets, or Facebook, or just going to a meetup, and how do you introduce yourself in a meetup; what are the questions to ask in an online forum, or how do you introduce yourself in an online meetup, or the meetup itself.

There are things that a lot of people didn’t know because they hear one advertisement on the radio, or through Facebook, or somewhere – they heard about real estate, and they went for the two-day weekend, and they thought that’s the holy grail of multifamily syndication… But if we look at it, there’s a lot of other ways to get started. So that’s one thing.

The other thing is the two big chapters in this book is basically how do you [unintelligible [00:06:08].10] a deal? Passive investors sometimes are so green in their approach to real estate investing; sometimes they like the deal just based on numbers, or based on the group… Sometimes they put too much hope on the group, that some group is gonna save all their money and is gonna take care of their money, but they forget that all the syndications are basically private LLCs, who is responsible [unintelligible [00:06:29].19] by the deal sponsor.

And also, how do they look at a deal sponsor, how do they choose different types of deal sponsors, and what do they look for in that deal sponsor, how do they match that deal sponsor’s skillset with the deal itself? Because not all the deals are the same – there’s deep value-add, there’s value-add, there’s also [unintelligible [00:06:47].18] which is basically focusing on the cashflow.

And what’s the investment cycle? For example, someone who is just starting out, who has a W-2 job, in their 30’s, what kind of deal should they be looking for, versus someone who is in their 60’s and is almost retiring, or they retired, really hoping on that  cashflow to come in to sustain their life – what kind of deals should they be looking for, what kind of sponsor do they need to align?

So a lot of reflection back into the passive investor itself, and get them to choose the right deal for themselves, rather than just looking at the deal, going through a webinar, or being part of a group and thinking that that’s all it is, and “I can invest in any deals.”

These are the two big chapters that I have, and there’s a lot of other chapters too, like with the process itself, and how the whole process works… Because a lot of people starting out as a passive investor – they do not know how do they communicate with the deal sponsor, and where [unintelligible [00:07:39].01] Some capital source may not be the best source for that deal, or may not be the best source for them – which one have taxes, which one doesn’t have tax, and how do you avoid all this tax? There’s a lot of secrets that people like us know that not every passive investor knows.

I’m surprised — and I have a lot of passive investors investing with me, and a lot of them need to know all this information.

Joe Fairless: What are some of the things that you mention (maybe pick out one or two) that when you shared those things with your passive investors, it was eye-opening to them? Because I’m sure that could be eye-opening for others too, during our conversation.

James Kandasamy: Sure. [unintelligible [00:08:17].03] like for example as passive investors I know right now multifamily is hard, but multifamily goes in cycles, and I did put in a lot of data that I researched myself, 15 years of data, in terms of different asset  classes. We take a market, like for example I took Austin in this case, and I did analyze, looking at different cycles of commercial real estate, and I can bet you nobody has that data in any other book or anywhere else, because I did the research myself – 15 years of data, different asset classes, put into a cycle, converting to a chart, and I show them in chart to say what each asset class does, especially in Austin, Texas. Same thing you can do for any market, but I took Austin, Texas, and I just showed them sometimes what you think is the best investment or what the gurus are telling you may not be the best investment advice.

For example, for passive investors – they can invest in any asset class, because they’re passive. And what should they look for, specifically look for good operators in that asset class. So that’s one thing, on top of many other things.

Joe Fairless: How do you define “good operator”?

James Kandasamy: I would say a good operator depends on what kind of deals they’re doing. If they’re doing deep value-add, there’s a lot of skills that they need to have for deep value add: strong property management, strong project management, strong budget management, and also the capabilities of finding that kind of deals and turning around. That’s a skill that a good operator needs to have in a deep value-add deal… Whereas on [unintelligible [00:09:42].17] deal it’s a different skillset. Some of the skills may not be strong, and they need to be able to manage the property management to a lesser degree. They need to be able to identify which market has that cashflow potential and able to go on for longer-term.

A good operator depends on what type of deals they’re doing, and [unintelligible [00:09:59].23] operators can’t really do deep value-add. I think you can always go from deep value-add to [unintelligible [00:10:06].25] because the complexity becomes much less, but you can’t go the other way around.

And also the other skills that good operators have – do they have good leadership skills? Operators are strong leaders, and need to be able to fire a property management company if they are not doing very well; they need to be able to go and identify different aspects of the deal, like what marketing is working, what marketing is not working. So you need strong leadership skills, strong business experience – what business have they done in the past? Not everybody from W-2 can do this job, because in W-2 you are not a business person, you are more of an intrapreneur. When you’re an entrepreneur and you are running a business on your own, the whole show is on yourself… So you need to be able to make that quick decision when you’re doing the syndication on multifamily or any commercial real estate, because you are the captain of the ship, and not everybody can be a captain of the ship… Sorry to say, guys, but it is what it is.

So a strong business experience, strong leadership experience and an ability to identify timings of the market, because different asset classes have different timing requirements, and identifying different locations, where is the demand, how they’re able to analyze submarket demand is key as well.

These are some of the things that a strong operator needs to have. I did lay it out very in detail, in tabulated form, in my book, to say which type of deal needs what type of operator, and what are some of the skills that a strong operator needs to have.

Joe Fairless: In terms of if a deal is right for the passive investor, there are so many different types of deals, so many different types of asset classes, and so many different types of structures that a deal can have – preferred return, no preferred return, equity investor, debt investor… What are some questions that the passive investor should ask himself/herself to then determine the type of deals that they should be investing in?

James Kandasamy: That’s an awesome question. I’ve covered in depth in my book – at a high level, on a  syndicated commercial real estate, there’s two types of compensation. One is called more of a profit split, or carried interest, or equity split – that’s one thing; the other one is more of a waterfall, pref return type of deal. Both have pros and cons, and neither is better than the other… But a lot of people are just exposed to one and they think that is the superior compensation model, and that’s the best way to do deals. So it depends – there’s pros and cons on both sides of the deal type in terms of structure.

And for investors, they really need to look at — for example, for a pref return deal, the good thing is the investors do have a base return coming back to them, but the part is that’s also… Say they’re getting an 8% return, including the operation, and let’s say there’s a potential of doing 10% cash-on-cash doing the operation, the 2% — let’s say you do a 70/30 split, out of 2% of 70/30 is only 30% of 0.6% going to the sponsor, so I think it’s less motivating for the sponsor to really push on the cashflow… It’s more heavy on the fee side of it; it’s a small — beneficial for the sponsor to be at the starting point and at the end point, rather than on the operation side of it. Whereas on the equity split it’s a lot more focused on the operation, because if you make a lot more profit, then the sponsor makes more money, so the sponsor will be more motivated to make more money throughout the whole operation.

But the bad part about equity split is if the deal is not doing very well, the investors are not gonna get anything; they’ll probably get like 2%-3%. The base return is not there. So there’s pros and cons with both, and it depends on the deal, whether it’s a value-add deal, whether it’s a cashflowing deal. It really depends. I hope I made sense.

Joe Fairless: Yeah, and as an equity investor – every investor should know prior to being an equity investor the pros and cons of that. And I know the preferred return mitigates some of that, because they’re getting first in line on the returns.

James Kandasamy: Correct, correct. And you’d be surprised about how many people don’t know the difference when they talk “Oh, this person’s taking a 70/30 split and the other person is taking 80/20, and the other person is taking 90/10.” Nobody really understands “What are you talking about here?” I did a lot of analysis on both structures, and I realized it’s both the same, but it does motivate the sponsor and protect the passive investors at different points of time in the whole deal. I outline that in the book.

Also some structures are more debt, rather than equity; some people don’t understand that, too. So rather than being an equity partner, they become a debt partner, but they do not know… So I did outline that a bit more.

Joe Fairless: Anything else that you think we should talk about that we haven’t discussed, before we wrap up?

James Kandasamy: I would say there’s a lot of things in the book, and it’s a bit hard to go through in the podcast. Some of the things I covered from the capital standpoint, like do you take IRA, do you do QRP, or do you do cash, which one is the best way. Because IRAs do happen on UBIT and UDFI taxes, which not many people know… And how do you get away with that tax, using QRP. And in Texas there’s another way to take out your 401K while working, so I did outline that as well; it’s crazy, not many people know that, but I think as a passive investor it’s good to know that that’s an option, to take out your 401K while working, as long as you’re married.

Joe Fairless: James, how can the Best Ever listeners get your book and learn more about what you’ve got going on?

James Kandasamy: My book is on Amazon right now. I have Kindle, Audiobook and paperback all released. We are a best-seller right now; in fact, we were a best-seller for the past two days.

Joe Fairless: Congratulations on that.

James Kandasamy: Thank you. Usually, people go to a best-seller for a blip, and then they often disappear, and people take a screenshot, but we’ve been a best-seller for two days, so… [laughter]

Joe Fairless: You can take a video.

James Kandasamy: We can take a video, exactly. [laughter] And you can reach me at AchieveInvestmentGroup.com. My e-mail address is James@AchieveInvestmentGroup.com.

Joe Fairless: Well, James, thank you for sharing with us some thoughts as a general partner that the passive investors should think through whenever they’re investing in deals – what to consider prior to investing, how to think about the deal sponsor, what questions to ask the deal sponsor, and what deal is right for the investor… Because ultimately, there’s all sorts of different opportunities out there, and there’s all sorts of different personalities, and risk profiles, and appetites for risk… So there’s not necessarily a deal that is structured incorrectly, but it might be structured incorrectly for what you want as an investor, at the point in time that you’re investing, and what you’re looking for. Thanks for talking through that, James.

I hope you have a best ever weekend, and we’ll talk to you again soon.

James Kandasamy: Thank you, Joe.

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