Edited transcript from the teleseminar, “Multifamily Outlook Beyond COVID-19,” with David Lindahl

Originally broadcast on May 21, 2020

 

 

Kim Lisa Taylor:

Welcome to Syndication Attorneys’ free monthly teleseminar where we talk about topics of interest to real estate syndicators with the opportunity to ask live questions and get answers at the end of the call. I’m attorney Kim Lisa Taylor.

Also joining me on the call is Charlene Standridge, our law clerk and business development director.

Before we get started, please note that all of our calls will be recorded and may be used for future promotion, posted on our website or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call.

Information discussed during this free teleconference is of a general educational nature and should not be construed as legal advice. This is an audio-only conference. Today, our topic is “Multifamily Outlook Beyond COVID-19” with our special guest, David Lindahl. Hi, Dave.

 

David Lindahl:

Hey, Kim. How’s it going?

 

Kim Lisa Taylor:

Really good, really good. I don’t know if you guys have ever heard my story before of how I met Dave. But back in 2007… well, actually, 2006, my husband and I wanted to check out some different real estate investing models and we went to a learning annex in Los Angeles, California.

And you could go into all these little breakout rooms, and one of the rooms was this guy who was teaching people how to buy multifamily, and I thought that sounded really interesting. So we went in and we listened and we dutifully got up at the end and bought Dave’s home study course and went home and did absolutely nothing with it for a year and a half.

 

David Lindahl:

What?

 

Kim Lisa Taylor:

That never happens, right?

 

David Lindahl:

Yeah.

 

Kim Lisa Taylor:

We started listening to Dave’s calls and Dave is very persuasive, as some of you may know. And he suggested that everybody on the call might want to attend a Multifamily Millions Bootcamp, and we thought, “That was great.” So we went out to Boston and we did that. That was late 2007.

And then he announced on stage that he was going to have a Private Money Bootcamp, first ever. And I thought, “Oh, boy. We should go to that.” I was a fairly new attorney at the time. I’d been doing some real estate litigation and environmental law prior to that. And I thought, “Well, if I’m going to get into this space and we’re going to syndicate, we’d better learn how to do this right.”

So we went and Dave had an attorney on the stage whose name was Gene Trowbridge, and Gene taught us all about securities. Turned out that Gene and I lived about 75 miles apart from each other in Southern California, even though we were both in Boston when we met.

So I went up to Gene and said, “Gene, I work with other attorneys. I’d love to work with you. And he and I struck up a relationship and I worked for him for a couple years, and then in 2010, we started our own law firm, a securities law firm, Trowbridge & Taylor.

Worked continuously with Gene in the law firm partnership up until 2016, and then my husband and I decided we were going to move to Florida. So we packed up the truck and put the stuff on top and moved across the country, and I started up my own law firm out in Florida. So that’s my story.

But along the way, I’ve certainly been in a ton of RE Mentor events, and I co-teach the Private Money Bootcamp. I’ve just known Dave and his organization, they’ve been top-notch – the whole entire team.

 

David Lindahl:

It’s been a lot of dinners.

 

Kim Lisa Taylor:

Yeah, those educational classes that RE Mentor gives are just, I think, without parallel. We see a lot of people training in this market right now that aren’t giving the same breadth and depth of training that the RE Mentor program does. And as a consequence of that, almost all of our clients that have come back for deal after deal and have done a lot of syndications have come out of the RE Mentor program. So Dave, I think that speaks highly of your organization.

 

David Lindahl:

I think that’s because I made a lot of mistakes there when I first started, and I still make mistakes. But I’m willing to share all of them, and so people can watch out when they first get started. So after they do their first deal, they can survive it and get into their second and third and fourth.

 

Kim Lisa Taylor:

And it really does make a difference. I think one of the things that sets you apart from some of the other trainers is that you’ve got … It’s more like a curriculum. It’s not like you just go to one bootcamp and you try to learn everything all at one time. You go to this one and then you go on to the next one, and then you learn all these different, more in-depth skills which I think is just where people gain the confidence to do it.

 

David Lindahl:

In this business, there’s so much to know and learn. So you get an overview and then you get to deep-dive into each of the topics, and that’s where it really helps out, those deep dives.

 

Kim Lisa Taylor:

Yeah. Well, let’s talk about what’s going on right now. I mean obviously, this coronavirus has put everything into a tailspin, and we’re all just trying to figure it out. Everybody, I think, was stunned for about four to six weeks, just paralyzed. And now, we’re starting to see a lot more people calling and getting deals, and coming through the door.

But everybody’s curious about what’s next, what’s going to happen in multifamily. So that’s why we wanted you to give us your wisdom on some of these things. You’ve been through a couple of cycles, I think.

 

David Lindahl:

I’ve been through three market cycles, two epidemics, two financial crises and now a pandemic.

 

Kim Lisa Taylor:

Wow. That is pretty amazing.

 

David Lindahl:

I’ve seen it from all angles.

 

Kim Lisa Taylor:

So you probably have a pretty good idea, then, of what might happen here in the future. So let’s just dive into the questions. We’re starting to see some flexibility and pricing out. Have the sellers started to adjust any kind of pricing?

 

David Lindahl:

Everybody’s still on hold right now. Sellers would love to get the properties in the market sold. The buyers, they were on the sidelines but, as you said, there are some people out there in the marketplace. The smart ones are actually out there in the marketplace making deals.

It’s a little harder to make deals now because they’re still up in the air due to the effect of this on the marketplace. The majority of rent gets paid in April, so people had reserves. But now, we’re in May, so everybody’s looking to see what’s going to happen in May and June.

I think those are going to be the two hardest months. And then after we see what happens, prices will start to reset and we’ll get an idea of where the market’s headed and how to buy properly. Right now, when you’re buying, you’re one of the few investors out there that are buying.

And one of the things you need to do is you’ve got to be aware that your revenue stream might be a lot lower when you get to the closing table. So you need to prepare for that. … it’s actually 90 days now it’s typically taking to close.

That’s because it’s hard to get all your due diligence done because it’s hard to get people on the properties and actually go through the properties at this particular time. So you’ve got a 90-day close. Within that 90 days though, we should see … by July, we should have a really good indication about what the effects were.

Of course, you buy based on price. But you also buy based on the cap rate of that price. So you put it in a disclosure or you put it an agreement, inside of your purchase and sale agreement and your offer that states that you’re buying based on … you’re agreeing on a price, but you’re also agreeing on a certain cap rate.

So the revenue is coming low at the time of closing with you in the bank, the bank is definitely going to be looking at this. And if for some reason, those revenues are a lot lower, they’re going to make that loan amount a lot lower. That’s why you want to be doing the same things the bank’s doing, watching it and then buy this thing based on the capitalization rate.

You agree on a purchase price, but you really agree on the capitalization rate. You buy in the actuals and then it will adjust. Now, if you do this, there’s a possibility that the revenues are going to go higher. And then you’re paying a higher price. That’s OK because really, you want to mitigate your risk on the downside.

If the numbers still work but the revenue’s higher, which they probably would if you stay at the same cap rate, then you’ve still got a good deal. But what you’re mitigating, the risk, is on the downside.

 

Kim Lisa Taylor:

Wow. That’s going to be a pretty advanced purchase and sale agreement that’s going to be able to accommodate that.

 

David Lindahl:

Well, yeah. Sellers aren’t going to be too happy with it, and I know this by experience because how many times have you gone into a deal and it’s by pro forma? So the broker or the owner, they want you to buy based on a pro forma. Not what the actual numbers are, but what the numbers will be if you fix a couple of the value-adds that the owner just couldn’t get around to or wasn’t skilled enough to fix prior to selling the property.

So what we’ve done and what I’ve trained people to do is to say, “OK, if you’re not going to give me the actual numbers, then what we’ll do is at the closing, we’ll see the actual numbers and then we’ll agree on this price but at this cap rate,” just like I just said. And at the closing, well, if those actual numbers are less, then we’re buying for that.

Sellers hate that. But in reality, what’s really happening? I mean if they’re giving you bogus numbers to start off with and the deal’s not going to work when you get those actual numbers, why waste all of your time? You know?

 

Kim Lisa Taylor:

Right.

 

David Lindahl:

But in this case, with the coronavirus, it’s not that the sellers are trying to be underhanded. It’s just that nobody’s knows. Nobody knows right now what the effects are going to be.

 

Kim Lisa Taylor:

And that’s why I’ve been hearing from lender’s counsel that they’re requiring six to 18 months on debt service reserves before close, and that’s based on the debt service coverage ratio. In some cases, they’ll say that if after a few months, they’ll release part of it. But that’s a pretty big chunk. So now, you’ve got to raise that much more money.

 

David Lindahl:

Exactly. I had a student that was doing a deal and then there was the coronavirus in the middle of this, and he raised it up $1.3 million when Fannie Mae readjusted what the reserves were going to be. They not only readjusted the mortgage, but they also readjusted the property reserve itself, the reserves for when things go wrong in the property, or things that need to be fixed. So then with 18 months on that as well.

 

Kim Lisa Taylor:

Wow, so 18 months repairs and 18 months for that service reserve. So you’ve got to build that into your raise and figure out how you’re going to do that and still make the deal make sense.

 

David Lindahl:

Yeah.

 

Kim Lisa Taylor:

Wow. What about commercial mortgages? Have you heard anything about are they following along with what Fannie and Freddie are doing?

 

David Lindahl:

Are you talking about office buildings or are you talking about CMBS?

 

Kim Lisa Taylor:

Yeah, CMBS.

 

David Lindahl:

Well, there are some out there that are saying that you can actually borrow those reserves at a low interest rate. If you don’t use them, you won’t get charged. You’re only charged on what you use or what they use.

So that’s one, that’s the best variation that we’ve seen. We’re out there looking at deals all the time. So we were going into a deal and when all this hit, and it’s like, “Wow. All right, so now what do we do?” I would love to share that name, and I can’t remember it off the top of my head. If I can find it during this call, I’ll share it with everybody, who that lender is.

 

Kim Lisa Taylor:

That’d be great. That sounds like a great solution. That’s going to be very popular, I’m sure. But what about people that have existing properties, and all of a sudden, they have these decreased revenue streams? And if they’re having trouble making their mortgages, have there been any accommodations for that?

 

David Lindahl:

Are you talking about the owners?

 

Kim Lisa Taylor:

Yeah, so the syndicators.

 

David Lindahl:

Freddie Mac and Fannie Mae are offering forbearance for the owners. They’re giving three months, don’t pay your mortgage and then they’ll make out an arrangement with you over the next 12 months to make up those payments. So if you don’t have to do that, you don’t want to.

This is when they always say that the naked man gets exposed at low tide. This is when if you didn’t go into the deal properly and you didn’t buy based on the right numbers conservatively, and if you had a very high debt, a very high break-even rate, then you’re going to have difficult times.

But if you brought properly, it shouldn’t be that much of an issue going in. Well, it shouldn’t be as long as … I know where the issues are. The issues are on your C and B properties, entity properties as well because those are the people that live in those units that typically are service type of workers.

They’re the ones that lost their jobs first, they’re the ones that probably are not going to get back as fast. But your B properties are going to be a lot more stable going in.

 

Kim Lisa Taylor:

Wow. I think the lesson here is don’t under-capitalize to begin with. That’s always a problem. If you under-capitalize when you buy something, then you can get stuck with the same property you just bought. You can’t do anything to it. Then you don’t have the reserves in place for something like this.

 

David Lindahl:

Absolutely. There’s a huge opportunity that’s developing right now. I call it the marginal owner plus coronavirus equals family wealth. And all the marginal owners are going to be exposed. If you ever planted grass or if you’ve eaten nuts, and those nuts, the small particles still stay in your teeth, or the rocks from the grass that you just planted pop up, that’s what’s happening right now.

The marginal owners are going to be exposed, and because they either didn’t buy the property properly, they didn’t oversee the property properly, or they never learned properly to oversee it, or they’ve got the wrong management company in there. So one of those three are the several other reasons why people don’t buy properly.

All the people that didn’t buy properly and aren’t managing properly, they are going to be exposed in this marketplace and they’re going to create an opportunity for us as investors to come in and take those properties back. That’s where these deals are going to be.

By the way, I don’t know if you saw it, but CoStar just had an article out last week, and it was something like 30% of all commercial mortgages are going to go upside down over the next year. And they said that the pricing when those properties come back to the banks, the pricing that they’re going to go back out at is about 30% of what they paid pre-COVID.

 

Kim Lisa Taylor:

Wow.

 

David Lindahl:

That’s huge. They did an analysis. There was something like 14,000 mortgages that they predict are going to go upside down over the next year. That’s a great list to get.

 

Kim Lisa Taylor:

Yeah, right.

 

David Lindahl:

Been working on that.

 

Kim Lisa Taylor:

No kidding. That’s amazing. Wow. Well, I know that Gene and I built our firm after the Great Recession and it’s because there were so many opportunities in 2009-2010, and the people that bought them and then sold them five, six years later, they did very, very well for themselves and their clients or their investors.

 

David Lindahl:

Some of the most successful students are the ones that were investing or joined us right after the last financial crisis, because I mean they get in right at the very bottom.

 

Kim Lisa Taylor:

That’s right. So this is the time to be here.

 

David Lindahl:

Exactly.

 

Kim Lisa Taylor:

And right now, you need to learning and positioning yourself so that you can go out and take advantage of these great deals that are coming. Well, the other thing is that six months from now when you’re asking for people for their last trailing 12-month profit-loss statements, it’s going to look a whole lot different than it did January 1.

So they’re going to have to start getting realistic about the pricing because the banks are going to be looking at all of that, for sure.

 

David Lindahl:

Yeah. Let me tell what’s going to happen. These marginal managers, their rent’s going to start becoming reduced, they’re going to stop doing repairs and maintenance on their properties because they don’t have the funds to do it. The good tenants that they have are going to look at the property and see that … this is over the next four to six months.

The good tenants that they have are going to take a look at the properties and realize that the management doesn’t take care of the property anymore. They’re going to start leaving. Now, these marginal operators or owners now are going to create marginal properties.

So the good tenants are going to leave these marginal properties for a better place to live because they’re good tenants and they deserve that, they respect themselves. And when that good tenant leaves, you can’t replace that good tenant with another good tenant because they’re not going to move into this place that needs these repairs.

And it first starts showing on the exterior, and then you’ve got tenants that are upset because the repairs aren’t been done on the unit. So you’re going to replace the good tenants with marginal tenants, and then the quality of the tenant profile starts going down.

When the quality of the profile starts going down, the amount of revenue that you have coming in isn’t as great. It starts to lessen because when the profile goes down, so do the collections. So collections start going down as well and so do evictions. They start going up. So you’ve got these two things happening at the same time.

So now, they’ve got marginal tenants coming in and the revenue stream’s going down. They can’t take of the repairs and maintenance. Now, they start reducing their rent to give a concession to get more tenants in because now, they’ll take anybody because they need the money to start paying their mortgage.

And their reserves will become depleted. Then they’re going to get a point where they’ve got a decision to make, and that is, they’re going to realize that this property is not going to make it. Eventually, they’re either going to have to give it back to the bank or sell.

The smart ones will sell prior to having to make that decision to give it back to the bank. So that’s the first opportunity that’s going to start happening, and then you’re going to have the other ones that just weren’t smart enough to try to get rid of that property before.

They just didn’t see it coming because they weren’t trained properly. They weren’t good operators and they never were. And because of that, they didn’t know how to get out of the mess that they got themselves into. There’s the opportunity right there all spelled out.

 

Kim Lisa Taylor:

Well, that’s pretty amazing, I think, as well. What about investors? I’ve heard that investors lost money in the stock market are … They would normally pull out some money and put it into some multifamily properties, but they’re reluctant to do so until the stock market recovers. What do you think is going to happen with all that?

 

David Lindahl:

Well, I think it’s an individual case-by-case. There’s certainly a group of people that have that mindset. But in anybody’s investment portfolio, first, it starts with family and friends and then you move over to business owners and surely investors.

So the true investors, they see what’s happening in the marketplace. I mean not the ones that are just focused on the stock market, but actually, also in the real estate marketplace who are excited as well and they’re ready to … It’s called dry powdery. They’ve got dry powder and they’re just waiting for the opportunity to present itself in order to move in for a deal.

If you don’t have an investor list, now’s the time to start creating an investor list. And if you do have an investor list, now’s the time to really communicate with them and let them know about the opportunity that’s coming and to be ready because property is going to start popping up.

 

Kim Lisa Taylor:

That’s it then.

 

David Lindahl:

It’s a good time to survey them as well because a lot of people’s circumstances have changed in the last three or four months. So it’s a good time to survey your investor list and let them know and say, “Hey, if I do find a deal tomorrow, are you still interested in investing? And if so, what would the amount be?” because a lot of that has changed now.

 

Kim Lisa Taylor:

We’re in an unusual situation right now where people are stuck at home in certain places, so they’re happy to talk to an adult. So you might be really welcoming your call where otherwise, you might have not been able to get a hold of them.

 

David Lindahl:

Absolutely, yeah.

 

Kim Lisa Taylor:

You’ve got a captive audience. So I think that’s great, just touch base with all the people that are already on your list and think about how you’re going to expand your list. And you can do digital conferences, you can talk to people on the phone. Whatever means you have for reaching out to people, this is really the time to really be developing that and putting up your investor marketing program.

 

David Lindahl:

And the ones that are just as excited as you are about it, I always ask that question, “Who else do you know that may be interested in this as well?” And then you can extend your referral base that way, your investor base.

 

Kim Lisa Taylor:

Right. So short-term, looks like there’s some opportunities starting to pop up, looks like there’s definitely going to be some opportunities within the next year when these owners start getting punched a little bit and realizing the trouble that they’re in. How long do you think it’s all going to last?

 

David Lindahl:

This opportunity?

 

Kim Lisa Taylor:

Yeah.

 

David Lindahl:

Well, of course, the best deals are going to come in early. But I think this is going to be a two-year cycle. I think we’ve got two or three years to really buy up a lot, and then we’ll start the regular market cycle back again. The exciting thing about this particular, the time that we’re in right now is that a lot of markets are resetting.

They’re going to go back to the buyer’s market phase two, which is the downward phase. Then they’re going to reset — a lot of them — at the same time and start moving forward into the emerging phase.

It happened after the last crisis in 2008, the financial crisis. There was a big reset. Typically, in any given time, there’s anywhere from eight to 20 emerging markets around the United States and a primary or secondary market and some tertiary markets as well.

Now, there’s going to be 50 or 60 of them, and it’s just going to be you decide where you want to invest in. And those people now will be able to invest in their own backyard because of the big reset that’s happening.

 

Kim Lisa Taylor:

Well, that will be a first for some people. I know the whole time that I’ve been involved in this business, there’s been some markets that have just been tight all along. So maybe we’re going to see something there.

 

David Lindahl:

Well, there was a time that you could … After 2008, you could actually invest in Los Angeles, New York City and San Diego and it would cash-flow. And those big cities will cash-flow again except now, you have L.A. and San Diego and all of California under rent control, so it screws that up for people living there.

But you’ve got so many good markets around California like Los Angeles, the Texas markets, Nevada, Reno and all that, Washington. So there are certainly markets that are close that you can do really well in.

 

Kim Lisa Taylor:

It’s my sense that some of these investors that have lost some money in this current market downturn in the stock market, that they’re going to be really looking hard at their investment portfolios and maybe wanting to escape any future roller coaster rides. Do you think I’m on track with that?

 

David Lindahl:

Roller coaster rides of the stock market?

 

Kim Lisa Taylor:

Yeah.

 

David Lindahl:

Yes, I do. I mean here’s the thing. Those people that own properties right now stopped disbursement. That’s probably the first time since I’ve been an investor that disbursements across the board have stopped only because you just don’t know what’s going to happen.

And at the end of the financial crisis, disbursement didn’t stop because people still needed a place to live and they were still paying their rent. This is the other case, is so many people getting laid off at once. And then the public service announcement saying, “Don’t pay your rent for three months,” and then the local government saying, “You can’t have a moratorium on evictions.”

It’s been one of those odd things. But in most cases, the stock market has this wild swing. But real estate, it typically, over time, goes up and you get in disbursements. At every drop in the stock market, we’ve had people calling our office saying, “What have you got? What have you got to invest in?”

And there were investors that were in another deal and they just got their disbursement check, but yet they lost 40% of the stock market or 20% of the stock market.

 

Kim Lisa Taylor:

They didn’t want the grief and the stress, I think. I think you brought up a really, really valid point. If any of you that are listening to this call already own properties, it’s OK to stop distributions to your investors right now and just tell them, “Look, well, these are really uncertain times.”

“We don’t know what the rent situation is going to look like. We need to just withhold cash and disbursement, then all that money’s going to be there … But if we do need it, having a reserve is better than doing a capital call.”

But don’t be afraid to do a capital call if you need one, because that’s what that language is in the documents for, is that if you need the money, you should be thinking about whether to do a capital call.

I know one sector that seems like it’s going to really take a long-term hit maybe is the student housing. What do you think about that?

 

David Lindahl:

Yeah. I’ve been thinking about that a lot because usually, that’s the safe haven in a down market is student housing, and that’s always performed the best in multifamily in a down market and the commercial families like office and retail and all that.

It’s usually the safe haven. But now, we’ve got this situation where they’re not having classes. I think it’s a temporary thing. The revenues from student housing inside of colleges themselves, that’s big.

I was on a call with Harvard … the dean of the business school, and they were losing $10 million a month of revenues because the students weren’t at the school.

 

Kim Lisa Taylor:

Wow.

 

David Lindahl:

That was a call for alumni. So that’s a big part of it, so they’re going to want people on campus and to have people on campus because they’ll get the revenues from the dorms and the food and all of that. That means the surrounding area will revise student housing. That means it’s going to come back as well.

I think the next year’s going to be really rocky because most of the schools, they’re not having their fall semester, and nobody’s sure that the winter’s semester is going to happen because all the scientists are predicting that we’re going to have a fall rebound, which won’t be good, but there’s no vaccine that’s really going to happen until a year from now.

So student housing is really iffy right now. But you know what? On the backside of this where people are hurt on student housing, it’s going to be a great time to buy, because I believe the long-term lookout for student housing is still good. Because I’ll tell you what, you know I’m a big demographics follower, in 2021 to 2023, that’s when the largest amount of the next wave … It does not cover millennials.

I forget what it is. But the next wave is coming through. So not only do we have a down market starting to increase, but we also have a demand increase coming in from ’21 to ’23. So it’s a really good time to be in multifamily property buying during this period.

 

Kim Lisa Taylor:

Great. Well, Dave, how are you guys handling your education program right now? I know you’ve got a lot of classes that you usually schedule on a regular basis and they’re usually live. Are you doing digital classes? Are you on pause? What’s your plan?

 

David Lindahl:

We’re doing virtual. All of our live events are on pause right now because you just can’t put people together. Our biggest concern is the safety of the people that are there, our clients, our students. So we’re waiting to see what happens. We’re looking around the country.

We’re following the guidelines of the government, and we’re looking to see if there’s any openings and where we could have a class and then people are safe to travel there. But right now, we’re just on a pause. Even our Ultimate Partnering event in August, the big event, we usually have anywhere from a thousand to 1,500 people there, we put that on pause.

George Foreman was going to speak at that one. That’s on pause. We’re going to do a virtual event in November. We’ll get all set for that Ultimate Partnering and then we’ll be back sometime in 2021. I really don’t think this whole thing’s going to clear out in terms of the coronavirus in our society until next summer.

 

Kim Lisa Taylor:

Really?

 

David Lindahl:

Yeah. If we do any teaching, it’s going to be very small groups so we can keep everybody separated. But most of the stuff’s going to be done virtually.

 

Kim Lisa Taylor:

Gosh, it’s a different world right now. And I surely miss having those live events too and being able to attend and meet people face to face. Zoom helps a lot, but it’s not the same. It really isn’t. That personal touch and face to face, it means so much to all of us as human beings. I think a lot of us are really missing it.

 

David Lindahl:

Yeah, I agree.

 

Kim Lisa Taylor:

Anything else you want to add? Anything we haven’t covered?

 

David Lindahl:

I want to plug, if you don’t mind … I’ve got a one-hour explanation of the opportunity that we’re going into. I explained it very shortly, but I take about an hour to explain it. And then this Saturday, we’re having a five-hour virtual event.

Now, the fee to get into that event is just $20 and the $20 is actually being sent to Feeding America, which for $20, you can provide 60 meals for people. So we’re just really giving back to our students and opening up and saying, “Hey, this is the opportunity and the hour that I present. If you can see it like I see it and get as excited as I am, then give us the $20, we’ll give it to Feeding America.”

And then come this Saturday and we’re going to do a full five hours, a deep dive into exactly how to prepare yourself and be prepared to be taking advantage of the opportunity that has developed. So you would go to daveevent.com.

 

Kim Lisa Taylor:

OK, great. All right, good. And if people wanted to contact your office and ask any questions about your training programs or any of your upcoming events, what should they do?

 

David Lindahl:

Our website is REMentor.com or they can call the office at any time, business hours, 781-878-7114 and somebody will be happy to explain, go through the programs.

 

Kim Lisa Taylor:

All right. Well, so we are going to go to live Q&A, so if anybody’s on the call who wants to ask a question, this is a great time to get it in the queue. Charlene, can you tell them what they need to do?

 

Charlene Standridge:

Yes. You can either raise your hand and I will unmute you and you can ask your question, or you can type your question in and I will read it and we will have Dave and Kim answer the questions.

 

Kim Lisa Taylor:

So before we go to live Q&A and get you guys a chance to get in the queue, I just want to talk about how you can reach us.Do you want to schedule an appointment with us? You can do so at syndicationattorneys.com. There’s a place there where you can schedule an appointment.

Also, I encourage everybody to spend some time in our library because in the library, there’s over 40 articles. There’s all of these previously recorded teleseminars that we’ve done. We’re been doing this now for over three years every month, and those are all posted.

You’ll see a couple more in there with Dave. We’ve got Frequently Asked Questions. These are the things that people ask me on a regular basis. We answer them, we post them, so they’re probably questions you’ve got, too. There’s white papers, there’s all kinds of stuff, and you can get a free digital copy of my book, “How to Legally Raise Private Money.”

If you’d rather have that on Kindle or a soft copy, you can get that through Amazon, so “How to Legally Raise Private Money” with Dave who so graciously wrote the foreword for me.

 

David Lindahl:

My pleasure.

 

Kim Lisa Taylor:

And then the other place I’d invite you to go if you’re thinking about setting up your investor marketing program right now, please visit our sister website, investormarketingmaterials.com. We have professional editors and graphic designers that can help you design professional marketing materials to show your investors, to show them you mean business, and to show them that you’re professional. So Charlene, do we have any questions?

 

Charlene Standridge:

Yeah. We have a couple here. The first one is “A and B grade properties tenanted by millennials who lost their jobs are walking out of their leases and moving home, also increasing vacancy issues in higher grade properties.”

 

Kim Lisa Taylor:

It’s what you were saying, Dave.

 

David Lindahl:

Yeah. Was that a statement or is that a question, somebody asking is that happening?

 

Charlene Standridge:

I’m thinking that’s a statement.

 

David Lindahl:

Here’s the thing. Really, the effect of this coronavirus is property to property. So we know the C properties are going to probably be affected more. We know that. The B properties will be affected as well and so will the A.

So it all depends on how well that manager is operating, and there’s a whole bunch of things, that if you did best practices and you were a smart operator, that you did as soon as this outbreak started, communicating with your tenants and telling them what to do, and you’re going through the entire process, and showing them where to go to, because there’s a lot of government assistance out there for rent.

And then there’s also the payback programs for people that are deficient. So the smart operators aren’t having as difficult a time. But the operators that never educated themselves properly or just aren’t hands-on with their properties, they will have the most difficult time.

 

Kim Lisa Taylor:

All right.

 

Charlene Standridge:

Our next one is “California has a 5% rent caps per year plus cost of living, so 7-plus% per year, not bad really.” So another statement.

 

Kim Lisa Taylor:

So fair enough.

 

David Lindahl:

5% is not bad but the whole idea behind multifamily properties and investing is the cash flow is nice, but the appreciation is where you create your real wealth. So you don’t want to be capped on the amount of appreciation that you can get on a property.

So if you go into a property that has a value-add, all right, and then somebody hasn’t raised those rents in, say, the last five years, and there’s X amount under market, and then all of a sudden, how much under market is way above that 5%, that’s no good because you can’t execute on that value-add.

That’s the problem with that. Now, if you’ve got an A property … And here, the opportunity when the market is coming out of this crisis we’re in, one of the opportunities is As are going to be yielding about the same amount that Bs are.

For a brief window, you’ll be able to buy an A property which is less risky and was built a lot earlier, and you’ll be able to buy about the same yield as a B property. So it’s a good time to be stocking up with some As because we don’t make as much money on the As, but they’re a lot safer and the opportunity is there. If I was going to have a rent cap, I would be owning A properties for the rent caps.

 

Kim Lisa Taylor:

Now, I have some clients that have some A properties and they’re saying that the rent’s being paid. Right now, it is anyway. So time will tell, but I’m not sure that’s the same situation that’s happening in the C properties.

 

David Lindahl:

Now, the A properties, those people probably have reserves, more reserves. The amount of reserves in the bank account that tenants will have will depend on property type. The As will have a lot more, the Bs will have some, the Cs will usually have not much if any.

 

Kim Lisa Taylor:

Right. All right.

 

Charlene Standridge:

“Where can we get a list of the new emerging markets?”

 

David Lindahl:

My friend, Scott Stafford, has a program called RE Indicator, as in Real Estate Indicator. He pinpoints emerging markets. We do our own list as well, but he goes really deep into tertiary markets.

And I was looking through there, and most of the markets … before coronavirus happened, we were in the late innings of this cycle, anyway. I mean you can go into a market, a good secondary … certainly at the primary, a good secondary market or a large tertiary market and stake a flag and get three or five deals before you’re ready to move on to the next market or get the appreciation you were looking for.

Most of the opportunities were one-off deals in a tertiary market here or a tertiary market there. When I was looking at that map, a lot of the places, I didn’t recognize. And it was all the way down to cities that had 200,000 occupants or more. But that being said, the reset is about to happen.

And the primary markets, I mean if you’re interested in investing in the primary markets, typically, the markets that move the fastest coming out of a problem in the economy are D.C., Minneapolis, New York and then the primaries will follow that, Boston and Orlando, and then the secondaries will follow that.

But now, they’re pretty much all resetting at the same time. I think what you would do is look at which markets were impacted the most by the coronavirus and which ones were impacted least. And the ones that were impacted the least will come out faster. The ones that were impacted most will come out slower.

And what I would do is, I would start with the ones that weren’t as impacted and then I would really focus on the ones that were impacted a lot because that’s where the owners are hardest hit, and that’s where the biggest opportunities are going to be.

 

Kim Lisa Taylor:

All right. Charlene, who’s next?

 

Charlene Standridge:

“What kind of cap rates you will be looking for in the next four to six months?”

 

David Lindahl:

Let me give you a formula that I’ve been teaching since 2002, and that I’ve been using since 1996 to invest with, and we call it The Trinity. The Trinity is when three different ratios come together and go over a certain point, then you can buy that property conservatively, you can get investors in the deal, and you can take that deal down with no money out your pocket and still get 20% of the cash flow, 25% of the equity and 100% of the acquisition fee.

I’m about to give you those numbers. Any deal that comes in above these numbers, you can take a higher of that deal. You could get 20, you can get 30%, 35%, 40, all the way up to 50% of the deal. So it’s a capitalization rate of eight-plus … Now, the capitalization rate covers you as the investor and tells you what your returns going to be.

The cash-on-cash return tells you what your investors will get, but you need a cash-on-cash return of 12-plus so that you can give your investors an eight. It may sound a little confusing, but your investors will give you money … This is what I found through the years.

As long as you’re giving them an 8% cash-on-cash return a year, in order to give them eight and carve out your percentage, the 25%, that deal needs to have a 12 cash-on-cash return. So now, you’ve got yourself and the investor covered, and then the third most important person in the deal is the bank.

And the bank wants to see at least a 1.2 debt coverage ratio, but in order for this deal to work and if you do it conservatively, and you’re able to get your investors in, and you have no money into the deal, and for it to work, you need to see that at a 1.6.

So the debt coverage ratio tells the bank how many times your cash flow covers your mortgage payment. When these three things come together, then you’ve got a deal that works. Now, in a lot of markets at a lot of different times, to find these deals that cover these three ratios, you’re not going to find it on the internet.

Every once in a while, you’ll get lucky and you’ll find one on CoStar, Credit Key. But you typically won’t find them on the internet. You get them through your relationships with your brokers or you get them through direct mail, and that’s the way you should always be doing business.

Through the years, people have told me, “Dave, you can’t find anything in The Trinity in this market.” And my next question would be, “Tell me about your broker relationship. Tell me about the last conversation you had with that broker,” because it’s got to be a relationship.

You’ve got to form what I call commonality, and commonality is having something in common with the broker other than real estate, something that you’re both passionate about, that you can talk about. Because when you’re talking about things other than business, then you’re creating a relationship and that relationship will bring you business.

And not only that, you’ll find that you become friends with the person as well. That’s how you need to buy your deals, and that’s how you get those deals. In terms of direct mail, that’s just a numbers game and those deals will come in. Typically, you’re going to get a 1% response on the amount of direct mail that you send out.

You’re going to get a lot of tire kickers, but you’ll get 1% on deals and that more than pays for the cost of direct mail.

 

Kim Lisa Taylor:

I’d just like to add that that rule of commonality that you just talked about is the exact kind of attitude that you should have when you’re talking to your investors, too. You’re really looking to connect on a personal level as well as a business level, and that makes for long-term investor relationships.

 

David Lindahl:

I agree, good point.

 

Kim Lisa Taylor:

All right, Charlene?

 

Charlene Standridge:

“How would you propose a capital raise on a land deal that is a high-density zoned and a premier area during this current market?”

 

David Lindahl:

That’s something I can’t forecast. I’m not really a builder. I have built in the past, been very painful. The smartest thing to do would be to hire an engineer to do a feasibility study, cost you somewhere between $7,000 and $10,000, find out what the best use for that land is, and then you do your numbers off of that.

I know that’s not an expense that you want to incur up front going into a deal, but I can’t think of any other way to value land at this particular point.

I don’t know of any other way because that’s really not my forte.

 

Charlene Standridge:

All right. “If I have a deal under contract, what kind of discount do you think I should be asking the seller for — 5%, 10%?”

 

David Lindahl:

It’s not a discount. You should be looking at the numbers of the property. So if the numbers of property are moving down, like I said earlier, you want to buy that deal based on the capitalization rate that you used to come up to the price that you agreed on.

So I would go back to the seller and say, “Hey, the numbers are going down. When I bought this property, you gave me these numbers. But now they’re here and I bought them at a capitalization rate of seven. So based on the capitalization rate of seven with these new numbers, the current property has a value of …” and that’s the new purchase price.

Believe me, the bank’s going to do the exact same thing. So what you’ve got to avoid right now is getting stuck in a situation where you’re past your due diligence point where your money’s gone hard, and then the seller can just say, “Screw.” So you’ve got to have extensions, built-in extensions automatically.

And if you can do it without putting up any more money, the better. But you need to have automatic extensions in the deal to cover right to the closing.

 

Kim Lisa Taylor:

It could take a little longer to raise money right now too and the banks are taking longer, so you’ve really got to build all that in so that you’re not getting crunched at the end because of the situation and nothing that you did.

 

Charlene Standridge:

“Who do we contact to acquire the non-performing loans as a result of the marginal manager?”

 

David Lindahl:

There are companies out there, there are auction sites out there where they’ll go. But you really want to go to the local commercial banks in the area that you want to do business with, find out who owns the real estate loan. I mean who heads that part of the business.

And then start sending them letters and build the relationship like you would with your broker or your investors.

 

Charlene Standridge:

“Besides larger reserves and extending closing times, what else can be expected to see trying to close?”

 

Kim Lisa Taylor:

I think the lender is looking a lot harder at the people who are doing the deal. I think they’re looking for a specific experience. That’s what I’ve been seeing lately.

 

David Lindahl:

If you don’t have the experience, then get yourself a good sponsor. And a lot of times, you’ll find within your investment pool, there’s somebody that does have that experience, and they can get on a loan if they want that deal with you and get it done.

 

Charlene Standridge:

“Do you recommend finding investors from Facebook ads or social media at all?”

 

David Lindahl:

Well, here’s the thing, as Kim knows … I mean she’s probably better to answer that question than I am. There are certain rules and regulations that you need to follow. So Kim, why don’t you answer that one?

 

Kim Lisa Taylor:

Say that again, Charlene.

 

Charlene Standridge:

The question is, “Do you recommend finding investors from Facebook ads or social media at all?”

 

Kim Lisa Taylor:

Well, it depends on what exemption you’re going to use to be able to raise money. If you’ve got a deal under contract right now and you’re meeting people that way, then you’d better have a Regulation D rule 506(c) offering that allows you to advertise.

If you don’t have a deal under contract and you’re meeting people that way, then you need to take the time to get to know those people and to develop a relationship with them before you start telling them about deals.

So there’s an article on our website called “Determining Investor Suitability” that I would recommend everybody on this call read because that talks about what the SEC believes is necessary to be able to prove that you had a pre-existing substantive relationship, and you didn’t advertise to find these people. So read that article, “Determining Investor Suitability.”

 

Charlene Standridge:

“What is the address for Dave’s event on Saturday? I think you said it’s virtual, right?”

 

David Lindahl:

It’s virtual, yeah. It’s going to be on Zoom. So it’s daveevent.com.  That takes you to a presentation that I did to explain the opportunity. It’s about 45 minutes to an hour long, and if you can … From that point, if you decide, “This is something I’m really interested in,” then there’s a $20 fee and you’ll be invited into that five-hour event. It starts Saturday at 12:00 Eastern.

 

Charlene Standridge:

Perfect. “Which properties are more affected — C and B?”

 

David Lindahl:

Yeah. The C properties are affected the most because of the type of tenant profile. And then the Bs, a little less so, and then the As are probably the least affected. Again, that just goes to the stability of their jobs and the amount of reserves that they would have in the bank.

 

Charlene Standridge:

“Any comment on the eviction moratoriums from the CARES Act and new HEROES Bill, which is planning to add another 12 months of moratoriums? Seems more political risk than financial at this point.”

 

David Lindahl:

I wasn’t aware of that. Are you aware of that, Kim, that they’re going to put a 12-month moratorium on evictions?

 

Kim Lisa Taylor:

Well, I think that’s the proposal that Senate has said is dead on arrival. But I’m not …

 

David Lindahl:

That doesn’t make any sense.

 

Kim Lisa Taylor:

I’m not aware of that either. But I think that it’s important that we write into the documents, the risks related to coronavirus and political issues, deferrals and things like that, that could happen. Because as long as you’re informing your investors up front that these are the things that could happen and could ultimately cause you to lose the property, well, they can’t come back and blame you for it if it does because they read about it and they decided to invest anyway.

But I think you do have a duty to inform investors that this could happen, and it could affect their returns and their ability to get their money back.

 

Charlene Standridge:

Hey, the next one is, “My C class is at 98.3% over 520 units of C. My B class is at 97.4% over 387 units.”

 

David Lindahl:

I’d say kudos. I’d say kudos to that because whoever’s managing those properties is doing well.

 

Kim Lisa Taylor:

Yeah. Let’s hope is stays that way, right?

 

David Lindahl:

Yeah, absolutely.

 

Charlene Standridge:

Can you provide your website again, Dave?

 

David Lindahl:

Oh, the website is daveevent.com. Is that how you want to …

 

Kim Lisa Taylor:

They’re asking for the REIndicator.com, RE Indicator was the other one you mentioned.

 

David Lindahl:

Yeah, that’s Scott Stafford product. It’s good.

 

Charlene Standridge:

“What is your view about investing in SFR versus multifamily going forward given concerns from distancing caused by coronavirus?”

 

David Lindahl:

Single-family residence, is that SFR?

 

Charlene Standridge:

Yeah.

 

David Lindahl:

I’m not a single-family investor. When I started investing 25, 26 years ago, I first started with credit cards. I ran out of credit card money, and then I would sign up for every credit card that I could get. I was broke back then.

And so I’d get my down payments with that, and then I ran out of those and that’s when I learned how to flip houses. So I would flip houses so I could get more down payments for more multifamily properties, and then my multifamily properties started generating enough cash flow for down payments to buy more.

So I’ve never really been a single-family investor mainly because it’s a lot of work, and you’ve got to be on-site. And in order for you to get a check, you’ve got to do all that work and then resell the property, where a multifamily property is a true business.

True businesspeople, they look for opportunities to create a revenue. When I was at Harvard University, and the only reason I got in there, and that was in my late 30s, was because I went through the Harvard Business School OPM program, which is like the MBA but it’s for people … The best way to describe it, it’s for people that have started businesses and created over $10 million revenue stream.

And then you get invited into that program, and then they qualify you to receive a lecture. So when I was in that program, one of the things they drilled into our heads is that you want to create a company that you can create a sustainable revenue stream from.

It’s all about sustainable revenue stream. Businesses are evaluated on sustainable revenue streams and your team, the team of people you surround yourself with. You can’t create a sustainable revenue stream with single-family houses because … unless you’re a big producer and you’re just buying up a whole bunch of them and you’ve got people underneath you going through them and flipping them out, which most people don’t.

But multifamily properties, it’s all about the revenue stream. The value of the property is based on the revenue stream. And then you build a team below you of your attorney, a good SEC attorney like Kim, you get your manager in there, the people that are your team, and then you run these properties.

So your role is to go out there and get more deals so you can hand off to your team and keep that sustainable revenue stream going. The other part of your responsibility is to be a good asset manager so you can oversee the asset management of the property but not the actual property management of the property.

So no, I’m sure there’s going to be a lot of great opportunities in single-family investing coming out of this turn as well, but that’s not my market.

 

Kim Lisa Taylor:

We have a couple of people with their hands raised. Why don’t we go and ask them for their questions?

 

Charlene Standridge:

Marty, I’m going to unmute you now and you can ask your question. All right, Marty?

 

Marty:

I have to attend another call. I’m going to drop off in a second. Thank you very much. I’ve taken down all the websites and all the names and stuff like that, and I’ll be in contact with the two of you at a later time. We’ve raised a fund. We’re looking at new opportunities. We believe the same thing’s going on in the market that you were talking about.

 

David Lindahl:

Yeah, you’ve raised the fund. Yeah, good for you.

 

Marty:

I think so. We’re ready to go and we do agree with you about the upside in the California market. We believe that was a fatal error, and we have significant assets here, but we’re now starting to move … My attention’s turning to the southeast right now and to the Atlantic coast. I think there’s huge opportunity there.

 

David Lindahl:

I agree.

 

Marty:

All right, thank you very much. It was outstanding program today.

 

Kim Lisa Taylor:

Thank you so much.

 

David Lindahl:

Nice to talk to you.

 

Charlene Standridge:

Oh, one more came in. Just a minute. Rick, I’m going to unmute you. Rick G, you can ask your question.

 

Rick G:

Thank you. Dave, I’m just curious as to what your thoughts are on Las Vegas. I know you said that some of the opportunities are the ones that got hit the hardest, and seems like Vegas is getting pretty wiped out. So any thoughts on kind of what …

 

David Lindahl:

Yeah. I’d be a buyer in Vegas. I’d be looking. That market’s turning really bad right now. The casinos have been closed for like nine weeks now. And it can open up slowly. I mean how can you social distance in a casino? It’s really hard, and all those shows, too.

So I would definitely be watching that market and I would be a buyer because you know it’s going to come back. It’s just a matter of time.

 

Rick G:

That was my same thought.

 

David Lindahl:

I don’t know if it would be the first market I go into, because I think it’s going to take longer to shake out. But I would have an eye on Vegas the whole time.

 

Kim Lisa Taylor:

Hey Charlene, we’re running out of time here, so I’m just going to pick a few of these remaining questions. There’s one that asked if we could share the link to the report that talked about the 30% … Let’s see, what was it? Sell properties for 30% of purchase price. I think you said that was CoStar report, wasn’t it, Dave?

 

David Lindahl:

Yeah. That was shared to me by my partner, so it’s inside of my email. I’m not in the office today but I will forward that over to you, Kim, and then you can send it out.

 

Kim Lisa Taylor:

And then somebody asked, “Can you use or format more than one sponsor on a given deal?” Well, sure. You can have multiple guarantors, sponsors as long as they all agree. There’s no problem with that. And usually, you’re going to have to have a sponsor. If you don’t have the net worth to cover the loan amount or the loan balance, then you’re going to have to bring in some other people that do.

It’s very common to pool people’s resources together to be able to hit those liquidity targets that the lenders have.

Let’s see. “Is this event going to be recorded?” Yes, it is being recorded and we will broadcast that, and we will also post it on a website where we post all the rest of them.

 

David Lindahl:

Where it lives in immortality.

 

Kim Lisa Taylor:

Yes. Dave, how about your event? Somebody’s asking if your Saturday event is going to be recorded.

 

David Lindahl:

No, that’s not going to be recorded. We may do it again, we may do it one more time. But we’re not recording it.

 

Kim Lisa Taylor:

And that’s all the questions that we have right now. Thank you all for attending. Dave, this was phenomenal. As always, you have such great wealth of advice to share with all of us. We can’t get enough of it. So if you want more, attend Dave’s Saturday event and listen to his one-hour persuasive discussion where I’m sure once you’re done listening to that, you won’t want to miss the Saturday event, I’m sure of that.

 

David Lindahl:

It lays it out. It lays it out step-by-step to what the opportunity is and how we got there.

 

Kim Lisa Taylor:

That’s fantastic.

All right. Well, thank you so much everybody and we’ll see you next month.

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