Are you an investor looking for better risk-adjusted returns? Listen to hear how Tauheed manages downside protection, downside risk, and capital preservation in this episode!
Tauheed Siddiqui, a Wallstreet Hedge fund Industry veteran, has found that multifamily real estate offers investors better risk-adjusted returns and less volatility as compared to stocks. He leverages his analytical skills to select the right multifamily deals. Tauheed is a general partner in over 1,300 units. He is focused on existing value add multifamily deals as well as new construction development. Click below to listen now!
Table of Contents:
- Where To Listen To The Podcast
- Learn Risk-Adjusted Returns With Downside Protection
- Volatility of Stock Market
- Downside Protection to Help You Back Up
- Net Income Is King
- Managing Downside Protection
- Life Outside Managing Downside Protection
- How to Reach Tauheed Siddiqui
Learn Risk-Adjusted Returns With Downside Protection
Darin: Tauheed Siddiqui lives in the Dallas area with his wife and two college-aged children. His background is in the Wall Street hedge fund arena, and he has extensive experience with analyzing and managing risk. Tauheed is a general partner in over 1,300 multifamily units. His focus is on value-add multifamily as well as new construction and development.
Just a little background on how I know Tauheed. If you listened to other podcasts, you know I joined a multifamily mentorship group, and that was back in December of 2017. The first thing I did when I joined that group is, there was a private Facebook group, and I looked on that group to look at posts and see who was actually doing deals. I reached out to a number of those people and set up meetings at Starbucks, and Tauheed was the first person that I met with.
He was kind enough to get together with me. And then I invested in his deal. It was the first deal I got involved in, like a month later. I was so excited to learn from him and to be a part of a deal and to learn the space. So it's great having you on, Tauheed. I really appreciate it. Typically, the first question I ask is, how many properties and how many units are you currently invested in?
Tauheed: Sure. Again, thanks, Darin, for having me. Right now I'm a general partner in about 1,300 units. 800 of those, I would say, are in DFW, 200 in San Antonio, and approximately 300 in Florida. In Florida, we are in two markets. One is Jacksonville and the other is Tampa St. Pete.
How Downside Protection of Hedge Fund Helps
Darin: When I met with you, you had a really interesting background. I was just getting in the space, so I didn't know how people came up into this world of syndication. But you were a Wall Street guy before. So can you share a little bit about what you were doing in the Wall Street arena before you got involved in real estate?
Tauheed: Yes. I was in the hedge funds world. I started Wall Street with one of the Japanese banks and then joined a Swiss bank. We launched fund of funds. Then we did asset allocation and risk management. We had a portfolio of close to a billion dollars there. And then, actually, I ventured out and formed our own company under the auspices of another large company. There were three of us. And then, actually, one left and two of us ran the company for about five years.
And then we went to 2001, 2000 bear market, and the Iraq war, and all that. But downside protection of hedge funds helped us a lot. We did pretty good until 2005, and that's when I, to be honest, decided to just leave Wall Street. And I guess your next question is going to be why. To be honest with you, sometime in eight days I would travel three continents, and I just couldn't handle it anymore. To be honest with you, I used to make day trips or a day-and-a-half trip to Switzerland, take a 6:00 PM flight from New York, get ready at the airport, take a shower, go do a presentation to some private banks, and then have lunch somewhere, and rush back to the airport, and fly back to New York. I did that so many times.
Darin: So you were living in Manhattan. And then when you left Wall Street, you chose to move to Dallas? Is that how it worked? How did you make that decision?
Tauheed: I actually lived just a little bit, 35 miles away from Manhattan, but I worked, for the most part, in Manhattan. Our office was actually 1 Rock, right there, Rockefeller Center. And that was another thing, to be honest with you. Around holidays, it would take three hours to get out of Manhattan. Another thing was meetings after meetings. It was like, you could tell, you just waste so much time. So eventually, I left that, got into real estate. And actually, I moved to Texas in 2013.
I tell you, it was just perfect timing. And since then, real estate has been, obviously, doing great here, so my timing was perfect. And I just love it here. By the time I reached here in 2013, the real estate here has already started kind of ticking up from the 2008 recession. We were doing pretty good, and the Wall Street guy in me, the downside protection guy in me said, "Oh, my god. They're already up 15%. Historically, you do only two to 5% a year. This is too much. What's going to happen?"
So based on that concept, I said, "You know, I really want to get into the construction here." So I started building duplexes. And the idea was that 15, 20, or 25%, whatever margin you have if something bad repeats, I'll have that buffer. To be honest, that's how I got in. I started building here in Princeton, and kind of never looked back. And lately, we have kind of 10X-ed our construction business in the past 12 months.
Prepping to Be a Construction Company
Darin: There are listeners that are focused on getting into real estate. I know that this is the fact because I was there. It was like when you're in the corporate world, there's a lot of people that want to make that jump, want to get out. But it's really hard mentally to take that leap of faith to go out on your own. So what did you do to prep yourself to leave the hedge fund world and actually go out on your own, start your own construction company to build duplexes?
Tauheed: I was a little fortunate that the company we formed did pretty good. And with the bank, I was doing okay. So I knew that I can sustain myself and my family for a year or two if I have to. I had that luxury, to be honest, and I was just at a point where I said, "Now I want to do what I want to do instead of the corporate world." And don't get me wrong. Next life, honestly, if I'm in my 20s, I would do exactly the same thing.
I absolutely loved Wall Street. I loved every second of it. Every day we had to learn so much, and we had to compete, and you had the performance between January and December, I love all that. To be honest, that's me. But when you get into your 40s, your perspective changes, and I just didn't want to waste all that time traveling.
And another thing was, also, the volatility got to me. To be honest, I have invested and worked from an asset allocation point with managers of commodities, currencies, debt, equity, and it's tough. It's different when you're in your 20s. You can take 10 to 30% hit. Now I don't have a stomach for that.
Why Tauheed Chose Real Estate
Tauheed: I tell you, even when 9/11 happens, it was a not only very, very difficult time emotionally, but we just launched a portfolio a week before that. The market was closed, and we had a lot of European clients calling us every day. Our offices were closed, obviously, and it was an emotionally very, very difficult time in New York. But even from an investment standpoint, I recall then, the market was closed.
And something else happens globally, and you're down 10% overnight. I just couldn't take that anymore. And that's why I wanted to focus on real estate, where there's more visibility, there's less volatility, and it's more local. I mean, you invested in a global fund and something happens in Japan, there's nothing you can do about it. But your portfolio is down 10%. You really can't do anything. And that's something I kind of didn't want to do anymore.
It's the volatility that I could not take. It's the certainty of returns that I preferred, more visibility. And that's kind of what led me to real estate. Also, I didn't want to have like 7:00 to 7:00 hours five, six days a week. In real estate, I still work hard, to be honest with you. I work hours, but at least it's my choice. You know, sometimes we just go play golf on Wednesday or Friday or whatever. But then I work on Sunday, right? And I don’t mind that.
Darin: Absolutely. One of the things I would say coming out of that is, one, I was in a similar situation. I was working for a large Dutch bank on their capital markets desk, trading large loan portfolios. Did very well. I knew I wanted to go out on my own.
Wall Street vs Real Estate Investments
Darin: So my wife was asking me, "Hey, let's buy the bigger house." And I was like, "No," because at some point this is going to end. And when it does, I don't ever want to work for anybody again.
What you did, what I did was, we put enough away where we had the flexibility and the runway to go out on our own. So that's a piece of advice I would give to people is, "Look, if you really have that itch to get into real estate or start your own business, plan for it. Start downsizing your lifestyle and putting some money away to give you the flexibility to do that."
The other thing you talked about was the difference between Wall Street investments and real estate in that when there's a downside event, it's immediately impacted in the valuation in stocks and bonds, where real estate is much less liquid, but there's not a ticker symbol. So you don't see the valuation just crater. When we talk about COVID, I mean, I remember that two-week time period when it first happened last year and the stock market was going down and down and down and down, but all these multifamily investments, I didn't have a ticker symbol. So I was like, "Look, as long as the cash flow is there to pay the mortgage, eventually, they'll come out on the other side."
Tauheed: Absolutely. And I'll tell you, I got this experience of getting hit. For those who were investing in the '90s, if you remember, there was a hedge fund, a very large hedge fund, called Long-Term Capital. They blew up. They blew up in August 1997.
Darin: They had a book written about them. You were part of that investment? Yes.
From Hero to Zero
Tauheed: The Swiss bank I used to work for, we had discretionary investments, but we had non-discretionary, where investors made their own decision. And we had a very large portfolio with Long-Term Capital. Actually, I was working with Long-Term Capital, so I have some firsthand knowledge. And I can tell you, overnight, those super-geniuses, their net worth went to zero. And along with that, billions of dollars of wealth was destroyed.
Had it not been the Federal Reserve, to be honest, we would have seen a major crash in the financial markets. They jumped in and they protected everybody. But anyway, from our side, we had just launched a fund just a month before, and bang, we got hit, where S&P is down over 14% in a month. I tell you, I was like, "Oh, my god. This is it."
Darin: Yes. What are we going to do?
Tauheed: "This is the end," right? "This is the end of the department, this is the end of the job, everything." It turned out, by the time the month ended, S&P was down over 14%. We were up a few basis points.
So actually, that was the best thing that happened for our new fund and our department because we proved how good we were with hedge fund and downside risk. But in between, I can tell you, there were a lot of sleepless nights. So that's what happened in '97 and then '98, '99. Everybody thought they were geniuses. Everybody cracked the code because Nasdaq was up like 100% every month, every year, and we made a lot of money. And then, bang, we got hit in 2000. There was a bloodbath. And there were margin calls everywhere. I can tell you, people are crying.
Volatility of Stock Market
Tauheed: I literally met clients who were crying. They took a second mortgage and invested it in the stock market because they thought it's going to go up. Why? Because it went up the last two years. I have nothing against the stock market. If you're a long-term investor and you have the right expectations of a seven to 8% annual return, that's good. But along with it comes volatility.
So risk-adjusted returns in real estate, to me, are very high. And within real estate then, if you look at the workforce housing, you can go as far back as to depression time and run some index, and the multifamily index will have done better than most other asset classes during difficult times. And when it's a recovery, it recovers faster than other asset classes.
That was my reason. I'm a very downside protection kind of guy. Ideally, I don't like to lose money. Now, in the investment world, we all know you can't always win. That's fine, but I always focus on downside protection. And that's, frankly, what led me to real estate, and within real estate, to multifamily. Like I said because you can go almost 100 years back and you just look at that index. It has been very resilient in difficult markets, in recessions, and that's the kind of business, ideally, I want to be in.
Darin: That's amazing. You used these terms four or five times, downside risk, downside protection. So I mean, you come at it from the Wall Street how-do-I-mitigate-my-risk perspective. And you got into real estate and you believe that being in real estate is a better risk profile than investing in Wall Street-type assets.
The Level of Downside Protection in Multifamily
Tauheed: Absolutely, and particularly right now. When we have debt in trillions, I mean, at some point inflation is going to hit us. At some point, paper assets may not have the value that they have. And at that point, inflation. I don't think we're going to have consumer inflation, but I think we're going to have asset inflation. When that happens, where do you want to be? I want to be in real estate.
Darin: So talk about that.
Tauheed: It's very, very clear and simple. That's very clear.
Darin: We've put, what, three, four trillion dollars into the marketplace, and the Fed says they're going to keep interest rates super low for the next two years. But the ten-year has been ticking up and there's more talk and more talk about the impact of inflation. When you put $4 trillion in the marketplace, you'd imagine that at some point that's going to be inflationary. So talk to the listeners about, what's the impact? Let's talk about multifamily. So you buy a multifamily complex. What's the impact? How does that play out in an inflationary environment?
Tauheed: Look, at the end of the day, these are cash-flow-producing assets. And when you have inflation, it's going to hit assets. Like I said before, I don't think we're going to have very high consumer inflation, but I think we're going to have asset inflation. I think, possibly you can argue that DFW, you can say, maybe that has started. And we will only know, I think, once a couple of two, three years have passed. Then we'll see back and say, "Oh, my god. Look at everything else and look at where real estate is going."
Positive Factors Helping Real Estate
Tauheed: I understand. There are a lot of other factors, very positive factors that are helping us. We have almost a perfect storm, wind behind us. But there's a reason for that. As far as inflation, again, if inflation hits us, which at some point it should, I know there's always, "This time it's different," and this different paradigm. Trust me, that's what we heard in the '90s. And then it wasn't a different paradigm. So it's fine. But I think at some point inflation will hit, and inflation will hit the assets. And hey, that's the time I want to be in real estate and I want to own assets, and that's where I am right now.
Many people ask me, "You were in Wall Street. Where are your assets?" And I can tell you, 99% of my assets are in real estate. What I have in Wall Street right now is basically a hedge, again, for downside protection. I'm in silver, gold for a while, and it hasn't been a good ride, frankly, for the last seven, eight years. But that's just a hedge I have that, if and when if there's ever a crash, it'll protect. But other than that, 99% I'm in real estate. And again, a very simple reason. At some point, inflation's going to hit, and at that time, you got to be in real estate.
Darin: When I think about it, I'm like, "Okay, well, let's talk through a multifamily property. You have all these tenants that are paying rent. Then you have expenses, utility expenses, property tax expenses, insurance expenses. And one of the big, big ones is your debt service."
Downside Protection and Asset Inflation
Darin: And so, talk through a scenario, "Okay, well, say we do have inflation and say that the Democrats get through and then we have a minimum wage of $15 across the board. And now, all of a sudden, people are making more money and jobs cost more. Most likely, it's going to be passed on to the consumer and goods, and also, where else, in rent."
In my mind, rent will go up also. So now you've got this multifamily property that has all these tenants that are making more money, and now you're increasing rent as an asset owner. But if you have long-term debt on the property, your debt service may stay flat. So your rent could be going up, but your debt service may stay flat. And so, that increases the income for the property, and then, obviously, increases the valuation, hence, asset inflation.
Tauheed: Absolutely. You nailed it, to be honest. I was just talking to my asset manager in the morning, where for the last few months, let's face it, it's not been easy in multifamily. We know that. We have a delinquency issue. And we had a moratorium issue. And they're obviously related. Then we have economy.
But we were just saying, "The last seven, eight months we've had, probably we'll never have this kind of difficulty going forward." So going back to what you were saying, that is the case. From here on, we're going to have stimulus money, and I think for the next two, three years the economy, post-June, July, when the majority or vast majority has been vaccinated, we're going to have so much pent-up demand, there will be so much economic stimulus.
Effects of Delinquency in Real Estate
Tauheed: We will have a lot of economic activity, and all that's going to help the workforce. So our delinquency will be lower and our tenants will be making more money. It's going to be a great business. Everything that was difficult in the last seven, eight months, actually will kind of reverse itself.
Darin: I think it's crazy. I agree with you. I'm a GP in a property, our delinquency has definitely gone up dramatically over the last year due to COVID. What gets me so incredibly excited is that I used to have these discussions with other syndicators like, "What happens in the next down cycle?" But this scenario was never, ever, ever even on the table, where they shut down the economy and the government would tell you across the board, "You can't tell your tenant to leave because they're not paying." Nobody could have imagined that happening. But, every month, we're still cash-flow positive.
That is crazy. So in my mind, I'm like, "I don't know when it's going to turn." But when it does, I'm going to be like, "I can't believe that we came through that the way we did." So I'm totally in agreement with you.
Tauheed: But again, despite all this, on the multifamily side, particularly in the Sun Belt, and you have to pick your markets, but particularly in the Sun Belt, look what happened to the cap rates. Even though you and I, as GPs, we're faced with this delinquency moratorium and all that, but look what happened to the prices. Prices have gone up. The whole Sun Belt had cap rates compression, and that's going to continue. Again, this is the most difficult time maybe, honestly, for our lifetime.
Downside Protection to Help You Back Up
Tauheed: We may not have this kind of difficulty ever again. Like you said, this was a fat tail event. I'm sorry, I just keep using that terminology, but it's a fat tail event. This doesn't happen. You and I will never see economies shut down like we did last year, probably. I don't think we'll ever see it again. We went through this, and we survived.
When all this happened, I'll tell you, the very first day when they said, "Everything's going to shut down," it was like 5:00 in the morning and I was texting my property management company. Because I've never experienced anything like this, and I'm like, "Is the staff going to be there? Everything's shut down, and if you guys are not there, my God, well, what am I going to do?"
Then he sent me a list. This is literally 5:00 in the morning. We were texting each other. He said, "No, no, no. We're part of the essentials. They're going to be there." And I was like, "Are they going to pay? Are they going to pay?" On the TV, they're paying rent strikes, this, that. Well, guess what. Yes, we're not collecting as much as we did a year ago, but we survived.
But as the things are getting resolved, everybody's going to get vaccinated, the economy opens up again. Restaurants open up, our B and C class, they'll make money. They will pay us. We won't have any moratoriums to deal with as we clean up the house with evictions.
Honestly, it's a great time to be buying, I think. I know it sounds crazy to some, but I'm like, "This is the best time to buy real estate. Buy it."
Attractive Markets According to Tauheed
Tauheed: That's what I'm doing, I'll be honest with you.
Darin: You mentioned picking your markets. So talk a little bit about that. What markets do you think are attractive markets, and why?
Tauheed: Honestly, the whole Sun Belt. I love Florida. We bought a property in Florida last year. I'll talk about it later, but just let me answer your question first about the markets. Right now, literally yesterday we submitted two LOIs, one in North Carolina, one in Georgia, both phenomenal markets. DFW, as we all know, has been very competitive. But it's a great market.
This is not 2008, as far as I'm concerned. And this is not a speculative market. This is asset prices going up for fundamental reasons in these markets because you look at their growth rate, you look at a number of people moving in every day to these markets. There's a reason why we have such a deficiency of housing markets in these, and I know. I build single-family, I build townhomes. It doesn't happen overnight. It takes time. And this is not for months. I'll tell you, the whole Sun Belt, as far as I'm concerned, is going to be a great market for decades to come. And that's why, for me, I'm all in.
Darin: That's the thing. When I think of what's going on with COVID and markets, and it was happening in Texas beforehand, but since COVID happened, you have certain markets where companies are moving out of, individuals are moving out of, and let's just call it New York City, California, Chicago. People are moving into these other markets that you're talking about, Florida, Georgia, the Carolinas, Tennessee, Texas, Arizona. And those markets, their prices are going up but for fundamental reasons.
The Fundamental Demand & Downside Protection
Darin: We are going through a challenge with delinquency, but it's funny because I think in our property, I think we're 97% occupied and 100% pre-leased. Anytime somebody leaves, we have a line of people that want to move in because you have all these people that are moving in from other states. And so, there's more competition for all kinds of real estate, multifamily apartments, residential, jobs, everything. And so, that is what is not speculative but is more based on fundamentals, as I would agree with you.
Tauheed: Absolutely. This is based on fundamental demand. This is demand-driven. These migration trends don't turn in months or years. They take decades to mature. And that's what's going to happen. Let me tell you a little story. I bought nine acres of land in Wylie two years ago. Maybe I'll give you the numbers. I bought it for 50,000 an acre. Two months ago, Collin County paid me at the rate of $203,000 an acre.
Darin: You didn't sell the entire property. They just needed right of way, so you sold a piece of the property to them.
Tauheed: Yes. They got the appraisal done, and they said, "Right now the land is worth 203,000 per acre." So based on that, I think they sold them about, what, seven, eight acres or something like that, and they paid me that. This was all part of the plan when we bought it. I knew this was going to happen and all that. This was in the model. But in terms of pricing, just to give you an example. I'm from New York, I'm used to paying 250 per square foot for a 40-year-old home. I'm used to it. But when I moved to Texas, it was a different story.
A Story About Working With Friends
Tauheed: A very close friend of mine said, "We want to be part of this project." And honestly, I was doing this on my own. I didn't need real partners, but they're my close buddies and they joined me. So now I had to do a formal pro forma for them. So I did that and I said, "Guys, we're going to build about 1,600, 1,700 square-foot townhomes. I really think it will sell for 265,000, although right, now they're selling for 285,000. But since you are my friends, I just want to be very safe. Let's call it $265,000."
We went in. Then we paid. They bought. One said, "We transferred it to another entity," and all that. And now we're doing this project. Now, actually, since then, we moved to 1,900 square feet because of COVID, and I'll talk about that, we changed the plan. 1,390 square foot is being sold for $305,000.
It is only a two-bedroom and a two-and-a-half-bath. We are three bedrooms and two and a half baths, and we are about 500 to 600 square feet more. So comparing the markets, we were used to in New York, again, for 240 a foot. I was not used to over 200 a foot here in Texas. So I was like, "Oh, my god. I don't want to tell my friends. Let me just under-promise, over-deliver."
And even at that time, they told me, "Tauheed, how can you do 265,000 when 285,000 are being sold?" I'm like, "I don't know. Something bad can happen about it. So I'm not going to promise you. Just don't expect more." And they were like, "No, it's 300,000." I'm like, "Whatever, but I'm not showing you that."
Capital Preservation and Downside Protection
Tauheed: So now I showed them that, and they're like, "Yep, we were going to be at least 350,000, at least." So yes, all of a sudden, in Texas you see this. This is because of fundamental demand. The rents are going up, so the price is going up. It's all driven by fundamental demand.
Darin: I completely agree. Now, talk to this a little bit because I know I was there, and I think that there are listeners out there that are in the same boat. Look, we've been raised to go in the corporate world and then sock away 10, 20% into 401(k) or whatever. You might make that decision when you're signing your HR paperwork and never look at it again. Most people don't understand what their investments are, but they just do it. Everybody's doing it, so they just feel safe.
But when you go to get into real estate, that first transaction, whether it's a duplex or getting into a passive multifamily deal, it's not like you're just buying $1,000 worth of stock. It's typically a $50,000 investment. As for us, my wife and I bought a new construction duplex in Gunter, and it was going to take a year to build. It was 50 grand. For us, it was like a $300,000 investment. And then getting into multifamily, the typical minimums are 50,000, 75,000, 100,000. And so, that scares off a lot of people, and it scared me for many years. I only got involved three years ago.
But what I want you to talk about is capital preservation. And when you talk about downside risk and downside protection, having made that shift and pulled a lot of money out of the stock market.
Cautious Investors Needs Downside Protection
Darin: I've invested it in, I don't know, nine, 10, 11 passive deals. I'm in three GP deals, but I feel so much more secure being in these real estate deals than having all my money in the stock market. But the initial investment and the first time doing it can be scary because it's unknown. So kind of talk about that.
Tauheed: Yes. Look, one big difference, there is a disadvantage to a lot of people in that if they can only invest $5,000, $10,000, it's not going to be easy. There are platforms now, crowdfunding and all of that, or you succeed through which, but for the most part, if it's a private placement, it is going to be $50,000 or $100,000. So we can't do much about the investors. We don't have that much minimum to invest.
Darin: Right. So let's talk to the investors that have that but still have never done it and are scared to do it.
Tauheed: Yes. So if you're sophisticated, call it, or you are accredited, then for me, honestly, it's a no-brainer, obviously. But I think that that's just education. Stocks, by the way, nobody talks about this, for a US citizen, are not tax-efficient. Mutual funds have double taxation. I know not a lot of people talk about it. I did all my hedge funds, so all of my investors, some overseas investors, didn't care about taxes. But the other major, major advantage, you mentioned your investments, you didn't talk about the depreciation you're going to get, the lower taxes. Essentially, your yield is going to be tax-free.
We as real estate investors have a tremendous advantage for tax advantage or over other assets. So I am always surprised. I can't think of just income. It has to be net income.
Net Income Is King
Tauheed: Once you put that into the equation and you can afford to invest $50,000, it's a no-brainer for us. Again, I'm going to say for us. Now, it's kind of our job, at the same time, to educate our friends and relatives and our investors. And I think as you tell them that, then they understand.
I mean, yes, real estate also had down cycles. I'm the first one. I understand that. In New York, we went through that post-'87. It was until '92, '93 where the market stayed flat. But then we had a huge leg up. And in those tough times, also the cash-flowing properties did fine.
Then you look at the stock market and you look at volatility, and there's another concept, Sharpe ratio, which is risk-adjusted returns. In real estate, those are much higher. It's not about the 10% return you get or the 20% return you get. It is with what kind of risk you took while getting those returns. In the stock market, the volatility is much higher than real estate. You got taxes. Then you got volatility. You got cash flow. Again, for us, it's a no-brainer. But I understand. We need to kind of help others in educating and learning the benefits of real estate.
Darin: It's a larger entrance fee to get in the game, 50,000 to 100,000 versus buying $1,000 or $5,000 or $10,000 worth of stock or a mutual fund. The tax efficiencies are huge, but the downside is that, okay, it's much less liquid, so it's a much longer-term investment you're getting into it. And you're most likely not going to get out of it for three, four, five, six, seven years.
Volatility in Real Estate
Darin: I also look at that as being an attractive piece of it, after having done it. It was scary for me thinking about getting in. There is some volatility in real estate, but their cycles are much longer. So when it goes down, all of a sudden, it may be flat for, like you said, three or four years. All of a sudden, real estate may peter out and just not be going anywhere.
But as long as the cash flow is there to sustain the property, then you know that it's going to come out on the other side, and you don't have a ticker symbol that tells you your $100,000 investment is now worth $30,000. It's just, hey, maybe you're not getting the same distributions you were getting, maybe you're not getting distribution. But as long as the asset manager is able to keep the property and the cash flow is there, then eventually, it's going to come out the other side.
That's what I love. The other thing is, and your deal was the first deal I invested in. It was structured where the first distribution didn't happen for six months. And I remember coming home and telling my wife, "That was awesome." She's like, "What?" We invested 50,000 in your deal, and I'm like, "We got an ACH wire into our account for," and I still remember, "$1,920."
And she's like, "All right. Well, why are you so excited? I mean, you've made much more money than that." I'm like, "Because tomorrow it's still $1,920." She's like, "I don't get it." I'm like, "With any of my stock investments if it pops and it goes up, I'm thinking to myself, 'Do I sell? Do I keep it?'"
Downside Protection for Market Volatility
Darin: You're having to do that with every one of your equity investments because, at any point in time, one's going down, one's going up, and you're having to make that mental. But here, on that deal, I didn't have to think about that at all. All I thought about was, "That's cash. Now I accumulate to get into my next deal." So I love that about these multifamily deals.
Tauheed: Yes. Sometimes that volatility, then it's an emotional rollercoaster. And again, when I was in my 20s, I could deal with it. I can't deal with it in the 50s. By the way, the deal you're talking about, that's submarket. I mean, on the back end, where we bought it, where things are trading right now, that's a huge delta. So at the right time, it will be sold.
We were just seeing the comps. As a matter of fact, I had a conversation with the broker yesterday. He was telling me about the comps, and I'm like, "We know. We just got to take care of a few things, and we will be in the market, and we'll sell it." And just speaking of COVID and how we dealt with it, Darin, you mentioned multifamily, Brad and I bought a deal in St Pete. We closed it on February 25th. So just as we closed, literally two weeks later, COVID.
I loved that deal, to be honest. It took us, I mean, a good 18 months to find a deal there. I was so excited, and then COVID happened. Brad is a partner there, so that adds more pressure.
Darin: For the listener's perspective, when he's mentioning Brad, he's referring to Brad Sumrok, which is the multifamily mentorship group that both of us are involved in.
Real Estate Is a Life-Changer
Tauheed: Well, for me, I have to say, he's been a life-changer. It's just been so wonderful getting into his group, getting to know him. He and I have now even partnered on deals. You can see my shirt. This is from his group. He has done wonderful things for me, my family, and my life, I say. So hats off to Brad. He was partnering, and this happened in February. We close, and this happens.
Then I'm like, "Oh, my God. What did we do?" And this is Florida, where the demographics, you look on paper, are older. And COVID might have hit. We all knew that's going to hit older people, unfortunately, more than the young. We just saw that in Europe. So it was scary times, but what we did is, we just said, "Okay, it is what it is. Let's look at our business plan." And we pivoted.
You know how we do it, right? We have pro forma rents. Then we said, "Just freeze everything. Let's keep the rents the way they are. Then let's focus on occupancy. Let's help tenants. And let's find them assistance." We did that for, I think, like two, three months. As things were going crazy everywhere else in the country, our occupancy was going up, and our collections were just fine.
So we said, "Well, maybe our decision of waiting on rehab, let's revisit it." So then, honestly, we agreed to do it in phases instead of doing it all in one shot. We did phase one. Then we're doing just fine. Again, occupancy was fine, and we were doing okay with rents. Eventually, we said, "You know what? Let's do phase two as well."
The Concept of Helping Others in Multifamily
Tauheed: And then towards the year-end, we said, "Let's raise the rents also." All worked out. At this point, I can tell you where we bought it, its equity can be doubled today. This is just based on the cap rates. Brad had a Facebook post about it too because we just increased the NOI. That's multifamily. While all these crazy things were going on, this is what we were able to accomplish.
Darin: Look, I'm thankful to be in your deal, and I know that you guys are bright, and I trust you guys, and you're leading the ship. That's the thing that's also nice about this business to me. It's if I buy IBM stock, I can't call the chairman of IBM tomorrow and say, "Hey, what's going on over here?" or, "Let's go play golf." But with these multifamily deals, you know the person that is managing the deal, and you have access to that person, and you get monthly communications from that person. It's just a different animal, and I like that. I like that about it for sure.
And we all try to help each other and learn from each other. So you have a construction business. You started out building duplexes and fourplexes. And then you got into syndication, and you've done syndications. I've seen you do syndications with people in the multifamily mentorship group and outside the group, and one deal with just your buddies, and you've got land deals. You got all the stuff going on. I've talked to a lot of syndicators that over the last, say, year to three years, they've kind of shifted from B, C properties to trying to level up and buy more B+, A assets.
Managing Downside Protection
Darin: Some that are actually starting to talk about getting into new construction development, which you already were in. So what I'd like you to talk about, if you would, is what are the differences between ground-up construction and buying an existing cash-flowing deal, both from a risk profile perspective, return profile perspective, and what do you find most attractive in today's market?
Tauheed: I'm a little bit surprised when I talk to more investors, that they feel construction deals are riskier and have a higher return.
I don't know why that perception is out there, but I always feel that if there's a risk in a construction deal, you can mitigate it. So I don't find it riskier if you manage it right.
Darin: My perspective, as I've been involved in all existing cash-flowing deals, I'm in one retail development deal, but in my mind, until you do something, yes, it's scarier. For me, I think there's more risk in a development deal because all right, lumber prices just shot up. If you did your pro forma and you’re expecting to pay X amount for lumber, and all of a sudden, it doubles, well, that has got to eat into your margins. Or maybe it takes longer to fill the property than you're expecting. Whether they're founded or not, these are some of the things that float in my head.
Tauheed: I agree with that. However, again, you can mitigate risk, and maybe I can give you an example. I was approaching a project when I was going to do it and then my buddies joined me. Again, I'm going back to Wylie. This is part townhomes, part commercial.
Tauheed: In the townhomes, when I was going to do it by myself, I said, "I'll split it. I'm not going to do them all in one shot. So I'll build X number, rent them, finance it, then build the second one, then the third one. So if the economy turns, I won't have a large exposure."
But when we got more partners, we said, "Well, it'll be more efficient if we build them all in one shot." So we agreed to that, and now we are doing that. Lumber pricing, honestly, yes, there's nothing any of us can do. However, the only good thing is, we are able to pass the cost to the consumer right now.
Darin: That right there is something that's like, "Look, I didn't even think about that." Okay, lumber prices go up. But look you just up your sales price. I mean, you don't have to sell it for what the original pro forma was. Look, everybody is in the same boat. Everybody's lumber price is going up, so everybody's end price has to go up.
Tauheed: Yes. And again, how you mitigate your risks. Honestly, I kind of learned this lesson in my previous development, where I pre-sold everything because it was just me doing the project and it was a relatively larger project. And I presold it so I figured, "Hey, that's how I mitigate my risk."
But here, one lesson I learned was, honestly, I left a lot of profit on the table by pre-selling. Because the price was fixed and then I was exposed to risks, like lumber going up. So in this case, I'll tell you, somebody offered us, before we broke ground, they said, "We'll buy it for 245,000 per townhome." And I said, "No."
Faith in Sun Belt Market
Tauheed: That's not going to happen because I think the price minimum was going to be 265,000, whereas we had the comps for 285,000. So we mitigated that risk by not preselling. Now I can sell at a higher price.
So it all comes with experience, to be honest. And the other major change for me, Darin, last year was, we have gone strategically from build-to-sell to build-to-rent model. So in that sense, I'm not as sensitive as I was to final pricing at a certain specific time. I'm not sensitive to that anymore. And again, these are my close friends, a close group of investors. I explained to them, and they all are like, "Makes sense." Before, our business model used to build and sell. Now, it is built, rent, run it for eight to 10 years, and then sell.
Darin: Why did you make that decision?
Tauheed: Because I just felt that we create so much value when we build. I want to keep that and take advantage of that cash flow for the next eight to 10 years. There is a concept of infinite return, and I'm not going to say it's exactly infinite returns. But hey, if you can invest pre-development raw land, and then when you have the construction done, then refi, and I can give you all or most of your money back, then why not let it run for another eight to 10 years?
Darin: And that just proves the point that you said probably 30 minutes ago that you believe the Texas markets, the Sun Belt markets have another decade to go.
Tauheed: Absolutely, and it's going to cash flow.
Going to Mastermind Classes
Tauheed: Look, in between, I'm not saying there's not going to be a flat market or might be a slight dip or whatever, for a year or two years, but that's not our horizon. Our investment horizon is not two, three years. I'm looking at eight to 10 years. When we build our property, we build it, everything's going to be brand new. We want to keep it for eight to 10 years, and then we'll sell it.
And in real estate, my saying is, "If you transact, you're going get rich. But if you hold it for long-term, you're going to get wealthy."
Darin: That's big. You talked about what Brad has done in the mentorship group. I also know you're part of at least one mastermind. Look, you're already successful. You were successful as a hedge fund guy. Then you came into development. You were already building stuff. And you started building on your own. You've gotten some investors who are close friends. You got in the syndication market. Are you involved in any other masterminds? Why do you continue to network?
Tauheed: I am right now. You know that I'm in Brad's mastermind. That has helped me a ton. I think this is my third year, and I was with him in the very first mastermind we had the very first time. I think you had it about two years ago. It has helped me a ton, to be honest.
Darin: How so?
Let me tell you. I have such a fear of failure, that it was very difficult for me to overcome. For a long time, I would not let my friends or any investor come in a construction deal. Because I just can't have anybody losing money. And I just can't deal with it.
Courage to Manage Downside Protection
Tauheed: In the mastermind, I talked about it. And others, and Brad, and Jen helped me with that. And I'll tell you, I'll never forget, I think it was Brad who said, "Why are you thinking you're going to lose their money? Why are you not thinking, what if you make them money?" And I was like, "Wow. Yes, I can do this." Still, it was very difficult.
So it didn't take one mastermind, honestly. I kept going multiple times, discussing it, getting feedback from, obviously, their very, very successful superstars there. No, those are rock stars. They are very experienced. And they have different backgrounds.
So I learned from them. Honestly, that's what gave me the courage to finally tell my friends, "Okay, fine. You can invest." And Wylie, I could have handled it myself out. That's how it was all financed. Everything was all set up. And equity, I had it, everything. They invest themselves into it. And I said, "Fine."
But the result of that is that just nine acres and townhomes we were building are only five acres. Since then, pretty much the same group, we bought 22 acres, where we are going to build single-family homes, and it's all going to be build-to-rent. Single-family homes, we're going to run them like apartments. Now, half of that is for another partner. He probably wants to sell. But half, that's going to be owned by my team, call it 50 homes, we'll build and rent.
We also just bought 19 acres in Sherman. Pretty much same team again, same core group. And there, we have 19 acres. We're going to really re-plat it into a piece so it's going to be commercial. A piece of it is going to be multifamily, and the third pad is going to be townhomes.
Boost From Mastermind
Tauheed: So, man, there was no way before the mastermind I would have done this. And Brad knows this. Brad knows this because I always was going back to him like, "Ah, I can't do this." They're like, "No." But you meet other people. I mean, you talk to other successful people, how they did it, and they helped me overcome that fear. And I have to say, now that I did the pro forma at 265,000, now it's going to be selling at 350,000 for this, my friends, I love it. I love it. I hope they're going to make a lot of money.
Darin: That's huge. So much good stuff out of that. Here's a guy who was a successful hedge fund guy, successful developer, successful syndicator, had the capital to do his own deals, still finds value in networking with others, and still has limiting beliefs that he has to work through. Look, a lot of people think, when I bring somebody on that has 1,000 units or 2,000 units, they have it completely covered. They just know it all. And it's not the case.
Five years ago, 10 years ago, you may have had a different limiting belief, and somehow you got over that through experience. For the listener's benefit, look, you have to start with one, your first investment property, whatever that is, or starting your own company for the first time. It's scary, but if you get around other people that have done it, done what you want to do, like Tauheed said, it gives you the courage to go after your goals, go after your dreams. It's not to say that it's going to be easy.
Life Outside Managing Downside Protection
Darin: But there was a piece of Tauheed, he was trying to prevent his friends from losing money, but what he missed was the opportunity to make them all a ton of money. And now he's doing that. So, to listeners out there, you need to think hard about what is important to you and surround yourself with other people that will help get you over the ledge.
What do you like to do outside of business? I know you're a good golfer. So I played golf with his guy, and it was hole 18. He had a like a 15-footer, and it was a side-bender in a big way. It probably broke, five-six feet, and he nailed it for birdie to win on the 18th hole. So I know he's a golfer. So golf, and what else do you get going on?
Tauheed: Well, thanks for not mentioning how bad I played in the other 17 holes. No, golf, honestly, everyone knows I love the sport. I play it. And a lesson learned from Wall Street was that I worked too hard where I did not enjoy it, to be honest. And that's another thing I'm still working at where, how do you enjoy the moment? But after leaving Wall Street, I made the decision that I got to have a hobby, and that's going to help the longevity of my next career.
So I play golf. And for other reasons, philosophically also, I think golf is very much like life. Sometimes a day you get a good round, and someday you get a bad round. And sometimes you get good breaks. You play a good shot from a bad lie and sometimes a bad shot from a good lie. It's all life lessons. That's how life works.
Like Father Like Son
Tauheed: We have an organization, association, CGA. Actually, as of this year, I'm the president of that golf association. We do five, six tournaments a year. It's a great way of socializing. I've met a lot of people through that. So that's one. And then, Darin, you know I have twins, two 21-year-old kids. Well, they're not kids anymore, I guess, 21 years old. They're adults now.
Darin: They're still your kids, right?
Tauheed: I know. But they just remind me sometimes like, "Dad, we're 21." So I'm like, "Thanks. Okay." So I help them a lot, to be honest. My son is very much into investments. He wanted to go to Wall Street. And then two years ago, I told him, "Hey, maybe you should look into real estate." At the time, it was a very nice compliment. He's said, "No, dad. That's for old people." And I'm like, "Gee, thanks."
Darin: You still have dark hair. My kids tell me, "Dad, your hair is white."
Tauheed: These are not dark, these are dyed. But a year and a half, I think, he came to me and he said, "Would you pay if I get my license?" And I'm like, "Wow. You want to get a real estate license? Well, you're going full-time to school." He's like, "No, Dad I have about 20 days in between two semesters. I'll get it." I'm like, "Okay, I'll pay if you want to get it."
He got the license and he's doing well. He is a little bit active right now. He's in training with a firm where they do what I do, multifamily. So I spend quite a bit of time with him. I spend quite a bit of time with my daughter, to be honest, my kids.
Developing Relationships With Brokers
Tauheed: We know they have maybe a year or two with us at most, and then they'll be solo flying. That takes, to be honest with you, most of my time, family and wealth, and investments.
Darin: Awesome. Well, I look forward to getting out and playing some golf with you again. I know that you've done a fantastic job of developing relationships with brokers that are sourcing some deals for you that you play golf with. You've leveraged that to have fun and do business at the same time. Hey, if listeners want to reach out to you, and listeners, I would highly encourage it. I mean, again, he was the first person that I met with, so genuine and such a great business background. If they want to reach out to you, how can somebody get a hold of you?
Darin: Okay, fantastic. And it's taasinvestments.com. Fantastic. Tauheed, thank you so much for coming on the show. Listeners, I hope you really enjoyed that one. Until next week, signing off.