With economic recession either looming, or already here, how can multifamily investors weather the storm? Multifamily real estate has historically been one of the most resilient asset classes, and adjusting strategies around leverage and underwriting can help ensure success. Abel Pacheco, Principal of 5 Talents Capital and host of “5 Talents Podcast – How To Build Wealth Like the 1%” joins the show to explore.
Watch On YouTube
- How Abel went from managing 8 rentals to well over 1500+ doors, investing in over $150MM of real estate.
- The good, bad and ugly of being an LP investor in multifamily.
- Key aspects of multifamily deals investors should focus on when growing their knowledge.
- Important factors that can signal if a multifamily investment opportunity should be taken, or passed on.
- How economic uncertainty affects strategy for wealth generation via passive multifamily investment
- How to reduce risk while increasing NOI for equity capture.
- What methods are most effective for ensuring healthy cash flow on a multifamily asset during an economic downturn.
- Current trends in multifamily that passive investors should be aware of, especially given the current economic landscape.
- Where some of the most compelling multifamily markets are, and what makes them compelling to investors.
Featured On This Episode
- The Fed Ignored the Money Supply, and a Recession Is Coming (Wall Street Journal)
- How the Latest Rate Hike Impacts Multifamily (Multi-Housing News)
Today’s Guest: Abel Pacheco
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott Hawksworth: Hello, and welcome to the Multifamily Investor Podcast. I’m your host Scott Hawksworth.
And today, we are going to be talking about building wealth through passive multifamily investment and joining me to offer his insights on this.
He’s someone who has a great story about building wealth through passive multifamily investment and he’s been on the LP side as well as the GP side.
His name is Abel Pacheco and he is the principal of Five Talents Capital and he is a host of the Five Talents Podcast How to build wealth, like the 1%. So for talking about building wealth, I can’t think of a better guest. Able welcome to the show.
Abel Pacheco: Thank you so much for having us we really appreciate it and i’m excited about this podcast we’re going to get done man I’m pumped.
Scott Hawksworth: I’m stoked myself I think there’s a lot of great stuff we’re going to dive into, and thank you for being here, so I guess with that said let’s just dive in.
You know, we want to talk today about growing a real estate portfolio through passive investing and you yourself
Have a very powerful success story, and I want to get these numbers right you grew your investments from managing eight rentals to now well over 1500 doors investing over 150 million in real estate tell me how you started and how you got to where you are today.
Abel Pacheco: Yeah man, well, we just.
One step at a time.
I guess is the easy easiest way to say it.
There is no no shortcut it was just kind of a long journey, I think a lot of people discount you know how much time it took like in preparation to go from a point A to Point B, but really we were investors, since 2008 so a lot of people just see this and run, we went from.
To passively investing in about 800 doors to general partners and active general partners principles syndicators operators, whatever you want to all the synonyms they’re.
Not 1500 plus doors.
Eight 800 doors to 1500 and that transition was pretty sure you know as a like four years of time, but 2008 was the official real estate start so that journey was one that was.
A time from w to corporate world professional.
executive, you know I started as a very entry level guy in tech.
Work my way up about 10 years at the same company and through that process, I was in sales, it was zero t zero to hero, and then hero to zero every month.
started over every third yeah absolutely those commissions right yes 100% you know hundred percent was like.
Man if you don’t have a good month and half of your paycheck is up for grabs if you don’t hit it then you’re coming out with a paycheck that’s 50% less and that’s that’s sales.
yeah so I realized early man, if I don’t keep grinding amount and keep working, then the paychecks going to stop coming in, so I kind of stopped that somehow got to figure out how to build wealth.
invest in the future for income and so that part was real estate, you know we we did a.
We did a few different education and courses throughout the years, but it was like the rich dad poor dad purple and yellow book.
kind of started.
us with the mindset of man, if I don’t create some income, you know, while we’re sleeping and then we’re going to work till we die and Warren Buffett quote.
So we got to figure that part out that was what led us to buy your first house and single family for number of years and then.
transitioning over, but you know it’s me it’s me and my wife we’re working hard throughout the process, investing all of our monies and then.
Through that time you know have our family, I have a four year old and a two year old now and the time that we invested in the past, before a little ones here here definitely laid a lot of ground work, a lot of foundation for the ability to to have like the presser variance the determination.
That discipline, whatever you want to call it to like.
put some money aside and invest it live off less than what you earn and then invest the rest and that discipline was there was you know definitely see the Foundation, I have a lot more to tell you, but let me pause just to make sure we’re we’re sharing some of the right info Scott.
Scott Hawksworth: yeah no I think that’s fantastic and and really recognizing the value of those passive investments.
You know, earning while you’re sleeping I think that is that is so critical and that’s what draws so many folks in our audience to multifamily and.
So I guess then maybe you know, maybe to shift gears a little bit to kind of dive in a little bit more to your experience as an LP so you know you start kind of growing and you’re having success.
As an LP can you speak to maybe some of the good bad and ugly.
That you’ve sort of experienced as an LP and what you’ve seen and and maybe some of the things that you learned that might be helpful to others who are maybe looking at deals right now and and wanting to get in on the LP side.
Abel Pacheco: yeah well to properly introduce it, you know, I have to reflect back on my 10 years experience, being a single family investor because most people take a look at this LP leap i’m going to be in limited partner i’m going to trust somebody with $50,000 $100,000 in my.
Scott Hawksworth: mind.
Abel Pacheco: And i’m a trust them to do all the work right i’ve got to let go i’ve got to relinquish control.
Right trust team all that.
I have to do it if i’m going to summarize and say, the end result is you need to look at the deal.
The market and the team, and those are your three jobs as a passive investor is that each one of those, but when I thought about my experiences in single family, I felt like I was more in control, when I was a single family owner.
I was me and my wife, there was no partners every decision we made was going to be.
You know our responsibility to you know, to have success and I did this for 10 years I took control, I had ownership, we were 100% owners and after 10 years, the first time I did a personal financial statement I put all my assets and I look I deducted all of my.
All my expenses or for the liabilities rather assets my left liabilities, I came out with my net worth and I go man i’m not a millionaire.
And the guy with 10 houses i’m the guy that people looked at to work at my professional career and enables the real estate guy talked to him, you want some advice.
You know i’m the i’m the source that a lot of people went to and I looked and I go we’ll shoot if i’m doing this for 10 years and my net worth is.
Barely you know quarter million dollars, then, if I do the math I was like a little under I guess 30 ish or mid 30s around the time I go i’m gonna have to do this for another 20 to 30 years.
Before I have enough income to live financially free in that model I wasn’t raising capital.
I wasn’t going to the bank and taking out large leverage loans I wasn’t doing any rehab or fixing flip or owner finance I wasn’t doing anything creative.
I was going to the mls I was buying a deal, I was buying it rent ready and renting it out, so I was making like $300 to $400 cash flow positive per deal and, at the time we were like okay well that’s three grand a month.
How do we move forward from 36 to our lifestyle, we were making 250 K 300 K in their professional career and I go man that’s that mass not going to work out we’re going to be working.
till we’re like 50 or 60 and the goal is to get out sooner how in the world does that equate.
And so that mentality, was what led me to i’ve got to figure out how to literally put money to work without having to put an extra cycles because, while I was Monday through Friday eight to five at the job.
That was my daytime with source to create income and the flip side of spending all my money.
You know, all my income was was like I had a nice car nice house things like that, but on the on the flip side of the equity was just so slow on the on the single family side of it.
We ended up saying we’ve got to put that passive got to put the active income, now that we’re we’re making a time and put it away into something where I don’t have to work because the nights and weekends were turning into.
Real Estate single family real estate.
Scott Hawksworth: And so that’s just go go go yeah.
Abel Pacheco: it’s a time right, and you know I may say, oh I made was making 250 300 K in w two, but this is a 10 year career a 13 year career in tech I was making like 50 K, my first year.
60 K, my second year.
70 8090 100 and like wasn’t towards it wasn’t till the last few years I was making a.
Good significant chunk of money where I had enough to say okay i’m going to invest 50 and that’s part of the reason why I go it’s like this is a journey didn’t happen overnight for anybody younger that’s listening.
I still had a lot of years to build up income to actually invest and then, when we saved enough and we could actually invest in bigger seeds so.
that’s kind of like that groundwork before you even get to LP so I don’t want to discount that, and you know say Oh, it was simple, but then as an LP my job became very simple.
let’s look at the deal, the market and the team and that’s why I kind of come back to that is.
I wanted to invest in the best possible team that I knew that had the most experience doing this, you know in my network, I want to invest in a market that I thought was really strong.
And I wanted to invest in a good deal and that’s a limited partners, you know role is to vet those things, and if you do that, you know thoroughly, you can have a pretty good run you know, so I must say good bad and ugly.
Man that good was I made money while sleeping the good was, I had a better tax loss than I had ever had.
In 10 years investing in single family, the good was still I felt proud, I felt confident, I felt encouraged that I was in 124 doors in one shot right that I didn’t have to do any work.
Scott Hawksworth: Right, he was just like infested there it is.
Abel Pacheco: yeah yeah and that was the confidence that you know the the ugly or the bad is like shoot I my my taxes are pretty complicated.
So you invested enough deals, and you know the situation we’re in like 17 syndications and we’re waiting for K one.
Scott Hawksworth: that’s a lot of a ones.
Abel Pacheco: It takes forever you pull you do an extension, every year we don’t file taxes until like before October.
My taxes are very complicated there’s a big bill for the CPA.
You know it’s like you’re herding cats you’ve got multiple different investment portals with every different team multiple different portals that you’re trying to track all this stuff.
you’ve got reports that you either have to well right as an active, but as a passive you’re trying to keep up with it.
And once you’re deployed out there, I would say that’s probably some of the bad and the ugly is like trying to keep track of it all.
But if you get your basic spreadsheet put it on there, and just check them off one by one, at a time during tax season, then it’s easier to do it and then you’re trying to you know you know struggle to put that in you’ve got some other stuff that is also complicated.
c corpse s corpse llc and living trust once you have a you know portfolio of passive investments, even for the true LP i’m not doing anything but putting my money out there.
Like you learn through probate that if something happens to you, you know, then the judge is going to determine what happens to your assets and, if you want.
Scott Hawksworth: Not hey.
Abel Pacheco: If you don’t want that to happen, you create a living, trust and you got tax implications, you know between family members me my wife.
Active passive who’s the real estate professional how it works filing jointly, so I say that’s that’s let me pause here that’s a that’s a good and bad and ugly maybe.
Scott Hawksworth: yeah no I think that’s that’s really great to sort of.
point that out as well, because you know when you then start talking about scanning like Okay, I want to invest in this other thing i’m going to you know, invest in more doors, then it just kind of I guess the way would go, is it just kind of increases some of the complexity right.
Abel Pacheco: yeah yeah yeah it does it takes a little longer and it’s just one of those things I heard some I heard some tax professionals and some wealth advisors.
Talk about like the base of their clients and they described it as like a pyramid there is, you know across thousands of investors, the majority of the investors that they serve.
They have invested in their work for one K some stocks and bonds and it’s like the biggest base well their tax returns are very simple.
They and and and they say, well, when there are 50 or 60 they may have a million or two.
or three and that’s the biggest base of their clients and as they go up this pyramid there’s a smaller base of clients.
And they’ve invested in the more diversified asset, so they did do work.
For one K and stock programs and things, but they also invested in real estate and so their tax returns were more complicated.
And then they have the highest of the high on this pyramid where there’s one that that mid bass was like they described it as 3 million to 10,000,015 million.
And then the biggest highest base of the top of the pyramid were like the 1% 10 million 20,000,100 million, they have the most complex structures.
And vehicles and entities and they were they were diversified across a bunch of different.
assets, so you have a pro and a con do you do you want to earn like you know the wealthiest of the wealthy.
You have to do what they do and part of what they do is they’re investing in more complex kind of structures and employing a you know experts to kind of help them weed through that and that’s kind of what we’re trying to do right it’s just that’s the goal.
Scott Hawksworth: Absolutely absolutely there’s a there’s a process, you know you have to kind of walk before you just start sprinting right.
yeah all of that, I guess you know, maybe this is a good segue because education is is so critical.
When you’re a passive investor and whether you’ve already invested in a multi family deal or you’re looking to invest in more you know you want to make those those good decisions you want to make sure you’re finding the good team, the right deal good market.
What are some of the key I guess areas of focus that you think are really worthwhile for passive investors to grow their knowledge and really looking to that success is it underwriting is it.
You know understanding those specific markets themselves deal structures i’m just curious what area of education, do you think really is worth focusing on.
Abel Pacheco: yeah well a great question so there’s two ways that i’ll answer and i’ll give my best, you know the best insight I think there’s tactics and strategies.
And there’s also mindset, so the tactics and the strategies that one’s going to use is usually what a lot of people will answer this type of question because it’s it’s real, I have to look at.
The tactics and strategies that employment for my investment thesis or my diversification plans or my strategy i’m in the right market that has a good population growth and has good corp.
Movement coming into the state good job creation, a diverse, you know diverse economic.
plan for the the city like the Economic Development Committee is active and they’re bringing more jobs and corporations, the company and I want.
I want net positive population growth well usually causes that as jobs and i’m looking at median income and that’s my deal, you know.
The market mechanic sorry in the deal is in that it feels like a good value add I can buy it at a good basis, improve it and increase rents better than my.
competitors can do when i’m looking at the comps there’s there’s 900 and minds is 900 also, but I have a plan to increase it and the median income is about a third.
Of what people will spend on housing So when I look at my value add strategy, I can get to 1100 dollars and rent on that example and know that my meeting and come can cover that additional rental.
amen that’s the base right.
So I look at that and I look at the team, and you know it’s kind of, say, oh have they’ve done this type of deal in this market with this plan, and I feel good about that.
tactics and strategies and I can create a filter and I can look for either deal that are like that in this market with this team, or you know any any which way to look at it.
But if my mindset is not in it, I can learn all the tactics and strategies and world, but if I haven’t trained my mind first to say you know what.
I am going to take a risk, I could potentially lose some money, and that is the scenario, but if I don’t take a risk today.
Then I am going to work for the rest of my life, which is a bigger risk to me than not putting my 50 K at risk on that side.
Some people can’t even get over that first like mental hurdle that says i’ve got to put my money to work.
And and they’re they’re like so fear and The reason I say some people like this was technically me I was doing this.
Even though I was an investor in single family real estate, I was so worried about losing my money on a scale of one to 10 from a risk standpoint, I was the one being the lowest risk, I was probably like at a two.
And because I didn’t take enough risk I didn’t make enough return and I don’t want to be a 10 either I don’t want to be a speculative investor and I don’t want to be, you know that the person that’s just wildly looking for this 10 X return on a doing.
Scott Hawksworth: too, though the craps table there yeah I don’t want to be a Vegas investor I when I go to Vegas I lose.
Abel Pacheco: Right so it’s like well Okay, I need to be somewhere in between a little bit more on the five or six range.
And so that mindset or mentality, I was, I had a lot of fear of losing all of our money, and I still have a healthy dose of it right, but it’s that fear comes from.
The lack of confidence and the lack of confidence comes from a lack of competence in a subject, and the only way you’re going to overcome, that is, with education.
So we you have to spend time you have to invest in those things like we talked about learning or educating yourself on the tactics and strategies.
And then, once you do and to invested more of your time what happens is your money tends to flow.
If it does, towards your education you’re like you know what i’m going to put my money towards the places that i’ve had been educating myself you become more competent than you become more can.
Scott Hawksworth: shift your mindset.
Abel Pacheco: yeah you change your mindset through that process like if you don’t spend time educating yourself you’re always going to be scared and fearful and you’ll probably make the wrong moves like you’re likely make the wrong move.
Being scared and I like I don’t put any money i’m just following somebody else and like damn that’s not the best position either.
You need to find the right.
line of like creating the mindset seeding into your own education figuring this stuff out and like you know Scott, you spent a lot of time putting this podcast together.
interviewing a lot of folks getting a lot of their mindset and asking these questions, so all of your listeners and audience man they they need to be they need to be clicking like subscribe, putting the you know the.
Scott Hawksworth: All the things yeah.
Abel Pacheco: yeah all over and say thank you for.
Taking the time because God does that you’re taking the time to invest in listening.
And you’re learning through that that’s that’s really what I say is you know spend a lot of times as much as you can educating yourself in the subject.
And you know manage manage but yes manage but interviewed on my own podcast some of those people where they their wealth managers their strategist and they say.
The ones that make the most money are the ones that are investing in where they have the highest amount of education themselves so whether that’s real estate or tech startups.
Or you know if it is the stock market for some people right whatever they spend the most time amount educating themselves that’s where they tend to do best on their own investments.
Scott Hawksworth: I think that’s 100% correct and and and really it’s a it’s a great point to make, I want to dive in a little more actually because I know folks are listening right now and they’re they’re wondering okay.
All right, i’ve got to learn i’ve got to get this education so as you increase your education, able and then you were looking to some of these deals.
In various markets and things of that nature, what were, maybe some of the factors that would lead you to you know, once you had that mindset.
would lead you to say yes or no so maybe you’ve adjusted your your risk you’re taking you’re willing to take more risks now cuz you feel a little bit more confident.
But what specific things would you be looking for where, if you saw this in a deal, you would say not for me versus making that decision point, because I think, then there can be that.
That issue where maybe some investors are a little you know trigger shy, so to speak, and they’re like oh i’m still not sure what what’s a good what’s a yes versus what’s a no.
Abel Pacheco: yeah the biggest one for me now that I can see, with clear clarity two or three years, investing and then passively investing still now a couple more years.
But what it is it’s the team is the most important kind of variable in this scenario, a good quality team.
track record and experience and they’ve done it before, and you know I don’t even want to discount someone’s first deal.
Because i’ve met some people that have an amazing crazy track record and everyone had their first deal like everyone’s had a first deal.
And that first deal may have been a wild success but usually the people that were running it if they’ve had wild success on the first one, they usually had some also previous successes before.
Scott Hawksworth: Right someone on the.
grass or something like that right.
Abel Pacheco: yeah even if it’s different like asset classes for real estate or different.
You know, different industries and those successes usually occurred because they had huge obstacles challenges, probably losses and failures.
And that’s part of like having the success you don’t you don’t just jump into like hey i’m gonna have wild success in this part without having some failures too and.
I think some of those biggest obstacles are you know people’s past like leading up to that point so when the team is leading the deal it’s comprised of some experts in various categories.
Somebody who’s great at property management somebody who’s great at and the analysis or the underwriting.
Somebody who’s great at raising some capital or bringing some deal some some some capital to the deal we wouldn’t close without that.
Somebody good at putting the best possible team structure in the asset you’ve got legal you’ve got all the SEC rules.
you’ve got these experts in everyone’s own right to do these deals, otherwise they don’t they don’t just magically happen.
you’ve got to pull the best possible people together, and if you have a team of experts on that you’re like okay well great I feel good.
Usually, when you look at their track record hey what’s brought you here today, what kind of how many deals have you done, you know what have you what have you been able to accomplish so far, and you can see that history of success success and failure.
Not only in the real estate it definitely helps I wanted you’ve done 10 deals 20 deals 30 deals you’ve done a you know $500 million of assets under management.
Okay, you, you probably had some ups and downs in that tell me about the ups and tell me about the Downs downs, are the ones that were really the big learning scenario and most of the big.
portfolios are going to have some of those Downs and even somebody that’s brand new newer team.
You know they have track records, where they can speak to their wins and losses in the past and so that’s like that’s really, what I want to know.
first, and then i’m really digging into the market and the deal as a passive investor and really you know today i’m primarily active.
As a general partner and kind of leading the deals, but as I have built up the you know the portfolio some of my deals that i’m passive in.
are starting to bloom and they’re coming back in their full cycle and some of my first deals that i’ve led as.
You know, as a as a syndicated and general partner, those are starting to come up on their time or, like all right i’m excited.
So i’m going to have the same challenge the the other LP investors, or which are like well who’s the next team behind me.
Because I want to diversify outside of me also I don’t want to just lead active deals I, I want to create passive income for for us and our family as well you know the whole the whole cycle it’s a big circle.
Scott Hawksworth: makes it’s a it’s absolutely a big.
Abel Pacheco: circle circle yeah.
Scott Hawksworth: Could you could you speak to a bit of sort of your transition, you know you you then went to the LP side now you know you’re leading more deals what was that transition like and sort of what was the I guess the impetus there for you.
Abel Pacheco: Well it’s a the fun part about being an limited partner in a ton of doors or first or many multiple deals is you get to see how other people run deals and you get a as an LP passive investor, if you take an active approach you can learn a ton from your passive investments.
Scott Hawksworth: mean just having those conversations and really trying to understand the inner workings of the deal.
Abel Pacheco: you’re getting a monthly report or quarterly report and you figure out what happens i’m pulling this business plan this execution this strategy, and this is what’s working and what’s not you usually get quarterly financials.
Income minus expenses equals your noi.
And you can underwrite your own deals and kind of practice that way, and you can basically pull the you know pull the punches without having to do all the hard work or train you’re looking through it and say, well, if I was in charge, what would I be doing.
And this is what they’re doing is it working.
And you’re learning, while you’re earning at the same time, and some other models, you know you you you’re you’re paying for education, but not getting any return this year definitely paying for the education, because you’re investing but it’s an investment it’s returning.
To getting good tax benefits.
You see K ones, which you know I never saw a ppm before I signed my first agreement, I never saw an operating agreement before.
We signed, our first one, we never did the K ones, I never did my tax structure, I didn’t think about C corpse s corpse or llc so I didn’t think about living trusted and.
Think about how all the intersection of all this stuff comes together, and as you do it yourself when I became an active principle when people had questions, it was easier for me to answer because I had already been there.
It was what.
you’ve seen that side of it being.
Scott Hawksworth: dug into it right.
Abel Pacheco: Correct yeah we saw it we’ve done it we’ve experienced I could give people some basic knowledge and like this is this is how we do it, this is how I did it.
Right and not that I wouldn’t say i’m the source of all truth for sure i’m probably the.
farthest from that, but I am definitely i’ve had my experiences and now we’re learning from them and employing them and and where did those experiences come from.
people that have had success before me and i’m just following the same path that I saw that I had i’ve had success like as an LP and now making the plays as a GP and so that’s definitely helped a lot in that transition.
Scott Hawksworth: Absolutely shifting gears a little bit you know economically we’re hurtling towards recession if we’re not already in it there’s a lot of uncertainty out there, you know we’ve got inflation all of that happening from the passive investment, you know wealth building side.
You know, does the blueprint really change and I guess you know what factors should passive investors really be cognizant of and focusing on in this current landscape.
Abel Pacheco: yeah so there’s a few things, yes, I mean her hurdling towards your session I like the way you said it, so I was like man we’re in a tough spot right.
what’s the economic.
You know I look and forecast and all that stuff and you know who knows, is the answer.
Scott Hawksworth: yeah nobody’s got the crystal ball, who knows, is my answer.
Abel Pacheco: What I can tell you that i’m experiencing you know the factors today is the Fed is raising interest rates.
And they’re doing it at a.
at a rapid pace.
Scott Hawksworth: And was 75 basis points.
Abel Pacheco: Last month they’re yeah they’re going to keep coming back okay they’ve indicated that will happen in the future.
So what’s happening is our our debt terms, I have already factored in the next future increase the lenders are factoring in today, even though hasn’t occurred and so you’re like okay that’s going to keep happening, you have a lot of.
lenders that are trying to take their previous loans that they had on the books, so people they’ve already closed deals.
they’ve already taken them to the clo market which is kind of like the cmt s of single family stuff.
And some of those lenders are not picking up our not being able to sell their portfolios mean meaning.
They don’t have more capital in their accounts to lend more so it’s becoming stricter and titers harder to get the terms that you know we were used to even three months ago, three weeks ago it’s changing very rapidly.
So that part is happening, and then, as the debt becomes a little tighter That means the deals are harder to.
Make pencil meaning another way to get the return that I want I wanted a higher leverage not crazy leverage, but just higher than 60 65% which is.
You know, maybe the market that hey first conservatism, so if I was trying to get a little more leverage I may not be able to get it meaning, I have to bring more equity down payment to the table.
That means my returns are lower lower leverage will return, so if sellers want the same prices, because the sellers prices were and they were up into the right aggressively we thought prices were going to go down during coven prices went up CAP rates went down.
that’s the inverse right and so as.
CAP rates compressed prices went up sellers were demanding pretty much whatever they what they wanted to.
brokers were encouraging the the sellers to say you can get it there’s 30 more people that are willing to put an offer, if the first one does not pay we’re going to go to number 20.
Scott Hawksworth: P number stillness only.
Because of that they were still missing out on deals.
Abel Pacheco: And so it’s like okay.
louie money was trying to come in money was trying to buy prices went through the roof, and the sellers are had that.
You know i’m essentially one of the sellers now as we’ve sold some and i’m on both sides, so I can kind of see both perspectives.
And as we try to get the higher prices, now we don’t have the lending this quite going to pay the same amount, so you have fewer competitors.
Fewer deals being made because I as a seller i’m not willing to take a lower price yet.
So every other sellers not willing to take a lower price yet trying to ride this thing out and less some of the sellers have.
Debt terms that are ending right around now and are being forced to sell at a lower price those that can wait a little longer.
likely are going to wait for that better price those that cannot are going to go to market they’re going to have to sell it a lower price there’s less competitors, making lower offers you know that’s slowly already what’s happening is a 10 to 15%.
decrease in price that deals were under contract, two months ago that are starting to retrain and so that’s happening in the market right now.
So if i’m a limited partner passive investor that’s ultimately the mindset that i’m taking and say what’s going to happen, I don’t know who knows we’ll see what happens in three to six months but i’m.
banking on as a buyer to have a slightly increased CAP rate to purchase at today where I can have a very good Conservative business plan.
That says, I can forecast an increase in rent based on my median income put a good value plan together, which has increased my interior unit some kind of value add.
You know, a deal that i’m looking for our group anyways and in a good market that basically lasted through covert and.
The vacancy and delinquency and things that were were some markets had a harder time than others so we’re primarily investing in Texas and San Antonio and.
Austin and macallan and you know that’s kind of where we’re the majority of our focuses Dallas and we have a couple of new development projects but.
that’s that mindset is like now i’m trying to read through this read the tea leaves and invest with teams that I think, have the best opportunity for success.
And for us trying to look for the best possible deals, because I believe we put together the best possible team within our network so it’s like man that’s a.
No, no easy answer just looking at the numbers, looking at the market mechanics looking at population growth, trying to find the best possible conservative deal that I can, something that under promises i’m not looking for the 20% return right now, as a general partner or a limited partner.
i’m looking for a scale town.
You know, average modest return, based on the numbers and i’m gonna i’m going to say you know set my expectations that we can even hit.
A portion of that return i’m going to feel good if my expectations are right, you know, in a solid deal where i’m not super super over leveraged i’m not I don’t want to be 78 80% variable rate, with no, you know count want to be there, I want to be lower.
Lower debt service coverage sorry.
Lower ltv or ltc.
To bring up my debt service coverage ratio and you know just being a best possibly I can.
Scott Hawksworth: Right so so really you know being maybe a little more conservative than you would have been in another, you know economic landscape and then kind of leaning on.
Those market factors that you like, and you know I always like to point out we’ve seen historically when we have had economic recessions multifamily real estate really does tend to whether those recessions pretty well.
and perform really well as an asset class, you know, obviously, depending on the market and.
Abel Pacheco: As well we’re we’re excited we’re excited to code for sure.
That not what scared through covert worried fearful like oh man.
Scott Hawksworth: what’s the heck’s going to happen what’s happening next yeah.
Abel Pacheco: Organic excited with the outcome was like okay that performed as we, as we expected, so I guess I shouldn’t have been worried, but i’m like you just i’m a human being right, I am.
And the outcome is like Okay, we weathered it pretty well you know I thought about to for for some of the more.
For some for the some of the investors limited partners that are really you know numbers driven and financially driven I am looking at the sofer.
And i’m trying to forecast how high that thing the so for yield curve will go up into the right.
Because if i’m looking at variable interest rates there’s a spread, you know anywhere like 400 basis points spread on top of this, so far, so first what replaced live or.
That you know people are using right now, and so that taker is trying to figure out where it’s going to go and i’m trying to forecast and stress test for the future.
So two or three years down the road and we’re trying to say hey what well our interest rates, going to do, can I still make a debt service coverage payment.
And can I still be above a 1.25 even when interest rates go up into the right in your two or three.
The data points tells you that fed has never raised rates for more than like 18 or 24 months or something sometimes under two years.
At a time before they start coming down so you’re trying to figure out is there is there a deal that can withstand those you know numbers metrics mechanics you know so for.
Scott Hawksworth: Your underwriting does does.
The sort of the the stress tests that you apply to your underwriting models to those shifts in a landscape like this do you do you say you know what let’s let’s test it even harder let’s see what if what happens if.
ya know whatever economic factor impacts that D is it that just even more important.
Abel Pacheco: We used to do debt service coverage ratio, we used to do occupancy you know before a stress test, I would say those things are the same what’s definitely changes the forward looking car for for rising interest rates.
Just transparently, I never had a stress test for interest rates going up, at a certain point.
And then you know transparently it’s like man that’s the that’s The first thing is your what’s our yield curve what’s it going to be in three years and will that work.
You use that what’s called a debt yield ratio and the debt yield ratio is usually around stabilization so three years it stabilized.
Right, what is your debt yield because the lenders want to know that if you’re in a like, for example, a bridge term.
If i’m doing bridge today what is my debt you’re going in but, more importantly, wants to stabilize Am I done my value add i’ve increased rates amanda fully stabilized deal.
What is it going out because they want to know you have enough to refinance into a longer term deal a longer term.
loan usually agency and that’s kind of like the basic plan right so as you do, that plan that three year stabilization and that you’ll have to.
Also, and you know, think about oh what’s the rates, going to be in three years and is it will it still be high, is it going higher.
Or is it going to stay put so you’ve got to have some kind of forward looking you know conservatism and the deals now.
Even more you know and some teams may you know may have been smarter.
To already say oh that’s what’s going to happen, you know I would definitely say we definitely added that everything else is pretty much stay the same, you know it’s like just still be conservative all the way through that hasn’t changed.
it’s definitely the the forward looking so for curve.
Scott Hawksworth: Absolutely okay shifting gears again because I want to get back to yeah and we’re talking about what you’ve.
You know what you learned and your observations from the LP side and how you, you know, have brought that to the GP side, so I want to get just a bit of your insights on how.
You approach multifamily assets that you that you are on the GP side, for you know.
One thing I was, as I was looking at your site you guys were talking about equity capture and how critical, that is to your success model, and you know, reducing that risk.
While increasing the noi is really where the rubber meets the road there, so what are, maybe some of the keys and and strategies to implement to do that reduce that risk while increasing that noi.
Abel Pacheco: yeah for us tactically speaking it’s the property management construction management timeline management.
Those things are like the tactical portions you’ve got to rehab plan certain amount of days and times you got to make sure that we’re on track on time and under budget and you got to make sure that those.
The investments in the in the exterior for people walking on the property, for the first time in the interior units which are I can increase my rants from nine to 1100 dollars, for example.
Like I can actually pull off that plan and the reasonable amount of time, so that’s you know the essentially making sure we’re reducing our risk.
For us in that in that equity capture as we’re as you’re you know, asking me about how do we capture equity we’re increasing our net operating income.
The biggest way to do that, we may you know carve a little bit expenses, but for the most part, our expenses assumptions are going up.
They were 3% formally now they’re four and 5% inflation is definitely caused us to take those assumptions for expenses so it’s not like expenses are going down, we can cut in certain areas.
But what’s really happening is the income is going up and that’s the up into the right there we’re looking for how do I quickly get more income, so that my net operating income increases.
And that is primarily done through the unit’s unit interior upgrades and so you’re trying to Max out the most interior unit upgrade you can get.
while still being cognizant of our renters our tenants our Community base and the median income of people that have a high demand for good quality housing, they can afford to pay it, but you know we’re trying to try to capture as much as we can so.
tactically or number numbers wise, you know if somebody has employed my trusty calculator if you have $55,000, for example, 55 K.
Average median income in the area divided by three that means there’s $18,000 that somebody could let him a little legitimately pay for rent if I divided that by 12 so the monthly.
expense for housing that’s like 1500 bucks and if my plan is to go from nine to 11 the same number will shoot I feel really good I feel like.
I have reduce my risk I haven’t put set that ticker at 1500 dollars, is what I want to try to get I want to try to get from nine to 11 and I know that my renting base my community, the average median income still has that $400.
Scott Hawksworth: We still have that that space there to grow.
Abel Pacheco: They have the cushion yet to afford to pay, and then I could probably increase rents, over time, but I don’t want to Max it out to 1500 just because my immediate income says they can afford to pay it.
So you’re trying to balance the existing.
The occupancy the interior renovation on time on under budget, the amount of time that it takes to do the renovation.
All of those things are like able Pacheco is not on the property talking to any renters and trying to have an assigned least nor am I in the units.
Trying to do you know new vinyl plank flooring and fixtures that’s my property management.
team that’s that that team my construction management team that’s them so you’re trying to figure out who’s the best possible.
asset and team Member to help us with that plan and turn units and watch it like a Hawk and asset management every week and so that’s the.
Those are the tactical things there to try to reduce risk and capture as much equity net operating income and then forecasts, a good exit CAP rate that you know is is conservative as well that’s another part of conservatives I don’t think I talked about biggest lever, and your underwriting.
is going to be your CAP rate your exit what did I buy it going in and what’s my exit going out and if i’ve got a big spread between a number of basis points from year one.
To year five whatever i’m exiting I feel like i’m more conservative, if I have a same entry, as the same exit.
that’s not a very conservative view i’m saying i’m expecting CAP rates stay low, when in fact they’ve already increased a little bit over the last three three monster like okay i’m glad I put that spread of conservatism in there.
Scott Hawksworth: So that’s.
Abel Pacheco: A little bit.
Scott Hawksworth: When when I talk with lps and they’re saying you know well, what what factors Should I be looking at what what you know quantitative factors Should I be looking at.
Look at that exit CAP rate, because that is something that you know sponsors can there can be a lot of assumptions there and that’s something that you want to ask about and and.
You know, maybe even scrutinize not to put a negative spin on it, but it’s just a fact right.
Abel Pacheco: it’s it’s the one it’s the one number that has the biggest jump I can make all of my other numbers in my underwriting my excel spreadsheet.
very conservative assumptions like throughout the entire deal and if I move one number that exit CAP rate out it’s the it has the biggest leverage and the biggest power can making something look good when it’s really not.
So you have to you have to look at the team and you’re trying to find out hey.
Tell me about your assumptions and what kind of you know, things are you looking at, and you know whether you have a list or whether you have some market, you know data costar data, you know.
or some kind of third party or broker data or other lps you know just kind of data points on you know South Texas vs Arizona.
Scott Hawksworth: Right or right.
Abel Pacheco: different markets, but you got to figure out how to get it, and what assumptions are working and what’s everyone’s putting in there and then.
You make your own assessment of what’s going to happen in the future, and then take a risk, then you got to go at some point you gotta you gotta take the leap and jump.
Scott Hawksworth: Exactly that’s that’s what you were talking about earlier, you know, at some point, you do have to take some level of risk, you know, maybe not that 10 certainly not zero, but you know you’re.
Abel Pacheco: Tired you gotta you gotta take it you got to take a leap somewhere.
You know so.
Scott Hawksworth: 100% 100% as we’re winding down here, I always like to just talk about trends in general and i’m curious to what overall trends you’re seeing right now, if there’s anything we haven’t touched on, as of yet in multifamily certainly given the current landscape, but just in general.
Abel Pacheco: Man trends in general um there’s a lot of capital to be placed, is what I feel I feel that that the amount of investors that have wanted to deal recently has grown and increased, and you know when you look at the market factors man stock market took a took a hit.
there’s a cancellation that are.
Sure yeah inflationary period prices are going up.
You know, it feels like that the number of jobs that are high pain are also you know, trying to meet the demand.
of workers needed in every single area of you know industry that I that I work in whether it’s lack of employees on for my tax.
CPA is my attorneys are feeling there are iras and self directed areas when I go to restaurants there’s like a shortage of people chefs I mean, like all the industries that i’m involved in.
So if people are trying to pay more to grab employees it’s like man that’s that’s a hard thing.
All of those economic factors, the people that have money to invest or the entities or organizations are trying to place that capital.
And they’re trying to put it in there, the deals are becoming even more tighter and trying to you know think there’s going to be a little bit of a lag two to three months before sellers.
You know, go yeah i’ve got to come down to the lower price and maybe some of that’s happening right now, but I think there may be some additional deals to be had, and then I think the investors that don’t have hard timelines are just going to wait it out so.
we’re going to see some deals that.
They don’t need to sell the probably wait till a year or two and then come back to market and see how it goes, and you know so that’s kind of my thoughts about trends.
Scott Hawksworth: yeah absolutely I think it’s gonna be interesting to see where it all shakes out and and again, you know I kind of always circle back to the fact that.
You know, we still have a housing supply issue in this country, the demand does not meet the supply and you know multifamily housing is still very much needed, so I think, whatever the landscape that that fundamental.
mismatch is not going to change, which to me, is just a great sign for passive multifamily investment.
Abel Pacheco: yep yeah so it’s been a pleasure talking Scott, I really appreciate it.
Scott Hawksworth: Absolutely it’s been fantastic speaking with you, and before I let you go if folks want to connect maybe check out your podcast find out a bit more about the great deals you guys have going on.
Where can they do that, where, should they go.
Abel Pacheco: yeah go to our website is probably the best place www dot five talents dot capital so it’s the number five talents T le nt s dot capital.
And that’ll give them a little bit of information, if you want to learn more.
About you know investing we’ve got an e book on there we’ve got a little bit at investor education it’s got links to our podcast how to build wealth, like the 1% to five talents podcasts and.
got a short case study you know, one of our deals that we’ve highlighted, and you can see our portfolio or investment for portfolio on there so that’s probably the best place.
go there you’ll link to everything www dot five talents capital and mass guys been awesome talking to so I appreciate your time.
Scott Hawksworth: it’s been fantastic, and of course we will have links to that on our show notes at multifamily investor.com April Thank you again so much and we’ll be speaking again soon i’m sure.
Abel Pacheco: Yes, Sir talk soon.