Rich Bouchner: Private Equity Real Estate and Dogs
Rich Bouchner is the Senior Director, Capital Markets for Alpha Investing, a private equity real estate firm providing investors with access to institutional-grad assets with compelling, risk-adjusted returns.
The veteran real estate investor, dog lover, and sales expert, joined Fortune’s Path founder Tom Noser in this Fortune’s Path podcast episode to traverse a range of topics:
How Alpha chooses properties, and why they only invest in properties that already exist
The impact of rising interest rates on his business (actually, not much)
How a dog can get you through tough times
The role that a history degree plays in developing a consultative approach to sales
How a dog can get you through tough times
Transcript
[00:00:00] Tom: How can a dog get you through bad times? How does selling door to door to non-English speakers prepare you for a career in finance? What should you look for when investing in real estate? These are some of the questions we asked Rich Bouchner, veteran real estate investor, dog lover, and sales expert.
Rich is the senior Director of Capital Markets for Alpha Investing, a private equity real estate firm providing investors with access to institutional grade assets. With compelling risk adjusted returns, Rich talks about how Alpha Investing chooses properties, how they structure their deals for tax advantages, why they only invest in properties that already exist, and why high interest rates haven't hurt his business, On this episode of the Fortune’s Path podcast.
Rich, it is so good to see you today. I appreciate you joining me.
[00:01:02] Rich: Tom, thanks for having me. This is exciting. This is my first podcast, so be gentle.
[00:01:06] Tom: I will - they're conversational. So the audience judges us not - I won't ever judge you. So you have a long history in sales and in real estate and investment, but perhaps more important than all of that, you are a dog lover.
When we met you told me about an important dog in your history. Easy, which I thought was a wonderful name. Can you tell me something about Easy?
Rich: Yeah, I can tell you a lot of things about Easy, but I know we've got other topics to talk about. I grew up as a dog guy, [the]fourth of four kids in a house in Connecticut.
So there's always craziness going on in the house, but we always had a dog. We always had an animal. Early on in my adult life, I was in New York. Living in New York is difficult enough on its own, you know, let alone having a dog. I was married at the time and we moved to New Orleans and my now ex-wife knew that I was a dog guy.
So she was like, okay, we're in New Orleans. It makes a lot more sense to have a dog. Let's do that. And I was on board. I just joined the board of the SPCA and didn't really know what kind of dog we wanted. I just knew that I wanted a larger one and one that was kind of chill. I didn't want a puppy.
And I found an organization called Labs4Rescue, and they do exactly what the name implies, right? They find Labs. And typically, it's interesting, a lot of Labs that are bred in the South end up, or born in the South end up in the Northeast. You have a lot of dogs that aren't neutered or spayed in the South.
You have a lot of folks who are dog lovers in the Northeast. There's kind of like an underground railroad for dogs that go between the South and the Northeast. So Labs4Rescue was in Louisiana and I connected with them. I remember I went out to the woman's house who was fostering probably 15 Labs of all shapes and sizes, ages. She had property. She did it right.
Some of the dogs are jumping on you. Other dogs are just playing, whatever. And Easy’s name at the time was Gentleman Jack and his owner had passed away and he was two years old and the family for whatever reason didn't didn't want to take on the responsibility of having a dog.
So he ended up in a shelter and thankfully the folks at the shelter in Jefferson Parish, Louisiana realized that he was a special dog and they they got him to Labs 4Rescue right away and they treated him. He's heartwarm positive. They took care of all that and he and I just kind of made eye contact when I went out to Jennifer's house and from there, I was like - he's the one. But, he was 90 pounds, almost a hundred pounds. He was part Lab, part Great Dane. So very tall, very elegant. My ex-wife did not grow up in a dog house. So I needed to make sure that they were right for each other. She came out and visited him and she was like, yeah, he's it.
We got him home and he was Gentleman Jack for a while and then I just kind of was assessing his personality. I grew up a New York Giants fan and Eli Manning's nickname in the Giants - he was still quarterback at the time for the Giants. His nickname in the locker room was Easy Eli, just because he was so chill.
Easy was that dog. Nothing phased him. I had him for almost seven and a half, eight years. Saw me through my divorce. He's how I met my current partner, through Easy at the dog park.
He was just my wing man. You just saw me through a very pivotal time in my life. This is a photo that..
Tom: I don't think is gonna come through on camera we run on the podcast, but he's got a, a certain elegance to him. You can see the shape of his head that that's no ordinary dog, soul eyes.
[00:05:08] Rich: Yeah, exactly. So thank you for indulging me because I can keep going on about this special dog and just everybody, if you're a dog person, I think everybody in their life has that one dog that just sticks with them.
[00:05:20] Tom: And he was that dog. That's fantastic. You also, in New Orleans, the Big Easy, so he was big, and easy. A hundred pounds is a lot of dog for someone who didn't grow up with a dog. So your ex-wife, I wonder how she reacted to having a a hundred pound roommate.
[00:05:36] Rich: He was a black dog living in a hot city. Most of his time was spent on the couch with his paws up in the air.
Just kind of like, whatever we got to go for a walk again. We just got in.
[00:05:49] Tom: We just got it.
[00:05:50] Rich: Exactly. We were in a condo at the time and he was a very good condo dog. Cause he just didn't need a lot of activity.
[00:05:57] Tom: I love that. That's right. Air conditioned all day. Comfy. Why go outside?
So I'm curious. So the second book that I wrote is from a dog's point of view. And honestly, you know, Margaret and I would sit outside on our porch and I would stare at her. And have delusions that I knew what she was thinking. When you were with Easy, you said that he helped you get through your divorce.
How did he do that?
[00:06:26] Rich: Well, he was he was a great listener, right? But, you know, just long walks, it was kind of meditative, to spend time with him. I spent a lot of time in the dog park with him, or I'd take them up to the levee and we'd walk on the levee or I'd take them off leash or go down to the Mississippi, you know, New Orleans is a fairly dog friendly town.
He and I would, if I was having dinner with friends, as long as we were eating outside, I'd bring the dog with me. He was just the guy who was my wingman and not judgmental and gave me, anytime that I felt like I had a moment of, difficulty, a weekend without plans, or feeling lonely or not sure about what path my life was going down, he was just the guy that was there for me, either with a walk or just hanging on the couch or just listening to me, you know, rant and rave about, about life and gave me a lot of support in those ways.
[00:07:23] Tom: First, I know that's not, we don't know each other well, and that's a fairly intimate question. So I appreciate your willingness to answer it. The other thing to me that's so interesting is you talked about being a good listener. I'm gonna use that as a pivot to talk about sales.
We'll come back to dogs, I'm sure. So tell me a little bit about your sales career and about why you think you're a good salesperson. Assuming you do think you're good at sales, why are you good? Those are your words.
[00:07:56] Rich: That's right. Those are my words. I'm putting words in your mouth.
[00:07:58] Tom: Right. So let me [unintelligible] make it where, say, what makes a good salesperson.
[00:08:03] Rich: I was very fortunate to receive very solid sales training early on in my career. A lot of folks don't have that benefit. I was a history major at Tulane, which, you know, prepared me to learn how to learn and to be intellectually curious and ask questions, which I think is a big part of being a successful salesperson.
Along with empathy and having this kind of grind, you know, I think good salespeople grind, but my first real job, whatever that means, I was 21, 22 - was for Pitney Bowes. I remember I showed up in South Florida, stayed with friends on their couch, didn't have a job.
This is the early ‘90s. The economy's not in very good shape and I ended up getting a job for Dictaphone, which is part of Pitney Bowes. And one of the reasons I took that job is because I knew what a good sales training program Pitney Bowes has. I really learned how to sell. I learned how to ask open ended questions.
I learned a consultative sales approach. I learned how to close. I learned that rejection is just one of those things. If you take it personally, then you probably need to go out and find another line of work. My territory was South Florida and I was knocking on office or doors for offices inside of office parks, a big part of the day.
I'm wearing a suit cause this is what people did in the ‘90s. I'm knocking on doors, going from office to office. It's 90 some odd degrees out. I was wearing a pager. So there are [no]cell phones. But if my manager wanted to talk to me, my pager would buzz and I have to find a pay phone and call.
I knocked on a lot of doors and by the end of the day, my dress shirt was, I'd sweat, through it. I couldn't wear a jacket for most of the day cause it was too hot.
You would never know that I had taken Spanish for most of my high school and college career, but I could barely speak it.
But going around South Florida, a lot of folks just assumed because I was tan at that point because outside all day that I spoke Spanish. So I had to pivot the conversation, you know from ‘hola, mi amor ricardo no, habla espanol.’ Would you like to talk about the phone? It was an eye opening experience and I did that for a couple of years and it was not easy. That job got me over to Merrill Lynch, which got me to business school, which got me to Wall Street.
But I think at least for me, and I think for a lot of people, sales provides a foundation that if you embrace it, it opens your eyes to having conversations with people, understanding different walks of life. I've met so many different types of people doing different things. I mean, that's one of the things that I enjoy most about sales.
It's the people that I meet and the stories that I hear. Am I good at it? I don't know. I think I'm okay at it, but I think if a salesperson ever thinks that they're good, they get complacent. Once you get complacent in sales, you stop being hungry. Once you stop being hungry, that's kind of the beginning of the end.
[00:11:17] Tom: You kind of stop eating. Literally. It's an eat what you kill business. You have worked with, it sounds like you have met a lot of different kinds of people in your life, so that door to door running into people who mistook you for someone who was a native Spanish speaker, and now you sell to high net worth individuals among others, is that correct?
That is correct. Have you noticed any differences? In people's outlook on life, depending upon how much money they have?
[00:11:52] Rich: There are some people who don't have two nickels to rub together who are happy because they found their calling or their purpose or they know how to dig deep and they're just their best selves. There are people that I've run into who have more money than they know what to do with and they're never gonna be happy.
It's just not in their DNA. I don't think there's always a correlation between wealth and happiness That's a big question around society, around values, around how people grew up. But the people that I enjoy working with, who have made it in life, are the people who remain humble, and curious, and knock on wood, that's the majority of my client base. People that I really genuinely enjoy having lunch with or having a beer with, they're successful people, but they're also good people.
[00:12:49] Tom: Do you feel like part of your sales process is kind of a weeding out people who would potentially be good investors versus not so good investors?
[00:12:59] Rich: No, because I'm not that picky. I absolutely have folks that I don't necessarily enjoy visiting with, but they might not enjoy talking to me either. For some people it's a transaction, which I get, but no, I absolutely have clients that are challenging, but they're challenging sometimes because they really believe in a ton of due diligence or they ask a lot of really tough questions or they get into the nitty gritty and who am I to argue with somebody's process?
Yeah. You're talking about somebody's hard earned money that, knock on wood, they'll invest with our firm Alpha. It's their right, to ask any questions they want to ask and have us go down any road that they want us to go down. It's our privilege to hopefully pick them up as clients.
So I hope I'm never in a position that I feel like somebody's too much work for me because nobody needs to invest with me. There are other people doing what we do and they're probably really good at it as well.
[00:14:01] Tom: So tell me about Alpha. Let's pretend for a minute I’m gonna imagine I’m a high net worth individual but I have to imagine that right now. I’m going to try and ask you some due diligence questions, but first I need to understand what Alpha is. So let's say it's our first meeting together and I met you through a friend. Tell me how you would handle that meeting.
[00:14:31] Rich: A lot of its building rapport. Trying to have, you, Tom, as my potential high net worth investor, feel comfortable with me and comfortable [with] Alpha.
That takes time, but let's assume we've built rapport and you're comfortable with Rich and you're comfortable with Alpha. You know, the basic pitch is Alpha is a private equity real estate shop. We find best of breed sponsors - operators that we feel have a strategy that makes sense for us and our high net worth clients to invest with over the next five to 10 years.
We want to develop long term relationships with our operators, with our sponsors, because it takes us three to six months of due diligence before we decide that it would potentially be a fit for us. If we do, and we try to have three to five different strategies that we're investing in at any given time.
So we're not the ones who go out and buy the apartment building or the senior housing complex. We partner with best of breed folks who've been in those spaces 15, 20, 25 years. Then we bring a majority of the equity to the table for them. In the past, maybe they were running around and raising equity from 50 to 75 different high net worth guys at a time.
That's fine. That's a great model. That's what my old shop did. But for a lot of operators, they don't want to be in that business. So if they can find somebody like us who can bring 60 to 80 to 90 percent of the equity to a deal, it saves them to give up some economics, but it saves them a lot of hassle from having to raise. Once we find folks that we want to invest alongside of, we negotiate better economics than you and I would get if we went to them individually, right?
That's how we cover our fees. If we do our job well, we recover 75 percent of our fees, by getting better economics from our sponsors that you and I would get if we went directly. And then we also negotiate control rights. By control rights, I mean that we have the ability to say no to a sale of a property.
We look at financials, we co-underwrite deals with our partners. We look at rent rolls because our investors are giving us their money to invest. We want to know that we can look at a deal and have some serious say about how that deal goes. If we didn't have asset management folks on our team to go out and walk the properties, look at the financials, get on weekly calls with our operators, those control rights wouldn't do us a lot of good.
So not only do we have the rights, but we have the people who know asset management of investment properties to know how to underwrite a deal and then how to manage a deal. Once we've purchased it and all of our deals are cash flowing deals, they can throw off anywhere from six to eight to sometimes even 10 percent cash on cash.
We generally hold our properties anywhere from five to seven years. We're very risk focused. The majority of our investors have made their money, so we're not looking to hit home runs if we can hit a bunch of doubles and have downside protection in our deals. We feel like we've done our job and everything we do is inside of a limited partnership.
So depreciation flows through to our investors, which has tax advantages. So in a nutshell, that's how Alpha operates.
[00:17:57] Tom: So these existing properties are some of these investments and properties that are being built?
[00:18:01] Rich: Everything we do is cash flowing - it's existing. In our mindset we feel like we can't mitigate risk sufficiently in developments if we buy something - for example, we're doing tax abatement multifamily acquisitions in Texas.
[00:18:21] Tom: What is tax abatement multifamily acquisition?
[00:18:24] Rich: Housing authorities in Texas are trying to create more affordable housing for folks in Texas. One of the ways they do that is by partnering with operators. And the trade is that if an operator agrees to rent-restrict half of the units in a building, these are 250, 300 unit buildings, so half of those units to people making 80% of the area median income.
The housing authority will give a 99 year tax abatement meaning they don't pay property taxes for 99 years. A deal we just did in Dallas-Fort Worth saved almost a million dollars a year in property taxes. A building that, you know, you get two appraisals, and these are all underwritten by Fannie Mae and Freddie Mac.
They're all agency mortgages. The building was a $70 million building at market rate. But with the new cash flow that tax abatement was generating , the tax abatement appraisal took the building from $70 million to $84 million. That happens on day one. So your four cap, which it was trading at market becomes a 6.2 or 6. 4 cap on day one.
[00:19:39] Tom: I don't know quite what that means, four cap, 6. 2.
[00:19:41] Rich: I apologize.
Tom: So it's kind of like I'm a naive rich person.
Rich: I could use more of you.
[00:19:53] Tom: There aren't many of us. We're hard to find.
[00:19:54] Rich: If you're in farther between than they used to be…, a cap rate is kind of like yield on a bond. A bond paying 4%, that's a nice yield, but a bond paying 6%, that's 50 percent more yield, right?
That's more attractive. The way that the yield goes up, on a deal like this is because we're no longer paying a million dollars a year property taxes. There's more cash flow. You're 4 percent goes to a 6 percent and that's a lot more downside protection. On day one, did I buy, do I want a Treasury bank 4% or do I want a Treasury bank 6%?
Well, on day one, your 4% Treasury goes to a 6%. So we're looking for deals that are not just relying upon us saying we're better than everybody else. We're going to buy it because we're smarter than the average bear. Our $70 million building becomes a $75 million. That's hard to do in this environment.
The tax abatement strategy helps move the needle pretty significantly.
[00:20:53] Tom: Interesting. Let me see if I can think of a critical question to ask. There's a lot of things that I can put my money into and why is real estate better than, gold? Why is it better than the S&P 500?
Why is it better than, insert trendy real investment here.
[00:21:22] Rich: I'm not ever one to say that one type of investment is better than another type of investment. But when I came out of Vanderbilt for business school, one of my takeaways early on in my career was the importance of asset allocation.
If an investor gets the asset allocation decision right - you know, stocks, bonds, real estate, commodities. If they get that decision right, they can make a lot of other mistakes elsewhere in their portfolio. They can pick bad stocks. They can have bad market timing, but asset and their different studies that will have different numbers, but ballpark asset, that asset allocation decision is responsible for 85 to 90 percent of a portfolio's overall returns.
[00:22:03] Tom: I’m kind of out of my depth here, so you can correct me, but I think that research is sort of certainly pre-pandemic, but even before that, like pre maybe pre-’08. It feels that everything is moving together now. So it's like, stocks go up, real estate goes up, real estate goes down.
I mean, stocks go down, real estate goes down. Even stocks and bonds seem to move together, which is not the way it used to be. So the whole concept of asset allocation - does this even work anymore?
[00:22:44] Rich: Some of the most dangerous words in investing are this time is different. Yeah, that's true. What, makes, I'm about to contradict myself, but what makes this time different is, we're seeing a bubble deflating. For the longest amount of time, we had easy, easy money because interest rates were very, very low. And so everything was over inflated.
Everything is kind of reverting back to the mean. If investments get really high, eventually they're going to come back to the mean. Investments are really underperforming. They're going to get back to the mean. So that's also the importance of rebalancing because you never know when something is going to overperform or outperform.
So trim your winners and reinvest in your losers. And over time, that's going to pay off a lot. You're going to take some of your chips off the table for the ones that are outperforming, and reinvest in the ones that are underperforming. So when they come back, you're going to make more money in the way up.
[00:23:42] Tom: Counterintuitive is doubling down on the winners.
[00:23:46] Rich: That's right. And that's what most people do. You know, when we talk to folks about some of our most recent investment opportunities at Alpha, a lot of folks like, Oh, I don't know, Rich, it's, it's not really a good time now because it looks like the property market is beat up.
But that's when you want to buy stuff, right? When everything was blowing and going in 2018, 2019, 2020, that's when people should have been taking chips off the table, but people couldn't wait to get into the next deal. This is human nature, right? That's behavioral economics.
Is asset allocation broken? No, I don't think so.You saw this coming out of the internet bubble. Anytime a bubble deflates, you'll see asset classes move in tandem. But I think the importance of real estate under kind of a normalized market scenario is that it should provide a ballast to a portfolio, especially if you believe that we're in a rising inflationary period, hard assets where you want to be. Rents now are leveling out, but over the last two or three years, you rents in the Sunbelt in particular have been going up at a double digit clip, so absolutely outpacing inflation. Even with higher interest rates, most of these investments are still going to be okay because rents have moved so quickly over the last couple of years.
There's a place for commodities, gold, there's definitely a place for equities, there's a place for fixed income, and there's a place for real estate inside of a portfolio. What that answer is, that's a very personal conversation. Your risk tolerance may be different than the next person's.
Let's look at a typical portfolio. Maybe 20 percent of that portfolio should be in alternative investments. Maybe half of that should be in real estate. You should probably have some industrial. You should have some multifamily. If you have a higher risk tolerance, you do some retail and do some hospitality.
The tax advantages and the diversification that real estate provides, it should absolutely be a part of everybody's portfolio. But how much, that's hard to answer without really knowing somebody's risk tolerance.
[00:26:06] Tom: I'm pausing for a second. I'm trying to understand a little bit more about the real estate business.
Sure. I’m not going to name someone but i'm going to talk about a famous person who has been successful in the real estate business and also has a career in politics. This perso has been primarily in, I guess hospitality, as we learn about the picture of their financial situation It seems like they've lost a lot of money over the years.
So I want to understand -is it is one way that you can make money in real estate is you own a property and then you borrow money and use that property as collateral? You pay yourself that loan and that loan actually doesn't appear as income. So I, if I want to, I can live off the loan, but I don't pay any taxes on it because it's a loan?
Am I anywhere near the truth on this?
[00:27:20] Rich: I am not a tax professional.
Tom: I'm sorry to put you on the spot.
Rich: It's not that different than you or me refinancing our house. We take cash out of our house. We don't pay taxes on it. We don't pay taxes on them. So there are layers upon layers of ways to borrow against real estate.
Some of them are without a doubt above board and the IRS will bless them. Others are a little murkier. I personally and professionally am not a big believer in a ton of leverage. If I can't sleep at night with an investment, if Alpha can't sleep at night with our portfolio, we don't want to be in those investments.
But there are a lot of folks who feel very differently and they've made a lot of money, but they lost a lot of money. Leverage is going to speed you up on the way down and it's going to accelerate down the way down as well. I believe I know of this person.
And I would say if this person is doing it, I would probably do a 180 and do the exact opposite because I want to be able to look my investors in the eye.
[00:28:29] Tom: So let's talk about some of those above board tax advantages of real estate investing. You mentioned if I'm a limited partner in a property that the depreciation for that property flows through to me as a tax benefit.
First of all, for listeners like me who only have a very vague understanding of what depreciation is, if you could give me the simple definition of that and tell me how that works.
[00:29:01] Rich: So the government, you know, I think common sense would say, if I buy something today, it's worth less tomorrow?
Then it's worth less. The next day, not its market value, but the actual, useful life, it is.
[00:29:20] Tom: This is for physical assets only, isn't it?
[00:29:23] Rich: That's right. The government allows folks to depreciate the value of a physical asset, depending on what type of asset it is and schedule that the IRS allows for that.
So with real estate, investors can take some of that value every year and its worth, take that depreciation and use that to offset the income that property is throwing off. So anytime an investor comes in as a limited partner, taxes are reported via a K1 versus a 1098 or 1099 or whatever.
Let's say you put a million dollars into an investment. Over the course of a year you might have $70,000 of income that comes into your checking account. But because of depreciation you are not responsible for paying taxes on that $70K worth of income in that year, because of depreciation. The property is worth less according to the tax code, even though the market value is actually going up, the property is worth less and you can use that depreciation to offset that income.
Your CPA, says, ‘Oh, Tom, look - you have 70,000 more dollars in your checking account, but you've got 40 or 50,000 worth of depreciation. Let me work my magic and you will not pay ordinary income. I'm at 70,000. Would you only pay on 20? It depends on how they deal in the math, but at some point there's a catch up, right?
There is a day of reckoning when the property is sold. There's a step up in bases for the property. Let's say that's a hundred million dollar property. You get 10 million of depreciation in year one and another 10 million in year two and so on. When you go to sell it, you have to get caught up.
But as opposed to paying ordinary income, while you've owned that property, you pay capital gains when you sell the property, and that's a much lower rate, capital gains rate is much lower than ordinary income.
[00:31:37] Tom: So capital gains maxes out I think at 20 percent now? And I think ordinary income is at like 36?
[00:31:44] Rich: Yeah, depending on the tax bracket. It's in the high 30s. So you're not avoiding taxes, but you're deferring them. You're paying them with tomorrow's dollars, which is always good and you're paying fewer of them.
[00:31:57] Tom: You're certainly avoiding the difference between the maximum, earned income rate and the capital gains rate.
That's pure savings. That's really interesting. I was going to point this out, but you already did, which is that this sounds like the tax code. I know the law is the law. The process of writing laws, is complex, but this seems a little funky there's this depreciation thing because the value of this property is not going down.
It's going up. Otherwise, you wouldn't invest in it. In this case depreciation is a wonderful gift, even though it doesn't reflect an actual financial reality.
[00:32:43] Rich: That's absolutely right. I would imagine when you look at the folks who wrote these laws many decades ago and folks who are, in your case in Nashville, my case in Austin, or in Washington, DC, a lot of those folks own real estate or their families own real estate. Real estate is the number one wealth creator in the world. I think it was Tony Soprano who said, he ain't making any more of it. Obviously technology is great and there are all sorts of other ways to make money, but let's go back to the Rockefellers, Carnegies, they owned a lot of land.
Right. And they were very influential when it came to writing the tax codes. This stuff has been sticky. I'm not a tax guy. I'm not here to weigh in if it's right or wrong, but I have a hard time imagining that this is going to go away just based upon the people who are lobbyists and where the money comes from.
[00:33:47] Tom: Your point about the people who own the land. It's interesting you, you quote Tony Soprano. My wife would attribute that quote of they're not making any more of it to Scarlett O'Hara.
[00:33:59] Rich: I like Scarlett O'Hara more so than Tony Soprano.
[00:34:03] Tom: I think she's a more trustworthy source. So let's say that, you're, convincing me. So I see some tax advantages here for investing in this real estate. You guys pick operators. But there's this whole interest rate environment that we're in right now.
Are some of your guys going to get upside down, or are they going to get in a situation where the rates go against them, and they've got adjustable rates or whatever, and suddenly things aren't as rosy a year from now as they are today? Talk to me a little bit about that downside risk and, and in today's environment, how they would, how you'd manage that.
[00:34:44] Rich: That is a challenge for anybody who's involved in real estate at the moment. There was an operator in Houston. I saw this, I think in Bloomberg a couple of weeks ago. They bought a big multifamily portfolio, but bought it in ‘21, I think. So not that long ago they bought it with a ton of leverage and they bought it with adjustable rate mortgages and they didn't have a rate caps on their loans.
That's a formula for disaster, right? They've had a lot of leverage, so not a lot of equity in the deal. They had adjustable rate mortgages. As rates went up, their rates went up and they didn't lock in their rate interest rate and they basically had to turn the key back In and they were underwater almost from the get-go. I had lunch with a friend of mine who runs commercial real estate banking for a large national bank that you would know. He said all of the stuff that you're reading about office markets like in San Francisco, for example, everything you read is true. These buildings that were worth x and were worth x minus and now they're worth x minus minus. But the banks don't want to take the keys back because they've done that before it's not a lot of fun They're not in the business of owning real estate.
So they're doing everything in their power to provide some kind of a workout. They're going to take some of these keys back, but you're going to see a lot of creative math too, to keep these properties away from bank ownership. What we're seeing with our current deals, we're fine because we're structuring them for this environment.
You can lock your costs but you write this into a deal. You can lock your interest rate in, for five or seven years or whatever the case may be. That's fine. That's, prudent. That's good insurance. You may put more equity in a deal than you might otherwise. That's another way to provide downside protection.
You have tax abatements, right? And for us, all that is free cash flow. In a building that's a 2022 building, that's 95 percent occupied. We're going to sleep very well at night with that deal. The challenges that we'll have and most other folks will have are these deals that were done four or five years ago and they might not have a rate cap or the rate caps expire or, they were in markets like Phoenix or Nevada, where rents were going up and up and now they're flat or they're coming down.
In some of those situations, investors may not get the distributions that they were hoping to get. That's the first thing you do. If a deal looks like it's going to start to get skinny, you cut off your distribution so you can hoard cash. That's a very prudent thing to do, even though most investors understand it, they don't want to hear it.
But they understand it. If your balance sheet starts to run dry, then you do a capital call, and you reach out to your investors and say, listen, guys, this is what's happening. Our rents aren't increasing, our interest rates are going up. Every limited partner will be asked to contribute 5,000. It could be 50,000. Just depends on the deal. Limited partners typically don't need to answer a capital call, but if they decide that it's not right for them or they're not comfortable or they don't have the liquidity, then they're diluted a little bit with their ownership, and then the general partner will either throw in on their behalf or they'll take a loan or whatever the case may be.
But I think you're going to see a lot. And when I talk to investors who typically will come into just about every deal. If they like the deal, they're sitting on their hands now in some cases, because they anticipate capital calls and they want to make sure they have dry powder, for when that might happen.
[00:38:44] Tom: That's a bit of a chill down my spine.
[00:38:50] Rich: I mean…
[00:38:55] Tom: This is the strangest recession in that we're all sure. Haven't we hit the iceberg yet? Where I didn't, did you hear the iceberg? I haven't heard the iceberg, but it's like the invisible recession, or it's just that some of the fundamentals are so bizarre. This actually brings me to a subject I wanted to talk about, which is that my sense about what you're doing is that you're selling a story of the future.
Is that a reasonable way to describe what you do?
[00:39:28] Rich: Yeah. Any time one is selling an investment, it is right. You're selling a story, a promise, a vision of the future. Some have a little bit more hot air than other stories. Sure. One of the things I like about real estate is very tangible, right?
We're not doing developments. That's really selling the dream. We're buying this piece of dirt. In three years from now, there's going to be 300 units with parking and a pool and a coffee bar. That's it. We feel so good about this area that we're convinced people are going to move in here and pay 20 percent more than they're paying across the street.
That's selling the future. We're selling something that's much more tangible. We're selling cash flowing properties that are already in place and we're doing work with operators who've been in these spaces for 10, 15, 20 years. But you're right. It's still an investment.
So you are selling the promise of the future.
[00:40:23] Tom: Some of the property owners, the operators that you're working with, are they trying to get cash out of these properties? They don't want to sell the property. But they'd like to get some cash out to take a trip. Do whatever is that partially what you guys are enabling them to do?
[00:40:43] Rich: No, because we are buying from the existing owner. So I don't know what that owner is doing, what they do with the money. Who knows? Who cares? That's on them. Generally they are paying their investors back and they're taking their pieces of the profit and move on to the next deal.
Our guy, we are not doing what you just described is, is known as a recap. When somebody owns a property and for whatever reason they decide to raise more money and then they take their chips off the table. We've certainly done that in the past. But our limited partners get paid first. It's pro rata, but let's say we buy a property three years from now, it's worth more than it was when we bought it, no different than you or I going to the bank and refinancing our house, you borrow against the new valuation, you pay off the existing loan.
And generally, if that works out, it's great for the limited partner because they're getting anywhere from 30 to 50 percent of their initial investment back. They're taking chips off the table. That's generally tax free, right? Because it's a return there. Investment not on their investment and most people love that - they're like, I gave you a dollar, you give me 50 cents back.
I'll take that all day long.
[00:41:54] Tom: The money you're putting in buys a share of the property from the existing owner. Is that accurate?
[00:42:05] Rich: We buy the entire property from the owner, and and then we are forming a partnership. Then you as a potential investor are a member inside of that partnership.
So you get your pro rata share of whatever the value of that property is. So the operator used to work for one owner.
[00:42:24] Tom: Now they're going to work for you. That's kind of the situation. Maybe same operator, same operator typically.
[00:42:32] Rich: No, generally. You've got a management company who manages the property day to day, right?
Sometimes they come with it. Sometimes they don't, it depends. Our operator, our sponsor, they're taking out the existing owner. So the existing owner just goes on with their life and then we now own it and then we operate it as we see fit.
[00:42:52] Tom: Gotcha. Now, typically not always, but typically when somebody sells an asset, they think it's going to go down. So they're trying to sell at the top. I know that applies probably more to equities than it does to real estate, but is that ever a concern?
[00:43:09] Rich: It depends on the market. Folks who are buying or bought over the last year or so, if they're not doing something with a tax abatement or if they're not buying something where there's kind of a secret sauce, I would not want to buy at the top of the market because there's really nowhere for the market to go except stay flat, or if interest rates continue to go up. But you never know why people sell. It's a sovereign wealth fund and that fund has a life to it.
It's time for them to sell because by perspectives, that fund only has a seven or 10 year life. Sometimes it's a family office and they want to sell because the next generation has something else they want to do with the money. Uh, sometimes all the depreciation has been used up in the property.
Sometimes folks with, a seven year loan have to refinance it. Instead of refinancing at a higher rate, it's time to sell. It's hard to say why people sell. But I don't think people are generally selling because I think it's going down. I think sometimes they're selling for some of those reasons that I mentioned, where there's an opportunity cost.
They see that there's somewhere else that they want to go with their money. They're ready to move on.
[00:44:23] Tom: Do you mind if I give you some sort of meta feedback about how I see you? First of all, as you describe real estate to someone who knows nothing about it, and also how you handle questions from a very naive, imaginary rich person, here's some things I love about your sales process. The way you, I don't want to put labels on things, but the way you talk to me, some things about the way you talk to me, if I bring up an objection, even if it's a stupid objection, so far you haven't said that's a stupid objection, which I appreciate.
[00:45:00] Rich: So far you haven't seen me hit the mute button.
[00:45:03] Tom: That's right. You've been doing that in a very surreptitious way. But you, you answer those in a way where you acknowledge that might be something. I haven't detected any kind of dodge, any kind of attempt avoid a question, avoid an issue. Even when I talked about our famous political real estate investor, you handled that with the best of humor.
I personally think if someone in a sales process believes that the person they're talking to is trying to hide something, you're dead. As the salesperson, you're dead. The best way to overcome an objection is to just lean into it.
[00:45:51] Rich: That might happen. We're not right for everybody.
That's okay, right? I am in my life, but I certainly don't want to be defensive. I have to believe in what I'm doing. I also have this kind of if it's not right for you, that's okay. That's fine. There are other people for me to talk to and I'd rather you and I leave a conversation with respect for each other and hopefully forming a friendship.
If we do, the word in Louisiana - I spend a lot time in New Orleans - is langniappe. If we get business out of this, that's the langniappe, that's the icing on the cake. That to me is what this is all about. It's about building relationships.
Being as transparent as I possibly can. I hope that my family gets fed because we do business. I'm not going to lose sleep over it if it doesn't work out, because I'll talk to somebody else tomorrow.
[00:46:43] Tom: That's super critical in sales. One of the things that I've found in my relatively short sales career is that the more desperate you get, the harder it gets to close.
Everybody wants to do business with someone who's too busy to do business with them. Nobody wants to do business with somebody who's got plenty of time.
[00:47:07] Rich: Think about in school, who was the guy that got all the girls? The guy that didn't care. I'm going to play pool.
[00:47:21] Tom: That's right. The guy who didn't care. I wonder, have you noticed, you said earlier in the conversation that you're running into fewer naive rich people. Have you seen a change in high net worth investors over the last five or 10 years? Have they changed what they want out of investment or they changed their approach?
Or it's just sort of - you've talked about Andrew Carnegie earlier. I know neither one of us is old enough to have known Andrew Carnegie personally. Do you see any change in wealthy people?
[00:47:57] Rich: The change in wealthy people reflects the change in society overall based upon the amount of information that's available.
Nobody's naive anymore. They're only naive if they choose to be, and most people with a lot of money don't choose to be naive when it comes to their money. Sometimes they know enough to be extremely dangerous, but between what they can find online, what they hear on Bloomberg, what they see on CNBC, there's a lot of information out there.
Sometimes it's analysis by paralysis. That's dangerous too. In my prior life, I was in wealth management. I can't tell you the number of really successful, and typically it's business owners, the wealth was generated where it was generated by. operating and selling the business, they missed out on investment cycles because they were so concerned that the other shoe was going to drop that they took their money out of the market. But they never got back into the market. This goes back to what you and I were saying before - a lot of people sell not the bottom, but close to the bottom, because they're so nervous. They're freaking out and then they wait all the way to the top and then maybe they get back in or they don't get back in.
It's simple, but dollar cost averaging just makes a lot of sense because it takes the emotion out of the decision making process. Many investors are smart. They have a lot of friends who made money. They understand real estate. Once they trust you, then the second, third, fourth deal is much easier.
But on some of these folks, it'll take a year to two before they do the first deal because they want to see everything. And I can't play them.
[00:49:48] Tom: I was going to ask about what the sales cycle is. When we began our imaginary conversation, you said that, well, I'm going to take it for granted that we've already established rapport. I imagine that can take a while.
[00:50:00] Rich: Thankfully I enjoy that part of the process. You know, I don't think I need to get on airplanes quite as often as I do, but I still don't think there's a better way to solidify a relationship than being across the table from somebody over a lunch or a coffee or a beer, and that's important.
That's rapport. That also helps a relationship solid when times do get rocky. It's not that different than a best friend or a marriage or a sibling. You must have the solid foundation. When tough things come your way, that foundation is already in place. That's very hard to do if you're just pitching deals versus really getting to know somebody.
[00:50:41] Tom: Totally agree. This has been a lot of fun. You're really good at making a real estate an interesting subject.
[00:50:51] Rich: If I'm reading between the lines, you're telling me it's typically not an interesting subject?
[00:50:55] Tom: No, I was just saying that I haven't known enough about it to realize how it's interesting.
You're able to explain it in a way where someone who's, the only thing I've ever done is buy a house. That it makes sense to me. So thank you.
[00:51:12] Rich: I appreciate being on your show and I appreciate all of your questions. This this was really a conversation and I don't feel like it was a q&a and that is delightful, so thank you for letting me be part of your show.
[00:51:26] Tom: Glad to. One last thing to wrap: tell me what is an ideal customer? Or now I blanked on the name of your firm. That's terrible.
[00:51:33] Rich: Alpha Investing.
[00:51:36] Tom: . Excuse me. Thank you.
[00:51:37] Rich: We're actually based in Nashville
[00:51:37] Tom: actually.
[00:51:38] Rich: Maybe I'll run into you next time I'm in Nashville.
Yeah, that'd be fun. I'll run into the two guys who started. They're both Fandy guys. Yeah. Facetiously, I would say somebody with a lot of money. Right? That's the ideal customer
[00:51:54] Tom: who wants
[00:51:55] Rich: to invest in real estate. Mine too. You know, it's, it's somebody who, who understands the power of real estate, wants to work with a company.
That's very transparent. That's very communicative. You know, there are some very large real estate investment shops who are really good at what they do, but they're not into communicating and they're not into transparency. They're like, we're so big, there's our track record. Send us the money and we'll send you a dividend.
That's fine for some people. That fits the model for a lot of people. Our clients want to know that if they pick up a phone, they're going to get me, they're going to get the founders. If they have a question about the K1 or about a statement, they'll talk to our head of ops. Our investor portal, we designed that in house because we found a lot of off the shelf stuff was just too generic on DSO.
We really try to listen to our investors and give them what they want. As far as not the investment is table status, right? If we don't get the investment right, nothing else matters, but communication, transparency, and really just building this tight network of like minded people who want to be involved in some interesting real estate stuff.
[00:52:59] Tom: Well, thank you, Rich. This was interesting real estate stuff.
[00:53:01] Rich: Maybe that'll be the name of my podcast. Take care. Thank you very much. Bye bye.
[00:53:23] Tom: The Fortune’s Path podcast is a production of Fortune's Path. We help technology businesses create products that generate monopoly profits, fractional product management, product leadership, coaching, competitive intelligence. Find your genius with Fortune's Path. Special thanks to Rich Bogner for being our guest.
Music and editing of the Fortune's Path podcast are by my son, Ted Noser. Look for the Fortune's Path book from Advantage Books on fortunespath. com. I'm Tom Noser. Thanks for listening, and I hope we meet along Fortune's Path.