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Today’s Ritter On Real Estate guest is Denis Shapiro. Denis began investing in real estate in 2012 when the market was just beginning to recover from the GFC (Global Financial Crisis). He built a cash-flowing portfolio including many alternative assets, such as Note and ATM funds, mobile home parks, life insurance policies, tech start-ups, Industrial property, short-term rentals, and more. He co-founded an investment club for accredited investors in 2019. Following the success of his investor club, he launched SIH Capital Group. SIHCG provides accredited investors with a simplified strategy to invest for passive income.
Denis has observed key changes in the alternative asset market in the decade of recovery from the GFC. The JOBS Act of 2012 opened many alternative assets up to everyday investors, but clear expertise and guidance is still hard to find nearly a decade later.
This observation compelled Denis to write The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways in 2021. His book is based on his own experience becoming a successful alternative asset investor and interviews with some of the best alternative asset investors in business today.
Key Points From The Episode:
- Starting off with traditional investment vehicles.
- The realization that there’s a lack of growth in traditional investments.
- Building a diverse portfolio.
- Networking, due diligence, and underwriting alternative investments.
- Meeting other syndicators in conferences for additional knowledge.
- What to look for in a sponsor.
- Advantages of diversifying deals by getting a partner.
- Deploying multiple deals with different sponsors.
- Basics of Financial Independence Retire Early (FIRE) movement.
- What happens after you retire?
- Finding the ultimate life goal in commercial real estate.
- The idea of saving versus investing in continuing the income stream
- The misconception about being 100% “passive”.
- Importance of learning the basics of underwriting.
Books mentioned:
- The Alternative Investment Almanac by Dennis Shapiro
Transcript:
[0:00:00.0] DS:
I think alternative investments once you enter that space, it’s all about networking. Alternative investments is a very broad topic, literally anything that’s not traded easily by the public stock market. So it’s mostly private securities, they’re usually higher minimums, so you have to be a little bit more careful with your due diligence. So having a network and learning some basics on the writing skills are so critical when it comes to alternative investments.
[0:00:25.0] KR:
Welcome to read around real estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts to give their top investing advice, strategies and tools, and I break down the insights and 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. I’m your host, Kent Ritter.
[0:00:49.0] KR:
Hello fellow investors Welcome back to an episode of “Ritter On Real Estate” , where we teach you how to passively invest like a pro. Today, my guest is Denis Shapiro. Denis began investing in real estate back in 2012. And he’s built a cash flowing portfolio including many alternative assets such as no ATM funds, mobile home parks, life insurance policies, tech startups, industrial property, short term rentals, and more. He co-founded an investment club for accredited investors in 2019. And then he launched sh Capital Group, which provides accredited investors with a simplified strategy to invest for passive income. In addition, all of that he’s the author of the alternative investment Almanac, which is the experts guide on building personal wealth and non-traditional ways in 2021. So Denis, thanks for coming on the show.
[0:01:41.0] DS:
Thank you for having me. It’s great to be here.
[0:01:43.0] KR:
Yeah, so obviously, we’ve got a lot to unpack today. And I love getting you know, folks on their search experience investors to share their knowledge with the group. But before we dig in, why don’t you just tell us a little bit more about who you are and how you got to where you are today?
[0:02:00.0] DS:
Sure. I actually even started investing in real estate in 2012. But even before that, in high school, I think 2004-2005 I started buying my first traditional, I think was like a mutual fund.My oldest brother gave me a copy of Rich Dad, Poor Dad. And he was about eight years older than me, he read it, he was totally hooked. And we have like a very brainwash family type of thing. So if we find something that’s good, we try to really hammer it home to the rest of the siblings. So when I read the book, I wasn’t a big fan of the book. At that time I was only 14 at that time. I was like I have to buy an asset though. And I just didn’t like the book just because I felt like he was making more money from his talks than what he’s actually saying in the book. later on. I read the book, you know, 100 times really loved the book. But at 14, I remember not liking the book, but remembering that I need to buy an asset. So I started, you know, I started buying mutual funds at that time. And I remember the first one I bought. I had like a pizzeria job, I saved money for like the whole month just to buy one mutual fund and I followed it along for the whole year expecting to be rich by the end of the year. And I think it went up by like $7 or something like that. So it was a really wasteful of a compounding year. But I started you know, getting more into the traditional side, I started looking into stock pickers and I went the Warren Buffett route, the Peter Lynch route. And I kept experimenting with different strategies on the traditional side. And what I realized was, my portfolio would never be the way I want it to be because it never produced income and appreciation at the same time. I didn’t feel like the dividend stocks did their job. I tried different traditional strategies like bond and and like a portion bond portion stocks, and I tried utilities and I tried mlps and rates, you name it, I tried it and it all failed on the traditional side. And what I realized is that I would have years of basically yield get wiped out over a one market correction. So what I kind of got to the point after I think 1015 years of being in traditional assets was that it’s great for appreciation. If you buy if you buy like a low cost index fund, it doesn’t really take much brain power, you could kind of set it and forget it. And at the same time when I was coming to this realization, I was starting to build up this alternative investment portfolio where I was looking at I was like, wow, you know, this stuff is really not volatize navassa. Because these are private securities, the cash flow is so much better. And at first I was really kind of trying to keep them separate and be like well, I have a traditional portfolio and have an alternative portfolio. And when things really started clicking was actually combining the two and realizing I should have a traditional and alternative portfolio where I could use 1% of my brain power and get decent appreciation with my traditional side. But then I could use nine 9% of my brain power when it comes to the due diligence side of alternative investments and networking and learning, basic underwriting and all of that stuff that comes along with alternative investments. And I married the two and I kind of got the yield I really wanted while getting, you know, a good balance of what exactly I was going for.
[0:05:23.0] KR:
Gotcha. So you’ve developed a portfolio, it’s a mix of a diversified portfolio, you’ve got your traditional stocks, mutual funds, you’ve got your alternative assets over here. And you’re, you’re kind of relying on the stocks from an appreciation standpoint, and rely more than traditional assets for cash flow, as well as that general I mean, I imagine there’s appreciation on that side, too. But yeah, your main cash flow source.
[0:05:49.0] DS:
Yeah, so the alternative investments I look at as your cash flow, cash flow plays. And it’s more, it’s not as much about combining cash flow and appreciation, it ended up being more of like a time management thing where I knew I didn’t need too much time if I picked a low cost index fund. And then I could spend a lot of time developing my network developing, you know, all the things that you really need to be successful in the passive investment world.
[0:06:19.0] KR:
Gotcha. So it’s more about putting the traditional piece through an index fund kind of on autopilot, and then allowing you instead of actively picking stocks and trying to do that they’re allowing you to really to focus on the alternative assets and, and doing the diligence there.
[0:06:31.0] DS:
Exactly.Yeah,
[0:06:32.0] KR:
gotcha, gotcha. Oh, great, that I think that makes a ton of sense. And how do you speak a little bit about it, but how do you find your alternative investment opportunities?
[0:06:45.0] DS:
So I think alternative investments, once you enter that space, it’s all about networking. Alternative investments is a very broad topic. It’s literally anything that’s not traded on basically the public stock market. So it’s, it’s mostly private securities, they’re usually higher minimums. So you have to be a little bit more careful with your due diligence. So having a network and learning some basic on the writing skills are so critical when it comes to alternative investments. Most of the operators I’ve sourced were directly from my network or network network. And then it’s just about you start picking up trends as you start investing in more deals, which markets are producing better returns and which business plans work better than others, you know, and you have to see like, hey, that’s a Class C asset, you should have a class C type of business plan to go along with it. So it’s all about actually networking with alternative investments much, much more so than the traditional side.
[0:07:48.0] KR:
Gotcha. Yeah, absolutely. You got to go out and find those investments, right? So what are some of the sources that you’ve used to build out your network.
[0:07:58.0] DS:
So I started off kind of using Linkedin when I started from like, zero, I remember I just added like real estate investor in on my title. And all of a sudden, I started getting like borderline spam messages from brokers and insurance guys, and you know, but they basically wanted to spend 15 20 minutes find out what you’re up to, you know, I’m sure it’s sometimes it’s not spam, but they were you get a lot of requests, once you put in like real estate investor, because they have like, their VA is sourcing you so that they can contact you. And what I ended up doing is once I was getting on those calls, I was picking up the terms that were being used, that I wasn’t aware of. And once you start realizing there’s a whole different language and in commercial real estate, but it’s the same language throughout different spaces. So once you kind of learn the language of apartment buildings, you could be a passive investor in self storage and mobile home parks. Because there’s little tweaks in the terms, but more or less, you kind of know the layout once you kind of learn it. So that was my first like my first recommendation to anybody who’s starting out when they’re building out the network, just put in the words investor, and Linkedin. And you know, whatever you want to do, if you want to do tech, tech investing, or angel investing or real estate investing, and you will get you know, you’ll get inundated with requests for like 15 minutes, you know, calls and once you get on those calls, realize what the terminology is being used. Because what you want to do is you want to have that basic language understanding before you start going to conferences and meetups because now you go there and you’re not, when you don’t know anything you come off as like, hey, I need a coach, and I need a mentor. And that puts off a lot of people versus when you could speak that language. You could actually be like, hey, do you mind getting on a call once a quarter? And I’ll tell you what I’m seeing. You know which operators are crushing it and what are you seeing. It takes a little while to get that relationship where you could honestly exchange information. But that’s usually the flow path I use. I use LinkedIn to learn language, I started going to conferences to actually meet other investors, especially our limited partners. And you got to go to conferences that actually specialize where the speakers are actually syndicators. And not just like a wholesaling conference. So you’ll need other LP investors there. And when you start meeting them, you know, those are the best sources of information because they could give you honest, actual feedback on how certain operators are doing because, you know, in the operator world, you know, everybody’s the best operator because it’s partially a marketing game, right? So you’ll never get, you know, the full picture. And that’s the only way you’ll really get an honest answer.
[0:10:43.0] KR:
Gotcha. Now that’s a great technique and a good way to do your due diligence. So speaking about the sponsor, because you know, I’m of the mindset that the sponsor is the most important part of the deal, right? You’ve got to have a solid sponsor. So what do you do? What do you look for in a sponsor, when you’re going out and deciding if it’s somebody want to invest with,
[0:11:06.0] DS:
So I couldn’t agree more like, the sponsor usually will make or break the deal, what I like to look for is his expertise in a certain area. So what I want to my worst deals have always come when I’ve had a syndicator go into a new market, because then they’re kind of learning on your dime. And as an investor, you kind of want to, you want that, that trial and error to already be done before you put your money into the deal. So it’s more about seeing certain red flags, and you get, you start picking up more red flags, the more deals you look at. So some things I look at, like I said, are, Hey, you know is this their first time in the market, if it’s not is that if it’s the third deal on the market, how did the other two deals do? So that would so my big thing is, you know, expertise in that local market. The second big thing for me is property management. Because as important as an operator is, I also know that the number one escape goat, when a deal starts going bad, is always the property manager, and then they get fired. And once they get fired, that will throw back the business plan for months. Because then you gotta bring the other, the other property manager in, it takes time to get them up to speed. And you know, all this time, you know, the months gone by so the second thing I look at, besides the specific, that specific market and expertise in our market, the second thing I look at is that relationship with the property manager, obviously, some of the bigger syndicators already kind of have in house property management. So they really have no one to blame, which is nice. But at the same time, if it’s a third party property management, how many deals have they done together, because property manager and syndicator is kind of like a dating game, and you don’t want them to do a blind date on your deal. So that’s the second really, really big thing. And then the third big thing for me is I look at unit composition, I feel like this gets overlooked. My worst deals have always been the ones with the heaviest concentration of one bedroom units. They just, I don’t know, I don’t know what it is about them. But I think they’re forced they’re more of a trend transit type of environment versus twos and threes, where families kind of move in, and families will tend to stay longer in a building. So those are the kind of quick things I look for, you could usually, if you just look at those three things, you could use a screen out most deals fairly quickly. And then there’s all the other nuances where it’s more about fitting in with your own personal model, like hey, do you believe in class A or, you know, it’s funny, as an investor, and as a fund operator. It’s funny that almost every asset class can be argued is the best asset class. So it’s like, oh, I only do Class A, because such and such like Class A, the, the officers in a company, they don’t get fired during a recession. But then you hear a different operator go, Oh, I only do Class B because if something happens with Class A and they do get fired, they’ll go, they’ll go downgrade to class B and then you usually Class C is the broadest because you never really see Class D right? It’s almost everything else that goes by default. It’s a Class C, but then Class C the operator says well, this is workhouse, this workout is housing. And you know, it’s it’s the you know, it’s the bread and butter, and it’s the most affordable. So you always have these arguments of which one is the best. And that’s more of that will fit into your own personal objective. Like if you subscribe to the notion that you feel like the workouts housing will do better, or you have a portfolio full of workouts, housing, and then you want to diversify with some class A and some class B, then you might want to stick to operators who are specifically looking for class A and Class B deals because most operators have that niche of which class they focus on.
[0:14:57.0] KR:
Yeah, I think those are some great tips. And some good ways to start to narrow down is one understand your goals, but start to narrow down different sponsors and different investments. And, yeah, the unit composition is one I hadn’t heard of, but but but I can definitely see that, you know, it’s interesting, like we’ve got deals where, you know, half the property, our studios, and they absolutely are just just killing it full all the time. And the dollar per square foot is the highest you can get. And, and it just, it kind of depends on the market, the location, you know, and it just, so it just really depends, but that’s an interesting insight into those one bedrooms. I mean that yeah, that is one thing that I look at is, you know, as we’re looking at properties, I like to see the heaviest concentration and twos and I agree with you that like the twos are the most versatile. You know, you could have, you could have a couple of roommates, you could have a family, you could have somebody that wants an office, you could you know, so there, I think there’s the most opportunities there too. And what I’ve actually seen recently in Indianapolis is from for us, really a per square foot standpoint, the two bed two baths lead the market in per square foot rent. So it’s just interesting to see that the variances between the different unit types.
[0:16:23.0] DS:
Yeah, great point. And I think with COVID, I think that that made the second bedroom doubt much more important. Because now your family has come over and you don’t want to put them in a hotel or especially to office that’s the big one, you know, remote working, you want that second bedroom.
[0:16:41.0] KR:
So tell me a little bit more about this investment club, you started, you know, what, what was? What’s the purpose behind it, and how does it operate?
[0:16:49.0] DS:
Yeah, so what ended up happening was, I was looking for a smaller multifamily. And I was partnering with and then the visual, and we were out there we were searching. And at the same time I invested in my first syndication, this was a few years back. And what we were realizing is we were just comparing the numbers and when we’re saying like, Hey, you know, investing in the syndication is like beating this hands down. I was like, we’re gonna have to get involved, we won’t have to select the property manager, the projected returns are actually better, there’s an actual exit plan versus sometimes for multifamily, you’re not going to get that. So we were like we were really leaning heavily towards that, you know, the syndication world. So what we realized that, hey, if we started an LLC together, we can actually invest in more deals, because instead of me just investing in one deal, and you investing in one deal, we could combine it and now we could invest in, you know, 2,3,4, or 5 deals, we ended up meeting a third partner, and we were all accredited investors. This is like a key here, because unless you’re only going to be doing 506 b deals you need to be you know, you need to network with other accredited investors, because this will actually open the door for you. And everybody needs to have active participation. The moment one person in the club does not actively participate in the decisions, then it becomes a security and you actually need a security document within your investment club. But otherwise, it’s just a simple LLC, where you know everybody’s involved and because syndications tend to have higher minimums. Usually the syndications I kind of see are like that $50,000 range where most syndicators now I’ve started bumping it up to 75 and 100. So if you could, if you’re gonna do one deal yourself, if you network with Twitter and credit investors, all of a sudden now you could kind of do a like a mini portfolio of multiple syndications in one shot, and you know, it spreads out the risks and you get geographic exposure and all that all those good things. And then we started realizing that we each had very specific backgrounds. So I started really getting a focus on apartment building investing. One of my partners was a big crypto guy. And then the other partner was a big tech startup guy. So even though we all greenlighted the individual decisions, now we started bringing in other stuff. And it wasn’t just apartment building syndications, we kind of have like a well rounded investment club, and it kind of formed naturally. And I would definitely say like, again, that dating reference, it’s not something you should be rushed into, I think, I think me my two partners for the investment club, were talking for six months, before we ever, you know, did the operating agreement and the LLC, because we really wanted to see if our styles would complement each other. But once you get the right partners, there are so many pros to the investment cloud because now you’re just diversifying so much from one deal that you would have done by yourself.
[0:19:45.0] KR:
Yeah, I think that’s a really interesting approach and it makes a ton of sense and I haven’t heard that before but you just you guys are kind of pooling it together. You’re JB one to meet the minimums, right? But to not to have if you were only going to go invest, you know 75,000 in one deal, you can spread that across, you know, three deals now if there’s three people, right? And so that’s, that’s a really smart idea. And so have you guys just continued? Are there other people in the group now? Is it? Is it just the kind of the small team or how does it work these days,
[0:19:45.0] DS:
You know, we keep it small, we sometimes will, we’ll use our investment club, and then we will maybe negotiate better terms on a certain deal and go in with other people, but then they will invest themselves, but then we’ll collectively get the same terms, we don’t want to, we don’t want to mess with the actual investment club dynamics. Because the more people you have, the more involvement they need to be in. Because the magic here is for everybody to be actively involved. So if you get this investment club, and it becomes too big, then it’s gonna be really hard not to create a security. Sure. So that’s kind of the mindset. So we kind of kept it. The evolution of the investment club was actually the fund that I started, which was the SH Capital Group, where we kind of saw, hey, this is working really, really well, what’s the next step? And then we were like, you know what, let’s do the fund at that point.
[0:21:12.0] KR:
Gotcha. So the club has evolved into this fund, and tell me more about the fund.
[0:21:17.0] DS:
So the fund is actual security. So what I realized is, when I was networking with a lot of people who are not in commercial real estate, they would get lost in the weeds very quickly, with some of the basic terms like the concept of waterfalls, and you know, what’s a preferred return, and confusing a preferred return with it with a dividend. And there was just some basic stuff that they couldn’t get over it and for them, and made the deal look, you know, more confusing, or they’re like, Oh, it’s 1730. So that means, you know, I’m losing 30% of my money from day one, they couldn’t get over certain concepts of investing in commercial real estate. So what I wanted to do is I kind of took it back to my traditional background where I was looking for the perfect income, income product that can complement my, you know, traditional portfolio, and I couldn’t find that in the stock market. So when I was launching my fund, I wanted to create a non publicly traded read, basically, that will give people a steady or consistent preferred distribution. But without all the backend stuff, so that they can kind of have the same type of returns from almost day one, from their investment till the end of the fund.
[0:22:33.0] KR:
Really interesting. So now you are bringing in other folks, and then you’re deploying the capital across multiple deals and multiple sponsors.
[0:22:41.0] DS:
Yes,exactly. And then they just get a fixed kind of rate return. It’s almost like a rate that’s just not traded. So you’re not going to have three years of your yield wiped out if, if the market corrects, because everything is private security. So there’s no traditional, there’s no traditional assets in the actual fund. It’s all alternative investments that are private securities, with the majority focus in commercial real estate.
[0:23:04.0] KR:
Gotcha. And what’s the benefit for an investor of going into your fund versus going in directly into the deal? Is it mainly just for folks that don’t have the knowledge to evaluate the deal on their own, so you’re kind of a stamp in your blessing on the deal?
[0:23:20.0] DS:
Yeah, so there’s a few advantages, the biggest one for me is that it’s more of a person who has value in capital preservation and consistent income. Sometimes, if you invest in a singular deal, if that single deal doesn’t perform well, you’re not going to get any distributions, right? You could even lose your money, because it’s you you’re you’re completely exposed to that one specific deal. So versus if you’re in a fund, especially a fund that’s already kind of operating, then you get access to all the deals in that fund. So you kind of mitigate a lot of those risks. But at the same time, because my fund has more than just apartment buildings, we also include notes and ATM funds, it has a higher cash flow from day one. So what I call, usually when you invest in apartment buildings, there’s like a drag that you get when you invest in your one, it’s like a 4%, like, typical value ideal, right? I don’t want to generalize this across every single deal. But on a typical deal, you’ll get that value, add your one where it’s like a 4% return, and then your two kind of goes so five, and then a year three, maybe a seven, and then I’ll average out, you know, a seven, eight in the life of the of the deal, but it has that wind up period, because you got to cover the closing cost. And, you know, it’s hard to get a really good deal in today’s market. So all those factors, so for someone who is looking for a higher income from day one, that’s not really what they’re going for. So that’s where you invest in an Income Fund, because we have notes and we have other assets that allow us to pay basically the full preferred return from day one.
[0:24:57.0] KR:
Gotcha. So the fund is focused more on income and cash flow rather than that appreciation. I mean, there’s some appreciation component to it because of the apartments. But really it’s for the cash flow and because you’ve combined these different things like ATM investments and notes which are higher cash flow, then you’re able to get your preferred return right away. Gotcha. Oh, very cool. So you brought up something that I thought was interesting, I wanted you to elaborate on a little bit on the show, you said, you know, there’s this idea of the fire so the fire move, and maybe you can explain, you know what that is for folks that don’t know and then talk about you know, what’s the biggest thing that’s missing.
[0:25:43.0] DS:
So this is like a unique, I guess, generation where I think it’s only been a really taken off in the last decade or so. So it stands for financial independence and retiring early. It’s kind of like a concept where people realize that they save money, they invest the difference and if they could save up to 25 times their annual expenses, they could actually retire at any time, they don’t have to wait till the typical 62 to 63 age so as a think I was 25 when I discovered the fire movement, obviously, like, you know, retiring at 30 sounded really awesome. So you know, I really went down the rabbit hole. I was kind of doing alternative investments at that point, not not too much at that point. Because the fire movements are really big on you know, low cost index funds and kind of that’s their kind of philosophy. But some people in the fire movement now are starting to gravitate towards commercial real estate and syndications as well. But what I found those, what I missed is it’s so focused on the numbers and getting to that, you know, that 25 times your annual expense number, and saving, saving savings, what you end up realizing is what happens after you retire, right? So it’s like, Okay, I’m gonna usually the bucket list is something like, Oh, I’m going to travel the world, I’m going to homeschool my kids, I’m going to catch up on my Netflix, I’m going to wake up whenever you want. And then what ends up happening is like, literally the first month, a lot of these retirees that retire, they do the traveling, and then they come home and they’re like, Alright, I got that out of the way. They watch Netflix, and they’re like, Alright, I get my cues clear. And then it’s like, oh, I actually hate homeschooling, I’m sending my kids back to school. And now it’s like, Alright, now what I do all day, and they have this, like tunnel vision to hit this number. But they don’t work on your afterlife, so to say. And that’s kind of where I was lucky, where commercial real estate really started taking a bigger, bigger role in my life, as I started approaching, you know, the fire movement where I was able to blend the two and I was like, you know, let me slow down, I don’t really need to retire. 30 but what I do want to do is when I retire, I really want to have something that I’m excited about. And that’s commercial real estate, like I know, you probably have the same philosophy of me, each deal is its own, you know, these, like you can get in, you can play with it. Yeah, it becomes kind of like a child and you can be a general partner, you could be a limited partner, it is, you know, it’s like putty. And to me that excites me. And the fact that you know, it can provide a consistent income for people who really don’t know that, that don’t have much better alternatives out there. So that’s kind of what I feel like they miss out on. And it’s just my advice for anybody who is gearing towards retirement is to you can just have a bucket list of things that you’re going to do you need an actual like it like hey, if you’re you know, craftsmen or you’re going to build cabinets or something like that you need that it because the good chances are that the people around you that you grew up with and your family and friends, they’re not retiring at 30.
[0:28:50.0] KR:
Yeah, I mean, it could be golf. You just need a hobby, right? Yeah. Your hobby just happens to make you money. Those are the best kind of the best kind of hobbies. Yeah. No, but I think what you’re also getting to what I’m taking away from that is the idea of saving versus investing. So this is like you can save your way to retirement, right? I mean, and that is that’s a traditional, like 401k route to it’s going to save your way to, to retirement, but you save your way to that 25x number, but then, you know, you you retire and then kind of what is it from there and if you’re investing versus saving, instead of just socking the money away, you’re actually investing in things like like real property that continue to cash flow, continue to cash flow without your active involvement, right, and you’re continuing that income stream versus having kind of a set pile that just dwindles down over time and you kind of you know, you hope it lasts until you till you pass away You don’t need it anymore, right versus having those things set aside that are cash flowing for you. That is passive, where you can still go do the things you want, you can travel, you can homeschool your kids if you want. I don’t think I would want to homeschool my kids either. But if you want to you could because you got that passive income coming in, right?
[0:30:13.0] DS:
Yeah, exactly. And that was actually something I kind of overlooked when I was talking about traditional assets. The other big thing I had a problem with is I have three kids, and I wanted to leave a legacy. And I’m not, you know, my life is not centered around money. But I realized that my life could be better with money. So I had a huge problem with the concept of, Hey, I’m going to retire and this low cost index fund is going to produce a 2% dividend. And the alternative there is that I’m going to sell a portion of my portfolio every year. So to make up for that 4% at that 25x number equates to Yeah, so I had a huge problem with that, because I did not want to retire and be like, Well, my game plan now is to start selling assets. I want it to be like, hey, in 20 years, I’m actually my assets are bigger than they are today. I just didn’t have to work for these last 20 years.
[0:31:02.0] KR:
Yeah, exactly. Right now, I’m glad I’m glad you brought that piece up because I think that’s critical. And so as we’re talking in as we, you know, this show focuses, you know, we focus a lot on real estate here, obviously. And so there’s something else that you brought up around syndications. One is just common misconceptions around real estate syndications. And so enlighten us on what those are so that folks can, you know, can wrap their heads around these.
[0:31:31.0] DS:
So there’s a, I know I put two there’s actually really three. But I’ll go over the first one: is the tax friendliness that the market is pitched on? So what ends up happening is when you look at a deal, and like, well, there’s going to be a cost segregation, you’re going to get this huge negative negative schedule, okay? Turns out like a lot of people can’t actually use that because it’s passive. So yes, it can offset other passive income, but it’s not a passive loss. But what it does is basically creates a very tax friendly distribution of cash flow during the years of the property that gets recaptured. See, what’s the misconception here that a lot of syndicators don’t talk about is the recapturing part of it where what you’re doing is not really tax friendly as much as tax deferred. And for some reason in the syndication world, like sometimes the syndicator will explain it but sometimes they’ll really mark it as like like gives off the impression that like you’ll never pay taxes on these gains and what you’re really doing is you’re kicking the can down but like one CPA explained it to me really well this always stuck in my head is you’re kicking the can down the road you know, if you keep planning correctly, then it’s great you could keep kicking the can indefinitely right but you have to plan to go and you have to plan to kick and then what ends up happening is there’s almost like a quicksand effect because let’s say you’re on like year three and your cost basis now is zero and now all of a sudden the project is exiting a little earlier than you’re expecting now you’re gonna get hit with a huge tax hit if you don’t if you don’t get into another deal quick right you know, that’s like quicksand effect so the first misconception out there that I want other you know, limited investors or anybody in commercial real estate to really understand is there’s a huge difference between tax deferred and for it to be 100% tax friendly.
[0:33:26.0] KR:
Yeah, no, I think that’s a great point i mean that’s how I how I always think about it is even my own investing is you know, as long as I’m yeah you need to be you need to be buying and selling in the same year right so they can so they can offset each other and as long as you’re doing that right you’re kicking that can down the road and and you can continue to kick that can for as long as you can continue to buy or invest in properties, right but but you’re absolutely right there there is a recapture that comes at sale there there can be a little bit arbitrage and the recapture rate is lower, you know, typically than what you’re going to pay in your your ordinary income. But at the same time, I think I think that’s a valid point to bring up. I think the other thing that often gets overlooked is the ubit tax when you’re investing with from a retirement account, and you will say if it’s a property that is heavily leveraged, which which most syndication and most real estate investments are so that’s one of the great things about real estate is the ability to put leverage on it and increase your returns. But if you’re investing from your retirement account, then you got to educate yourself on what a ubit taxes and the fact that you’re probably going to, you know, you’re going to face that tax it’s probably going to degrade your return by by a percent or two, depending on depending on your situation. So I think another common thing that is overlooked.
[0:34:49.0] DS:
That’s such a great point and I think a lot of people sometimes will open up a new self directed IRA just to invest in like a syndication because they weren’t aware. Hey, I could invest in you know, Uncle john Nice deal that over here, if I do this, so that’s where it’s also important that like what you said with the Yuba taxes also explaining to the custodian or your IRA, self directed IRA source, that this is your intention, because you know, there are solo 401k is that, you know, kind of skate around the issue. But the point is, you want to have your CPA kind of involved in that decision making. So you’re not just opening up any self-directed IRA, you’re opening up something that makes that pairs well with syndications otherwise, like you said, you’re gonna get hit with the Yuba tax.
[0:35:32.0] KR:
Yeah. So is a dozen, I actually don’t know, does a four do a solo 401k actually, is that something where you can avoid the tax?
[0:35:41.0] DS:
Yes, I’m not a financial professional, but I’ve been looking into this topic with my fund. And what I’ve been seeing is that the solo 401k avoids it. I know EQ RP is out there, and they kind of talk about it, but from my understanding it is the solo 401k that has the nuances, you have to have some kind of self employment to open up a solo 401k. Right. But from my understanding of a solo 401k, but that’s something you know, you should talk to the person you’re opening up that IRA with, so that they can align. So maybe there’s a way you can avoid some of those taxes that, you know, that operators may not be too quick to tell you about.
[0:36:22.0] KR:
Yeah, no, that’s great information, good for people to be able to dig in further and do their own research and talk to their CPA or, or their IRA custodian about so that’s awesome. All right. What are the other misconceptions?
[0:36:34.0] DS:
So one I’ll do really quickly is the term conservative, like it’s just like, anybody that knows commercial real estate knows that every single deal you ever, ever will see is somehow conservative. So when you hear the word conservative just crossed it out, because it’s just used everywhere? It’s ubiquitous.
[0:36:53.0] KR:
Yeah. I mean, no, nobody’s marketing, like, this is the most aggressive. Yeah, underwriting you could ever have. It’s probably not going to happen, right?
[0:37:02.0] DS:
Yeah,And you know, it’s, it’s funny, like, the first deal you ever look at, you’re like, you even tell your friends about it, like all these deals, awesome. It’s conservative. Yeah. And then like after the next 99, deals, you look at that also have that word in it, like, this word doesn’t really mean that much. So it’s good.
[0:37:18.0] KR:
I was gonna say that it’s a really good point, conservative. Same thing, I’ve never seen a deal that didn’t say conservative, and conservative means a lot of different things to a lot of people. So what does it mean to you? Like, when you actually look at underwriting and say, Man, these guys are pretty conservative, like, What? What are you seeing?
[0:37:38.0] DS:
So this is a great point. So I kind of want to throw in my third misconception as well. Sure. And this is about the concept of being completely 100% passive. So I equate being 100% passive to, you know, almost like gambling, where, you know, you have to get to the point where before you wire the money, you actively are involved in the process, that due diligence process. So one part of that, like that I talked about was networking and talking to other people knowing the language and going to your network and saying, hey, how is that operator bubble? How’s that operator, you know, all that active involvement. But the next crucial piece of that is underwriting. underwriting is like this daunting task that most new investors are like, get so overwhelmed. But there’s so much great programs out there that you can download, you know, I, you know, a spreadsheet that usually has a tutorial, it’ll walk you through it, not to the point where you’re going to be a general partner on a deal, but at a point where you could take that deal. And now you can kind of see what the operators’ assumptions are. And when you start playing with the underwriting, you’ll see that there’s a few little variables that when you tweak them, create a huge difference in your IRR and all the crazy projections. So this is where, where you tell me like Hey, what do you consider conservative? So from someone who actually looks at, you know, general partnership deals as well. I look at it, how many levers need to be pushed to get that business plan working? You know, so, for example, I look, I’ve looked at a deal recently where it was a low income housing play, where the contractual rate was a lot higher, but the operator was a big developer, and they were not they weren’t keen on filing the paperwork on time. So that means the business plan on day one is literally coming in and filing the paperwork. It’s not renovating, it’s not putting in the dog park or valet trash or Giga service or any other parts of that business plan. So it’s a very simple business model to execute because it only needs one thing for it to go right. Yep. So sometimes you look at business plans, and you think you’re looking at like, like this world’s most complicated equation, because they have 18 moving parts. And, you know, they’re going to be putting cell phone towers, and they’re going to be, you know, laundry machines and the more moving parts that they need to hit on to hit their numbers, the less conservative of a deal is to me, and the only way you know that is if you have some basic on the writing, where you can say like, okay, you know, what, I hate the fact that they used 4%, you know, rent growth, and they’re only using 1% expense growth. I was like, it’s not lining up. So those are the things that it’s important for you to have some basic understanding of underwriting so you can gauge how conservative the deal actually is.
[0:40:40.0] KR:
So yeah, so number of variables that need to happen to go Right, right. And then as you’re underwriting on your own, you can start to take those variables out and say, Well, you know, what, if they don’t actually rent the washer and dryers, for example, or you know, what if the cell phone tower doesn’t work out, right, like, what does that do to the deal? And then returns? Exactly, yeah, so So yeah, I agree completely with your third misconception that like, just because it’s called passive doesn’t mean you have to, you can be totally hands off, right, you have to do your own edging. I mean, it’s the same thing with any investment. Like, it’s not just alternative investments, like with stocks, you should also be doing your research on the companies and, but with alternative investments, especially right, and it just takes a little more work. Because, like you said, you got to learn how to underwrite yourself, and not that it has to be, to the extent a GP would do, it doesn’t have to be a 20 page underwriting document. But you need to have something where you can validate their assumptions and understand well. If their assumptions Don’t go, as they say, they’re gonna go like, what does that do to the deal? Right? And are you still comfortable with the returns at that point? And oftentimes, you may well still be right. I mean, like, Okay, if they’re saying it’s gonna be a 15% IRR and, or something doesn’t go right. And it’s still attend. Like that. That’s still not bad in many cases, right? That’s kind of worst case scenario, but I think it’s important to understand that and be able to evaluate that on your own.
[0:42:09.0] DS:
Yeah. 100%. Like, I like to say that it’s passive after you wire the money. Yeah. Right. Because then there’s no kind of like, no, take backs at that point. Yeah, to that point. Yeah, exactly. Exactly. And I also want to clarify that the learning curve is great in commercial real estate. So you aren’t you you know, you do some basic underwriting and due diligence on deal one, you know, when that same operator gets a deal, on deal two or three, you’re probably you’re probably looking at half the time, you’re going to spend to the point where now, you know, I could pull up a deal and probably within two, three minutes kind of red flag or say like, Hey, I should take a closer look at this, because this looks good. And I’ll throw out one more thing, a huge red flag is returns that are just so much higher than the other deals, because if you have a couple operators in your network, and a couple of them are in the same market, and they’re all projecting, like 13 to 15% IRR, and all of a sudden, now you’re getting deals offered to you at 27 or 34. And it’s like a value add deal, then it’s like, okay, yo, what’s going on here? Because Yeah, either these three operators don’t know what they’re doing. Or this is the world’s greatest deal. So any outlier like that, I usually consider that like an almost an immediate red flag.
[0:43:20.0] KR:
Yeah, and it goes back to the levers that you can pull to move a deal, right? And those things that are gonna really move those numbers and go back to what are the assumptions for those like, what are they assuming rent growth is? What are they assuming the cap rate that they’re going to exit on? Is that right? Like those are some of the things that are going to move the needle the most on these investments. So it’s, if you get one to 24, it’s the ability to go in and look at what’s different, that in their assumptions versus the assumptions other operators are making, right? Like other operators might be saying, well, you’re gonna exit out at a six and a half cap rate, and they’re saying you’re gonna exit at a five cap rate, right? And that that could create that difference but like, to your point, you got to have the baseline knowledge to be able to go in and be able to see at that level, and that’s like the the proper level of diligence to do before you make an investment.
[0:44:13.0] DS:
Yeah, and that’s usually nine out of 10 times that’s usually when you see those outsized returns, that’s usually indication of a newer syndicator because they’re trying to kind of get that investor to not really look at the deal, but be blown away with actual numbers. Yeah, where they’re gonna overlook, you know, experience and everything like that, where the more experienced operators know that, hey, we’re probably gonna hit 18 on this, but we’re gonna say 13. And then, well, we have, you know, a margin of error, where, you know, as a general partner, like, we look at deals too, and there’s deals we look at and we underwrite and we’re like, Alright, well, this is actually too high. Let’s bring this down. Yeah, and, you know, we’ll leave some upside where we will Tell them about the upside, but we won’t project that upside because you want to be careful where you know, you project 18 and you give someone 17 and 17 is a great return. But you know, they’re gonna be upset because you didn’t hit your numbers.
[0:45:07.0] KR:
Yeah, yeah, you want to under promise and over deliver. Right, We do the same thing. If I feel like the returns are just looking too high, I’ll just, you know, we’ll throw in additional reserves, which which makes the deal safer. You know, we’ll we’ll maybe not project I mean, if there’s an income stream that I’m not 100% confident and like, we’ve done this with like washer dryer rentals before rural like, you know, we’re going to buy washer dryers and bring them back. And actually, it’s, it’s done. It’s been a great program for us. But don’t when we first started doing it, we didn’t we underwrote the expense, but not the income, because we’re like, well, it might work, it may not work, and we didn’t need that extra income to make the deal actually attractive. So it’s something like you said, you tell people about, but we were able to leave that off the table. And, and when it did work? Well, you know, we looked like heroes, right? But But, but but it’s all about setting expectations, right? It’s really important. It’s like, if you tell people you’re going to get 15 and you get 13? Well, people are going to be disappointed if you told them, you’re going to get them 10 and you get them 13. Everybody’s happy. Right? So it’s just, it’s all about perception and setting the right expectations. And I agree that, you know, like, like, when we talk about conservative, I mean, the things that I look for and try to do is one is just like the amount of reserves in the deal. I mean, I think that’s a big one that people miss out on is, you know, is there extra cash for things to go wrong that are unexpected, right. And I think that’s a really important piece in any deal because Real Estate’s all about solving problems. And inevitably, something is going to go wrong. I mean, I mean, something’s gonna, something’s gonna happen that you didn’t expect, right? And so I think having that extra cash set aside for a rainy day is is an important aspect. So Dennis, one thing I wanted to ask you because to that point, you know, a firm out of the head underwriter at a firm I used to work at had had a great quote, and it was, you know, ever every pro forma is wrong. Like every underwriting model is wrong. It’s just you’re either wrong positive or you’re wrong negative because it’s just, it’s your best guess, right? Nothing’s ever going to go exactly like you put it down on paper. So to that point, how much do you actually focus on those return numbers that people are throwing out IRR hours and cash on cash and things? How much do you actually focus on that number, when you’re evaluating the deal versus focusing on the other aspects like, sponsor experience, the market, it’s in the location, you know, and invest on those factors versus just saying, Oh, this one’s saying 15? That one’s saying 17? Like, like, I want to go with the 17?
[0:47:50.0] DS:
Yeah, I think this is just about becoming a more mature investor. I think when you’re new, it’s so hard to get away from the higher number. But the more experienced investors that I talked to him myself, at this point, we hardly look at the performer, we just want to make sure it’s not an outlier, right, we want to make sure it’s at least most deals, you know, if they’re not hitting and I would say 13 IRR, I don’t really see them. So as long as they’re hidden over 13, and it’s a reputable operation, I care much more about the team, the operator, the business plan, how many levers are being pushed, the financing is huge, you know, what kind of debt Do they have on the product? Those are the things that I focus on the performance so much. The other one, I heard a performer besides the one you mentioned, those performance line flies. So I heard that was a good one. Yeah, you don’t you don’t when you get more experienced you don’t give too much credence to to perform. The only thing I do like to see is I do sometimes like to compare the performance of the T 12. Sometimes when I get access to the T 12, most syndicators would share. And that’s usually good, because then you could see how aggressive the assumptions are, from the actual numbers to what numbers they are projecting. But besides that, most of the time, if I have an existing relationship with the operator, I don’t I don’t get too in the weeds with the performance.
[0:49:17.0] KR:
Gotcha. Yeah, I think it’s a good point. That’s what I thought you’re gonna say. So I wanted to tee that one up. Because I think those are the critical things. And you know, the performance is your best guess, at the point in time when likely you have the least information about the property, because you don’t even own it yet. Yeah. And so I think it’s just important for people to understand. Well, Dennis, you know, but before I let you go, tell us about the book that you wrote. And, you know, just tell us what inspires you to write it and then tell us a little bit about what’s inside?
[0:49:49.0] DS:
Yeah, so the book is called alternative investment Almanac expert insights on building personal wealth in non traditional ways you can find on Amazon. Just if you search Dennis Shapiro or alternative investment Almanac, and what I realized was throughout my years of networking, I was getting some really cool opportunities that weren’t just apartment buildings. It’s like this, almost like a fraternity where you’re getting access to wineries and you’re getting access to ATM funds and no funds. And what I realized was these, these are really cool niches that a lot of people aren’t aware of. They don’t, they don’t know that they exist. And then when I spoke when I was working with people who just really do stocks and bonds, every time you mentioned alternative investment, there’s like this Ponzi scheme association that they would get from them. So I wanted to kind of debunk the myths and say, like, hey, there’s, I think I have nine alternative investments in there most of them are derivatives of commercial real estate, like apartment buildings, mobile home park Self Storage is I have some life insurance policies, I did a chapter on the infinite banking concepts. And what I wanted to do is there plenty of great books out there. So if you wanted to read an apartment building, there’s you know, there’s Brian Burks, and there’s Joe fairless, and there’s 300 pages of knowledge. But what I wanted to give was for a new and credit investor, or even one that’s approaching accreditation, that they could read a chapter and the chapter will be about just one asset class. So it’s a high level intro into the asset, where it’s not, you know, you’re not going to get a PhD from it, but you’ll get enough to understand what it actually looks like to invest in an apartment building. And then my favorite part is each chapter ends with a Q & A. So I got some really awesome speakers where they each answered the exact same questions. And they talked about their specific asset. So you could see what a well accomplished apartment building is. investor, I had Brian Burke and Andrew Cushman on, and between them, they probably have like 20,000 units. So you could see someone who you could see that combination of knowledge, just answer the exact same questions, and you can kind of see what they’re saying. And then at the same time, when you go to the ATM funds, you could see someone who’s, you know, invested in millions of dollars worth of ATM is what they’re saying to the exact same questions. So it gives you some kind of basis. And I really wanted it to get out there that hey, you know what, that these asset classes aren’t as mysterious, it’s not like a secret society. It’s out there. They’re private security. So most of them aren’t heavily marketed. But they are out there, and they’re not as complicated as, as most financial advisors would like you to think they are. And that’s really what the book is for.
[0:52:36.0] KR:
Yeah, and I appreciate that. I’m definitely gonna have to check it out and read it. And I think that’s an awesome, kind of bite sized approach very approachable for people that are just getting into this, you know, yeah, I hate to hear every time I hear somebody tell me that they’re fine. their financial advisor told them that real estate is risky. You know, I think he hits the exact opposite, I think, I think the stock market where something can drop 30-40% in a single day, that is a pretty high level of risk, versus kind of the steady, steady apartment cash flows or other types of investments. So I appreciate you putting that out there. Yeah, yeah, definitely. So Dennis, before I let you go, I want to take you through our keys to success around these four questions I want to ask you. The first one is, you know, if you and this is right up your alley. If you could only ask a deal sponsor one question. What should that question be?
[0:53:34.0] DS:
What’s the deal without hesitation that you want to make sure that they do have a worse deal under their belt? And what did they learn from the worst deal? Hopefully, you know, they’ll have an answer ready? I remember. I had one one famous operator, he was like, Well, my worst deal was with the global financial crisis and he came out of pocket and he covered the mortgage for two, three years. What a great answer. Okay, that’s a great thank you. Though. The red flags are the ones that say I never had a bad deal. Those are the ones you’re like okay. Thank you. Have a good day.
[0:54:10.0] KR:
All right,on what are you most proud of in your career?
[0:54:13.0] DS:
I would definitely say the book that I think I started last year between the book and the fund. Actually, I would say the fund I had a couple of people who were approaching with like retired age and they were so frustrated with the income options that were there and for them to go through the whole learning process would have probably not been feasible but for them to have you know, a one stop shop where they could have went they reached out they felt comfortable they got to know me and now they’re getting much more income than they would have gotten alternatives so that’s you know, I’m helping people you know, reach their you know, retirement goals and that’s a great feeling.
[0:54:55.0] KR:
Yeah, those are my favorites to where you have folks that have, like, just been socking away money in their savings account because they didn’t have another option. And then they learn about about these and all of a sudden they’re getting, you know, seven 8% a year in cash, and they’re getting that appreciation and it’s just so cool to see the response and, and the impact that you can have on people’s lives and giving them access to, to something that they didn’t know about. So yeah, very cool. And what’s, uh, what’s a book that everybody should read, it could be your own,
[0:55:26.0] DS:
I’m gonna selfishly put out my own because one thing I’ll have to throw out there is, if anybody ever wants to write a book, the book writing process is surprisingly quick. The editing process is surprisingly 100 times longer than you ever expected. What ends up happening is, every time my editor made a change, or sent
it back to me, it’s like almost rereading the entire book, to kind of get the feel of it. So I ended up reading my book, like, between 30 to 50 times. So it’s kind of in doctrine at this point. So I’ll definitely say my book for now. Yeah, the alternative investment Almanac, it’s, it’s kind of my pride and joy for now.
[0:56:05.0] KR:
Very good.And then what is your number one key to success?
[0:56:10.0] DS:
It has to be with alternative investments. Like I’m pretty firm on this. If you’re not networking, you shouldn’t be investing in alternative investments. So it’s not working. I’ve gotten my best information. I’ve gotten the best referrals to operators. I’ve gotten my network to send me potential investors. You’re gonna live and die on your network.
[0:56:30.0] KR:
Yeah, 100%. And Denis, if people want to catch up with you, if they want to learn more about what you’re doing, where can they find you?
[0:56:38.0] DS:
The best place is sihcapitalgroup.com. When you go into the site, I have two free ebooks. So what I did was part of my book had the Q and A’s and part of my book had the content. So I created bridge versions of both of them. So if you go on the website, you can find the ebooks for each one of them. So if you’re not in the mood read 300 pages on alternative investments, it’s more bite size at 30 pages. Again, that’s sihcapitalgroup.com.
[0:57:06.0] KR:
Awesome. Well, thank you, Denis, for coming on and sharing so much information. I think you dropped some real gems today that can make folks better investors. So thanks again for coming on and have a great rest of the day.
[0:57:06.0] DS:
Same here, thank you so much for having me.
[0:57:18.0] 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. From next time. This is Kent Ritter with Ritter On Real Estate and go out and invest like a pro.