Understanding and Vetting Syndications with Senate Eskridge
Senate Eskridge, a professional real estate investor, talks about what real estate syndication is, how it works, and what a professional real estate investor looks like.
About Today’s Guest
Senate Eskridge is an avid real estate investor who currently owns a managed portfolio of single and multi-family homes numbering over 300 units across the country. Senate has over 5 years of experience in real estate investing. He has more than 20 years of experience in business development, management, and sales. He hosts a real estate investors group in his hometown, bringing investors together to network and learn from each other. Driven by self-development, Senate has completed numerous courses, including Dale Carnegie leadership training.
Episode Summary
Multi-family syndication deals are becoming increasingly popular for real estate investors interested in making passive income. In today’s episode, your hosts, Nate Hedrick and David Bright, welcome Senate Eskridge, a professional real estate investor who specializes in multi-family investments, back to the show to discuss his career and experience with real estate syndications. Senate shares his real estate journey, growing from ten single-family homes and scaling to multi-family homes and commercial real estate investments. Senate also explains, in detail, how a real estate syndicate works, the different ways of making passive income within multi-family real estate, potential tax benefits for investors, and what to avoid in real estate. He also talks about the difference between an operator and a property manager and the incredible value an operator brings to syndication. You will hear Senate break down the difference between a limited partner and a general partner, the risk levels associated with each, tax implications for the roles, and how each role is compensated. The role and importance of cost segregation in real estate investment is outlined plus a nod to an upcoming episode with cost segregation professionals. Listen through the end of the episode for some strategies for investors to protect themselves from a volatile market, evaluation criteria for selecting investments, and resources for pharmacists who are considering real estate syndication.
Key Points From This Episode
- Introduction and brief outline of today’s show.
- We find out more about Senate’s professional background.
- Benefits that investors will get when working with Senate in real estate.
- Skillsets and personal qualities required for Senate’s line of work.
- What the difference is between a limited and general partner.
- Role of an operator within a syndicate and how it is different from a property manager.
- Senate expands on his roles and responsibilities within a syndicate.
- Important metrics to consider when making an investment.
- Tax benefits for a limited partner when making an investment in multi-family real estate.
- Biggest differences between multi-family depreciation and a single-family depreciation.
- An example of a typical syndicate operation Senate has been involved in.
- How return on investment works for a limited partner.
- Breakdown of strategies to protect investors in a volatile market.
- Evaluation criteria Senate recommends before you make your investment.
- Resources for people who want to learn about real estate syndicates.
Highlights
“Your paycheck is relative to the size of the problem you’re solving.” — Senate Eskridge [0:10:35]
“I try to go into every deal with at least two exit strategies, preferably three.” — Senate Eskridge [0:30:52]
“The person running the deal is really what’s going to drive the success or the failure of the operation.” — Senate Eskridge [0:33:12]
Links Mentioned in Today’s Episode
- YFP Real Estate Investing 26: Leveraging Partnerships for Passive Investing
- Cost Segregation Services Incorporated
- Passive Investing Made Simple: How to Create Wealth and Passive Income Through Apartment Syndications by Anthony Vicino and Dan Krueger
- BiggerPockets
- Senate Eskridge
- Email Senate Eskridge: [email protected]
- Schedule a meeting with Senate Eskridge
- YFP Real Estate Investing
- Join the YFP Real Estate Investing Facebook Group
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[0:00:00.4] NH: Hello and welcome to the Your Financial Pharmacist Real Estate Investing Podcast. A show all about empowering pharmacists to achieve financial freedom through real estate investing. I’m Nate Hedrick and each week, my co-host David Bright and I explore stories from pharmacists all over the country who are achieving their real estate goals while maintaining a meaningful career in pharmacy.
Whether you’re a first-time investor or a seasoned pro, we’re here to provide education and inspiration about the world of real estate. Please note, this podcast is intended for educational purposes only and should not be considered financial or investment advice.
[0:00:42.6] NH: Hey, David, how’s it going?
[0:00:43.9] DB: Hey, good things, how are you doing man?
[0:00:46.0] NH: Good, I’m good. I’m sore, I spent the weekend or at least, Saturday, painting one of the properties I’m trying to get ready for rent and quickly reminded myself why I don’t often do that.
[0:00:54.4] DB: Yeah, I appreciate that there are pharmacists out there or people out there that want to go out there and do the weekend warrior thing and knock stuff like this out. I did that last summer too, where I painted a rental and thought it would be fun in the moment until I just realized, yes, for me, that’s not fun. I love that it’s fun for others, not the most fun for me either.
[0:01:11.8] NH: Yeah, some of the work I like doing but this was knocking a bar out of the wall that had been there for way too long and repainting a bunch of wood paneling and I was like, “Man, this is terrible, I need a pro to do this because this is not turning out the way I wanted.” Anyway, speaking of professionals, we brought on a professional this week, a professional real estate investor, Senate Eskridge, he came back on episode 26 actually with a pharmacist, Mason Goodman and talked about syndications.
Well, we decided to bring Senate back on by himself this time to really dive into how does syndication work, what does a professional real estate investor look like and a great fit to talk about all things syndication.
[0:01:48.2] DB: Yeah, it’s a really interesting business model too because as much as it’s billed as simple, just having someone to run the deal and someone to invest in the deal, there’s a lot of complexities in there and I appreciate that Senate explained that really well and really clearly.
We’ve also seen this market environment where this kind of rising tide of the market where values is just appreciating everywhere, rents are appreciating everywhere, everything’s going up fast, that rising tide has helped many ships but I think there’s a lot of these syndication projects look at like a three, five, 10-year horizon, Senate also speaks to how the market may not continue to boldly increase over that time and how you can protect yourself as an investor from potential corrections.
[0:02:31.0] NH: Yeah, what I really like is Senate’s explanation of how to vet, not just a deal, but an actual syndicator. The person bringing the deal to you because that can really make or break it and so, he walks through, if you’re going to put your passive money with someone and hope that it grows, this is how you can do that wisely and I think it’s really valuable when people are looking at syndication as an option to listen to somebody who not only run syndications but participates in them himself and so, I’ve seen this from both sides of the table.
[0:02:57.2] DB: Yeah, I like to – I think it would be easy to be cynical of like, “Oh, this guy is saying how a syndication should run and of course he’s going to say how he runs his” but he also says, “Don’t just take my word for it” and he has some references out there, like a really good book that he references to.
Other ways to vet deals and to make sure that if you’re going to jump into a world like this where you’re going to park your money with the syndicator for three, five, 10 or more years that you know, you understand the complexity of that, you understand the risk, the reward and you can do that intelligently.
[0:03:30.2] NH: Well, really glad we got to bring Senate back on the show and with that, we’ll take you guys to the interview.
[INTERVIEW]
[0:03:34.5] NH: Hey, Senate, welcome back to the show.
[0:03:37.1] SE: Hey, thanks for having me. I’m really excited to be here, I enjoyed the last one and been looking forward to this one for a little while.
[0:03:42.5] NH: Yeah, this is awesome, we had you back on episode 26 with a partner in crime, we brought on Mason, our pharmacist who kind of introduced us to you and all the things that you do. You’re a passive investors, syndicator, just incredible stories. Maybe, for those that missed that episode, maybe fill us in a little bit about your experience in real estate investing and your background?
[0:04:00.5] SE: Yeah, I’ll give you the short story, I started off with a single-family houses like most real estate people and I was buying houses and just started stacking those up and then I accidentally flipped a house. Somebody came and offered me some money for it and I said, “Sure, I’ll sell it” and I liked that big returns, so I was flipping houses, buying houses and I got up to the point where I had more than 10 units and I just really wasn’t scaling at the end of the day.
I looked at the cashflow I was receiving and the amount of work that I was getting – have to put in and I decided to do something different. I pivoted, went into multi-family, found some amazing coaches and mentors, spent well over a year learning about all the nuances in multi-family and other pieces of commercial real estate and dove in after that. I’ve been selling off all of my single-family portfolios.
Actually, I have one left. One left, everything else will be gone and moving into multi-family and never looking back at single-family or small duplexes or triplexes again. All after the big apartments going forward.
[0:05:08.6] NH: That’s awesome. Again, very unique, right? A lot of, what we talk about in the show is how to get started in real estate investing and a lot of people like to start with that single-family or small multi-families. This is a great perspective from somebody doing things a little bit differently, which is great, it helps us all kind of learn and grow so we appreciate that.
[0:05:24.7] SE: Yeah, of course.
[0:05:26.3] DB: Looking at that, you have a little bit different approach in terms of these larger apartment buildings, right? You aren’t going out and buying like some 70-unit apartment building all by yourself, right? When you invest in larger apartment buildings, you bring investors along with you, where they entrust you to manage that whole investment and then you entrust them to bring cash into that investment and so you create these larger partnerships, is that right?
[0:05:51.7] SE: Yeah, what I like to say is, anybody can go and buy a duplex or even a triplex and go with a conventional loan for it and then go rent it out and be a landlord and deal with the tenants and the toilets and the termites and all those other troubles that happen, right?
But it takes a special skillset to buy a multi-million-dollar large apartment building, not just anybody can go and do that. What I do is that I take people’s money, like your money, Nate, David, your audience, your people, I take those people together and I pull all that money together and we go buy a big multi-family property. This thing could be anywhere from three to 10 million or more even.
Then, I have spent the last years dedicated to learning how to have the systems in place, the people in place, the partners to make sure to operate that on a successful timeline, so that your investors can just sit back and reap all the benefits without putting in any other work, or dealing with any of those troubles.
[0:06:56.2] NH: The big advantage obviously to something like that is like you said, it takes a special skillset and you kind of fast track people right to that skillset by being the one to provide it, right? You don’t have to go out and learn all that stuff, you already have the experience, the knowledge, the knowhow, that’s really important, it’s awesome.
[0:07:09.7] SE: Yeah, absolutely. You know, a lot of people say what I do and that I’m special, that I had the special skill and maybe I do but you know, your audience is smart enough, they could go out and learn it but the amount of time that it would take and the bloody noses and the broken-up knuckles and all that kind of stuff that it take to get to that point is a lot of time and energy.
Like you said, I like how you said that, fast track people to that end result by letting them leverage my skillset, which is really what multi-family or real estate in general is all about, right? It’s leverage.
[0:07:42.3] NH: There are a lot of terms that get thrown around, we talk about syndications, deals like this, right? Where there’s some complexity built in and I think defining a few of those terms first might help our audience out, especially if you’ve not listened to some of our past episodes that talk about syndications.
Maybe start with something really simple like the difference between a general partner and a limited partner or an operator and a sponsor because those two roles are kind of the – or plurals I suppose, are really the kind of the primary things that you’re going to see and understanding where someone might fall into that is really essential to understanding the rest.
[0:08:12.8] SE: Yeah, absolutely. Well, I’ll start with the easiest one to understand in my opinion, which is the limited partner or the LP. Basically, all that means is that this is the person that’s bringing in money into the deal and the fact that they call it a limited partner is something really important to understand.
Because, your risk as a limited partner is limited to only the amount of money that you put in, which is amazing, because again, if you go back to the single-family house and you go buy one of those, you’re taking on all of the risk if something happens at that property.
Yes, there are ways to mitigate that risk and that’s not the subject of this episode but you are taking it on and it’s your job to mitigate it. As a limited partner in one of these syndications, that’s all taken care for you. All you have to worry about is your investment and now, the general partner, right? The big difference between that and the limited partner is they’re taking on all of that risk and all of that responsibility.
They’re bringing their knowledge and their skillset into the property to be able to manage all of those processes for you. That’s one of the big differences with a limited partner and a general partner is, general partner is taking on all that risk and all the responsibility and they of course are going to get compensated for that.
See, you asked also about an operator. An operator, this is probably, I think it is, the most important person in a real estate syndication. My operator that I’m working, just working on it recently, fantastic gentleman, his name is Chris, we call him the asset manager, it is his official role and this guy, his job is to make sure that the day-to-day business plan of an apartment complex is happening every single day.
So now, not a property manager, there’s a difference, right? The property manager, they’re the ones that are dealing with the toilets and the tenants, all the stuff we talked about earlier but Chris’ role, is to deal with the entire global process and make sure that everything that we’re telling our investor is going to happen.
[0:10:17.0] DB: It sounds like a lot of that is because you’re not typically just walking in and buying an already turnkey, already running apartment buildings but you’re generally doing some kind of turn around, some kind of rehab, fixing management, fixing a problem and driving an increase in value through something like that, is that right?
[0:10:33.4] SE: Absolutely. In fact, what I say is that your paycheck is relative to the size of the problem you’re solving, right? My job, when I go and I buy one of these assets is to identify those problems. I could tell you some real stories of different things that I’ve walked into and I love finding problems, I see something wrong and that just means that I now have value that I can go to give to my investors.
Whether that is a physical problem in the building, plumbing issues or roof issues or maybe an operational inefficiency which is my favorite thing. When I find somebody that is on this property, it’s – let’s call them, really, an older person, grandma, grandpa, which is nothing wrong with that but they’ve own the property for 20 years and they just don’t have the time to treat it like a business, right?
They treat it like an investment and it’s been paid for, for 20 years and it’s just cash flowing for them but what they don’t realize is that there’s this huge delta in the operations that they’re missing. Those are the things that I really like to do. Yeah, I find the problems and then I hand them over to the operator to fix.
[0:11:45.5] DB: Well, and then that drives kind of my next series of questions which is then quantifying that so that an investor can look at this and figure out. How does investing in a syndication deal compare with investing in the stock market or investing in my own real estate or investing in whatever that would be?
Things that we talk about in the single-family space and some of the small multi-family space would be things like cashflow or cash-on-cash return or return on investment, I know some of those metrics change like a year, IRR and things like that and in the multi-family space. What are some of those metrics that you suggest investors look at?
[0:12:23.4] SE: Yeah, metrics are absolutely important. First, you mentioned the stock market, one of the biggest differences in my mind between investing in the stock market versus investing in real estate is the ability to control it or to have the operator that you’re working with be able to control it. Who knows what’s going to happen with the crazy stock, right?
You’re following TESLA and Elon goes on some Joe Rogan show, right? You remember that happening? I just – that’s something that scares me about stocks, right? It’s, who knows what’s going to happen? With real estate, at least you have somebody that has some control and be able to control that.
But, back to your specific question about metrics, we still look at cash flow. We do it on a couple of different levels though, one of my favorite metrics is profit per unit or PPU, right? Really, what this comes down to is, at the end of the day, how much money are we making on an individual unit?
I have my own metric that I really like to have. I want to make sure that we’re making a minimum of a hundred dollars per door per unit. Now, that’s not always day one, right? But we look out maybe within the first year or something like that to make sure to get to that point.
Another one that’s really important, you called it ROI, we call it cash-on-cash return and really, what it is, dollars in, versus dollars out, right? Just for your comparison. It’s simple formula, right? You take the amount of money that you put in divide that by the amount of money you receive on an annual basis, pretty easy math formula.
Now, something that they have to understand is that typically, in an apartment complex, that number can start fairly low but it builds up over time. One of the last deals that I did, the first year was only 4% but the 10th year is projected to be a 22%, right?
Another one that’s really important is the average annual return or the AAR, average annual return. Really, what that is, it’s the average of all of those links through that time, right? And so, if you average all that together on that deal, it’s 13% is what that comes out to be and then you also mentioned IRR.
This one’s a pretty complicated thing and you know, if you get into the actual nuts and bolts of it, it becomes a pretty intense formula that nobody can really figure it out without an Excel sheet and maybe a couple more calculators outside of the Excel sheet but really, all it does is it gives credit for the time value of money.
Everybody knows about inflation, right? Dollars today are worth more than dollars tomorrow. The faster you can get the money back, the higher the internal rate of return it would be, the IRR. You can typically see something like a 13% average annual return, right? That last one we talked about and then like a 17 or 18% IRR. Typically what that will mean is, they have some kind of refinance built in.
For example, in year two or three, they’ll refinance the property and I’ll give you a big chunk of money and so that gives you some of your initial investment back. That gets counted into internal rate of return. The other piece that gets counted into that is the sale at the end. When you sell that piece of property that will also bump up the IRR.
Again, it’s complicated, but really, all that does is it gives credit for when you’re receiving the money. Faster you get it, the higher the IRR will be.
[0:16:02.9] DB: Now, that makes sense and that also creates some consistent baseline values for comparing deals against each other. If you’ve got two or three different projects that are all a little different, someone could compare those, if they’re comparing something you have versus someone else’s deal then they’ve got other metrics to compare there from the quantitative side of things, we can talk more about other qualitative things and other things as well.
But while we’re on the topic of some of these metrics and the value of real estate investing, one thing that we’ve talked about a lot lately is depreciation as well and some of the tax benefits. Are there tax benefits that a limited partner would realize in a real estate investment like this?
[0:16:41.6] SE: Absolutely. I actually, it’s so great you bring this up. I just had a conversation with a friend of mine, just the other day about real estate investment trust or REITs and other stock market quasi real estate investment.
The biggest difference between them and owning an asset directly or through one of these syndications is that you become an actual partner in the property. You get all of the same benefits as the direct owner. If the owner gets a tax write off, you get a tax write off because remember, you’re a partner, right?
That limited partner and general partner, you become a partner in that property so when there’s depreciation, you receive it. Now, I want to make sure to talk a little bit about that and what the biggest differences between a big multi-family depreciation and a single-family depreciation.
One big key word that you need to talk to your syndicator about or a key phrase rather, is cost segregation, this is one of the most powerful wealth building tools that I have ever found. When you buy a single-family property, typically those are depreciated out over the course of 27 and a half years, right? That’s a long time.
But, you have the ability with – especially with bigger properties to break out all the individual components of a property. We’re talking like how long does the carpet last? How long does the roof last? How long do the doors last? Now, you need a special group of people to put together this study, we need to break it out mathematically and use engineering and some really intense stuff, I pay professionals to do just this thing.
What they’re going to do is, they’re going to be able to tell you, “This portion of the building can be depreciated in five years, this portion is in 10 years, this is in 15 years” and you can accelerate all that depreciation. As a partner in the apartment building, in the multi-family building, you get all of that depreciation on your K1 which is like your W2 for partnership, okay?Now, I’ve actually seen people be able to put – let’s call it $50,000 into one of these apartment deals and get 35, $40,000 worth of tax write-offs in year one.
Now guys, I am not an accountant and I’m definitely not your accountant, right? So disclaimer here, right? There are rules around how you use that depreciation and what it can be used for and how much of it you can use, so you have to talk to your CPA about that but it’s a huge, huge benefit.
[0:19:24.1] NH: Senate, I am really pumped that you brought that up because actually you don’t know this but next week, we’re going to have a guest on the show that is a professional. They are a segregation specialist that does this studies for people just like yourself, so we plugged you in that question, you don’t even know it so I think that’s awesome.
[0:19:38.0] SE: Nice, that’s fantastic. I can’t wait to hear it. Do you mind if I ask who it is?
[0:19:42.3] NH: Yeah, CSSI is the name of the company, so they’re Cost Segregation Services Incorporated.
[0:19:47.3] SE: Very familiar with them, yeah they’re great, yeah.
[0:19:49.8] NH: Cool, so that’s good. That’s really a fun plug, so a little taste of cost segregation and how important it is from Senate here and again, tune in next week because we’ll have more on that coming up which is really fun, so I am glad you said that. That’s really cool. I want to – this is great, right? This is a lot to talk about. There is a lot of detail here but something I think that helps especially us detail-oriented pharmacists is an example.
Maybe can you walk us through something, a recent example of an investment that you have gone through and maybe just a brief breakdown of how that looks and operates and what that might have looked like?
[0:20:20.7] SE: Yeah, I think there is one that I actually am really excited talking about. We just finished it just now and actually just last week we closed on it. We bought a 33 unit apartment complex in Pocatello, Idaho is where it’s at. It is a fantastic place to invest, which is one of the first things you should look at in an investment, where it’s at, right? Know why the operator and syndicator is so excited about that area.
Pocatello, Idaho is roughly two hours north of Salt Lake City, an hour south of Idaho Falls, Idaho and then about three hours depending on how you drive, three and a half to four hours from Boise. So it is a tertiary market from three great areas. It is booming really, really quickly, it is growing very fast, there is a great hospital system there, there is an FBA data center there, several large industries, very diverse employment.
So when I found this opportunity, I knew it was something I had to move on and so what it is, it’s a 33-unit apartment complex. We bought it for 3.3 million dollars, we’re going to put roughly $300,000 into it. So for the detail guys math, that comes to a $110,000 a door all in that’s worth our remodel. Now, the nice thing is going back to those cash-on-cash returns and everything that we talked about, right?
So we’re going to pay out our investors a 13% average annual return, it is a pretty solid number. If you look at the stock market, the average over the last 10 years is significantly less than that. This year it is even more significantly less than that but that’s not a fair judgment but the plan is we’re going to do a refinance in year three and we are going to give our investors back 60% of their money.
So if somebody puts in a $100,000, they’re going to get $60,000 back. The nice part about that is now is they only have $40,000 in the property. They can take that other 60 and go invest it somewhere else but they still own the property. Now, our cost segregation specialist that you guys are talking to, ours are telling us that we’re going to deliver roughly $80,000 worth of tax write offs to our investors’ year one and that’s epic.
Basically, they’re buying $80,000 worth of tax write offs for $100,000. It doesn’t always work that way, every deal is different, right? Now, we’re going to hold the property for 10 years. Over the course of that 10 years, we are going to deliver back 2.7 times the investors’ money. That $100,000 the total return to the investor is $271,000 plus all the depreciation over the course of the time.
We sell it in year 10 and hopefully add other properties to hand our investors at the same time. This deal, the reason it was so good was not because there was a big problem physically with the property. It was all mismanagement. The average rent on this property for a two bedroom one bath was $610 a month. There are 10 month-to-month leases. We’re going to immediately move to 800 like May 1st, they’re going to be 800 a month.
From 610 to 800 in that short amount of time. Within 18 months we’ll be averaging about 950 a month, all operational inefficiencies. We’re also going to put in a thing called RUBs, which is ratio utility billing, this is an amazing thing. On single family houses, people pay their own power bill. Well, typically not in big multi-family, sometimes they’re on one power meter especially common is one water meter and then you’ve got trash services things of that nature that the owner typically pays.
What we do is we institute the ability to break that out based on the square footage of every unit and then we bill back the entire usage back to the tenants based on that square footage. In other words, this becomes now a pass through to us. One of the best things about multi-family is the value of these is based on the income. If we can take something out of the expenses, now the net operating income or the NOI goes up, so we’re forcing value left and right on this property, very excited about it.
[0:24:33.3] NH: That’s a great example. I appreciate you walking us through that. Wow, that’s awesome.
[0:24:36.2] SE: Yeah.
[0:24:36.7] DB: I am curious too with the $300,000 in rehab, I know one of the things we talk about a lot with investors who jump into the single family space is they go in and they fix up a property. You are saying this is predominantly mismanagement but it sounds like you are also sprucing the price up a little bit.
[0:24:52.3] SE: Yeah, roughly 10%, which those are all really light rehabs. We are going to put in some new floors, a little bit of paint. The windows all need to be replaced, which is probably the biggest expense that we are going to face. However, this is going to save power for our tenants. We are going to make it look better, ending up us to charge more rents but yeah, almost every window in it was cracked a little bit and we’re a little spider web in the corner, something like that.
They are all aluminum windows, single pane and just really drafty, so we’re just going to make it a much more comfortable place to live.
[0:25:22.9] NH: One question I have too, if I find a limited partner in this deal, right? Funding is already closed like this one is gone but just for –
[0:25:29.2] SE: Yeah, thanks for clarifying that.
[0:25:30.6] NH: Yeah, no but for those that are in it already, right? You say a 13% return, is that guaranteed if I am a limited partner and on the flipside of that, if you get 16% do I see that extra three or you get to keep that? I guess if I am a limited partner, I would want to understand how that works.
[0:25:45.0] SE: Yeah, thanks for asking that question because there are some really nuances that we need to explain to really break that down. So this property, again, every property is different but this property we’re giving our investors what’s called a 7% referred return. What that means is that the investor gets the first 7% before the general partners and sponsors, before any of those people make any money, they get the first piece.
Now, that’s not guaranteed but we’re going to make it up. So if we fall short the first year, when we go do that refinance or when we do the sale, we’re going to go back and retroactively make anything that was missed up. So is it guaranteed? No but the chances of not getting the seven are pretty slim. Now, anything above the seven we split that with the investors and so the 13 is what’s expected.
If we get 12, yeah, they’re only going to get 12 but if we get 15 or 16, they’re going to share in that just like they would at that 13 number. So the nice – the reason that that’s important is because we’re incentivized based on that same success metric, right? I have money in this deal too, right? My money is in there so I am going to get that same 13% return we talked about. It is very important for that to succeed for me as well as the limited partners.
[0:27:09.1] DB: Now, that makes really good sense so I think that that helps to convey confidence to an investor when they know that you’ve also got skin in the game too, so you don’t want to see this drop. When it comes to the value and the return, it sounds like a big part of that is that refinance at year three and then the sale at year 10 and making sure that you hit those and I know that if looking ahead, my crystal ball is a little cloudy, right?
I don’t know quite where the market is going one day to the next, so as we look at thing that we are seeing right now, like we are seeing interest rates go up, interest rates have a tendency to drive cap rates, which can drive value. Interest rates can drive the refinance at the 3rd year mark. So how do you predict and then shift strategy as some of those market condition shift to make sure that investors are protected in a partnership like this?
[0:27:59.8] SE: There is a lot to unpack in that question. So let me first tell you, I spent a lot of time monitoring markets and I’ve got people that I trust and professionals that I lean on that tell me what is happening and what their crystal ball is maybe a little clearer than yours and mine, right? Now, nobody knows for sure but we have a lot of advisers like I said and we don’t always stick with the same game plan when we go into a deal.
Let me tell you another story about that same 33 unit that we talked about. We started originally looking at this property, it was still warm so it was at the tail end of winter so we’re going to call it four, five months ago is when we really started looking at this and we planned on doing what’s called a three-year bridge loan and so what that means is that at the end of year three, we had to pay that loan off.
Now, whether that’s through a refinance or sale or pull it out of our pocket and pay it but it was a great loan where we had what’s called an interest only payment. We don’t have to pay the principle on the loan, so the payment was significantly lower, which allowed us to have higher returns in the beginning of the deal but that allowed us to also flex our muscles and flex the business plan a little bit more aggressively so we’d have some more income.
The challenge is, what you just said, the interest rates, they’re a little scary. They’re going up and I don’t know for sure what’s going to happen in three years and what that’s going to look like. So we decided that we needed a plan B and so we started shopping for multiple other lenders and we actually found a local credit union that gave us a great rate. We actually saved a quarter point percentage and gave us a 10 year timeframe on the note.
The drawback is, instead of getting three years of interest only, now we only have one year. That gives us that first year to flex the muscles and get that business plan into place so that it’s going to pay for itself going forward. We can do it, no problem. Like I said earlier, I’ve got a great partner and it is going to make sure that this executes properly but because of the debt problem, we had to pivot to something better.
Even though we had a better or a lower payment in the first option, the risk just wasn’t worth the reward.
[0:30:19.2] DB: Yeah, I think that makes really good sense and I like hearing that too because I think for a lot of investors that are used to buying the single family house in a 30-year conventional typical mortgage like this whole concept of a balloon loan that becomes due in full in a very short number of years like if you have to payback multiple millions of dollars in three years, that can cause some heartburn, right?
I think that there’s – your approach of having a backup plan I think fits well with the risk-averse safety-oriented pharmacist type that we all are, so I like that.
[0:30:51.2] SE: Absolutely. I try to go into every deal with at least two exit strategies, preferably three.
[0:30:57.2] NH: You mentioned exit strategies, what about again, I am thinking someone listening to this that says, “I want to be a limited partner in one of these deals” what are the exit strategies that they have, right? As a limited partner, can I jump out of this deal if I don’t like it anymore or is this like a team sport like we’re all in it together and if Senate’s three-year plan is it, I got to stick with it, how does that work?
[0:31:16.8] SE: Yeah, so you know there is lots of pros and cons to these types of investments and one of the cons is they’re liquid. It’s also one of the pros I believe truthfully, I’ll tell you that story in a minute but that’s why they get such stable returns but they’re hard to get out of. Now, they’re not impossible so it is important to make sure that you know the operator you’re working with and that you understand the contract.
For example, my deals this one that we just did, we will allow someone if they need out of the deal to come to myself and the other general partners and have the ability to be bought out. Now, are they going to get the full rate of return at that point? No, absolutely not. They’re going to do it at a discount, so the best time to do it is when we do the refinance because now we have an appraisal, we know exactly what that property is worth and we can calculate exactly what their investment is worth.
But the challenge is, the partners have to have money and what if we just did a deal and we don’t have money either, right? It is possible but it is difficult to get out of it.
[0:32:22.3] NH: Got you, so there is exit ramps along the way but they might be under construction.
[0:32:26.8] SE: That’s great, I love that analogy. I might have to steal that.
[0:32:30.3] NH: Take it and steal it, go for it.
[0:32:31.8] DB: I think one of the things that we’re finding in this is we talked earlier about those quantitative factors where you can compare deals against each other but it sounds like there is a lot of other factors in there like you mentioned, the geography and the property type and where you think the market is going. I think that one that we haven’t hit on real thoroughly is as you look at that deal itself is who is running that deal.
Who is the syndicator, who is the operator, so what advice would you have for someone that is trying to evaluate a deal and trying to evaluate the person offering the deal?
[0:33:05.0] SE: Yeah, you know that question is probably the most important one that you have asked all night long because at the end of the day, the person running the deal is really what’s going to drive the success or the failure of the operation. I have actually said for a long time, I bet on the jockey not the horse because a good operator can take an average deal and knock it out of the park but a bad operator can take an amazing deal and drive it into the ground.
So I would spend the majority of the time looking at that and asking the operator about their background, their experience but more importantly, what are their values. Do you like them? Because you’re going to become their partner four, five, seven, 10 years and so you have to, at bare minimum, read their emails and get on calls with them and be aligned with them. I would say the first thing is, if you can’t sit down with the guy and go to dinner, a guy or gal and go to dinner, have a drink, would you invite them to your house for a barbecue?
First of rule of thumb, right? Got to actually make sure that you’re going to get along with them. After that, I would check in to their experience, where they come from, right? Do they have experience? Do they know what they’re doing? That doesn’t mean that a new person can’t be successful but if they’re new, I would ask things like, “Who are your coaches? How did you learn? Who is your backup?” those types of things.
[0:34:30.5] NH: Yeah, I think that’s super helpful because I think again, just listening to this people are going to get inspired. They’re going to be interested in tracking somebody down or figuring out if this is a good fit for them especially those that are looking for a lot more passive income, right? A lot more passive investment where they don’t have to learn how to be a landlord and deal with all of those pieces.
I think that’s great and it actually leads me to some of my final thoughts here and that’s if I am a new investor and I am thinking about doing a syndication, where can I go to learn a little bit more or what are the things that I should be doing as I start down that road?
[0:35:00.9] SE: You know, there is a couple of really good resources out there. Your podcast is great, right? Hopefully they are already listening to it, right? But there is the great book that I like called Passive Investing Made Simple. This really kind of explains all of the different terminologies and technologies like we talked about. You asked about cash-on-cash, waterfalls, but I would say Bigger Pockets is another amazing resource.
You can get on there and you can ask for references and referrals or just reach out to me. I know several of them, I am one but I also have no problem pointing you in some other directions. If I am not the right fit, I’ve got plenty of friends in the space that could be the right fit.
[0:35:42.1] NH: Perfect.
[0:35:42.7] DB: Then I guess our last question for the night is where can people find you if they want to learn more about you, if they want to ask you some of those questions, how can people connect with you?
[0:35:51.1] SE: You know, I am a pretty easy guy to find. My website is my name. It is senateeskridge.com. I’m sure you’ll put it in the shownotes but it’s spelled exactly like it sounds, Senate like a senator, Eskridge, it is pretty easy to Google me. I come up all over the place, so hit me up. You can email me on there, you can schedule a meeting on there if you look hard enough so.
[0:36:12.1] NH: Perfect. Well Senate, seriously, thank you for coming to the show and walking us through what is a very complicated topic but a very important one for our audience to understand and again, not an area that we get to go to very often so I really appreciate you, you spending the time with us just to walk through it.
[0:36:26.1] SE: Yeah, absolutely. I had a lot of fun tonight. I enjoyed talking about real estate, it is one of my favorite things to discuss. So you have any more questions, anytime, I’d love to come back again and anybody from your audience wants to talk, have them reach out to me. I’d be happy to help them even if they are not going to invest with me, I’d be happy to help them.
[0:36:42.9] NH: We’ll be sure to do that. I am sure we’ll have you back on the show in the future because it is always great talking to you.
[0:36:47.3] SE: Excellent. Thank you very much.
[0:36:49.5] DB: Thanks so much.
[END OF INTERVIEW]
[0:36:50.8] ANNOUNCER: Thanks for listening to the YPF Real Estate Investing podcast. If you like what you heard on today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question, know someone that would make a good guest or want to connect with Nate or David, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.
[DISCLAIMER]
[0:37:11.9] ANNOUNCER: As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on this podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.
Thank you again for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.
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