Air Date: 10.15.2020
As a big influence on Kent, Hunter Thompson has had a notable hand in bringing about the success of this very podcast. He joins us on the show today to talk about his remarkable process of finding the right deals and making the most of the opportunities that he finds. As someone fully committed to the vetting and due diligence processes, it is not surprising that Hunter is a step ahead of the rest, putting in the extra work in order to reap the rewards. And this extra work is now being shared with the public in the form of his podcast, book, ebook, and more! In our conversation today, we talk about the current status of passive investing, the momentum it has gained in the last few years, and the influence of the larger picture of the economy on the real estate markets. Hunter gives us a great idea of what he and his firm actually do, their specialty work, and the philosophies that inform their outlook. We get into some very simple actionable steps, like which questions investors should be asking when interviewing sponsors, and the asset classes that might be the best to look into right now. Our guest shares some of the things that have influenced his path; books, personalities, and most importantly a steadfast dedication to achieving greatness. Be sure to listen in to catch it all on today’s show!
Key Points From This Episode:
- The passive investing revolution that is growing from small beginnings.
- Hunter’s model for vetting sponsors and due diligence on potential deals.
- The important relationships that Hunter developed and learned from for his own business.
- Hunter’s decision to actively seek out deals and the types of opportunities he looks out for.
- How Hunter goes about avoiding the damage caused by bad sponsors.
- Considering the macroeconomic picture and how this impacts real estate investments going forward.
- Performance during the pandemic and the methods that have aided Hunter and his business.
- The meaning behind the name Asym Capital and how this ties into Hunter’s philosophy.
- Some of the asset classes that Hunter is most excited about currently and looking forward.
- The one question that Hunter believes all passive investors should ask sponsors.
- Hunter’s greatest achievement; helping amazing individuals find their feet in the business!
- The books that inspired and influenced the kind of book that Hunter wanted to write.
- Mimicking greatness and sacrifice; the two components that have led to Hunter’s success.
- Getting hold of Hunter and connecting with Asym Capital!
“We are actually part of this massive revolution being taking place right now in the financial sector. It’s being led by people with a microphone and some good ideas and a great network.” — @AsymCapital [0:02:29]
“Most passive investors simply didn’t have the time, the expertise, the economic viability to do the type of due diligence that I thought was prudent.” — @AsymCapital [0:08:19]
“I really like to focus on my strengths. I have very few of them and as do most people, by the way. I love talking to investors. I love the capital raising component of the business. I’m not the guy that’s going to be out there implementing the business plan at the property level.” — @AsymCapital [0:10:35]
“I’m happy to exchange some control for that diversification, especially when the economics are even remotely comparable, let alone, actually competitive.” — @AsymCapital [0:13:19]
Links Mentioned in Today’s Episode:
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—Full Transcript Below—
“HT: Just ask this question, which is internally to your own head, is this a rinse and repeat, or is there new components of this offering that are incurring risks that are very difficult to quantify? Because if you’re trying to look at things on a risk-adjusted basis, it’s hard to see what it’s going to be like if they hire a new property manager, or a new property management company.”
[00:00:21] KR: Welcome to Ritter on Real Estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts who give their top investing advice, strategies, and tools that I break down the insights into practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter on Real Estate, and I’m your host, Kent Ritter.
[00:00:44] KR: Hello, fellow investors. Welcome to Ritter on Real Estate, where we teach you how to passively invest like a pro. I’m your host, Kent Ritter. Today, my guest is Hunter Thompson. I’m very excited to have Hunter on the show. Hunter is the Managing Principal of Asym Capital. He’s purchased over a 100 million in commercial real estate assets and he’s the author of the Amazon bestseller about Raising Capital for Real Estate.
In addition to that, it’s just not enough, he’s also the host of The Cash Flow Connections Podcast, which I’ve been listening to for a few years now. Really was one of the first podcasts that I picked up when I decided I wanted to really educate myself on real estate and become an investor. I appreciate your content, Hunter. I still follow along with the podcast. I am an econ nerd, I guess you call it myself. I got an econ background. I love that you approach it from that standpoint and you’re bringing that level of detail into your analysis and what’s going on in the whole economy. Thank you so much for being here today.
[00:01:48] HT: Thanks again for the opportunity.
[00:01:50] KR: Yeah. You were a part of the launch of this podcast, that I want to thank you for too, because when we launched this thing back in May, you gave some content. You went over a seven-step due diligence process, which I want to talk to you today, but that was a big piece of getting folks excited about this and really starting off with the bang. Thanks for that too.
[00:02:09] HT: Yeah, I appreciate it. Look, now you’ve gained the success and you’ve gained some momentum and we’re just going to keep going from here. Congratulations on your recent close. It’s all about building that platform, attracting the right investors, educating them. We are actually part of this massive revolution being taking place right now in the financial sector. It’s being led by people with a microphone and some good ideas and a great network.
It’s the opposite to most revolutions in the financial sector, which is being led by very large private equity companies, if not larger e-trade accounts and various marketing budgets that are just far above and beyond what you and I could possibly fathom. They put out a bunch of bad ideas and it doesn’t matter that their investment thesises don’t make sense. The marketing component’s so overwhelming that we have to struggle to do our own thing. Anyway, really proud of what you’ve accomplished so far and looking forward to the conversation.
[00:03:02] KR: Yeah, man. I mean, I think that’s such a good point, because that’s really what the foundation of the show, of my show was is teaching people how to passively invest like a pro, because there’s a lot of shows out there about how to get in and get your hands dirty and do it and build a business, but if you really just want to be an investor and you want to approach it from that standpoint, that was the focus, that’s the idea.
Yeah, where are you getting all of your content? Like you said, traditionally it’s from the big banks. It’s from the large corporations. It’s go to your 401k, invest and save and do these things. They don’t even mention that this whole world exists to invest in private placements in real estate with folks that are putting together deals that are more lucrative than what you can get in your standard, what you would go to with your Schwab account, or wherever you go to invest.
I mean, my eyes were open to it about five years ago and my wealth has grown exponentially since then because of it. That’s really the idea of evangelizing this, about telling people that hey, this exists, and demystifying it and trying to make it simple for folks. I mean, you were years ahead of me in doing this a forefront. Like I said, I listened to you as I was learning, so I think that there’s huge service there. I mean, that’s the goal, to give people the ability to build wealth that traditionally has been reserved for really, really high-net worth folks, or private equity firms, right and bringing it down and making it accessible to everyday people. I think that’s a really cool thing. Like you said, that the podcast revolution is leading that space. Yeah, that’s really cool for bringing that together.
While I’ve got you here today, I’ve got a ton of questions I want to ask you, because I know you’re an expert in the space. I mean, Hunter is actually such a good passive investor, that he’s made it a full-time job and now you’re helping others passively invest in the same way, by putting, by vetting sponsors and doing the solid due diligence and doing that work to bring others into good deals. Can you talk a little bit about that, maybe how you got to that point, how you developed the concept? I mean, it’s not something you hear about a lot, but I think it is a really interesting model.
[00:05:21] HT: Yeah. Basically, I was very fortunate in terms of when I entered the space, not only in terms of the market dynamics, which at the time people can look back now and say, they’re very favorable. I can guarantee that that’s not what it felt like at the time. I started going down this path around 2010. What that means is that yes, if you look at the graph now, you can see that I was at the bottom of the chart. When you’re in the bottom of the chart and every single news article, all it’s saying is that we’re entering this unending tale spin of endless foreclosures and that prices have not found a bottom, nor will they. That’s where my career was founded.
Going to networking events where everyone’s head is in their hands, because they can’t believe they just lost their shirt in the one investment that guarantees you won’t lose your shirt, which is real estate. Historically speaking, that’s a very reasonable thing to say and to think. What happened though was that because I moved to California, not only was the market extremely decimated, but because of that reality, it acted as a massive filter for bad investment thesises, or investment thesisis that couldn’t weather significant economic corrections.
When I began to build my network of people that I looked up to and trusted and want to emulate in their business for my own, I was surrounded by very influential people who are able to weather that storm. My first investments in real estate were not typical buy a $30,000 property, try to fix it up and sell it for $45,000. Purchasing a small interest in 15, 25, 50 million-dollar syndications. This was before the popularization of “crowd funding,” which was basically legalized in 2012.
The combination of my interest in the space, my later development of a track record in the space and then also, the JOBS Act, which allowed people to publicly solicit for real estate deals online, I anticipated that there would be a tsunami of interest into this space and for very good reasons. One of which is that the investment thesis and the investment vehicle itself is very advantageous, but also, because like you said, this had been kept a secret to ultra-high net worth individuals for so long.
With our generation, the younger generations being able to access such an incredible amount of information on the internet and then to invest via the internet, because they’re more comfortable with the internet, because they grew up with it, I figured there was going to be a great opportunity. I know this has been long-winded, but I’m just trying to set the stage. I found as I got deeper into the world of passive syndications, I realized it is true that the complexities of commercial real estate lend itself to creating outsized returns if you’re working with best-in-class operators, but everyone’s marketing documents look the same.
Most passive investors simply didn’t have the time, the expertise, the economic viability to do the type of due diligence that I thought was prudent. As an example, even if you’re investing a quarter million dollars, or a half a million dollars, which would be a large investment amount for a passive investor, to spend a 100 hours on due diligence flying around the country, running background checks and criminal checks and talking to professional referrals, it’s going to eat into your returns. I just felt there was an opportunity to create a business that provide that extra layer of due diligence and that’s what Asym Capital ended up becoming.
[00:08:57] KR: That’s awesome. I love the idea that you’re looking around and saying, “Okay, the people left standing, those are the business models that can stand the test of time.” I mean, that’s a really good way to see, “Okay, which assets do I want to be in and what works?” And can I figure that out.
[00:09:15] HT: Correct.
[00:09:15] KR: Then you’re able to from there, build that out and realize that you’re right. I mean, I think that’s something that through this podcast, I’m trying to help rectify is just, a lot of people just don’t know – they don’t know what they don’t know. They don’t know even the questions they should be asking. If they get answers, it’s tough to know if that’s the right answer, or what’s the next question.
You’re talking about running the level of diligence of even doing background checks and following up on referrals. I mean, you’re right. People just – they’re busy. They don’t have that time. That service that you’re providing, I think to make sure that people are in good deals, with good sponsors, I mean, that sounds invaluable. That’s a really cool model.
[00:09:57] HT: Yeah, I appreciate it. Also, at the same time, this developed organically, where I had developed some very savvy relationships with institutional quality operating partners and then developed my own due diligence process for my own personal portfolio, but then with family capital as well. Then thought, this is actually a scalable infrastructure. If we can create something that can attract additional investors, we can leverage these pre-existing relationships and negotiate for favorable terms for our group, because as we grow in size, we can create that leverage. That’s exactly what happened.
At the end of the day, I really like to focus on my strengths. I have very few of them and as do most people, by the way. I love talking to investors. I love the capital raising component of the business. I’m not the guy that’s going to be out there implementing the business plan at the property level. There are people that I have found throughout my career that that’s their specialty and that’s all they want to do. They don’t want to interface with investors, or have a podcast, or something like that. That was an interesting part of the dynamic as well, where I want to educate and help nurture those relationships and then pool investors together to invest significantly.
[00:11:15] KR: Yeah, you’ve institutionalized the retail investor process. You’re aggregating this capital, so that you can bring the same weight that a large institution would and demand the terms, similar to a large institution.
[00:11:30] HT: Correct.
[00:11:31] KR: That’s really great. I mean, that’s great for your investors.
[00:11:34] HT: Exactly. That’s the model.
[00:11:36] KR: Most people that I think, probably most people in this space, a lot of people that probably you or I interview are out there actively syndicating. They’re actively doing deals. They’re taking the approach that they want to own it and control it and do this. You’ve taken a different path. What led to that decision? Was there a fork in the road of do I go out and actively take down these deals myself? Versus this model you’ve developed? How did you make that decision?
[00:12:05] HT: To be honest with you, is about focusing on what I felt I was best at, but also, from my perspective, I’m sure you’ll be sympathetic to this. When I look at the net result of a passive investment done through a partner who has a tremendous strategic advantage, whether that be through relationships, or software, or algorithms, or access to lenders, or access to capital, you can have so much of a head start, versus a mom and pop single property owner. That if I were to spend the next 10 years of my life only focusing on one particular strategy in one niche, I would likely be 70% as good, as someone that we would work with.
Well, guess what? It’s usually an 8% pref with the 70/30 split. You know what that means. I may get the same return if I only did this deal, this type of strategy, this niche, this particular geographic location. That doesn’t even factor in my time, let alone the benefits of diversification. I’m happy to exchange some control for that diversification, especially when the economics are even remotely comparable, let alone, actually competitive. I mean, that’s mind-blowing to me. That’s the strongest case for passive investing, without even getting into the liability and the headache and the time commitment. The economics are actually very similar.
[00:13:42] KR: I am sympathetic to that. I’ve made the transition, different path, the transition from passive investor. I still invest passively, but I’ve also started actively syndicating deals and doing other investments actively as well. What I can really relate to is the idea of there is such a big difference in the expertise and the skill set and the scale and technology and research and all this of the mom and pop, versus in a really advanced group.
I had to go through a similar process of deciding what my future was, where I was actively doing deals on my own. I was very much that the mom and pop syndicator, getting started, and I had the opportunity to join a firm that’s owned by one of my mentors, just a few months ago. Firm, it’s virgin held and they have close to 15,000 units. They’ve been doing it for about 12 years and they’ve been doing it well in totality. I mean, those guys have 30 plus years of real estate experience, development and all.
It was this idea of do I keep doing it on my own, or do I join into this this system that has been developed over years and years and refined and has the scale and weight? I can tell you that the results are of what they’re able to achieve and the way they approach things, it’s just night and day. It’s exactly what you’re speaking to of you find these operators that are really solid, and what they’re able to bring to bear on these deals to create these returns, I think is totally different from your typical mom and pop.
I’ve benefited greatly from it, from just what I’ve learned and being able to see behind the curtain and the advanced way that they do things. I definitely resonate with that. Then I think what you’re saying is ultimately as you came around, it’s focusing on what you’re good at. I like how you really hone in on you seem really focused. You’ll hone in on one thing and really focus on that and from a passive standpoint you’re saying, “This is what I’m good at. I like talking with people. I can bring all this together.” You don’t necessarily want to go out and be operating these deals. You want to focus on raising the capital. You build a process. You’re a process guy. You build a process to vet the sponsors. You can provide a unique skill set and you found this great niche that exists in the market.
Yeah, I think that’s really cool. You’ve taken this different path there. Yeah, I definitely get the idea of – I mean, and you’ll probably attest to this, but I mean, the sponsor is really, I think, what matters. It sounds like, I know you have a seven-step due diligence process and I want to talk about that. I know the sponsor is near the top of that, figuring that person out.
I know, that’s really what makes and breaks the deal. That’s what I talk with people about. I say, a bad sponsor can crush a good deal and vice versa. Really honing in on that aspect for the listeners, that’s where I always tell them to start. I think I probably got that from you, honestly, in your seven-step process. Can you take us through the process? We’re going to hit it at a high-level, understand what the steps are and give folks some insight into the value that you’re bringing at Asym.
[00:16:51] HT: Yeah, absolutely. I’ll give you the framework, which is the framework itself is strong enough, so that if you just know the framework, it will help you significantly. There’s a million questions that you can get into in the framework. In fact, I’ll give you a resource that I think a lot of your listeners will appreciate as well. The framework itself is going to put you ahead of most 80% of passive investors and that’s about – I’ll outline it very quickly.
In order of importance, this is our seven stages of due diligence. Number one, the sponsor, most important. Number two, the on-site management. Number three, the loan and the financing. Number four, the pro forma and the property performance, as in previous performance. Number five, the market. Number six, the property specific due diligence, things like the physical aspects of the property, how old is it, how many units is it, how close is it to a major street. Number seven, the legal documents. That’s the framework. Let me just give you two questions about each of these, so that we’re going to go into a level of detail in this conversation, the likes of which most passive investors would not be interested in doing, but let me just give you two questions that you can hack your way to expert due diligence.
The sponsor, how much of this potential investment is a rinse and repeat? Or are you incurring business plan implementation risk? That is such an important question. Do you have the infrastructure? Do you have the team? Do you have the software? Is this things you’ve already used before? Is it in a market you’ve already invested in before with that same property management company? Is it the same risk profile? You don’t have to get into all that level detail. Just ask this question, which is is this a rinse and repeat, or is there new components of this offering that are incurring risks that are very difficult to quantify? Because if you’re trying to look at things on a risk-adjusted basis, it’s hard to see what it’s going to be like if they hire a new property manager, or a new property management company.
Something else I would ask is can they pass a background check? We have our attorneys run these, or you can also do them through a company called tlo.com. Those two things right there are really, really important. Is it okay if I just run through the next couple of questions?
[00:19:06] KR: Yeah. Go for it, man. This is gold.
[00:19:08] HT: Okay, great. The on-site manager can make or break the investment as well. If there is a 100% occupied property in A class, whatever, you name it and the manager commits fraud, pretty much, everyone’s losing money. Here are a couple things I want to ask about that. Number one, what software do they use? Can I see a printout of what they’re going to be providing to the sponsor on a daily, weekly, monthly, quarterly basis? Just to look what that communication looks like. I don’t need to see it every single daily, day, month, quarter, whatever, but I just want to know what that transparency looks like.
I also want to get professional referrals from that property management company. Not necessarily who are the other investors that they’ve invested with, or have invested with them, but who is their CPA? Who is their attorney? Who is a contracting company that’s worked with them previously and can I reach out to them for a 30-minute call? I find that those types of referrals are far more powerful than a friend of theirs that’s invested successfully with them.
[00:20:10] KR: Absolutely.
[00:20:11] HT: Number three, the loan and the financing, I’d say that debt is the most important determining factor, as far as whether or not investors keep their principal. This is something that isn’t talked about enough, but it’s the reality of the situation. 2008 is a perfect example of that. It was more pronounced, but that’s always the case in real estate. If you’re having concerns about keeping your principal, debt is the determining factor.
Everyone focuses on loan-to-value. Sure, that’s important. I guess, the follow-up question there is what is that “value” based on? Is that a recent appraisal? Is it an as is appraisal, or does the appraisal assume that there’s been a significant value-add created during that time? What is the debt service coverage ratio on year one? What is the debt service coverage ratio when the interest only period ends? Those are important metrics to look at risk.
Just going through these really quickly and this is dense, but I’ll provide some background in just a second. The market, I like to see the industries that are providing the employment. Obviously, hospitality is extremely cyclical. I don’t need to say that. What really matters to me is is there any industry that is providing more than 25% of the employment? That’s a good question to ask. Then, does the market generally line up with your product? As an extreme example, if you have a A class property in a market that has a median income of $30,000, you may be, even at 90% occupancy now, but if the market takes a sneeze, the tenant base is not going to be there.
Property specific due diligence, number six. I’d say that diversification of the tenant base is critical. The easiest way to do that is the number of tenants, the number of units. This is why a lot of people talk about a 100 units or more in multifamily. What’s the number of units? I also want to take a look at the daily travel vehicles, so what are the daily travel vehicles? You can actually get this information at ESRI Business Analyst. They compile census data.
All right, number seven, sorry, legal documents and then we’re done. Legal documents, I’d say, I want to have a thorough understanding of the waterfall. How is capital distributed? I think, everyone is familiar with oh, there’s an 8% pref with the 60/40 split. Sure. How about capital above the pref from operations? Is that split 60/40, or does all of it go to the investor? If it does go to the investor, does that count as a return of capital and therefore, does that change the preferred return calculation for future quarters?
These are really important nuances and it’s not out of line for that to be the case, it’s just you need to know what you’re getting into. Also, say anything about capitol call. How is it decided that the capitol call is needed? Do the investors get to vote? If they don’t contribute, is there some penalty? There you go. Those are the seven. You’ll probably have to go back and listen to that a couple times to get all the information I just went through there. Here’s the thing, here’s the reason it’s important. If you’re listening to this podcast, you are an extremely savvy passive investor. That’s the nature of past investing. Most past investors are not listening to podcasts and taking this stuff seriously. Congratulations. If you’re like me when I started my career, I got a deal and I’d say, okay, I can see through the lines. I can anticipate from an intuition standpoint where the weakness of the deal is. I would find that weakness and I try to focus my due diligence process on that weakness.
That can get you by in an up-market, but that is not a pragmatic and objective way to look at real estate. You need to focus on the totality of the deal, because your intuition may be wrong. By the way, if you know what you’re doing, it will almost always not be something that’s easily accessible. Does that make sense? In the sense that if you know what you’re doing, generally speaking, the investments that have caused us headaches, not major problems, but headaches have been things that are very, very difficult to foresee. You have to have a objective list that you go through every single time. Since we’ve created that list, the results have been really spectacular.
[00:24:32] KR: Yeah. I appreciate that. I appreciate the level of diligence. I mean, just even being on the operator side and being on the other side of the of these conversations. I mean, just hearing the things that you’re focusing on, it is interesting. I mean, it’s things that we try to do, but keep the waterfall simple, because the more complicated it gets, just the harder it is to explain. You never want people questioning, did they get what they were owed, right? Keeping it simple, things like that.
The fraud thing really hits home for me, because I mean, one of my first passive investments and this was actually not the property manager, this was actually the sponsor, the guy committed fraud. It was luckily, a small investment. It was through a crowdfunding thing. It was me dipping my toe in the water, but ended up losing the money because the guy –
[00:25:21] HT: So sorry to hear that.
[00:25:22] KR: I mean, it was a great learning experience. It was like, “Oh, maybe I should do some due diligence next time.” Because this is really just me going, and this is the danger of crowdfunding, is going online and just looking around and just saying, “Oh, yeah. Let’s click on that one. Let’s click on that one.” Doing it with really doing no research. That’s really what hit home for me. I’m like, this is why everything you’re talking about is so important, because it’s not always sunshine and rainbows. Stuff does go wrong and you got to do the work upfront.
I don’t know if the guy had anything in his background, but I didn’t run a background check. Maybe something would have come out. Who knows? The piece you mentioned about the debt, I think is really critical. I don’t think people understand that. That’s one thing like, when we’re inside the deal, we’re spending a ton of time focusing on that. What’s the leverage?
One of the biggest things we look at is tracking that debt service coverage ratio and understanding, what is that cushion? Because that’s the cushion that you have when things go wrong. That’s the cushion that you’re going to eat into before you can’t pay a mortgage payment and until you have to start talking about forbearance, or even worse, foreclosure. I think, people need to really hone in on that metric, I think is critical.
Then I love the other stuff you mentioned too. Yeah, I appreciate your process. I think that distills everything that I’m trying to do on the show is just make people think about these investments in a different way and really do the homework. Not just go into it blindly, like I did, clicking through online and saying, “Yeah, it looks like a nice property and investing,” but really doing that work. I guess, if you don’t want to do that work, you work with somebody like Hunter, who’s doing the work for you, right? The work has to get done by somebody.
[00:27:05] HT: Exactly. I mean, that’s one of the benefits. We try to make it economically viable, so that there’s basically either no net fee, or it’s actually more advantageous to go through our firm. It’s very challenging to do that and we’re not able to accomplish it frequently. We just put out our first deal of 2020, which is an ATM deal. It was very challenging to make the economics work, but it’s available depending on when – you can find it at asymcapital.com and you can see the level of due diligence that we went through, so that our investors can feel more comfortable.
By the way, we do have an eBook that is literally just a list of a 111 questions passive investors should be asking. You can get that at cfcmentorshipprogram.com/questions. It’ll just jackpot you all the way through a big part of this conversation.
[00:27:57] KR: That’s awesome. I’ll make sure that gets in the show notes. Because though, the caveat is because I listened to your show about that, is that you should not forward all a 111 questions to the sponsor and ask them to fill out this survey. It’s a great tool to use sparingly and to dig in in the right places.
[00:28:21] HT: On a proportional basis. It will give you an idea, as far as the questions we’re asking before we invest 5 to 10 million dollars. If you can just invest just a couple of questions about each of those particular topics, you’re going to be well on your way.
[00:28:34] KR: Yeah, and spend the time on the sponsor. I think that’s why it’s at the top of everybody’s list. Yeah, and I felt like I could say that, because I heard you say it on the show.
[00:28:41] HT: Oh, a 100%. You don’t want to burn those relationships.
[00:28:46] KR: Yeah. One thing that I’ve always really enjoyed about your content is like I said at the beginning, the economics, bringing the macroeconomic picture into this and understanding what’s happening in the world outside of real estate impacts what we’re doing here and impacts what we’re doing day-to-day.
I’d love to dig into that a little bit. I’d love to get your thoughts. I mean, obviously, there’s so many things going on right now and nobody has a crystal ball. I mean, what is your take, or your opinion on economic outlook and how do we – I guess, because of that, what type of investments are you focusing on? How are you hedging your bets and preparing for whatever may come?
[00:29:29] HT: It’s an important question and it’s one that I’ve asked myself a lot. Then also, had the pleasure of asking IMF consultants, trained economists, people who manage hundreds of millions, if not billions of dollars of commercial real estate on our podcast. A lot of my investment thesis and economic thesis is derived from those conversations, or in preparation for those conversations.
I’ll give you my thoughts. Generally speaking, I have a very free market philosophy on life. I actually am a big proponent of philosophical libertarianism and I actually think that the free market can provide pretty much any service. I say pretty much, I mean, literally everything, including the police and military, which by the way, I’m not exaggerating when I say that you can e-mail me if you’re interested on that topic, but just to provide some context; people who have that worldview tend to see how far away from that society we are in terms of the world we’re living in. Because of the fact that there’s such a deviation in terms of the free market, versus how we’re living, they are always six months away from the massive catastrophe of economics. It makes them inept when it comes to making prudent investment decisions.
Let me break that down really quickly. A lot of the libertarian thought leaders that I look up to fall very short when it comes to being able to accurately predict where we’re going to be in a manner that would actually allow you to make prudent investments. That I hate, because my philosophy or whatever, being an anarcho-capitalist, the fun part about that is the capitalist part. The anarcho part is the part that just gets you uninvited to a lot of Thanksgivings. It’s not that fun.
The capitalist part, if you’re good at the capitalist part, it doesn’t matter what anything – You’re going to be interesting. People are going to flock to you. You’re going to have clients. You’re going to love them. You’re going to be able to have a fulfilling life, blah, blah, blah. If you’ve got the anarcho part and not the capitalist part, not so much fun. I say all this to say, despite the fact that I am a proponent of the free market, I also can see opportunities around us, like incredible opportunities. You can take that same philosophy and go, okay, the federal reserve is going to print money endlessly, because they have political incentives to do so. They’re going to keep interest rates down forever.
What’s that mean? Well, it’s one of the most favorable times to invest in real estate in the history of the United States. If you Google the 100-year history of interest rates, you’re going to see that there’s a massive uptick in the 70s. If you remove that uptick, you have a prolonged low interest rate environment and I anticipate that that’s where we’re going to head into, especially with the printing of money that the countries all over the world are doing. Particularly in terms of asset classes. Anything that is recession resistant, I’m typically a proponent of generally, because I’m happy to give up some of the potential upside of the more cyclical investment opportunities, because the two things I want are predictability of outcome and cash flow.
If I can generate a double-digit IRR in all stages of the economic cycle, I will be able to participate in all stages of the economic cycle, which is by far the most important. First, don’t lose money. Second, participate. I see deals now where we are in this quasi – who knows what stage of the cycle we’re in right now. We’re in a massive question mark right now, which is unique.
Six months ago, we say we’re late in the cycle. If I can produce a 12% IRR, assuming no rental income for 24 months, for example, I’m going to do that deal now. I’m going to do that deal in nine months. I’m going to keep trying to find deals like that. Now with that said, we just put out our first deal of 2020 and it wasn’t a real estate deal, but within that deal, there’s an incredible recession-resistant component. I won’t go into the details now, but the ATM business is absolutely fascinating. Within certain demographics, we saw less than an 11% reduction in transaction or volume during peak COVID, which is now recovered to around 99% of previous.
The mother of all sensitivity tests, in this particular demographic, in this particular niche was just conducted and the business did exceptionally well. I can go on, but those are a couple of ideas. Just from a big picture, the recession resistant component has always caught my eye, because my career was born out of the wake of the great recession.
[00:34:14] KR: Yeah. No, I appreciate that and I appreciate how you’re looking at it, like a sensitivity test. My focus is very much workforce, multifamily housing. I think we saw a similar thing. We saw our portfolio, collections stay above 90%, really be around the mid-90s, all the way through COVID, even up into September. We’ve seen the things play out. What we’ll always say is we’re not trying to hit home runs. We’re trying to hit singles and doubles, but we want to stay on base and we want to keep going around.
I think that’s why we invest largely in the Midwest, because it’s cyclical, it’s steady, cash flow focused, yield focused. It’s not the sexiest strategy in the world, but I think it aligns very well with what you’re describing. I think we’re similar in that thought process of I’d rather have – I guess, the idea is really about risk adjusted return, which I don’t think is talked about enough. I just had a conversation the other day with a group of investors and we were talking about the returns that we’re seeing.
I said, “Well, we want to see returns that are maybe 400, 500 basis points above that.” I said, “Well, you may get that, but what’s the likelihood that you’re actually going to achieve that?” Sure, it might be a hotel conversion in Baltimore, or somewhere and you might see that, but that looks very different than buying a cash flowing property in Indianapolis, for example. I don’t think this idea of risk comes into the conversation enough. I don’t think people spend enough time with the predictability of the outcome, like you said.
[00:35:50] HT: The name of my company is Asym Capital and people frequently ask, what is that? It’s not even a word. It’s short for asymmetric. The nature of the business is finding investment opportunities that produce asymmetric returns. That asymmetry is based on the risk profile, versus the return profile. There is a caveat to that. There are certain investment strategies, or return profiles that we’re not willing to entertain and I’ll give an example. Anything below a potential double-digit return, we’re not going to be complicated. It’s just not worth our time.
That’s just our business strategy, okay. It doesn’t matter if it’s collateralized by the hand of God, we’re not going to invest in a 5% return. Collateralized by the hand of God/the United States Military, that’s basically the same thing, so we don’t invest in bonds, but we’re pretty sure they’re going to play out the way that they may play out, that they said they will. On the other side of that though, if someone said we have a development deal that would likely produce a 60 IRR, it’s also outside of our return profile and investment strategy, just not the space in which we’re willing to participate.
A 60% IRR could be amazing, but within the strategy, like I said, if we can get to that double digit area and feel like you could receive let’s say, a 30% reduction in occupancy and still be cash flow positive, man, like I said, we haven’t found that deal in 2020 yet, but man, they’re out there and that’s why we’re always looking for them. We’ve done plenty of deals like that. 94% occupied, growing sub-market in Texas where the property is cash flow positive at 68% occupied, a 180 units.
That’s the way that I look at that, because it’s going back to that debt service coverage ratio. There’s other opportunities out there. I think, self-storage is really fascinating. I think the defaulted debt space right now is really fascinating. Of course, senior living, because of the attention to the sector, not because of how employment data may have negatively impacted the sector, because obviously, the tenants aren’t working typically, but the question mark is the tenant base is susceptible to COVID. There’s a opportunity for pricing arbitrage there. We’re paying attention to all of these.
I just want to circle back on something really important. When you hear me list these asset classes, you may start to feel like, “Well, how does he possibly have a market advantage in all of these asset classes? You can’t be a jack of all trades in this business.” My niche focus is identifying best-in-class operators. I’m pretty much good at one thing and that’s the thing. We leveraged their expertise, their infrastructure, their relationships with our investor base.
[00:38:36] KR: Yeah. I think that’s a general theme I’m getting from you is just the ability to be really specific focus and really dig in in that area and become really great in that one area. Like you said, finding the sponsor, spending the time, finding the sponsor and trusting that that’s the horse you want to ride to the finish line, right?
[00:38:56] HT: Correct.
[00:38:57] KR: Yeah. Well, very cool. Well, Hunter, at the end of each show, I have a little section I call the keys to success; a few questions that I’d love to ask you and we ask all of our guests. The first one, man, this is – I don’t know if this question is easier for you, or harder for you because of your background, but what is the one question every passive investor should ask their deal sponsor if they only got one question, not a 111?
[00:39:25] HT: It’s really about that rinse and repeat. It’s trying to figure out the business plan implementation risk. Because there’s so many data points that I can look at; assets under management, number of properties purchased, number of properties taken full cycle, the IRR of those respective things, blah, blah, blah. It’s really about looking at the deal and saying, how much of this is a rinse and repeat and how much of this is incurring new question marks in terms of houses going to go?
It may not be what it’s originally on its face. Because if you have a sponsor who has had tremendous success in Dallas, to take that same thesis and apply it just in Atlanta, you’re incurring risk doing that. I’m not saying it’s a no. I’m just saying, it will likely be a different property manager, it’s a different market, it’s a different lender, it’s a different tax consultant. These are all the things people don’t think about. They think the sponsor knows what he’s doing. He may. Sometimes, those relationships go sour. Sometimes that property manager, they could be the largest in Atlanta, but it’s not a good fit for that particular sponsor. It’s really that rinse and repeat.
[00:40:33] KR: Yup. No, I think that’s great. Yeah, the property manager, especially moving from market to market, I mean, that property management makes or breaks your deal. They’re the ones that are there day-to-day driving the performance. Very good. What are you most proud of in your career?
[00:40:49] HT: Oh, man. That’s a great one. It’s actually surprising. Can we have just a moment? Can I tell a little story about this, because this is –
[00:41:00] KR: Sure. It’s all yours.
[00:41:02] HT: I mentioned that I started in 2010 or so. What happened at that point in this industry of real estate, there was so many people that got wiped out and burned with these ultra-high dollar coaching programs. $50,000, a $100,000, a quarter million dollars, we’re going to teach you how to flip houses in California. A lot of those coaching programs were taught by people who had never flipped a house. The people that started implementing those strategies, a lot of them got burned, maybe because of market dynamics, maybe because they were being taught by people that didn’t know what they were doing.
When I entered this industry, people that I look up to, the people that made it, by the way, they really look down on any coaching in the real estate sector, mentorship stuff, etc. Because I learned so much from them, that’s the way that the beginning of my career went. In 2017, someone reached out to me from a podcast I did similar to this one and he said, “I loved everything you say, but I can’t find any real resources on this topic. What’s the next level?”
I’ve listened to a bunch of podcasts, but what’s the next level? I didn’t have a resource I could send him. I just didn’t feel like someone had taken this as seriously as I would have. Because if you go through some program and you think you know what you’re doing in this industry and you’re wrong, it can be catastrophic.
I created. I took three months. It’s all I worked on for three months and I created what I thought was an excellent resource for real estate entrepreneurship and passive investing. That’s what the CFC mentorship program was. I launched it, seven people went through it on one quarter. After that happened, I didn’t really know like, is it going to work? Are they going to get anything out of it? They attended all the meetings, but is it actually going to matter?
Then over the next six months, all of them took exactly what they wanted to do and ended up executing. Now, you’re probably familiar with many of these people. Adam Carswell was the first guy that ever graduated from that program. Now he works with me. That has now become one of my most proud things, where every quarter, we have seven or 10 people go through this program and I just get to see them take off like rocket ships. Ellis Hammond is another one. Spencer Hilligoss. I mean, these guys and girls, it’s cool to build relationships like that. Also, to just see their momentum go and just know that they have the confidence to move forward with deals. If you do one deal, even passively, it may make you $50,000. It’s like, oh, man. It’s so cool. It totally inverted what I thought originally.
[00:43:39] KR: Yeah, that’s awesome. I mean, that’s the epitome of the abundance mindset. You’ve discovered all this stuff. You could just be hoarding all this information and just making people come to you that did profiting off that, but you’ve actually decided to give that away and because of that, you’ve launched all these careers with yeah, I know all those people. That’s fantastic. That is something really to be proud about.
[00:44:01] HT: Yeah, appreciate it.
[00:44:02] KR: This one’s probably easy for you too. What book should everybody read? You can say your own.
[00:44:09] HT: Well, I’ll do this, okay. I’ll say some books that inspired me to write the book that I wrote in the way that I wrote it.
[00:44:14] KR: Excellent.
[00:44:15] HT: Double Double by Cameron Herold. That’s one that I don’t think enough people talk about. DotCom Secrets by Russell Brunson. In my opinion, these guys wrote a $25,000 coaching program and gave it away for 8 bucks. That’s insane. I wanted to do what they did for business consulting and Internet marketing in the real estate capital raising sector. I think I have done that.
I basically took what I would charge someone $25,000 to teach them and just wrote it and said, if you go to raisingcapitalforrealestate.com, you can get it for $8 and let’s see what happens. I want to make an impact on the industry, so that’s how I wanted to do it.
[00:44:56] KR: The reason I say too that you can plug your own book is because I’m actually reading it right now. It’s good. It’s good. I’ve really enjoyed it. I’ve learned a few things. Yeah. I mean, I think it really is high-quality. The level of detail was exactly what I expected from you.
[00:45:12] HT: Thanks, man.
[00:45:12] KR: Really get into it.
[00:45:13] HT: That’s very kind of you.
[00:45:15] KR: Last, but not least, what is your number one key to success?
[00:45:20] HT: I think, I want to say two if that’s okay, because I think they’re similar, or related. Number one, it’s all about having a playbook of someone else’s success that you can mimic. If you can identify someone who is very closely aligned with where you want to be in three years, five years, 10 years, 20 years and motivate them and encourage them to give you their playbook of your own success, that’s the easiest way to hack not only this industry, but any industry.
The other part of that though is a personal part, which is that especially this industry is lucrative and dangerous and things go wrong, people go to jail and you can make huge multi-million dollar mistakes. What that means is that you have to take this business very, very seriously. That’s going to be a lot of lonely time doing things, like listening to podcasts, studying economics, reading through Excel models and just alone in a room sacrificing other things.
A lot of people get into the real estate business, because they have this idea that they can go to Mexico for a month. Guess what? You can. You can. Guess what? No one I know is actually doing it. They just want to feel like they can. That’s important.
[00:46:36] KR: Everybody I know is working harder than they ever did at any W2.
[00:46:40] HT: Yes. Exactly.
[00:46:41] KR: Just you’re working for yourself, so it doesn’t feel like it.
[00:46:44] HT: It’s fun. Also because of how scalable it is, you’re working with other people that love their job. What do you think I would be doing if I had another three zeros in my bank account? This exact interview.
[00:46:56] KR: Well, hey. I appreciate that. I’ll take that as a compliment.
[00:46:59] HT: A 100%.
[00:47:01] KR: Hunter. I mean, thank you so much, man. You’ve provided so much value to me over the past few years. I’m so glad that I could bring you on and introduce you to my audience, most have probably heard about you, but if they haven’t I’m so glad that they know who you are and have you as a resource now. How can folks get a hold of you if they want to reach out?
[00:47:20] HT: Yes. For investors that are interested in investing, asymcapital.com. If you’re interested in doing a hybrid approach to passive investing, if you’re interested in creating your own brand, raising money, that’s what the CFC mentorship program is all about and that’s cfcmentorshipprogram.com. If you want a very cool resource, raisingcapitalforrealestate.com. You can get all the secrets of how I built my business.
[00:47:43] KR: Awesome. I’ll make sure all that gets in the show notes, so that folks can access it, because I’d recommend you guys definitely check out Hunter’s stuff. Definitely check out his podcast, Cash Flow Connections. Check out his book. I mean, all of it is just packed, packed with information. I’ve learned a ton from this guy over the years. I can’t say that enough.
[00:48:02] HT: I really appreciate that.
[00:48:03] KR: Yeah. Thank you for being on the show. This was a blast.
[00:48:06] HT: Happy to do it, man. Let’s do it again in three or six months.
[00:48:08] KR: Sounds great.
[END OF INTERVIEW]
[00:48:09] KR: Thanks for listening to another great episode of Ritter on Real Estate. Hit the subscribe button and make sure you don’t miss out on the content that will make you a better investor. Also, visit kentritter.com for articles, videos, and tools curated just for passive investors. Until next time, this is Kent Ritter with Ritter on Real Estate. Now, go out and invest like a pro.