June 12, 2022
Joe Fairless

JF2840: Should CRE Investors Take a Summer Break? ft. Dan Kryzanowski


Dan Kryzanowski has been a passive investor for the past decade and plans on using the summer of 2022 to reflect on his investment strategy, his goals, and the asset class(es) he chooses to focus on. Dan is an advisory partner at BV Capital, which is a private, veteran-owned real estate development and investment company. In this episode, Dan explains why he is taking a temporary step back this summer when it comes to investing, why he recommends deferring taxes with the Delaware Statutory Trust, and why he recommends completing additional due diligence when dealing with a sponsor consisting of only one GP.

 

Dan Kryzanowski | Real Estate Background

  • Advisory partner at BV Capital, which is a private, veteran-owned real estate development and investment company.
  • Portfolio:
    • LP of:
      • 2,600+ storage units
      • 1,500+ multifamily doors
      • Additionally, dozens of industrial, infrastructure, and residential properties
  • Based in: Austin, TX
  • Say hi to him at:
  • Greatest lesson: Be extra cautious (and complete additional due diligence) when dealing with a sponsor consisting of only one GP.

 

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed and I'm here with Dan Kryzanowski. Dan is joining us from Austin, Texas. He is an advisory partner at BV Capital, a private veteran-owned real estate investment and development company. He is an LP of over 2,600 storage units, over 1,500 multifamily doors, and dozens of industrial and infrastructure properties. Dan, can you start us off with a little bit more about your background and what you're currently focused on?

Dan Kryzanowski: Yeah, Slocomb. First, great to be here today. Beautiful day here in Austin, Texas. I feel that summer heat coming in, so - good for all of us. And I've been fortunate. I've been a passive investor for the past decade doing crowdfunding before the JOBS Act even came out. And through my tenure at Rocket Dollar, which was a checkbook control, self-directed provider, Slocomb, got to meet you, Joe, probably most half the folks or more that have been on your podcast. So it's been a truly humbling experience.

And like many folks now, it's "where do I reinvest?" I just got an email right before, it said, "Hey, we sold." I'm like, "Great. Alright, so where am I going to put it and what sort of strategy?" So I feel a lot of us, this will be a bit of soul searching, somewhat of a summer exercise to say, "Where do I want to go? Do I want to continue my strategy? Do I want to stay in multi, go heavy in storage, maybe look at other asset classes, etc.?" So I think collectively, we're in the same boat and glad that we have a lot of peers to share these conversations with.

Slocomb Reed: Yeah. Awesome. Dan, we're recording this May 20th today... And there is a lot brewing in the economy right now and in global politics, as well as national politics. A lot of people are sensing a shift coming in the economy that may impact commercial real estate investing. We're already seeing increased interest rates. There's a possibility that cap rates are expanding instead of compressing the way that they have for the last several years. So you bring up an interesting point, Dan. Focusing on your own passive investing and the placement of capital. There have been a lot of banner years recently, so there are a lot of deals that have sold recently, returning to limited partners considerable amounts of capital that you are looking to redeploy. That being the case and given what we're experiencing right now with increasing wages, increasing inflation, supply chain issues, global political concerns that are also impacting those other factors... With everything going on right now, are there any changes to the way that you're analyzing deals right now, or operators?

Dan Kryzanowski: Yes and yes. And I'm going to start very macro and bring it down quickly. I know you're going to ask me about books... So in the spirit of George Friedman, The Storm Before the Calm - and that's not a misstatement, it is Storm Before the Calm, and Ray Dalio's book on Changing World Order; I suggest reading both of those, because these two gentlemen... A lot of other folks have talked about 2030 for a long time, and guess what? We're in it. Friedman says there's an 80-year political shift, a 50-year economic shift, and of course, the 2020s is the first time both happened at once. So from a high level, what we're feeling is normal based on historic cycles in the United States. Now, that said, a lot of things are converging for the first time, so this is a bit new, per se.

So with all that, what's happening here - you're right. One, obviously, higher debt; that means not easier money. The division of the haves and the have-nots. I think less people that may have qualified as a have may not be able to. I live in Austin, good luck even buying a starter house these days. I think other things too, if you've owned a few properties, are you going to exchange and do a 1031? Are you going to pay taxes fully? Or do you want something in the middle like a DST, a Delaware Statutory Trust, that of the three, I would actually recommend, because you get the best of both worlds? You get tax deferral, so you don't have to still own, so maybe you can drop your manager or take another hat off. But you can also cash out a little bit while tax rates are still relative between now and 2026.

So that's just a unique strategy that as I'm talking to people that want to take some chips off the table - yeah, some of it's for life enjoyment, some of it to set up some sort of legacy, and then some of it's to move I think passively now. I think there's a natural pause for wanting to own, and then, like anything, it's reallocation of, I think, some asset classes. Folks that know me, I've been very bullish on storage. And I think one thing COVID proved, we talk about the four D's, which you all can Google, but the fifth D is decluttering. So a lot of us that had to feel like we had to move home, or one of our kids, or both parents working at the office per se, speaking for my son's point of view. An asset class like storage becomes a lot more important here.

So these are some of the things I think to throw around that even if a lot of folks down the [unintelligible 00:06:24.10] multifamily investor here, cheap debt, it's a little bit different. So you're going to have to feel a little discomfort here I think to get that same sort of allocation or risk/return profile.

Slocomb Reed: Gotcha. Tell us a little bit more about how the Delaware Statutory Trust works. What is it that that would do for people who are seeing some serious gains right now that are not necessarily eager to redeploy into commercial real estate in the current economic climate?

Dan Kryzanowski: First of all, I'll give you all my disclosures. Not a lawyer, not a CPA. That said, I am licensed...

Slocomb Reed: Of course, yes.

Dan Kryzanowski: [unintelligible 00:07:00] under BV Capital, so this isn't advice. This is just third-party when I kind of share a copy-paste view. Let's take a relatively simple example. Say, somebody bought for $1 million is going to sell for $1.3 million. We won't talk about the timeline, don't want to get into that. But to your point, I had property A, I don't want a similar property B. I just don't want to manage for multiple reasons. I'm happy I got out when I did, but I don't want to pay that full chunk of taxes.

So with that, in this example, let's say you've found another property for, I don't know, call it 500k; great, and then you have this other 800k. Well, you want to pay taxes on the full 800k. But in the 1031 world they call it to boot, that means you'll pay taxes on that 800k. In this scenario, you can take that 800k for a DST, which is going to offer you the tax deferral benefits. What I'd say, most DSTs tend to pay what will feel low; there's a lot of fees baked within, it's usually on a portfolio. That said, some up-and-coming sponsors I think are looking for best-of-breed properties that potentially can pay double digits and above. So like anything, do your diligence, talk to your sponsors, but there are some folks that are quite first in this space.

So if you know you're selling anything, have these conversations before you sell, because once the clock starts ticking, it's moving quick. And that's how a lot of folks get stuck with a huge tax bill, either through a small 1031 and money to boot, or just paying taxes on it all. A DST is going to help eliminate some of that burden.

Slocomb Reed: Let's talk about how we get into a DST. Is this something I need to set up before I sell, before I realize serious gains?

Dan Kryzanowski: Yeah. I think, like anything, before you sell, not just X days, but X months, have a strategy where you want to be on the back end. Like, if you're an owner-operator and you want to continue to be an owner-operator, yeah, look for properties of a similar amount, basically.

If you're saying, "I'm taking off my operating hat, but I still want to own," do your research on some DST providers, and then - I feel you have one or two options. One is set it and forget it. In one of these portfolios, as I said, a lot of them I see pay what I consider relatively low, 4% or 5%-ish... Or a little more homework on an individual operator that might have an offering that is going to be probably something that we see as a cash investor on the multifamily side.

Slocomb Reed: Gotcha. So let's talk through this procedurally, step by step. Obviously, we should have our ducks in a row before we sell. However, we're coming into a time where we have possibly just experienced the lowest cap rates that we are going to experience. So speaking to our Best Ever listeners who have recently sold and are struggling to find opportunities to redeploy capital on gains that they've already realized from sales that happened earlier this year or late last year - is it too late? And then what is it that they can do within a DST to get some of that capital reinvested?

Dan Kryzanowski: Yeah. Once again, not a CPA legal expert here, but from our scenario, once something is executed and you're looking backwards at least a quarter, it is what it is. You're generally going to be paying the taxes on that. At a high level - so let's assume somebody was in as a GP or a solid LP investor, had a few good years, really good years... Now I think is the time to pause and say, "Okay, what is my end goal here? Once again, do I want to be a FIRE and retire early?" If so, maybe think of something like industrial. A lot of these pay monthly distributions or it's more like a bond sort of thing, vis-à-vis say maybe an RV park or something, where you're looking at a different sort of risk profile.

In terms of your buckets of money, once again - did you sell last year and this year you're not going to do much, but you feel you can do a Roth conversion, call it on $100,000, $250,000? All else equal, you probably want to do your Roth conversions between now and the year 2026. And then finally, as I said, sometimes just taking care of housekeeping right now. Let's say you don't have a low mortgage rate for one reason or another right now; now might be a good time to pay off. Or even with that, for peace of mind, if you had to buy a house in this market. I think I read a stat, the median price is up 45% since COVID started. Yeah, it's cheap debt, but there is a lot of peace of mind if you had to pay an extra $100,000 just to pay off your house.

So I think from here as you look at your buckets, know what you can touch now, what you can't touch, [unintelligible 00:11:25] self-directed IRA, solo 401(k) until you're roughly 60 years old, and then have a thought to say, "Do I still want to own and operate or not?" And then based off of this, you can bucketize out. Let's say you have the benefit of at least a few of retirement and non-retirement bucket; your non-retirement stuff can still be stuff that you don't have to be as worried about, say, depreciation, return of capital, different sorts of tax benefits here. And also, you might want to put your money in some slow development play.

I've heard some of you take the self-storage world - there's a light shift of tone from just value-add-value-add to "Hey, let's look at a seven to 10-year plan." And I think some pretty smart operators are even moving there, say when they do their next fund or part of their [unintelligible 00:12:08.14]

So once again, if you have buckets of money that you don't need for a while, I think there's some smart money in development that's going to be pretty lucrative in some aspects, regardless of what the debt markets might do, because you're looking over like a seven to 10-year period, vis-à-vis what sort of cash flow you may need now.

So it's a bunch, but I share that because all of us have some of these. Some of us might have all of these attributes at the moment. But if anything, there are some good advisors out there that focus on this. I just think it's a good time to take a pause. It's going to be a hot summer, I feel it in my back already in Texas here in May. So there's not a single solution, but I do think it's a good time to take care of things, because you really don't know what things are going to hold personally, family-wise six months down the road.

Break: [00:12:50] - [00:14:37]

Slocomb Reed: Now, Dan, it sounds like you said you're taking a pause personally. Let me preface this... I feel like I'm taking a pause personally right now as well. That's also because my wife and I are expecting, so I'm trying to make sure that I'm lined up to be as much of a husband and a father as I can in the fall. So combining that with the current economic forecast for the rest of 2022, whoever it is that you're listening to and reading, it's a good time for me to have long-term fixed-rate debt, for me to have sufficient portfolio to live off of... And my primary focus right now is getting my ducks in a row in order to, as an owner-operator, only need to work 10, maybe 20 hours a week while maintaining the current portfolio and the current levels of success with that portfolio.

So I'm taking a bit of a personal step back right now as well. It sounds like you are, too. Is that exclusively for personal outside of real estate factors, or is it because of what you see coming forward and you think it's a better time to sit on the money you have now to redeploy sometime further into the future?

Dan Kryzanowski: I think somewhat our mistakes per se, we'll say financial mistakes/biggest learning experience tends to come when your ego's leading or you're on an emotional run. So I would share, as you're in baby bliss, be a little cautious with your checkbook, because you guys know you're highly optimistic. You're going to have a great son or daughter, everything's fantastic; somebody else might be in a different game, to be honest with you.

So yeah, with that, it's more of a financial pause. And I made a conscious decision, for better or worse, prior to COVID, to pull away from the, I'll call it the 100-hour weeks that you have in a typical start-up world. My son was turning four at the time, so it was another stage, three and a half, four, that I said, "I feel pretty good." I had to manage my time to lead to X income. I live my life in two-hour blocks right now, and I feel very fortunate that I can do that.

In terms of the finances and stuff - yeah, as I said, I have cash, I have pre-tax traditional, I have post-tax Roth. Where do I want to put it, for how long, etc.? Are there sponsors that I want to double down on? Are there folks that I don't? You never want to lawyer up, but there might be one situation of course that I have to now, and it's just like, "Okay, let's get ahead of it."

In Texas, I think we're fortunate for many things. One thing - well, we've had nine months of great weather, and now it's so hot we've got to stay inside with the AC on, and [unintelligible 00:17:02.12] versus wanting to be by the pool. So for me, it's a much more personal thing for a long-term look.

So let me give you an in-depth example. A really good friend, my first passive investment, he told me about self-directed IRAs way back when. He flips houses, he's never missed a payment in 20 years. It's single digits, what he pays. But boy, is there a peace of mind when I go with him.

If we're talking a year from now, and I said 8%... I can't say the G-word, but if I feel comfortable based on how I've invested with him previously, we might be like, "Well, Dan, tell me where I can get some more of that." You know what I mean? So some of that, I think it goes back to what are the goals, what's the peace of mind, what's the potential I'd have to worry about reinvesting, for example... And then likewise, this is also a factor of timing for folks that, let's say there's less product. Well, in theory, if there's less product, there's less sales calls, but there's more education calls, but then is the education calls and what you do going to lead to ROI personally.

So I think that's another decision point, or I think as you alluded to, we've built up great muscle in the shared network that we have. Is this going to take us to where we want to go on 10 or 20 hours a week per se? I think that's some of it. I think we should all give ourselves at least a few weeks over the summer to have some thoughtful strategy and just move forward from there.

Slocomb Reed: Absolutely. There are a couple of things I want to ask you about before we transition to the end of this show, Dan. But staying on this topic, saying what we may have already said in a different light, I feel personally - and this is not necessarily the venue for sharing what's going on in my personal life and my personal feelings, but I get the feeling that my micros are aligning with my macros; that what's happening in my personal life and the way that that is calling me to invest is aligning with what is happening in a bigger picture.

That because of what's happening in my personal life and what is happening in the economy at large, it's a good time to be keeping money in the bank, putting money in the bank, shoring up what I have currently, making sure that it is more recession-proof or recession-resistant, and waiting to see what comes over the next few months. Maybe it's only next few weeks, but possibly next few quarters.

But Dan, I've got a great person on the podcast today to be asking this... I don't want my feelings to be misjudging my investing. We're both saying there are good personal reasons for taking a break this summer. It feels to me like that's what the economy is telling us to do as well. Are you in agreement with that, that what we're seeing happening right now with inflation and interest rates, how they may impact cap rates and possible fluctuations in the employment market, resulting from the vast fluctuations in the stock market and the valuation of companies and their ability to raise capital. Micro side, macro specifically, it's a good time to keep money in the bank and watch and see what happens next, isn't it?

Dan Kryzanowski: If you have the liberty to keep some cash on the sidelines, and if you have, I'd say, a deep domain expertise and/or for some of our older listeners or somebody that follows our mentors that have been through these cycles, gentlemen or ladies in their late 60s or 70s, I think you're going to have a good feel when there's a really strong buy opportunity. There won't be that many out there, but I think you can stay in your lane and really cash in on whether it's the books you read, or just you've been in the industry for 50 years, or you grew up and you can check back in with your father, your uncle, your aunt on this... Yeah, I think there's no harm. You don't want to keep it there forever, and if we get to a hyperinflationary market, which personally I don't think we'll see in the US, that crazy; I think there's multiple reasons why not, but I still think there's going to be a relatively secure plays. It's just your hurdle, once again, may be a little bit lower than it was in years past, so level set based off of a lower return based on your life needs.

Slocomb Reed: Yeah. Dan, you're a second-time guest on the Best Ever podcast and you have a decade-long career of success as a limited partner, so it's good to be hearing this coming from you. One last thing before we transition, a note from my show notes, totally different conversation from the one that we're having... But one of the best lessons you've learned is to be extra cautious and even do additional due diligence when analyzing deals from sponsors consisting of only one general partner. I think at a guttural level, everyone agrees with that, but at a more rational, logical level, why is that and what additional steps of due diligence do you recommend?

Dan Kryzanowski: Yeah, and I hate to say don't do it, but it's a challenge for a one-man or one-woman shop to go through it. So this is where I think you really have to ask the question... It's a weird chicken and egg. If somebody does have a track record, but then why is he or she a single-person sponsor? I can see going from three partners to two, or four or five down to two or three, but going to one - that's a pretty sort of bold-ish statement. And there's two sides to every story, but I think you want to get both sides of the story, why somebody is in that situation. If somebody is up and coming per se... And listen, I'm always the guy that wants to bet on the underdog, help somebody out, mentor somebody, etc. A little more cautious to do it with my funds these days.

This may not be the easiest environment vis-à-vis a few years ago to learn as things are going on, whether it's supply chain, new debt rates, etc. That's the thing, too. If it's a single-person sponsor coming at you with "The top 10 things that could go wrong, but here's how they did it." So for example, on their debt, maybe they said, "Hey, I paid half a mil and so my debt's locked in at a certain rate." That's something pretty thoughtful that a lot of sponsors may not think about, but then also be that upfront with. I'd almost put it back in the sponsor score to say, '"A year ago, we were buying, but now these days, we're shopping as an LP investor." As any solopreneur knows, that's much more challenging, but I think it's something that if you are a single-person sponsor, that you want to come with those thoughtful FAQs in advance to your LPs.

Slocomb Reed: Right. Dan, are you ready for the Best Ever lightning round?

Dan Kryzanowski: I'm ready. Let's do it.

Slocomb Reed: Awesome. You've mentioned a couple of books already, but what is the Best Ever book you've recently read?

Dan Kryzanowski: Meg Poag, The Adversity Hack. As it sounds, pull your head away from your rear end, get rid of your ego etc, but the way that she writes really resonates particularly with anybody; parent, middle-aged, etc. in a post-COVID environment. It's a great read.

Slocomb Reed: What is your Best Ever way to give back?

Dan Kryzanowski: HOBY. Hugh O'Brian Youth. All of our friends out here with kids that are going into their sophomore year or freshman, check it out, hoby.org. It's a leadership conference, it helps guide folks what to do. It's not political, it's none of that. But for me, it was life-changing at the end of my sophomore year, and I know for a lot of other folks too, to stay involved. So reach out to your guidance counselor, just check out hoby.org.

Slocomb Reed: Nice. Dan, as a limited partner in commercial real estate syndications, what is the biggest mistake you've made and the Best Ever lesson that you've learned resulting from that mistake?

Dan Kryzanowski: Yeah, so boy, do I have a bunch. I'm actually going to give three, because we did talk about it. First, as I said, with the single sponsor, particularly if you're in baby bliss, and I'm not joking with you here... It was a beautiful part of Austin, and it was a short-term loan and I said, "This is easy money for three months." Well, that didn't happen. Our son was born in between. I said, "We'll give him another three months." Well, that still didn't happen. And boy, did I learn about some laws I didn't want to. I was very fortunate to get out at 70¢ on the dollar, but that was real-world MBA.

Another thing right now I think is -- let's talk about non-brick and mortar real quick... But any sort of prop tech start-up, much like the stock market, not everybody's an expert, and those that are have been at it a while. By default, if you're investing in start-up founders etc, say proptech, the real estate tech side, once again, it seems easy, but it's really not. So I would just say, be a little more cautious if you're going to go down that route.

And finally, if it is more going back to that single sponsor, or if it's more of a loan getting towards something, look to get a price collateral line. On the entity, everybody has a side consulting entity, this consulting entity, second. And then third, them as an individual. There's one person I [unintelligible 00:25:44] double-taped envelope, just in case. It was nothing personal, but it came after one of these situations and I've been very upfront with folks, and even some I'd say more friends. "Hey, if this is the route, this is what I would have to ask for at this point." So it's just covering both sides and I think it's the good, honest thing to do.

Slocomb Reed: Dan, what is your Best Ever advice?

Dan Kryzanowski: Oh... Breathe. I turn around, I flip myself in bed, I put my legs up the wall... Pretty thick up here in this skull of mine, but it does get the brain flowing. And then a bit of meditation. And as I said, we are hitting... Friedman said the 80-year, 50-year cycles are coming together for the first time. It's a good time to take a pause. Be healthy, be natural, drink a lot of water, especially this summer. I think it sounds cliche and simple, but I think especially now, those that do are going to have that clarity and peace with their decision versus a much more muddled environment.

Slocomb Reed: Where can people get in touch with you?

Dan Kryzanowski: I'm pretty big on LinkedIn. Yeah, LinkedIn is probably best. Please share that you heard it here first. I joke my superpowers are self-directed IRAs, solo 401(k), self-storage in Scranton, PA. So if any of those are of interest, please reach out.

Slocomb Reed: The link to your LinkedIn is in the show notes. Dan, thank you. Best Ever listeners, thank you as well. If you've gained value from this conversation, please do subscribe to our show. Leave us a five-star review and share this with a friend who you know we can add value to through this episode with Dan Kryzanowski. Thank you, and have a Best Ever day.

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