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It's Never Too Late To Effectively Start Investing With Alan Stewart [EP105]

June 14, 2022

It’s Never Too Late To Effectively Start Investing With Alan Stewart [EP105]

It's never too late and you're never too old to start investing in real estate!

Alan Stewart is a great example of how anyone can get started in real estate, no matter their age or experience. It took him five years to pull the trigger on his first real estate investment, but he learned and applied himself until he was successful. Now he's on a mission to help others do the same.

In this episode, Alan shares his background in management consulting, how he got started in real estate, the problems they solve while working in real estate and he and his partner's mission to create an institution focused on buying high-quality assets in high-quality areas. Listen and learn!

Table of Contents:

Five-Step Process For Passively Investing In Real Estate
Five-Step Process For Passively Investing In Real Estate

From Management Consulting to Multifamily Investing

It's Never Too Late to Transition From Management Consulting to Multifamily Investing
Photographer: Sidekix Media | Source: Unsplash

Darin: A little background on Alan before we start the show. Alan lives in the DFW area. He graduated from Texas A&M with an engineering degree and spent 20 years in corporate management consulting. He's seen the wealth-building power of real estate investing and he wants to share it with others.

A little bit on how I know Alan. We're both part of the same multifamily mentorship group here in the Dallas market, the Brad Sumrok group. I've seen Alan over the years at a lot of these events, and I love picking his brain. Because he's been in the industry for a long while and he always gives me great pointers. So very interested in this conversation. With that, first question, how many properties and how many units are you currently invested in?

Alan: I have been invested in 17 properties and a little over 3400 units. Combined with my business partner Jack, we've got about 7800 units across 36 properties.

Darin: The 17 properties, 3400 units that you're personally invested in, that's a mix of passive and general partner?

Alan: Right, yes. So it's six general partner. Actually, five of those have now gone full lifecycle with the balance as an LP.

Darin: Fantastic. So tell us a little bit about your background and how you even got into the industry.

Alan: Well, that's a great question. So I grew up in the Dallas-Fort Worth area, went to Texas A&M, studied engineering. I went straight into management consulting with what was then Andersen Consulting, it became Accenture, and ended up having a 20-year career.

It’s Never Too Late to Learn Multifamily Investing

Alan: Yes, 20 years in management consulting. Never thought I'd make it that far when I was probably about years two or three. It's not an easy industry, but I learned a lot. But what's more interesting is in 2001, I went to a conference here in Dallas, and Robert Kiyosaki was speaking and he was talking about his book Rich Dad Poor Dad. He was talking about instead of trading time for money, you should invest in assets that produce cash flow.

So, that was what I would say was the first light bulb that went off of what I'd call my real financial education or pragmatic financial education. Then I went on a journey for the next 11 years searching out mentors and I took a turn at single family investing.

Finally, in 2012, I got a multifamily mentor and that's where I got introduced to multifamily investing. I used to think that it was some rich guy or some big corporation that invested in multifamily. It turns out that it's people like you and me that invest in a lot of these things.

So, I've been doing that a little over 10 years. I left my corporate job as a managing partner running the Greater Texas practice for strategy consulting for Gartner. It's been just over four years ago that I've been doing this full time. It's been a blessing because I got my schedule back. In an entrepreneur role, I met so many cool people from all kinds of backgrounds. So that's how I got into it.

It’s Never Too Late for Engineers to Invest in Multifamily

Darin: That's huge. A few things you said there. One, my son goes to Texas A&M. I don't know, there's something about people that go down there that they drink the Kool-Aid and you're just sucked into that world. So that's fantastic.

Engineering, there are a lot of engineers in the multifamily space. I mean, you can come from any career path. There are people that come from single family investing and they want to scale up. There are engineers, there's software engineers, there's doctors, and lawyers. But there happens to be a lot of engineers. Why do you think that is?

Alan: That's a good question. I mean I guess for me, it's just having that analytical background, solving problems. Then also for me, in consulting, it was all about creating solutions and then managing big projects. And so, once I got that bug from Kiyosaki of, hey, there's something else, then it's like my solution-oriented mind started thinking about, well, how do I learn more? How do I get into it?

When I got interested in multifamily, it's like, oh, there's so many things about it that make sense in terms of my leverage of time and experience and things like that. I guess, process-wise, it just makes sense. So, for me, that's how it works. Maybe that's the same way for others. I always tell people, it's like, yes, I studied engineering, but I was never really a real engineer.

Darin: That's funny, though, that you said you like solving problems. I know when I got into this about four years ago, my first syndication I partnered with Raj Gupta out of Chicago. I think you know him.

Multifamily Is About Solving Problems

Darin: When we got involved, that's exactly what he told me. He said, "Darin, if you're going to like the real estate business, it's a business about solving problems." So talk about that a little bit, because I don't really think that if you're on the outside, that really makes sense. It's like, okay, well I'm going to buy real estate and somebody else is going to manage it. Well, what does that mean, solving problems?

Alan: Sure. Well, I think it means a lot of different things. First, when we're buying assets, of course, it's places where people live. And so, it's solving for quality housing, quality safe housing for people. So that's solving a problem.

When we take over properties, especially some of the earlier ones I did were deep value-add properties. We were definitely improving the quality of the asset and the level of professionalism with how it was run. So that's solving that problem for the resident.

But also for our investors. It's like, with me, I didn't know there was a different way other than stocks, bonds, mutual funds, investing in all of the amazing tax advantages, and everything else with multifamily. And so, it's helping to solve the problem for them of how can they both keep their wealth and grow their wealth in a tax advantage manner and create legacy for their families?

But then when you get under the nuts and bolts of it, as you're acquiring a deal, you've got to solve the problem of a seller wanting to sell a deal and you're wanting to buy a deal. And so, you're coming to terms of a price in terms that makes sense. So you're solving their problem and they want to sell the asset and you want to buy it.

It’s Never Too Late to Solve Problems for Different People

Alan: Then there's the debt side and, of course, the bank is wanting to manage their downside risk. And so, you're solving their problem of, hey, they want to make a return on their money, but doing it in a favorable circumstance. So, sharing what your track record is and experience, and your balance sheet, and liquidity. And so, they look at all those things. Let's help them solve their problem of lending out the money they have on their balance sheet.

Then we get in operations and there's all kinds of problems. On the capital side, sometimes properties have deferred maintenance. That could be, let's say, the roof has an issue or it needs to be painted, or it hasn't been upgraded for a while. And so, you're solving the problem of taking care of what needs to be taken care of the property and also creating a nicer product for the residents.

Then on the operations side, our residents pay rent and we collect rent. Sometimes you have to solve the problem around that. As well as you've got the staff that's at the property running it. So, it provides them a job. When you think about it, it's solving a whole bunch of different problems for a whole bunch of different people. I don't know, I find it really cool and fascinating.

Darin: Yes. I mean that's huge. You brought up so many different areas. I think when you're just starting to get into this, you just think, "I'm going to buy a piece of real estate. How am I going to do that?"

Choosing Your Team Is a Tough Problem to Solve

Choosing Your Team Is a Tough Problem to Solve
Photographer: Javier Allegue Barros | Source: Unsplash

Darin: "How am I going to raise the money for that?" You don't really think about all these other problems that are being solved, all these different areas and issues that come up. That you have to think through what's the best way. I mean even just picking your team.

Who should be your lender and what debt should I put on it based on how long we plan on holding this asset? The passive investor, they're not necessarily getting involved in that decision process. So the general partner and the sponsors are figuring that out.

Hiring the property management company and the attorneys and all the different team members is critical. Then sometimes you have to make some changes along the way too. It can be tough to have to change property management companies or change other vendors along the way. It could be the rehab team isn't implementing at the quality level that you want, whatever the case may be. It's not like you just buy it and you're done.

Alan: Correct. Yes, been through all those things.

Darin: Yes. So, hey, you recently started a company with another gentleman, Jack Langenberg. I was invested in one of his deals. It did very, very well, more than doubled our money. He was on the show, episode 68. So you two have partnered up and formed a company. Can you share with the listeners the name of the company and why you guys came together and what you guys are focused on?

Sapient Capital Group

Alan: Sure, happy to. So the name of the company is Sapient Capital Group. Some people are like, "Well, what the heck does Sapient mean?" And so, when we were thinking about branding.

Darin: I'm glad you're bringing that up because I was about to ask.

Alan: Yes. So it makes a lot of sense, well, once I explain it. Jack was a former corporate executive also, a COO/CFO type. So both of us had a long career. Sapient, one of the things, it means gaining wisdom through experience.

So, it's like we've got the battle scars from our corporate life, but then also have been doing multifamily a while. That's where we thought Sapient Capital Group made a lot of sense for us. Then it's actually been a partnership a long time in the making. So our very first deal that Jack and I both invested in was over 10 years ago. That's actually how we met.

So, we were going to meetings for the property and got to know each other. Then it turned out that we found out that both of our daughters were in a father-daughter program called Indian Princess. We were different tribes, but our daughters are a year apart. And so, there was that connection.

We just got to know each other over time. It's funny, we actually talked about formerly joining forces earlier. As a matter of fact, the property that just sold just three weeks ago, we had held it just over four years and we actually talked about partnering up on that deal.

It’s Never Too Late to Choose the Right Partner

Alan: So point being is we've been having this conversation a long time. I really respect him. He's a family guy, a good guy, a smart guy, willing to do work, which I would say is key to a GP team. And so, it's just something that organically happened over time, and we're excited about it.

Darin: Over a long period of time. So that's something I would like to highlight to the listeners too. Not all partnerships are formed that way. But a lot of partnerships, people get to know each other over years before they partner together.

So, it's about getting out there and letting people know who you are and what you can bring to the table and then finding a good match. Because from the outside, I think sometimes people think, oh, you just find three or four people that want to buy a multifamily and you partner together.

But you want to know that you're partnered with somebody that is aligned with you. The people that have told me that they've gotten into bad partnerships are the ones that have said, "You know what? It wasn't as much like the division of responsibilities. It was more we looked at the world differently. We had different moral compass." And so, time is a good way to get to know people, see that they're showing up consistently.

Alan: Yes, I agree.

I always tell people, when they're looking at partnerships, I use the analogy of marriage. It's like you definitely need to date a while before you get married, get to know each other.

The Rock Band Analogy

Alan: The other analogy I like to talk about in terms of the GP team is a rock band analogy. In a rock band, you've got a lead singer, you've got a guitarist, you've got a drummer at least, and they all play unique roles. And so, if you had three lead singers and no guitarist or drummer, the band is not going to work very well.

So, that's the other thing of being honest about, I would say, not only what you can do, but what you want to do. Or maybe even more importantly, what you don't want to do. Everybody being honest about that upfront that way, that you've got a rock band that sounds good when everybody's playing together.

Darin: I think that's such a great point. This industry is so different than a lot of other industries. I think that outside of this investing world, people are pretty tight-lipped about money, about how much money you have, what your net worth is, what your liquidity is.

All of a sudden I got involved here and people were like, "Well, you're talking about possibly partnering. Where do you stand? What's your financial wherewithal? What's your net worth? What can you bring to the table?" And, like you said, what do you want to do and what do you want me to do?

People have those conversations really, really fast. Then they make a decision really fast as to this is a good fit for me or not. If it's not a good fit, it's like, "Thank you very much, but I like doing those same things."

It’s Never Too Late to Join Conferences

Darin: "I'm looking for somebody that likes this piece," and they just move on. If they do think there's a synergy, then it's, "Hey, let's get to know each other better," and then move forward from there. So I think that's a great point.

The other thing that I remember from going to all these events, and whenever I talk to you, I'm always picking your brain. Like, "Hey, what mastermind are you in?" because you're always doing something in addition to. Some people join a multifamily mentorship group and that's all they do, and that's great. But there are other people, you included, that look at, okay, that's one facet, but I'm also going to have self-development in these different areas. So, you get involved in other areas as well. Talk about some of those other areas and why do you do it?

Alan: Well, that's a great question, Darin. Going back to that conference with Robert Kiyosaki. That was really the match that lit the fire around the personal development side as well of like, oh wow, there's all of this stuff that's out there. You've got people like Zig Ziglar and Jim Rohn and Brian Tracy, and Denis Waitley, Darren Hardy.

I wasn't really exposed to any of those folks before. Over time, I did and I started realizing that, oh wow, there's a lot of wisdom that's already been out there and a lot of tools and processes that you can you learn from and leverage over time. Then also part of the way that I got into that, was getting involved in different groups.

So proximity to big thinkers is powerful and it starts to make new thinking bigger, and expanding your horizon is maybe something you didn't think about.

It’s Never Too Late to Learn From Other People

Alan: And so, it's just been this daisy chain of learning and going and connecting more dots with people. For example, I'm in a multifamily mastermind, but I'm also in another mastermind with Kyle Wilson, which is actually a publisher of three books that I've co-authored.

But point being is that's just another example of, through being connected with that group, just like with multifamily 11 years ago, I didn't know that I could do it. Writing a book was never on the radar, but you get connected with other people and then they expanded your mindset and like, "Oh wow, I can do this with some cool people." So through Kyle Wilson and his group, we did that. So now I'm a three-time number one Amazon bestselling author, which is amazing.

Darin: That's awesome. Look, you were a management consultant with Andersen, and then Accenture for 20 years, you said?

Alan: Yes, 20 years total. I was about a decade at Accenture. Then I was at North Highland, and I finished my career at Gartner Consulting running a strategy practice.

Darin: Okay. I mean I think there are some people that can come out of that background and be pretty confident in themselves. I've worked in all these different companies. I have all these different CEOs, major companies that would take my advice, and why do I need to go invest my own money and my own time to listen to other people. But you didn't take that, that way. You took it like, look, there's other people out there that have done some things that I may want to do and why not learn from them?

It’s Never Too Late to Learn Something New

It’s Never Too Late to Learn Something New
Photographer: Tim Mossholder | Source: Unsplash

Darin: I think that's the difference between people that really see value in doing masterminds and going to conferences and networking, and people that are on the outside and they're like, "Oh, they just want my money."

So if I go to a conference and there may be seven speakers and four of them, I'm like, "I didn't get anything out of that." But then all of a sudden, the next one says something and I just get that one idea and I'm like, "Hey, if I took that one idea and I applied that to my business, that would have a huge impact." That makes it all worth it. You went to this Kyle Wilson mastermind. You didn't even think about writing a book.

Alan: Yes. Not at all.

Darin: Now you're co-author of three bestselling books. That's amazing.

Alan: Yes, amazing. Just to piggyback on something you just said, you were talking about, hey, you go up to a conference and you never know what you're going to learn. I know, it's like sometimes say there's something going on locally. It's after a long day and you're tired. You're like, "Oh, hey, maybe I'll just skip that one."

I've learned it's like just showing up, because every time when I'm really tired or I'm just like, "Oh, I'll just skip that call," or whatever, I always learn something new. I always meet somebody new. I always get some kind of value from it that I never expected. So just what you're saying of showing up and then having an open mind, and it's amazing what happens.

Darin: Yes, absolutely. Learning something new, that's an interesting phrase. We go to school and we're forced to learn.

Multifamily Investing Is Not for Everybody

Darin: You went to engineering school and you're forced to learn certain subjects. I know for me, I hated that I had to do it, but you have to do it. And so, you go through all these years all the way through high school and through college and you're forced to learn what they want to teach you. Then some people, when they graduate, they just stop learning. But the cool part is when you get to choose what you want to learn.

So when you went to that Robert Kiyosaki conference and it lit a light bulb in you. Then you went and found a mentorship group in multifamily, and then you went with Kyle Wilson's group, and you just keep expanding what your possibilities are.

Look, multifamily investing is for some people and it's not for everybody. But a lot of people think it's out of their reach. If you surround yourself with people that have already done it, then you have a much better chance of thinking, "You know what, if they can do it, I can do it."

Alan: Absolutely. That's probably one of the biggest things of being in a room with people that have already done it and you realize, "Oh, everybody's got different backgrounds." And, as you said, like a regular person just like me with focused actions over time, you can make it happen.

Darin: Yes, that's huge. I think there are some people out there that are skeptical and they think, "Okay, well, the guru, the one that's teaching, the one that's already done it, why are they bringing in other people to the fold? They just want my money."

Shifting Away From B, C Assets to A Quality Assets

Darin: Look, I don't think there are many people that are going to set up conferences and that are going to set up masterminds and dedicate themselves and commit without having some kind of financial reward. But most of the people that I've met, what really drives them is they truly want other people to succeed at what they've succeeded with. A lot of them have enough money that they don't have to do this. They could go sit on a beach and just keep to themselves. So I'm thankful that they're out there teaching everybody.

Alan: Absolutely. Yes, like you said, a lot of fantastic people out there with the heart of a teacher. It's like, hey, they have a God-given gift and knowledge and they just want to share it. They just love seeing people succeed through that. So I agree with you.

Darin: That's huge. So, hey, you and Jack both have a similar mentality, that you guys are focusing, I think, you confirm if I'm wrong, shifting away from B, C assets to A quality assets. So, one, am I right that you guys are doing that? Two, why?

Alan: Sure, great question. So the first answer is yes. We both grew up in the B and C value-add market, and the very first or several deals I did were pretty deep value add. I mean they were beautiful piece of crap properties when we bought them.

Darin: I'm like, describe what that means. What did it look like before?

A Picture of C-Class Property

Alan: Yes. So I'll try to paint a couple of pictures. So one is if you've never been in 1960s C-class property that has a lot of deferred maintenance and really hasn't been taken care of for a long time, they have a certain smell, one. If you've been in one, you know what I'm talking about. If you haven't, once you get in there, you're like, "Okay, got it."

Darin: That's what Alan was talking about.

Alan: Right. But just to give you a story, one apartment complex that we bought several years ago when we were doing due diligence, we walk every unit, and several of these units were pretty poor shape. I remember talking with one resident as we were looking at his unit. He had his shower enclosure. He had put the plastic all along where the tile was supposed to be, and duct tape and did some things.

The point being is he did that. He was telling me how he finally got it to where his shower wasn't leaking to his living room downstairs and how proud he was that he did that. But if you looked at it, you're like, "Seriously? This is how it is and they won't fix it?" So that's just one example. Point being is that's where we started. When we started over 10 years ago, there was a pretty big spread in the cap rate between A class and C class properties.

Darin: What was that spread?

Alan: Oh, shoot. It was probably at least 300 basis points, depending upon the deal.

Darin: So a cap rate for an A property might be, what? Back then, five or six?

It’s Never Too Late to Invest in A-Class Properties

Alan: Back then, it was probably around five or six.

Darin: Then a C property would be eight cap?

Alan: Yes, eight to nine. These properties, back in 2012, 2013. So point being is we were able to buy them at a much lower cost and get financing on them. So there was a lot of margin and spread to be made through that as we were improving the properties. Well, as time has gone past, we focus primarily in the Dallas-Fort Worth market. Also, across the country, cap rates across asset classes are really compressed. So now you look in the Dallas-Fort Worth area and it might be 25 to 50 basis points difference.

So that's a huge difference. It's like, hey, in general, if I'm putting a dollar in to buy a property, I'd much rather buy something that's newer and nicer in a well-located area versus something that's 50 years old and has a lot of deferred maintenance.

That was the hypothesis. I was talking about it for two years, because everybody that I was around, we all grew up in the same way, in the B and C value-add space. And so, we always just say, "Oh, you can't make any money off the A class properties. They're too expensive," or whatever.

Well, the market changed, but at the same time the barrier to entry to getting into the A class properties is much higher. It's a whole different group of brokers that do these properties. It's a whole different level of price point, different hard-earnest money that you have to put in there. You start competing with some small institutions.

Another Example of Solving a Problem

Alan: And so, even though the relative cap rate is getting closer, the barrier to entry is higher. So when we first did it, it was a daunting task, but we said, "Hey, we're going to do it. We're going to buy this," told the broker give us a chance to demonstrate that we can execute, and we did. So, now we're in that game and we're working on our second really nice A class property.

Darin: Awesome. That's another example of solving a problem. I mean you're going from B, C, you come up with a strategy that, hey, let's go after A. But then you realize that there's a higher barrier to entry, and rather than just put your tail between your legs and go back to the B, C, you say, "What do we need to change? What do we need to modify? What do we need to learn in order to compete in this area?" So that's huge.

I think the definition of value add has changed, and you talked about it. People talked more about B, C as a value add and the A's not so much. But I see deals come across my desk all the time now that are A properties that are being pitched as value add.

The value add could be that they were built in the early 2000s and they're ready for the next round of renovations. But I think that even over the last year, year and a half, it's changing such that you don't even have to do the rehab.

What Is Value Add?

It's Never Too Late to Give Value Add
Photographer: Towfiqu barbhuiya | Source: Unsplash

Darin: It's like, okay, well, there's just so much loss to lease. Because if somebody rented 12 months ago, their lease payment is 20% less than the guy who's leasing now. So all we have to do is re-lease at higher rates, and they're not even putting rehab in it. So talk about what what you've seen in that definition of value add.

Alan: Yes, it's a really great observation. So I would say, in the end, if you talk in economic terms, it's what additional value can you put into the property that your residents would be willing to pay for that additional value? And so, in the B and C world, when I was talking about a property that was just completely neglected, well, it's just putting it together and upgrading things.

Darin: Having tile that doesn't leak to the downstairs.

Alan: Right. So people are willing to pay more for that. It's like, okay, I can get my head around that. So let's talk about value add for A class properties. We talk about Uptown at Cole Park, which is the one we bought last year. So it's a 2016 podium-style asset in uptown Dallas, so fantastic area. You go look at the property and you say, "Oh, this property's beautiful," and it is.

There was a couple of things going on there. There was a lot of deliveries, new deliveries in the market, which was creating a lot of concessions. And so, when we were looking at it, you look backwards, there was a lot of concessions. But looking forward, there weren't. And so, exactly what you said, Darin, is there was a lot of loss to lease to burn off.

It’s Never Too Late to Add Value Through Design and Functionality Improvements

Alan: So burning off that loss to lease in terms of, that right there is a value add in terms of the economics of it. But then also we actually brought in an architect and designer and we're doing several really cool things to the property. For example, we're painting a mural on the outside. And so, it's going to be transformed from just another building to now it's going to be like, oh, it's like a landmark and people recognize the building. So, it's cool.

This is an interesting story, I would say, is it has air-conditioned interior hallways. They were nice, but it had this dimly lit and they were this mint green color. So it looked like a hospital hallway. Then it had carpets in the hallway and there's valet trash there. So sometimes trash spills and you always have to clean the carpet.

I was like, well, how could we just functionally, was what I was originally thinking, go to some type of hard surface to fix that and then brighten things up? Well, in working with the designer, we actually created this really cool four-color, really big pieces of LVT flooring in a herringbone pattern. Then on the hallways, it's painted three different colors between the side, the top, and the side. Then we put all new lighting in it.

I'm trying to describe best I can in words, but if you saw before and after, you'd be like, "Oh my gosh, that's amazing." Well, here's the point of the value add to that is part of it started as being a functional way of just improving some things.

It’s Never Too Late to Give What Tenants Are Willing to Pay

Alan: But from a design standpoint, it really came out amazing. So, for example, when we were going through renewals, there were some people that said, "Oh yes, I don't want to renew," and we're kind of, "Well, why not?" "Oh, well, you're not upgrading my hallway versus the other floor." It's a six-story building. We're like, "Yes, you're getting that, too," and they're like, "Oh, okay, great," and they signed for a 25% renewal rate, which is just amazing. So they stayed.

They had an amazing increase. So point being is it's like you just have to go into problem-solving. I mean you have to think about, well, what's valuable to your residents, from their perspective, what are they willing to pay for, and give that to them. That's a value add.

Darin: That's huge. I love what you said when you said how could we? I think that not necessarily knowing the answer yet, but how could we make this better? How could we solve this problem? How could we make the feeling of walking down this hallway feel much nicer. You go in a home and you're proud of where you live. How could we? Then you start searching for that answer.

You know what, as a real estate investor, a lot of times you don't know the answer right away, but there's another avenue where networking can come into play. So you ask other people that have renovated A properties and you start asking them, calling people, and talking to vendors that work on A properties. Then you start filtering through all those different ideas that people are giving you.

It’s Never Too Late to Hire Experts Who Can Help You

Darin: Then it's ultimately up to you to make the decision as to what to go with. But you don't have to have the answer right away. There's a lot of people that you can pull from to help you get there.

Alan: Yes, that's really key what you just said, because there's a lot of people that have really specific expertise. So the point being you don't have to know everything. But if you can ask good questions and, like you said, network and connect with people, that can fill that gap. Because I had a concept of what I wanted to do, but I needed the designer to turn that into, oh, okay, that's it. We paid the designer for the design work. It was 100% worth the investment.

Darin: Yes, that's huge. I'm a business guy and I'm a numbers guy. I'm not a designer. Colors and all that don't really come natural to me. So I went to a few different people to look for paint colors and the designer would come back and I'm like, "No, I don't like that. Let's try it again. No, I don't like that. Let's try it again," and then have to go to a different designer.

Then all of a sudden I get to the right one and I'm like, "Oh, that's it." Even as the business guy, look, I could have been wrong still. But that's the thing is you can press on people that have that expertise and then you ultimately make the decision. So nicer assets, I'm going to bring up a couple of things. One was COVID. Everybody was talking about a recession coming. Nobody knew it was going to be COVID.

The COVID Effect

Darin: When people talked about a recession, people that I talked to were saying that, all right, the bottom 20% in A's are going to flow down to the B's. The bottom 20% in B's are going to flow down to the C's to start to save money.

But in COVID, it was really the C's that got hurt. It was the people that were working in retail and working in restaurants, those types of jobs where all of a sudden they couldn't go back to work or their hours were cut. They don't have a lot of savings and they're paycheck-to-paycheck versus people that owned A properties, they were able to work from their apartment. And they were able to work remote. They had higher savings rates. So the A's actually performed very well in that recession.

So now we're in the midst of inflation and stock market going down and possibly going into another recession. Whether it's now or in the short to medium term, do you foresee the same thing happening? Do you think that A's are going to be impacted more or less or the same, or what's your viewpoint on that, in the next downturn?

Alan: I think it would probably be similar. To me, what you were talking about, I think it's an affordability issue. Especially C's, usually people are being qualified two and a half to three times their monthly income for their rent. If you're in two and a half to three times, I mean you hit a little bump in the road and you've got a problem. There's just not a lot of savings. And so, I think that'll still be an issue. Contrast that with, let's say, the property that we're buying now.

The Wider the Affordability Gap, the Better

Alan: When you look at the rent roll, it's like the average annual salary for that building is over 150,000 a year. So, when we're looking at our business plan, we can see that these residents actually have the capacity to pay about three times the amount of rent that they're currently paying, which is a huge amount. It's not that they're going to.

Darin: That's huge to have that type of income. I didn't realize that the income levels, the average income in your property is over $150K.

Alan: Yes. And so, every property's different, but that's part of it. I always say this is something to look at, no matter what class property it is. It's like understanding what is the median income of the submarket relative to what the rental rates are at the asset you're looking at buying.

But also if you look at the actual rent roll and what people's income actually is as part of your diligence process, you can see what capacity they have to increases. Because for example, if you take the same property, and even though it's a super nice property, let's say that the average income is 60,000. Well, okay, for the rental rates, relative rental rates, well, they can maybe go up a little bit, but certainly not a lot. And so, the point being is, the wider that affordability gap is, the better.

So going back to your question. That's the details of, yes, when we look at assets, when we look at the capacity, the more capacity they have, blimp patterns, this, that, and the other, they're going to be okay. And so, I think quality A assets and quality areas are probably going to be the least impacted.

Demographics of People in A-Class Properties

Demographics of People in A-Class Properties
Photographer: Christopher Burns | Source: Unsplash

Darin: Yes, that's huge. Not too many people talk about it, but, look, where your location is, if you were to go buy a house, the average house price is X. Say you have to put 20% down, that differential of your mortgage payment and your taxes, your insurance, that gap of, hey, do I want to live in a really high-quality apartment complex with a ton of amenities? Or do I want to pay that much more to have my own place? It just seems like more and more people are choosing to rent.

Alan: Absolutely. Yes, a lot of places we're looking, if you go buy a house, that would be just what you said, a similar level of amenities, which is really hard to recreate all the amenities that a nice A-class property has in a single family home. But I mean it could be $1500 to $2500, maybe even $3,000 more a month. But it's a big difference in affordability.

Darin: Yes, that's huge. What about age group? So let's talk about your A property. Are we talking about young professionals, or are we talking about retirees, or are we talking about people in their 40s, 50s? What's the demographic of people that are in these A properties?

Alan: Well, it's going to depend on exactly where it's located in a submarket. For example, in the uptown area, it's in general a little bit younger crowd, younger professionals.

But that being said, there's a lot of people that are empty nesters, and they don't want to deal with having the big house anymore. They want to live in a cool area that's walkable. So people that are looking for that live, work, play lifestyle regardless of age gravitate towards that.

Exit Strategy for A-Class Properties

Alan: Then, of course, you've got A-class properties that are purpose-built for 55 and up. And so, obviously those are all empty-nester type folks. But really it just depends on where it's located. Say it's an A-class property in the suburbs. It's located in a good school district. Usually, you're going to find more two, three, four-bedrooms. In those type of complexes, it's going to be more families. Point being is I don't think there's a cookie-cutter answer, but it's just what submarket is it in, what kind of amenities that submarket has, and who does that appeal to?

Darin: That makes sense. That's part of the problem solving too, whether you're building or whether you're looking at buying existing properties, is knowing what that submarket demographic is and does this product set really meet the needs for that demographic. So talk about if you're buying these A-class assets, are you looking at them the same way in terms of your exit strategy, or are they longer term holds?

Alan: Great question. So for us, when we're looking at properties now, we walk the property to say, okay, if we're looking at it, it's high-quality properties in high-quality areas. So we're looking to say, hey, this is an asset that we could look to hold on for a period of time.

Well, what does period of time mean? So if I could see holding it at least 10 years, that would check the box. Because what we really want to do is build up a portfolio of high-quality assets. And instead of selling them, assuming that everything goes as planned, we would continue to refinance them to reduce our basis in those properties to zero. Then take those monies and go invest them in additional properties.

The After-Tax Snowball Effect

Alan: Of course, additional loan money is not a taxable event. So we see that as, for high-quality assets and high-quality areas, the right strategy. Oh, by the way, we've realized, it's like, oh, okay, people have been doing this 20, 30, 40 years. This is exactly what they do. So it's not like reinventing the wheel, but you don't know what you don't know.

Darin: Right. You're moving from that value add B, C space to that longer-term, just hold, refi, pull out cash, go buy another one type of philosophy. You said 10 years. I mean some people have the strategy of I just don't ever sell. I'm going to buy, I'm just going to pull cash out, non-taxable event, buy something else.

But I would imagine you have to have a little different conversation with investors that it's a longer-term hold. Because some investors get used to that two, three, four years double your money and I'm going to roll into something else. And so, they may think like, "Well, man, if they're just going to hold onto this thing, my money's tied up forever." But what they don't realize is the after-tax snowball effect that can have.

Alan: Absolutely. So I'll just give you a real example from my portfolio. It's like a second property, basically. So this would've been in December of 2012. I would say it was a nice B-class property in a decent area adjacent to a school and single family homes. So nothing really special about the property, but nice, clean, and functional property. It was cash flowing well. I guess it was about three and a half years into that deal.

A Real Example From Alan Stewart’s Portfolio

Alan: It was a Fannie Mae loan, so we did a supplemental on it. So did a refinance. We put some capital back in the property and then put some capital in our pocket. Then two years later, we were five and a half years in. We totally refinanced it, again put some capital back in the property and then put some capital in our pocket. Then at that point we had actually more than double our original capital out of the property. So it's like getting a double on your money, but it's not a taxable event. We still owned the property and it was still cash flowing.

So, then we held it for another four and a half years. We actually just recently sold it. So we owned it about nine and a half years. In the end, I think it was over a 5X multiple. But point being is that by having those refinances, we were pulling capital out of the property, which I was then able to put in other properties.

And so, I think I'll let this blow your mind a little bit. So that capital came on property non-taxable. I put it in other deals, and those deals turned over. So it was basically, I would say, free money or loan money, and that doubled and all of that was non-taxable as well. So, once you see how people have been doing this a while, it's like wow. It's pretty amazing.

Darin: It's crazy. I learned a long time ago that real estate, it's a weird asset because it's an appreciating asset that you get to depreciate. But I didn't take action until four years ago. At least I'm glad I took action then.

It’s Never Too Late to Invest in Yourself

Darin: But I think there are a lot of people that are still scared to take a chance. So what would you say to somebody that maybe is looking at getting in their first passive investment? How do you get over that fear?

Alan: Sure. I mean I can really empathize with this. So going back, it was 2001 that I went to that conference. Then I guess it was 2005, 2006 when I actually did my first single family investment, which was more on the wholesale side.

Darin: It took you five years?

Alan: It took me five years. Why is it? Well, I was afraid. I was afraid that I didn't know what I didn't know, that I was making a mistake. I didn't want to lose money. And so, the point being is I get it. But I kept going at it.

If people haven't ever read the book Rich Dad Poor Dad by Robert Kiyosaki, I would start there, because it all starts with your mindset. I really think that's a great book to help you understand, high-level, the concepts. So that's the first thing I would do is invest in my education.

The second thing is depending upon what kind of investment you're looking to do, I would seek out some education and training or maybe a mentor. Because in the end, additional education and somebody that has been there can help you reduce your risk. Because then they can help you avoid some pitfalls that they already see and help you avoid. Then it's all about making a decision. It sounds easy, but you've got to make a decision. Then once you make a decision, you've got to take action.

The Power of Compound Effect

Alan: I could promise you, if you invest in your education, you make a decision and you take action, over time, really amazing things will happen. I know we're both fans of Darren Hardy. He talks about the compound effect. It's all these little actions that you take over time, compounding over time. It's like, hey, if I look back 11 years ago, before I started multifamily, I never would've thought that I would've retired from my six-figure corporate executive job and had my calendar back and be doing something that I like and able to help people. It wasn't on the radar, and it didn't happen overnight either, but amazing what can happen over time.

Darin: Yes. I mean that's huge. Mindset. Mindset, mindset. I mean, look, I had the capital and the first thing I invested in was a duplex. My wife and I, I think we had to invest like $50,000, $55,000, and I was scared, man. I think that we as humans are just more afraid of losing than have the positive mindset that you can win. But then having done the duplex, I was like, "How can I go bigger?" Then I surrounded myself with people that have done it, and then went from two units to 76 units.

I know so many people that do 100, 200, 300, 500-unit deals. It's all in your mind and what you can achieve. But it starts with the first step, the first step of, all right, like Alan said, read the book, or go to a meetup group, or go to a conference, or take a chance. Then one thing leads to another. Then all of a sudden other people are coming to you for advice.

It’s Never Too Late to Find Someone You Know, Like, and Trust

Alan: Yes. One additional thing I would add as we were talking was how to get started. So how I got started was after I had done those things, I made a decision, and then I made my first investment. I made my first investment as an LP. How to do it? I got to know, like, and trust some GPs.

I will say that when I made that first investment, there was a whole new world of learning that happened once you start seeing the lifecycle of a deal and see financial statements. It puts all the theory into practice. And so, that was really a stepping stone, when I went from LP to GP.

So that's the other thing that I'd probably say is get to know somebody that's got experience that you know, like, and trust, and make your first investment as an LP. I mean, hey, I love my LP investments. Got some smart guy working hard for me. So you want to talk about having leverage? Well, that's it. So in any case, I just want to add that.

Darin: No, that's huge. That's scary in itself, doing your first LP investment. You said there's nothing like having some money, your own money, involved to get you learning. I mean you could read as many books and go to many places as possible. But all of a sudden when you're invested in that first deal, you're paying attention to it and you're learning from it. Then all of a sudden it's giving you confidence and doing the next one or possibly getting on the active side.

It’s Never Too Late for You to Take Action

It’s Never Too Late for You to Take Action
Photographer: Maxime Horlaville | Source: Unsplash

Darin: So, anyway, you guys are doing a lot of great stuff. I like both you and Jack. And I think you've got a great partner. I think you've got a great strategy. You've been doing it for 10 years, man. What's the next big stretch goal? Where do you go from here?

Alan: Well, I mean you want to talk about our BHAG, big hairy audacious goal. I mean we're looking to become an institution ourselves. That's not going to happen overnight, but looking in the next year, we'd like to acquire $250 million in assets. So that's more than we've done in previous years, but we break it down and it's like, all right, well, we could just go buy three or four more deals like the last one, then there you are. When you start breaking it down like that, it makes sense.

But looking forward over the next five to 10 years, we really want to have a portfolio of at least 10,000 units, high-quality units. Like I said, just to continue to grow the company and we want to be an institutional player.

Darin: That's huge. Listeners, listen to this. I mean he shared in the beginning it took him five years to do his first investment. Now his goal for next year is to buy $250 million in assets. It does not happen unless you take some action. You have to take some action and you learn, and then you keep expanding your goals. So you mentioned a few times, I've got to hit you up on it, you're an author, co-author on three different books.

Bringing Value, Solving Problems

Darin: Can you share a little bit about that with the listeners? I mean what are these books about and why'd you get involved with them?

Alan: Sure. Well, I actually have a couple sitting next to me. So the very first one, let's see if I can show it here.

Darin: Bringing Value, Solving Problems. That's weird. We talked about that, and Leaving a Legacy.

Alan: Leaving a Legacy. So that really resonated with me. That's my story of how I grew up and starting a family early and going through my corporate career. Then I also talk about how I got invested in real estate and my journey to retiring for that to do this full time. Then the next one is Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities.

Darin: Foreword by Brian Tracy. I like Brian.

Alan: He's fantastic.

Darin: He's definitely a leader in the self-development books, for sure.

Alan: So that one has all kinds of cool people and it also has stories. It's not all real estate related. For example, Phil Collen, who's the lead guitarist for Def Leppard, he has a story in there, and Glenn Morshower, who's in all kinds of acting roles, including 24. I mean you'd definitely recognize him.

But the point being is it's all across the board. In that book, they talk about how there's some pivot that they had, some little new idea that became a game-changer. Or they just had some challenge and how they persevered through it. And so, that's what that was about. That's one that resonated for me.

It’s Never Too Late to Think Big!

Alan: Then with Jack, Jack saw what I was doing with this and he said, "Hey, I want to be part of that." And so, actually he's one of the co-authors for the latest one, which is Think Big! So in that one, it's all stories about, hey, we're thinking big. I shared some of it of like, oh, well, think about 11 years ago, I didn't know anything about multifamily. Then I was in B and C and never thought I would do A's. Now I'm doing A's and we're looking forward and looking to be an institutional player and help a lot of people along the way.

Because one of the big things I don't think I mentioned, but I really like, kind of where I had that light bulb go off with mindset of like, Hey, there's another way and just all the amazing advantages that are available with multifamily investing. Just helping people turn on lights, kind of like with my parents.

They were small business owners, actually had an automotive shop and repair business. I thought to myself, "Wow, I think they're going to work until they can't work anymore." I got them involved in some of my investments years ago and they were actually able to retire four years ago as well from that.

Darin: Good for them.

Alan: So it's like that's pretty cool when you can help people change their mindset. It was definitely a mindset change for my parents. I had to drag them along to begin with, but now they're all in.

Darin: Absolutely. I think, one, I've learned from other people in the real estate world, like, look, you've got to take responsibility for your own money. Don't just hand it over to somebody else.

It’s Never Too Late to Start Investing

Darin: Don't just hand it over to the stock market. You need to learn about where you're investing your money and take responsibility and be accountable for that. When you do that, you see different alternatives that you can do.

Darin: Partly, I'm like shame on me. For years and years and years, I fell into that world and I just parked money over into the stock market and mutual funds and ETFs. Then I couldn't believe what is out there in the multifamily real estate world.

Look, there's a lot of other different investments out there too, private placements, whether it's individual businesses or hotels or resorts or self-storage. I mean there are all these different asset classes. But educate yourself and surround yourself with some other people that will motivate you to actually take a chance.

Alan: I agree.

Darin: So what do you like to do outside of work, man?

Alan: Well, it's a great question. So I now have two adult children. My daughter's 22. So she's finishing up her last year of interior design school. Fun fact aside, she's actually going to create some artwork for our properties, which we have local artists.

Darin: Awesome.

Alan: Yes. So it's pretty cool. Then my son is about to turn 27 actually this week. So he also went to Texas A&M. I tried to talk him out of studying engineering, but he wanted to do it anyway. He's an engineer at Texas Instruments and he really likes it. For both of them, I've exposed them to multifamily investing over this period of time.

What Alan Stewart Loves to Do for Fun

Alan: And so, my son actually made his very first investment in my last deal. He's very proud to say that he's a multifamily owner, which is I think back, I'm like, "Wow. If I had started my investing in this at 26, wow, where would I be?"

The point being is that looking backwards, I did a lot of outdoors activities with the kids, of course sports and Indian Princess with my daughter. Then she was competitive in volleyball and track. And so, we did all of that. Then my son, he was in scouts and I was a scout leader. So we've been all over the place doing that kind of stuff, hiking, backpacking.

When my son graduated in 2018 and when I retired from the corporate world, it was June four years ago. And so, both of us, we took a backpacking trip to Yellowstone. And so, we spent a week and a half in the backcountry at Yellowstone.

Darin: Did you really?

Alan: Yes, seen all the beautiful sites. So in the end, we like experiences. My wife and I, we like the beach, if you can get the mountains in the summertime and some beach and a little snorkeling and stuff. But in the end, outdoors and experiencing different places around the world, different cuisines, and just getting to know the local people. That's what we like to do.

Darin: I'm impressed that you actually went backcountry in Yellowstone with your son. That's huge. I mean I've done Yellowstone, but with a car driving around. So to go backpacking, camping through backcountry, that's pretty awesome.

Backpacking Trip to Yellowstone

Darin: But I'm sure that that's a memory that will be imprinted in your memories for a long, long, long time.

Alan: Yes. One quick, funny story really that I just thought of. See, obviously whenever you go on a backpacking trip in the backcountry, you check in with the ranger, say, "Hey, this is what we're going to do. What's the feedback?" The ranger said, "Okay, this looks good. You can walk along here and you can cross the river here." We're like, "Okay."

So we're eight miles into what was supposed to be a 16-mile day. We started early and we got to the river. It was early June, and so it was supposed to be a river crossing, I guess, maybe in late August or September. And it was the Yellowstone River. It was probably about a hundred yards across and running. So basically if we were crossing that, we were going to die.

So then we had to solve some problems. We looked at the map and like, oh, well there's a bridge across the river, about four miles downriver. And so, we had to go four miles downriver, up and down, and then four miles upriver. So the 16-mile day turned into I think it was like 23 or 24 miles. Man, by the time we rolled into camp, man, we were beat. It's certainly an experience. I mean, it's good times.

Grab Your FREE Digital Copy of Think Big!

Darin: You won't forget that day, that's for sure. Well, Alan, I really appreciate you coming on the show. Listeners, if you want to get to know Alan better, Alan, what's the best way for them to reach out to you?

Alan: Yes, sure. The easiest way, just send me an email at info@sapientcg.com. If you do, please tell me that you heard me on Darin's podcast and a little bit about yourself. If you like, I'd be happy to send you a free digital copy of the Think Big! book, the one that Jack and I just did.

Darin: Free book there for you guys. Well, I really appreciate you sharing. Look, listeners, get out there and take action. Look what it's done for this guy. So until next week, signing off.

How to Reach Alan Stewart

  • Website
  • Email: info@sapientcg.com

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My 5 Step Process for Passively Investing In Real Estate

5 Step Process For Passively Investing In Real Estate

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