Dan Handford (03:10):
So, we’re not talking about just putting down the typical, $10,000, $20,000 that you might see in some of these smaller assets. These are pretty large assets. The earnest money deposit has to be meaningful, and so that’s one of the ways that we stand out. Then, at the end of the day, a lot of it has to do with the purchase price. And so, we pass on a lot of deals because, when we do our underwriting very conservatively, we have certain metrics that we have to hit, that we know that we want to hit as investors, we also know that our investors want to be able to hit as well, and we won’t be successful in that asset if we can’t hit some of those return metrics. And so, for us being able to find assets that hit those return metrics and having a maximum amount that we are willing or able to pay for that asset allows us to … having an even more challenging time trying to find assets because we pass on a lot of them because the bid on these assets goes way up higher than what we can afford. And a lot of times, we’ll get into the best and final round and feel like we’re going to get awarded the deal, and somebody comes in at the last minute and bids it up several million dollars more, and it just doesn’t make sense to us at that point.

Robert Leonard (04:13):
Whose earnest money are you using in these deals? When you talk seven figures for an earnest money, are you just taking that out of the capital you’ve raised?

Dan Handford (04:20):
Well, oddly enough, with our types of acquisitions, we’re raising all of our money from contract to close, so earnest money deposit actually has to be submitted within two days after contract signing. And so, we don’t raise the funds until we get closer to a week or two down the road. Once we actually get all the documents sent out, we do our webinar to promote their offering. And so, we actually use our own personal capital to be able to do that, so we’ve never had to use outside capital or had to be even more risky and use the offerings money because you never know. I mean, at the end of the day, it’s possible that the offering, that the closing might not occur, and you have to either eat that earnest money deposit or somehow try to get it back.

Dan Handford (04:57):
And so, we’ve been very conservative with that and said we’re just going to put our own neck out there on the line. And our partners, we have three managing partners, myself, Daniel Rendazzo, and Brandon Abbott, and between the three of us, we put up all of our earnest money deposit. And so far, up to this point, we have never lost earnest money, so that’s a good thing. And every deal that we put under contract, we’ve been able to close. So, it’s a good track record to have, and of course, it gives us more confidence when we’re going out there and putting three or four million dollars on an asset that’s hard and nonrefundable day one.

Stig Brodersen (05:28):
Interesting. Well, I think that’s a good segue to the next question here, Dan, because, in the personal finance world, there are a few different general rule of thumbs for emergency funds, and there is a similar approach in the real estate world. Some funds and investors are a bit more conservative, aiming for closer to 12 months of reserves, and then the others are a bit more aggressive and are okay with three months. Why has your firm chosen to keep at a minimum eight months of reserves and stress test as a 60% occupancy rate? How has this benefited or perhaps hindered your business throughout the years?

Dan Handford (06:01):
Yeah. So, I would say one of our earlier assets, we didn’t have enough offering reserves, and we were doing a major renovation on that property, and with not having the major operating reserves off to the side that we could potentially pull, we actually ended up not being able to … We ended up getting to a position where we may have not been able to complete the renovation plan because the renovations went over our budget. Right? And so, one of the things that we had to do was, is the partners actually had to loan the asset money to be able to keep it … not keep it afloat, but to be able to pay for the additional renovations so that we could continue to maintain the returns for investors. And so, with that particular asset, even though in the offering documents and in the operating agreements, we’re allowed to charge interest if we loan the property money, we just didn’t feel it was prudent to do that because we don’t necessarily want to make our investors feel like we’re just loaning money to the property to make extra money. Right? And so, we gave a no interest loan to the property, and we held onto that note until we ended up selling that asset.

Dan Handford (07:04):
We sold that asset for higher than the projections that we had had originally, so it was a great return for our investors, as well as us. But that’s one of the lessons that we learned early on, is that we want to make sure we have plenty of operating reserves. And so, what we try to do is we have … So, some groups might say they have 12 months of operating reserve, and we’re at eight. With us, our operating reserves at eight months is actually … If the property goes down to 0% occupancy, we can continue to support the property and pay the debt service and the expenses for eight months. Right? But the chances of the property going down to 0% is pretty remote. But if you look back in the last hundred years, all the recessions and economic cycles that have occurred, the recessions don’t normally last more than about 15 to 18 months. So, as long as you can hold onto that property, continue to support the property for at least 24 months or even 18 months, right, we always plan for 24 months. Then you hold on that asset to the other end, then you’ll do really, really well. And so, for us, even though we have this eight months of operating reserves, we’re not going to go down to 0%. Right?

Dan Handford (08:08):
And so, that eight months of operating reserves will actually get us farther down the road. And when some people say they have 12 months of operating reserves, they really don’t have 12 months of operating expenses. And to go all the way down to 0% occupancy, they have a certain number that they would say, if it drops below 25% occupancy or 30% occupancy, we can continue to support the property for 12 months, right, which, again, that’s just our conservative nature. And when we looked at, in the beginning, doing this, it reduced the returns for investors, for sure, because, when you have a large operating reserve, you actually have to raise more money. The more money you raise, the lower the return is for all of the investors in the deal, but at the same time, that return only reduced it by about a hundred basis points.

Dan Handford (08:50):
So, one percentage point is all it reduced it by. And so, for us and our investors, they’re like, “Absolutely, I’ll give up 1% on my return profile to mitigate any future risks of capital calls and any types of issues of potentially losing the property or anything like that, or the property happened to obtain loans though to support itself.” So, we actually do that to make sure that we have a much more conservative deal. And yes, we have to bring on more money, but, at the end of the day, it allows everyone to be able to sleep well at night. That’s that swan principle, right, to sleep well at night. And so, we have a lot of operating reserves that we can make sure we can sustain the property even if there are some economic pressures that come across.

Robert Leonard (09:30):
The capital call you mentioned and your debt structure is where that risk comes from. And I want to talk about that for a second because smaller individual real estate investors are typically pretty limited in the financing options that they have available to them, whereas large funds such as yourself, who are acquiring multi hundred unit properties, actually have access to a lot more financing options, such as family offices, hedge funds, and sometimes even insurance companies. Who does passiveinvesting.com typically obtain its debt financing from? And how is it most commonly structured?

Dan Handford (10:02):
It depends on the market, right? So, there’s been, sometimes there’s usually 6- to 9- to 12-month periods, where it kind of changes and shifts, based on the debt market that’s available at the time. So, there’s been times where we’ve used agency financing, whether it be Fannie Mae or Freddie Mac, if we get fixed rate financing that’s long term, 7-, 10-, 12-year terms, with usually some interest only periods for the first three to five to seven years, depending on the asset and the market. And then, most recently, we’ve been doing bridge debt.

Dan Handford (10:30):
So, we’re using some of the options that you mentioned. So, we’ve actually used life insurance companies. We’ve used hedge funds. We’ve used other private funds. We haven’t used any family office money, but it’s mostly just been those other institutional level funds that we’ve obtained our debt from.

Dan Handford (10:44):
And they have a floating rate, which is a little more risky, but it also provides the ability to not have any type of prepayment penalties, if you will, that will cause the performance of the property to start to go down if you try to sell it earlier than what you had originally projected. And right now, with the current market and the types of assets that we’re buying, the bridge debt, it seemed to have better terms for us. Now, obviously, with the capital markets in a major state of flux at this point in time, like we’re today sitting on a day where we actually have the Fed going to be probably increasingly the Fed rate by about 50 basis points. Right? And so, there’s a lot of flux that’s happening right now. And a lot of the floating rates now, instead of being based off of LIBOR, they’re now being based off of SOFR.

Dan Handford (11:29):
And so, there’s a lot of structure changes there as well, but, typically, as far as the structure is concerned, if it’s an agency debt, you’re usually going to have right now a little bit lower loan to value. So, you can be like 55% to 65% loan to value, and you’re using some sort of bridge debt. You’re going to see that tick up a little bit, maybe 65%, 70%, if you’re lucky, 75%. But usually we try to say between that 65% to 70% range when it comes to a bridge debt option that there … to be able to make the cost of capital more cohesive and their returns a little bit better for the investors and lower risk.

Stig Brodersen (12:02):
So, Dan, I wanted to transition and talk a bit about taxes. And I can already feel like our audience are like, taxes. That’s not typically the most exciting topic for most people, but it is for me and I know it is for Robert because it’s a game of making the most money, and taxes are an expense. How are Americans typically taxed whenever they make investments with you? And is there any way that they can lower their taxes?

Dan Handford (12:27):
When it comes to the types of assets that we acquire, obviously they’re large high quality assets, and they have a lot of depreciation available on them because we, every single one of our assets, we actually do what’s called a cost segregation study. And some of the smaller investors might not have heard of that before, but we basically have a asset. We actually have an outside engineer firm come into each one of our assets. The IRS is one that requires us to have the outside engineer firm come in, and they piecemeal the property down to the sheet rocks and the studs and the appliances and the countertops and the flooring and the shingles on the roof, and we can piecemeal the property down to accelerate depreciation.

Dan Handford (13:03):
And so, instead of, I can say, for example, like in a multifamily offering, like the one in Savannah, Georgia, that we’re doing right now, this particular one is a multifamily deal,, and there’s three different levels of depreciation that are available for investors in our offerings. There is straight line depreciation, which is pretty standard. Right? It’s 27 and a half years for residential properties and including multifamily. So, even though multifamily is considered CRE, commercial real estate, it actually still is classified as residential in the eyes of the IRS. So, you get 27 and a half year straight line depreciation schedule. And then, of course, on the commercial side, it’s 39 years, so you can depreciate that. Just basically take the value of the property minus the land, divided by 27 and a half or 39, and that’s how much depreciation you get every single year.

Dan Handford (13:48):
But then there’s two other additional levels of depreciation that you can obtain, which is accelerated depreciation, and that’s where that cost segregation study comes into play, where you can actually piecemeal the property down. And in certain parts of the property, you can actually accelerate for the first five to 15 years, based on the life expectancy schedule that the IRS gives us, based on the items that are in the property. And so, what that allows us to do is to really front load a lot of the depreciation of those first five to 15 years, which allows investors to have really high depreciation benefit. So, on our assets … Well, I’ll mention that in just a moment, what we see using our assets.

Dan Handford (14:24):
But the third level of depreciation is bonus depreciation. Right? And so, anytime there are renovations or anything like that we’re doing on the property in those first 12 months, we can bonus depreciate that. And right now, it’s been about 100%, but it’s going to go down, year over year, over the next couple of years. I think the next year’s going to be maybe 80%. It tapers down, but that bonus depreciation still allows us to front load that for those first several years, which gives us those nice pops of depreciation, and that depreciation is going to offset any of the income that comes off of the property.

Dan Handford (14:57):
And so, if somebody comes into our assets, and they invest $50,000 on one of our assets, they can expect to be having a depreciation benefit of anywhere between 40% to 50% on the low end, upwards to 70%, 80%, maybe even 90% depreciation of that investment in that first year. And they can take that depreciation to offset the income off the asset, but also to be able to offset some other types of gains that they have or with other types of income.

Dan Handford (15:22):
Now, I’m not a tax professional, so I’ll just make that disclaimer right now. But you definitely want to check with your CPA all the different nuances here. But one of the things that I found with my CPA is I had a CPA that was local to me. I really enjoyed working with [inaudible 00:15:37]. He was a great CPA until I started going into real estate. And once I started going into real estate, he started asking me questions about the real estate professional status and the depreciation benefits and stuff like that. I was like, “If you’re asking me these questions, you’re not the right guy for me.” So, I had to find a different CPA that was really knowledgeable in real estate to really be able to help me make it have a great impact on my taxable liability.

Dan Handford (15:59):
And now I don’t pay federal income tax right now because all the depreciation that I’m getting is offsetting my income, and it’s also because I also have the real estate professional status, which helps to offset my income that I have that comes in. And that’s a great benefit for real estate investors, is to be able to have the ability to have that differentiation offset the income that you are getting off of it but to also offset some of the other income, whether, if you’re an active investor, it can potentially offset some of your active income, whether it’s in real estate or in a W2 or your spouse. If you’re filing jointly, you can offset spousal income as well.

Dan Handford (16:34):
And then, also, if you’re not an active real estate investor, then you can have that depreciation offset other passive gains. So, if you have passive gains and other types of investments, whether it be real estate or stocks or whatever, it could help to offset some of those gains as well. And of course, when you go to sell the asset, that’s the real beauty of these types of assets. And what we do at passiveinvesting.com is, when we go to sell an asset, and we’ve now grown that nugget from $50,000 to, say, $100,000 or $150,000, we can now do what’s called a 1031 exchange on the back end and defer even longer those capital gains. And if we can continue to defer those capital gains until you pass away, when it turns over to your heirs, then, at that time, the basis of the property resets to the current value of the property at that time and allows you to effectively pay zero capital gain tax.

Dan Handford (17:24):
If you can continue to do that, you can still live off of the income that you’re spinning off of each one of the investments as you go throughout. So, with our investments, what we do is we give investors the option to 1031 exchange or liquidate out whenever we go to exit a deal and move on to the next asset. And so, up to this point, we’ve been able to exit eight deals, and we’ve been able to successfully execute those 1031 exchanges into the next asset successfully to be able to allow our investors to continue to offset those gains from one investment to the next.

Robert Leonard (17:54):
I’m sure, Stig, hearing 70%, 80%, 90%, and the audience hearing that, that high of depreciation percentages, their ears are probably going up. They’re probably excited, but, on the back end, there can be this concept of depreciation recapture. Talk to us a bit about how that impacts your property and some of your investors.

Dan Handford (18:14):
Yeah. So, whenever you go to sell the asset, if you do not 1031 exchange, and you liquidate out, then you’ll be subject to two different types of taxes. You’ll have the depreciation recapture tax, and then you’ll have the capital gains tax. And so, if you have … Obviously, we’ve been receiving the [inaudible 00:18:33], the negative K-1s, if you will, at the end of the year, where you’ve been able to use that depreciation to lower your income to effectively pay no income tax, then, of course, when you sell the asset, that’s where that depreciation to recapture comes in. And they’re going to say, “Okay. Well, you already took a benefit for the last three to five years on this depreciation. Now that you’ve sold, you’ve liquidated out, and you did not do a 1031 exchange, we’re going to recapture what we should have captured back when you used that.” So, that’s why it’s powerful to use the 1031 because we want to make sure we can continue to defer that as long as possible, and if we can do that all the way up until we die and pass it over, then the recapture, the depreciation recapture and the capital gains goes away.

Robert Leonard (19:12):
On the 1031 exchanges, is that a decision that passiveinvesting.com is making when they sell their property to go into the next property, or is that on the investor basis?

Dan Handford (19:23):
The investors have the opportunity to make the decision as to whether or not they want to 1031. So, we have, say, 20% of our investors that says, “Hey, I want to liquidate out.” We can liquidate out those investors when we sell that asset, and the other 80% can actually move on to the next asset. So, the next asset that we 1031 exchange into is not a choice that the investors have. It is one, another choice, that we choose that next asset and move on. Sometimes we already know in the [inaudible 00:19:50], we can tell the investors which asset we have chosen so they can decide whether or not they want to 1031 into that asset.

Dan Handford (19:55):
But usually, at that point in time, most investors don’t really have that much concern about it because, number one, they trust us because we’re always invested alongside of our investors in each one of our assets. They know we have a vested interest to make sure that the next vehicle that we put them into is going to be a great, solid investment. But, at the same time, they’re not really too concerned about it in everything else I’ve just said, but also they don’t want to pay the capital gains tax on it. So, even if it’s an asset that maybe is not the return profile that they would exactly want, then they still trust us to find one that’s going to be good and solid for them that will still produce returns.

Dan Handford (20:29):
And they’re going to have a higher investment into the next one. So, if they put initially put in $50,000, and we sell, their new investment amount might be $100,000 because of the gain that we had on that sale. And so, that benefits them because now all their returns are based off of the new, larger investment amount, which is $100,000 versus just the $50,000. And then, again, you do that three or four times, and now you’re at $175,000 or $200,000. Then you go to $300,000 and like $600,000, and then you can see how it can build on itself as you go from one asset to the next asset. And then you continue to live off the cash flows, and the actual principle continues to grow over time.

Robert Leonard (21:03):
For anyone that is just hearing this 1031 exchange conversation for the first time, it’s also known as a swap ’til you drop. So, if you do a quick Google search, you can check out 1031 exchanges under its other name, from time to time. But, Dan, earlier in the conversation, you alluded to the 320 unit luxury apartment complex in Savannah, Georgia, that you and your team at passiveinvesting.com are acquiring right now. As part of that deal structure, investors are being offered the opportunity to choose between two different classes of shares. There’s Class A, which is preferred equity, and then there’s Class B, which is the common equity. Many of the listeners of our show are stock investors, and therefore, they’re familiar with preferred stock and common stock within the realm of stock investing, but they might not be so within a real estate deal. Why has your team chosen to offer these two different options? And what do these options offer to investors?

Dan Handford (21:57):
We started offering these two types of share classes several years ago, and it was primarily because we had a subset of investors that wanted to have … I say guaranteed returns, but we can’t guarantee returns, as you know. These are investments, so they’re nothing that’s guaranteed. But when you are in a preferential position in the capital stack, and you have a preferred return, so, on our Class A share, we typically operate a 9% preferred return. And if they invest more than $250,000, they get a 10% preferred return. But, with that preferred return, there’s no participation in the upside over and above that, but what they get is they get a preferential treatment in the capital stack, and then they also get their capital back before the Class B investors, and it’s usually on about 20% to 30% of the capital stack. So, the deal would have to go really south. I mean, like really, really south for them not to get their return or for them not to be able to get their capital back. They are sitting in that preferential treatment position. And that’s why I say it’s as close to a guarantee as we can get, is for preferential treatment in the capital stack.

Dan Handford (23:02):
And we do get questions from investors like, “Why would anybody want to invest in that, if you could invest in Class B and get a 7% preferred return and then have the opportunity to get 15%, 20%, 25% return on these types of investments?” And the answer to that is, it really just depends on the investor because some investors are more risk averse than others. And so, they might want to do a blended approach, where they do 50% in Class A and 50% in Class B, and they have this nice blended return profile on the same investment. And we also have investors that are maybe a little bit older, and they don’t necessarily really care too much about the appreciation. They want the higher cash flow so they can live off those cash flows during retirement or whatever. And so, there’s a lot of different dynamics there, but we don’t usually have a large portion of our capital stack for Class A, so it usually fills up pretty quick, and then we don’t have any more that can go into Class A. Right?

Dan Handford (23:50):
So, the large majority … I’ll give you an example. So, actually in the Marina Grove deal, which is out in Savannah, Georgia, that deal has the two class shares, and it’s a $35.3 million capital raise. And the total purchase price is close to a $100 million. I think it’s like $96, $97 million, so it’s a large deal, but, of that $35.3 million that we’re raising for the equity side, only about maybe $3 to $4 million is set aside for Class A. So, only about 10% of the capital stack is really there for that Class A stack. So, you can see that being in a class A position is a really good thing. It has a very, very low risk when you’re trying to invest in that. And so, when somebody wants those higher cash flows, it’s a great opportunity for them to be able to invest in that share class to get those higher cash flows. And then, of course, again, you are giving up the opportunity for the upside. They’re giving up that opportunity to have that safer kind of almost guarantee, if you will, on the return.

Stig Brodersen (24:46):
Dan, the luxury apartment complex we just discussed there in Marina Grove, that was built in 2016, and it now has nearly a full occupancy, 96% of the numbers I’m looking at right now from early March. Now, the age of the property and the listing photos led me to believe that the property is in great condition. And then, despite this, the offering states that there’s a potential for a 24.7% annualized return for a 2.24 equity multiple for the Class B common equity or a five-year hold period. How are these potential returns to be achieved for investors? And what is the business plan for this property?

Dan Handford (25:24):
Yeah. So, one of the things that we try to do is we try to buy assets that either are direct from the developer so that we have some opportunity for organic rent growth, or we try to buy them from people that we have bought from in the past that have good quality assets. And this particular asset is, the rents are actually under market, and also the amenities set is under market. And so, what we’re going to do is we’re going to go into this asset, and there’s also some deferred maintenance that, some different items that we’ve noticed that we want to clean up to improve the property and improve the community. And so, being able to do that allows us to be able to look at our competitor set and see what are some of the other top properties doing from an amenity set that are very attractive? And we can start to add some of those amenities sets to our property, which will allow us to be able to have the opportunity to increase the growth of the rents because we’re now starting to be more competitive with the rent set that has come in.

Dan Handford (26:19):
And a lot of it has to do with location. Right? So, if you’re in a great location, and you have maybe a little bit of a lower amenity set, people still might want to drive an extra five or 10 minutes, if you will, to be able to get to a location that would allow them to maybe have a few more amenities on the property. And so, for us, we always look at that competitor set and see, what are the competitors doing? Why are they able to achieve a little bit higher rents than what we’re doing right now? And what can we do on the existing property that would allow us to be able to go in and to be able to improve the property and to be able to maybe make some renovations?

Dan Handford (26:53):
And so, for us, in addition to some of the exterior things like the pool, enhancing the pool deck and adding a new dog park with some fencing with nice sod in there, and also doing some additional landscaping and replacing a lot of the dead plants that are [inaudible 00:27:07] the property, we’re also going to be updating some of the fitness equipment. And then, one of the other things that we’re looking at doing on the interior is maybe updating some of the kitchen and the bath plumbing fixtures, and having a more modern lighting package inside the property, including maybe even adding some of the ceiling fans. And then, one of the things that’s really popular right now is increasing or adding the technology to the unit. So, you have these technology packages that you can add to the unit, which, with smart thermostats and things like that, that would allow us to be able to increase the rent and achieve rents of premiums of up to a dollar per square foot, which would get us more in line with the competitor set that’s around the property.

Robert Leonard (27:45):
Dan, for a second here, talk to us a bit about why you’re focused so heavily on increasing the rent and doing these types of activities that are going to drive the rent increase, rather than not just from a cash flow perspective, but explain how that impacts the valuation of that property.

Dan Handford (28:00):
Yeah. So, one of the things that you have to look at when you’re buying these properties is the exit. Right? And one of the things that the exit is based off of, or really the only thing that it’s based off of, is the NOI, the net operating income. And so, there’s two different ways to be able to affect the NOI. One is to go in, improve the property, spend some money to do some renovations and spend those CapEx dollars to improve the property and to get it to a better quality asset that will allow you to be able to charge more.

Dan Handford (28:29):
And then, the second thing is to reduce expenses. And so, that’s one of the things that we’re really good at is going into a property, seeing what’s missing in that property, be able to add value from that perspective, but then also to be able to look at the expenses and see where can we shave off some expenses so it still allows to increase that income. And then, the types of assets that we try to acquire are in great quality locations. Right? So, we try to look at assets in primary, or at least high-end secondary markets, where we know there’s lots of competition for those types of assets. And some people might be scared sometimes of competition, but we actually look at it as almost like a litmus test. If there’s not any competition, we don’t want to invest there.

Dan Handford (29:08):
And so, if you look at cap rates, which is how you value a property, if you look at those cap rates and you say, “Okay, I want to get a higher cap rate,” right? So, a lot of gurus and real estate coaches and stuff like that will tell people, “Go look for high cap rate of asset.” Well, I mean, high cap rate assets are usually in markets that have low competition. And the only way they can get investors to go invest there is to raise the cap rate, so that then that, of course, again, reduces their valuation, but also reduces the valuation on the exit as well.

Dan Handford (29:39):
And especially right now, the market where we’re in, and we have very, very compressed cap rates right now, and even in these markets where you normally would’ve seen like 10% and 11% and 12% cap rates, these tertiary and even quaternary markets, you’re now starting to see those inch down to 5%, 6%, and 7%. But what’s going to happen when we have some sort of economic correction, if you will, you’re going to start to see those cap rates go back up again. Right? And then the primary markets and those higher end secondary markets, you’re not going to see a major shift. You might see a 50 to 75, maybe 100 basis point increase in the cap rates, but when you start to go in to buy assets at a 6%, 7%, and 8%, in this type of an environment, in a tertiary and quaternary market, when you go to sell, you’re going to have a harder time because now you’re going to be having to sell at a 10%, 11%, 12% or maybe even 13% or 14%. So, those values of those properties are going way down.

Dan Handford (30:29):
And so, for us, we want be able to buy assets that are in low cap rate environments to be able to have those higher exit potentials. And to give you an example of those exit potentials and the time and energy and effort that are involved when it comes to the valuations and the cap rates, if we buy an asset in a 5% cap rate market, we buy another asset in an 8% cap rate market. Let’s say that they are very similar asset. We spend the same amount of time, energy, and effort on them. We do some renovations on each one. We’ve increased the net operating income by $100,000. Well, on a 5% cap rate environment, we’ve increased that net operating income by $100,000, and the value of the property has increased by $2 million. But if we look at that same $100,000 in a 8% cap rate environment, we’ve only increased the valuation on that particular market by … or that particular property, in an 8% cap environment, by $1.25 million. So, you can see that the exits for the same amount of time and energy and effort are much better in a higher quality market that has lower cap rate, and that’s what we go after with these types of assets.

Robert Leonard (31:34):
I can definitely speak to personally the quality of Savannah as an area. I was actually just down there last month and spent some time in downtown Savannah, so definitely can speak to it myself. It’s a great market. As part of that capital structure for the property at Mariner Grove in Savannah, you guys have a private loan at 74% loan to value with an adjustable interest rate of approximately 3.8% with five years of interest only payments. How are our rising interest rates impacting this variable debt product and this deal? Were you able to purchase an interest rate cap to mitigate risk prior to interest rates rising dramatically recently?

Dan Handford (32:10):
So, right now, if you know anything about the debt market, interest rate caps are becoming more and more expensive. And so, yes, the lender requires us to buy these interest rate caps because they want to mitigate their risk as well of the increasing interest rate environment. And so, yes, we have been able to purchase that interest rate cap. And what we’ve done strategically is we bought a short-term interest rate cap over the next two to three years, which allows us to be able to renegotiate the rate for the next two to three years as we’re continuing to stay into this particular asset. But it is possible, because this is a private loan or bridge loan option that has, it’s a five-year kind of 3-1-1 option, we do have the option to be able to refinance in two or three years into a fixed rate debt at that time, if we want, pull out [inaudible 00:32:54] capital and return that back to our investors.

Dan Handford (32:56):
So, there’s a lot of different options here, but, from a debt perspective, there is risk there right now, right, because there is some volatility in the market. And it is possible that the interest rates will continue to rise. And a lot of the economists are saying it is going to continue to arise, not arise but rise. It’s going to continue to rise in this environment, and what’s going to happen is that the cash flows of the property will be reduced. And so, the investors have to expect that, if interest rates do rise, there is going to be some cash flow fluctuation. So, it’s going to affect some of our projections, but the thing is, is that, when we underwrite, we can’t speculate. Right? We have never speculated with our underwriting. It’s always been what’s happening in the current environment, and can we plan for the speculative side of things, right? We don’t underwrite for it.

Dan Handford (33:44):
So, when, I mean, that we plan for … We talked earlier about having ample operating reserves. Right? So, if there is some major shift in the debt market, where we have this large increase in the rate, and it starts to impact cash flows, the biggest thing that it’s going do is they’re going to reduce in the short term the actual cash flows that are going to be distributed to investors in the short term, but the property’s still not going to be in a position where it can’t meet the debt service. Right? We’ll still be able to meet the debt service. We’ll still be able to produce great, solid returns for investors on the full cycle into the deal. It’s just in the short term because of that shifting of the debt market and where it’s going be. It’s going change.

Dan Handford (34:21):
And that’s also, it’s the nice thing and also the bad thing about floating rate debt, right, because, with floating rate debt and a great economy, when the interest rates are on the low end, right, we get the benefit. Right? And then, as the Fed starts to trying to shift their policies or whatever, they start to increase the rates, we kind of get the brunt end of it. Right? But then again, once they start to shift them back down, we get the nice benefit of it. So, that’s the nice thing about the floating rate, so it should hopefully equalize over the life of the deal.

Dan Handford (34:50):
But right now, we are starting to shift and starting to see that sometimes it’s better to go into some fixed rate debt. Even fixed rate debt right now is expensive. And the problem with fixed rate debt right now is that the debt coverage service ratio that they need on fixed rate debt is pretty low. And so, based on the current cap rates in the environment right now and the debt service coverage ratio, we’re starting to see that the loan to values, the load of costs are going down. So, it’s going down to 50%, 55% on some of these higher quality assets, just because of the valuations on the properties. And they want to make sure that the debt coverage service ratio is in line to make sure that the debt will continue be paid.

Robert Leonard (35:30):
Mariner Grove that we’ve been discussing is just one of the opportunities that you guys have available at passiveinvesting.com. One of the other ones is a self-storage fund, which, similar to Mariner Grove, you guys offer Class A and Class B shares. The Class B shares for this fund have a potential annualized return of 21% and a potential IRR of 18%, also over a similar hold period of about five to seven years. With investors’ money only being able to be invested in one place at a time, it is important for someone to consider their opportunity cost. How should an investor consider multiple investment opportunities for their portfolio? What should investors look at just beyond the potential returns that they could achieve?

Dan Handford (36:10):
One of the things … So, when we first started passiveinvesting.com, we made the decision that we wanted to name it passiveinvesting.com and not multifamilyinvesting.com or selfstorageinvesting.com because we wanted to leave ourselves open to the opportunity to add additional asset classes as we continue to grow. And so, what we have seen over the last couple years is that our investors have started to request additional assets. So, the majority of our holdings right now is in multifamily, followed up by self-storage, and then express car washes, which is a topic that we may get into today, maybe not, and then also hotels. Right?

Dan Handford (36:49):
And so, from an asset allocation perspective, it’s great to have a diversification. So, for many of you who are listening that have a portfolio in the stock market, you’re not going to put all of your eggs in one basket. Right? You’re not going to put all of your eggs in Rivian, because, if you did, you’d probably be in a bad position right now if you did the IPO, right, or even DiDi. Right? If you put your eggs in the DiDi stock, it’s really tanked right now. But, anyway, so you want to create that diversification in your portfolio. Right?

Dan Handford (37:16):
So, same thing in a real estate portfolio. As a passive portfolio, you want to make sure that you have some diversification. Obviously, you want to have a diversification of markets within the same asset and also asset classes within the same asset, but you also want to have a diversification in the type of assets that you’re investing in. So, right now, like I said, we have the multifamily assets that we have, we have the self-storage assets, we have our express car washes, and our hotels. Every single one of them actually has a different risk and return profile. And what’s interesting is, if you look at it from a, the ability to be able to shift and pivot quickly, multifamily, we have a one-year lease agreement, right? They’re renting that unit for one year. In self-storage, they’re renting it for 30 days. And hotels are renting it for one day. And express car washes, they’re renting it for five minutes. Right?

Dan Handford (38:11):
So, we could actually pivot a lot faster in a lot of these ones that are even outside of multifamily. So, if the market starts to shift and change, we can adjust pricing to mitigate some of that risk in some of these asset classes very quickly. We can pivot a lot faster. And so, those are the four primary assets we have right now. And as we continue to grow and expand, we will expand into some other asset classes like industrial and small warehouses and medical office building, assets that we know that can do really well at any time of economic recession and also cash flow very well as well.

Stig Brodersen (38:45):
Interesting. So, Dan, both of the investment opportunities we just discussed, they had this defined hold period between five to seven years. And the question then becomes how does passive investing determine when the right time is to dispose of an asset? One can easily imagine a situation where the asset is performing really well, but then the predetermined hold period has been reached.

Dan Handford (39:08):
One of the things that we always do right now is we’re underwriting every deal on a five-year hold and time horizon. And the reason why we say five to seven years is because it is possible in five years that it’s not the right time to sell. And so, we don’t want to set up our operating agreements and our offerings to the point where we are forced to sell at any point in time, because, if there is an economic recession, and there’s a downturn in five years from now, we don’t want to be forced to sell in that environment. So, the investors in these operating agreements have given us the flexibility to make the right decisions for them of when to actually sell the asset. And so, what we do to make sure, we’re always trying to figure out when is the right time to sell. Every year that we’re in the deal in each one of these offerings, we get a BOV, which is a broker opinion of value, which allows us to determine what can we sell this property for right now in the current environment? And then, once we get that analysis back, we can determine, is right now a good time to sell? And I’ll give you a quick example of that recently on one of our assets that we sold last year.

Dan Handford (40:09):
I’ll also give you an example of one that’s being sold right now. It’s under contract just this week. We bought it for $51.5 million, so it was an asset out of Raleigh, North Carolina, and we held onto it for two and a half years. And in the BOV last year that we got from the broker, they said that we could sell it for between about $72 to $73 million, and our five-year time horizon and target to sell that asset was to sell it for about $68 to $69 million. And so, of course, we’re looking at that going, “Wow. We’ve only been holding this thing for two and a half years. We can go ahead and outperform and achieve the returns that we had projected in five years and get it done in two and a half years.” And so, we pulled the trigger and decided to go ahead and sell that asset. Once the bids started coming in, we ended up selling it for $79 million. So, it was much higher than the BOV, and of course, a little over $10 million more than what the investors were expecting to receive on that one, right, based on the exit price. And so, it was a great return for our investors with a 35% return. It was a phenomenal exit. Right?

Dan Handford (41:10):
But that’s what we have to do because, if we would’ve just said, “No, we’re not going to look at it until year five,” then in year five, the market might’ve been a little bit different and changed, and we might not have even gotten $79,000,000. Maybe we would’ve only got the $72,000,000, $73,000,000, or maybe even $68,000,000, $69,000,000. Who knows, right? So, if, in the current environment, we can sell and outperform the projections, then we’ll go ahead and make that decision. And of course, we try to tee it up, like we said earlier, with another asset that they can 1031 exchange those proceeds into.

Dan Handford (41:35):
And then, right now, another example for you is we have an asset right now out of Charlotte, North Carolina. And we’ve held onto that for just over two years now, about. It’s probably closer to two and a half years now as well. And that particular asset … Actually, it’s only about a year and a half. Excuse me. But a year and a half that we’ve had that asset, and we were projected to sell it for, I think, $30, $33, $34 million, somewhere like that. And we’ve already got an offer, and we’re signing the contract this week for $39 million on that. Right? So, for us, it made sense.

Dan Handford (42:05):
Now, there’s another asset, because of the volatility of the market right now that’s located in Charlotte, North Carolina, that we put on the market. We were going to go sell it, and the offers came in, and they weren’t hitting our price that we originally were given by the brokers. And so, we just said, “You know what? It’s a great asset. It’s cash flowing very nicely. We’re not even … We don’t have to sell right now. So, if we’re not going to get what we want for that asset, we’re going to continue to hold on to it for the entire hold whole period.” Right? Maybe not for the entire hold period but at least until the next year we get another BOV to see is that the right time to sell? So, to answer your question, we always look at this on a regular basis. Our director of asset management, our asset management team is always on top of this, making sure that we know when is the right time to be able to sell that asset, so we can maximize the returns for investors.

Robert Leonard (42:49):
As you were talking about your approach to diversification at passiveinvesting.com, I was thinking back to, a few weeks ago, I had Jay Papasan on our real estate podcast. And for those who don’t know, Jay Papasan is the right-hand man of Gary Keller who founded Keller Williams. And Jay Papasan was the co-author for some of the most best-selling business books and real estate books of all time. And so, one of his main focuses is focusing on this one thing. He says you really need to drill down and focus on one thing. So, I’m curious how you balance diversification within those multiple asset classes versus really doubling down and focusing on what you guys are really good at?

Dan Handford (43:29):
It’s a great question because, even our investors, as they’ve continued to see our growth, right now, we’ve acquired just over a billion in assets in our groups since 2018, since we came together as passiveinvesting.com. And we’ve seen a significant trajectory of the amount of money and capital we’ve been able to bring in. And it’s all non-institutional capital we’ve been able to raise, so we raised money from just private high network, accredited investors. And so, I’ll give you a trajectory of how we’ve been.

Dan Handford (43:59):
So, in 2018, we raised $4 million from our investors. In 2019, we raised $32 million. During the middle of COVID, we raised $61 million. And then, last year, we had a banner year and raised over $196 million from our investors to be able to acquire the assets that we’ve acquired. And so, this year, we’re on a great trajectory. Even just in the first quarter, we’ve raised over $110 million. So, we’re on this trajectory. And so, we have had investors that have reached out and said, “Hey, you’re growing really fast. I really like it. I really enjoy investing with you, and, but I’m concerned. I’m concerned that you’re growing way too fast. Maybe you’re spreading yourself too thin with too many alternative asset classes.”

Dan Handford (44:35):
And so, I’ll share with you a story from … I actually owned four non-surgical orthopedic medical clinics. And when we were growing those clinics, one of the challenges that we saw is, when we actually grew to the second location, we went from one location to the second location, we ended up taking our entire core solid team from the primary location, the first location, and moving them to this new location because my thought was, “I don’t want that new location to fail, so I’m going to give it its best opportunity to be successful.” But guess what happened. We took our eyes off of the primary one, right, the first location, and it really started to suffer. And we didn’t notice it until three or four months down the road. And so, there’s a lot of things that we learned during that timeframe and during that growth period, which allows us to be able to expand into the third and the fourth location successfully without having any dramatic impact on the first two locations. And so, what we decided is that, “You know what? In order to grow and expand these clinics, we have to hire on ahead of time and actually put these people in some training and [inaudible 00:45:39] some training so that, when we hire, I mean, when we open up this next location, we already have another core team that can support that location.”

Dan Handford (45:45):
So, as we started to grow these clinics, that’s what we learned. And then, also, we learned that we can’t monitor the numbers on a quarterly basis anymore. We have to monitor the numbers on a daily basis to make sure we can shift and pivot as necessary. And so, being able to set those KPIs and watch them on a regular basis like that allows us to make those pivots and those changes a lot faster, instead of waiting until there is already a major problem in place. Right? And so, we learned a lot about that, going through there.

Dan Handford (46:12):
And so, because of the learning curve that we had, expanding those clinics, we learned that, even in this business with passiveinvesting.com, if we want to add on a new asset class … So, when we were just multifamily, we said, “You know what? We got a lot of feedback from our investors that they want us to be able to provide them with some opportunities to invest in some self-storage assets.” We actually set out to find a self-storage team that could help us be able to manage that business unit so that we don’t take our focus off of the primary and the core aspects of what we were doing with multifamily. So, we hired on a team to manage that particular asset class. And then, as we started to branch out into hotels and express car washes, we, again, hired on a team just for those different … We call them business units, if you will, those business units, to be able to manage those so that we have this diversification of our team members across the board.

Dan Handford (47:05):
Now, there are certain things that you can share across the asset classes like finance and accounting and stuff like that, but that are pretty easy to share. Right? But when I say share, it doesn’t mean you just have the same one or two people, when you had multifamily, manage that side of things. When you add on additional asset classes, you’ve got to hire more team members to work with that account, be a team. Right? And so, as we continue to grow, we’re able to grow that way. And one of the things from the very beginning that Danny, Brian, and myself decided on, early on, is that, each one of these assets that we acquire, we charge an asset management fee, right, usually between about 1% to 2% to be able to manage those assets. And we basically told ourselves from the very beginning that we are not going to take those asset management fees and put them in our own pockets as partners. We’re going to take those management fees, and we’re going to put them into our passiveinvesting.com LLC operating account, and it’s going to be there to support the growth of our team because we know that, more and more assets that we close and we acquire, of course, those fees also go up month after month after month. Right?

Dan Handford (48:04):
And so, as those grow, our team could grow with the portfolio. And right now, we’re sitting at about 39, 40 full-time team members that are working full-time with passiveinvesting.com. It’s because we know that we have to continue to hire people, to be able to support the growth, the trajectory that we’re on, so we can make sure we can protect the investments for our investors, but also, again, for our own investments because our goal is to grow our wealth, as well as our investors’ wealth and our families’ wealth together. Right? We can only do that if we continue to have that direct alignment of interests.

Stig Brodersen (48:34):
To go full circle, I think it’s important to go back to the basics. And one of the eight topics that people will learn about at your Multifamily Investor Nation Convention, next one, shall … And I just wanted to intersect and say Shaq is going to be there. I mean, how awesome is that? But to continue with the question, one of those eight topics, that is, how to select and analyze the market, the Marina Grove acquisition we discussed previously is one of your first acquisitions in the Savannah, Georgia, market, which is a part of the South that is benefiting from this population growth, 10.2%, in leading the West, Midwest, and Northeast. How do you and your team analyze a market like Savannah prior to investing?

Dan Handford (49:14):
Well, just to kind of tag a little bit in there about the MFI Con that you mentioned coming up in Charlotte in June, not only do we have Shaq, but we also have Jocko Willink. So, Jocko is the author of Extreme Ownership and the Dichotomy of Leadership. He’s a former U.S. Navy steel, and so we’re excited to have him there. A lot of people know who he is and of course, we have Barbara Corcoran coming in as well from Shark Tank, so it’s really exciting. It’s going to be a great event. There’s a lot of excitement coming around that event. And we’ve been doing a virtual event for our Multifamily Investor Nation group for quite some time. Even before COVID, we were one of the first, or if not the first, group in multifamily to do an event that was virtual.

Dan Handford (49:53):
And we’ve done almost, I think, seven or eight virtual Multifamily Investor Nation events. And then, now we decided that our group is big enough or they wanted to do a live in-person event, and of course, we wanted to do it with the bang. And so, that’s why we have these great celebrity speakers, that each one of them have a story around … except for maybe Jocko. I’m going to work on him a little bit. His mindset is more around the leadership aspects of what we’re doing. But Barbara Corcoran and Shaq both have a large portfolio in real estate. So, we’re going to really dive into their investment strategies and give opportunities for our investors to rub shoulders with them, to be able to talk with them a little bit.

Dan Handford (50:26):
But going back to your question about selecting the market of Savannah. Right? So, one of the things that we look for is we want to make sure that we have markets that have significant population growth. We want to make sure we have markets that have significant job growth. Right? And we also want to see markets that have … We want to see markets that are stabilized by some form of industry. Right? So, we want to see, especially like publicly-traded companies, right, so those blue chip corporations are really what provide some stability in a market. And so, we look for markets that have that. Of course, being the largest port on the East Coast really helps the story, right, because there’s a lot of industry that comes in from that, which allows us to be able to see that there’s a lot of growth that’s happening in that market. There’s a lot of growth that’s going to continue to happen in that market, especially with this type of an asset, especially with some of the colleges and universities that are there.

Dan Handford (51:20):
There’s a lot of growth that’s going to happen in that market. And so, it’s poised for a lot of continued growth. Even though it’s already had some growth, it’s poised for some continued growth because, number one, it’s a great market, right, as far as being in Savannah. The temperature is great. The weather is nice, and it’s right on the coast there. I would say that it’s one of those types of markets that, in the beginning, we looked at it, and then, as we continued to follow it and monitor it, we knew that we wanted to be in that market.

Dan Handford (51:47):
So, we’ve been looking at assets. Even right now, there’s another asset that we’re [inaudible 00:51:53] on in that market that we are hoping to get. It’s not awarded to us yet, but another sister property to Mariner Grove, but this property is going to … This Marina Grove property’s going to do really, really well. And the owners of this property, right now, we’ve purchased multiple assets from them in the past. They’re a great group. They take care of their assets, and so we’re not worried about any major deferred maintenance that’s going to cause any major issues with the property. Of course, it’s only 2016 vintage asset, so we’re not worried about water main breaks or anything like that happening on the property or having to replace the roof during our tenure or anything like that. So, it’s a great quality asset that’s going to continue to cash flow, continue to do really well. It’s going to have a great exit for us and our investors and those that join us.

Stig Brodersen (52:32):
Fantastic. Dan, as we wrap up the show, we want to give you the chance to tell the audience about the best place to connect with you and also about this amazing investing conference. I already said that Shaq’s going to be there. So, if that is not enough reason, then please take it away. I’m sure there are other good reasons why they should go to the conference.

Dan Handford (52:51):
Sure, sure. So, if you’re interested in checking out the conference or whatever, it’s very easy. Just go to msincon … MSIN stands for multifamily investor nation, so msincon.com. It’s the Multifamily Investor Nation Convention. It’s in Charlotte June 23rd, 24th, and 25th, and just coming up pretty soon next month. So, love to have you go check that event out, and then we’ll look forward to seeing you there and meeting you there in person and shaking your hand. If you want to follow me more, you can go to my LinkedIn. So, you can actually just go to linkwithdan.com. That’ll bring you straight over to my LinkedIn profile. You can link with me there and connect with me further.

Dan Handford (53:26):
And then, if you want to follow us more with our passiveinvesting.com group, you can go to our website, passiveinvesting.com. On the top, right hand corner of the page is a blue button that says, “Join the passive investor club.” If you click that button, fill out the form, one of our investor relations team members will reach out to you, discuss your investment goals, to see if our group is the right fit for you. And that way you’ll be apprised of some of the offerings that are available to you. And if you go to our website, you could also go there and look at this Mariner Grove asset and the details on it. It’s under our current offerings tab on the website, so you can see more details on this particular offering. [inaudible 00:53:59] fill up pretty soon, but if you go there, and it’s not available, then make sure you sign up for our list, and you’ll be apprised of some of the future offerings that we have available coming up.

Stig Brodersen (54:07):
Fantastic. And we’ll definitely make sure to link to all of that in our show notes. Very excited about this, Dan. And Robert and I are excited about looking more into those properties. It’s rare that we get the … We have different advertisers on the show, but it’s rare that we get an opportunity to invest together with them, you know, eating our own cooking, and we feel good about sharing the upside with our audience, but also sharing the downside. I think just sharing the upside isn’t a fair way of doing partnerships. So, Dan, thank you so much for taking time out of your business schedule to speak with Robert and me here today. I hope we can do this again soon.

Dan Handford (54:43):
Yes. I really do appreciate you inviting me on and being able to share this information and looking forward to coming back on and sharing some more insights later on as well.

Stig Brodersen (54:50):
Fantastic. And just rounding off the interview, just want to say that if you want to learn more about real estate, make sure to check out Robert’s podcast, Real Estate 101 by The Investor’s Podcast Network. Every week, you’ll learn everything you need to know about real estate, and Dan will be one of the guests here soon on that show. So, with that said, that was all that Dan, Robert, and I had for this week’s episode of The Investor’s Podcast.

Outro (55:12):
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