Seyla (00:02):

Thank you, everyone for joining today’s episode of the, How Did They Do It? Real Estate podcast. I am your host Seyla Prak and today’s guest, we have Robert Beardsley. Robert oversees acquisitions and capital markets for the Lone Star Capital Group and has acquired over $100 million of multifamily real estate. He has evaluated thousands of opportunities over using proprietary underwriting models and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles about underwriting deal structures and capital markets and hosts the Capital Spotlight podcast, which is focused on interviewing institutional investors. Roberts also helps run Greenoaks Capital, his family’s real estate investment and advisory firm. Welcome to the show, Robert.

Robert (00:54):

Thanks for having me on.

Seyla (00:56):

Can you please share a little bit about your background and how did you get started with real estate?

Robert (01:02):

Yeah, absolutely. So I actually grew up in a real estate family ever since I was a young, my parents ran their residential brokerage firm from home and so they both worked from home. And so I was you know, constantly hearing their phone calls, constantly learning about their business and, and, you know, learning more about real estate than I ever really thought I did. No, you know, it just, it kind of took it for granted. So I kind of, you know, grew up with that real estate background, but also given the fact that I grew up in Silicon Valley, there was a lot of emphasis on technology and start-ups. And so I actually went to school for computer science, but then circle back to real estate and, you know, had to get back involved in that business. And that’s where I eventually started my own real estate company after working with my parents for some time. And that’s now lone star capital.

Seyla (01:57):

Got it. So when you first start get into the real estate investing business, did you start with single family homes or how did you get started? Can you elaborate a little bit more on that?

Robert (02:08):

Yeah, so my family’s background has been in the single family space, whether it be from a, you know, sales, you know, brokerage side or flips development, construction. So everything was on the single family side. So when I got involved in the business, I was doing my research and I saw, you know, I found multifamily research about that and just realized that it was so much more scalable and a better fit for my goals. And it’s interesting because, you know, it took my younger self and younger more kind of ambitious mind to push my parents actually to open their minds to the multifamily as well. Right. They had been doing single family for 30 years. And so it was very hard. They thought, Oh, multifamily, what is that? Or that’s for the big that’s for the big people, we can’t do that. And so it took my, you know, kind of just ambitious and didn’t know any better to say, Hey, we should be doing multi-family. So for me, I jumped right into the multifamily business.

Seyla (03:12):

So you went to school and got your computer science degree. And did you go into the W2 job at all, or did you go straight to real estate investing?

Robert (03:26):

Yeah, I went straight into real estate investing from school, actually didn’t even graduate. I halfway through school, I was starting my business and spending so much time on my business that I took a leave of absence to start my, you know, continue working on my business and, and you know, focus on the real estate side. So never got the full, you know, aside from internships, never got the full W2 experience.

Seyla (03:49):

Will you be able to talk a little bit about your first multi-families investing your first deal and give a little bit more details and how did you get your first deal?

Robert (04:01):

Yeah, absolutely. So our first deal there’s, you know, there’s kind of a few first, so, you know, one of the ways that we started actually was by partnering with a sponsor that was going to be the lead sponsor, who had identified the opportunity, put it under contract and they were seeking partners to help raise capital. So that’s a great way to get started because we were able to get more exposure into the business and, but yet not have to be responsible for all of the whole deal. Right. We could just focus on raising capital, build our track record and gain that experience. So that was one way that we started. But then the next deal, we did it actually completely on our own. And, you know, it was our deal that we put under contract. We put up the, the risk money, you know, the earnest money deposit to put it under contract.

Robert (04:51):

So that was a very stressful time as we, you know, at that point had had a clock ticking and we had to go out and raise a lot of money and you know, so, so many things that we learned, you know, focusing on the capital raising side, raising money is a lot harder than you think, you know, especially when you’re kind of having the capital conversations, but that’s a big difference between actually raising the money. And so we learned that and had to go through that experience, which I think is a great experience to go through. You know, but it is not necessarily the best idea to, to always be risking a lot of money in terms of going hard on your deposit. But nevertheless kind of when you burn your bridges and go for it makes you stronger and you build your network just by necessity.

Robert (05:38):

So that was one thing that we learned. Another thing we learned is, and this is something that actually, that my dad used to say all the time in his previous businesses, you know, time moves very slow when you’re out of contract. And then as soon as you get under contract, time moves very quickly and you need to do much as you can before going under contract to prepare for that period. Because once you got under contract, there’s so many things happening, you need to line up the loan, provide all the due diligence, do your own due diligence you know, raise the capital structure of the deal you know, finalize the business plan. And so as much of that stuff that you can do upfront in anticipation that will really, you know, help you a ton.

Seyla (06:24):

So one of the things that you do for the multifamily space and before you’re actually putting a deal under contract is the underwriting process and making sure that it is the right one for you, would you be able to provide or share some of the criteria or things that you look at in terms of underwriting with our listeners?

Robert (06:46):

Yeah. So underwriting is a very big topic of mine. Something that love to love to talk about. I’d love to think about. So for underwriting, you need to, one of the things that I would recommend is understanding return requirements based on different business plans and levels of risk. You know, you can’t just look at every deal with the same lens or with the same return requirements, right? Because if a deal is in a great location and it’s a newer property, and, you know, it’s fully occupied, you can’t assign that type of property, the same return profile as a deal that’s, you know, in a small market, older property, high vacancy, you know, they’re just different deals and they need different return profiles. So something that we do in our businesses is we actually have a table created that we look at and update internally which assigns return metrics based on the deals you know, location, business plan type, and, and you know, quality of construction or, you know, vintage, right. If it’s a 2005 property that says a lot about it and is superior typically to a 1975 construction property. So, so that’s something that’s very important, you know, understanding what your return hurdles are, because that’s what you’re using to determine whether something is a good deal or not.

Seyla (08:12):

Thank you for sharing that information. And do you use any specific financial models a template, or do you actually build, build it yourself from scratch?

Robert (08:23):

Yeah, so what we use internally is our own underwriting model that I actually built over, you know, a few years and many different iterations and edits updates, throwing it away, rebuilding it. So it’s been a long time coming and something that, because we’ve used it over and over again, you know, underwriting over a thousand deals, it’s really been, you know, we understand the ins and outs of it, and it’s been grooved to be exactly how we want. And I think that’s very powerful, you know, you build your own or use someone else’s just getting those repetitions and underwriting. So many deals is what’s going to provide you that confidence and you know, that more nuanced understanding.

Seyla (09:07):

So how did you get that skillset and what did you do come to build everything else from scratch for you? And you’re probably underwriting thousands and thousands of deals so far. And, you know, like how, how do you create your own from scratch?

Robert (09:30):

Yeah, so, I mean, I’ve always been numbers. I’ve always had a brain for numbers. And so I kind of came from that computer science background. And I, when I started in the multi-family business, I gravitated towards the underwriting side because it fit, you know, my skill set and what I’m interested in. And so it was kind of a natural fit for me to get started and you know, start analysing deals in that way. And, you know, so what I did is I just, I downloaded as many underwriting models as I could get my hands on just to get as much exposure and understanding of how all the different models are calculating certain, certain things. And I would pick the best pieces of each model and then say, okay, well, I like how they’re doing that. I’m going to steal that and start incorporating that into my own. And so that’s what I always do. And I still do that to this day when I see a new model that I think is really interesting. I, you know, study it and see if there’s anything that I can take from it to improve my own model. So I’m always looking to, to update and improve.

Seyla (10:33):

So, you know, how you take a couple of years to masters you, your own underwriting models and why, at what point did you start writing a book that definitely guys to underwriting multifamily acquisition, isn’t that giving out your secret away?

Robert (10:51):

That’s a great question. So when I started learning underwriting, I figured that a book would already exist like this, you know, something that’s very straightforward book that would give you the step-by-step process of underwriting, you know, and give you the rules of thumb and guidelines for each and every input. But I, you know, as I did my research, nothing like that existed. So, you know, that was confusing to me. And so, as I was learning, I told myself, well, once you have this all figured out and you’ve built out the whole process, you’re going to write a book. That’s going to provide that and fill that gap in the market, because there’s such a big need for it. You know, people would call me all the time and say, Oh, I love your model. And, you know, you know, all this stuff, how can I learn it too?

Robert (11:34):

You know, what book can I read, or what book did you use? And I said, I, there, there was nothing. I can’t really recommend anything. And so that’s really why I wanted to write the book. And in terms of kind of the secret sauce and giving it away, I really don’t believe in a secret sauce for underwriting. I really think that underwriting is you know, it can be pretty straightforward and it really should be accessible to all people. You know, I don’t want people to think that underwriting is just for, you know, really smart people or really, you know, real estate experts. You know, it’s not, it’s neither of that. It’s, it’s anybody who wants to learn, whether they’re an active investor or a passive investor, they can absolutely you know, learn to undirect, proficiently and have the confidence that the deal that they’re looking at, you know, they really do understand it and they understand the numbers, they understand the risk. So you know, I think, I think that’s much more valuable, you know, real estate is more of a collaborative business than an, a competitive business, you know, we’re all partners. And so you know, whenever you’re doing a deal and you’re sharing the information with partners, you have to share your underwriting. And so to say, Oh, I can’t share my underwriting with you. It’s my secret sauce. You know, I think that is you know, just not very fair.

Seyla (12:48):

Yep. On, on behalf of our listeners, you know, I just want to thank you for sharing that and writing that book, and it definitely is going to help a lot of people out there. And so you mentioned about risk. So what are some of the risks in today’s market, especially with the uncertainty, with the COVID going on, where the new president’s coming on, and what’s some of the ways that you, you would recommend to making sure that we not overlook and when it comes to underwriting,

Robert (13:17):

Right? So there’s, there’s many risks in the market today, as you mentioned. And, you know, kind of the biggest overarching risk today is, is a valuation. So, you know, prices are very high and they’ve stayed very high through COVID and cap, you know, that means cap rates are low, but at the same time, we have very low interest rates all across the world. You know, any type of interest rate that you look at, whether it’s, you know, the U S ten-year treasury or lye bore you know, rates are very low. And so, you know, kind of a very big macro risk is an increase in rates. I personally, you know, and, and not many people think that that’s a near term risk, you know, rates are supposed to stay low for the next, you know, three years potentially or longer even.

Robert (14:04):

But that kind of is the overarching backdrop of risk today where we’re, you know, valuations are so high in part because of the global search for yield and you know, low interest rates. So what that means is you have to be really aware of your basis and what that means is, you know, really the price that you’re buying at, you know, so it’s not enough to just be buying a good deal or a good deal, because it has, let’s say, okay, cash flow, you know, because you could still potentially pay too much for a property and your basis is too high, but because you have a really low interest rate you know, the cash flow might be okay, so, you know, the, one of the main or something that’s very important to consider today is you can’t just be searching for, you know, good cash flow have to be also searching for good basis and good basis can be, you know, price per square, foot price per unit. And that, that can really protect you from any adverse changes in the market.

Seyla (15:07):

Thank you for sharing all those risks. And I want to go back and talk a little bit about the sponsor side. It’s the only strategy that makes today’s market that you recommend for a sponsor. Should they try reducing their asset management fees or you know, like look at different types of deal structures? Is there a new recommendation that you have for our afford sponsors out there?

Robert (15:34):

Yeah, so today some of the interesting dynamics happening today one would be the debt markets. So especially when COVID hit bridge loans became very expensive and just not as competitive from a proceeds perspective. And so it really just made a whole lot more sense to be doing permanent financing specifically with Fannie Mae and Freddie Mac. And now, you know, today it’s, we’re in November. And so bridge loans have come in and pricing. So they’ve gotten more competitive, but it’s still really hard to find a property and a business plan for that property that justifies the added cost and risk of a bridge loan. So, you know, I don’t think a whole ton of people are pursuing deals with bridge loans today, but I would say, you know, you have to be very cautious and that you have make sure that, you know, the deal absolutely justifies the bridge loan risk.

Robert (16:27):

Similarly, even if you are doing, you know, permanent debt ten-year money if you have a value add plan, and you’re trying to get, you know, 14, 15, 16% returns, you have to really question that whether your business plan of raising rents 20% and spending all this money and effort on the value add plan, is it actually worth it for the return you’re getting because in today’s market, it might be, you might be able to buy a deal that stabilized, and there’s not really much work to do not much execution risk, and you can get a similar return. So it’s just a question of, you know, is that incremental risk? Is that risk worth that incremental return? And often it’s not. But it’s a really big challenge for sponsors because sponsors need to show good investor show good returns for their investors. So it’s a very delicate balance.

Seyla (17:24):

Yup. Yup, definitely. And thank you for sharing all that insight. And I want to go back and talk a little bit about when you first started, you mentioned that your first deal you partner with neither sponsors and you focusing on capital raising at a time to get into your first multifamily space. At what point did you decided to start your own company, the loan style company?

Robert (17:51):

Yeah, so we had really already started it because we had the idea that we have, where we want it to go. We want it to be a lead sponsor. We wanted to be buying our own deals, managing our own deals and building up the business that way. But as I said before, a great way to start for many people is to start on the capital raising side because, you know, they can limit their responsibilities to that piece of the business yet they can get exposure to the whole business and they can, you know, you know, when you’re raising capital, you’re really forced to learn a lot.

Seyla (18:22):

And when you, when did you start the company

Robert (18:27):

Three years ago,

Seyla (18:28):

Three years ago, it was, and within three years you guys were able to scale up to a hundred million dollars of acquisition. Will you be able to share what, what were the challenges along the way in order to scale up to that levels so quickly and how did you overcome those?

Robert (18:46):

Yeah, I would say the biggest challenge is, is on the equity side. You know, you can figure out how to underwrite. It doesn’t take that long. You can figure out you know, what market that you want to be in and kind of build out that process, building out your team, you know, none of that takes years, right? You can build out your team, learn to underwrite, get into a groove in a pretty much in six months. But the hard part is really the equity side. Building those relationships, relationships don’t happen overnight. And so building the trust over multiple deals, you know, it’s going to take some time as you, you know, let’s say you have your first deal and you’re going to present it to an investor, you know, they might pass on it. And, but they might appreciate reviewing that deal with you and kind of building the relationship by looking at that deal with you. So then when you show them the next one, it’s a better chance that they’re actually going to invest. So, you know, that, that takes a lot longer to build up. So that’s been always a big challenge. And so one of the ways to overcome that challenge is just by partnering with people that have more experience that have more of those relationships already in place.

Seyla (19:54):

So another things on your website, I notice that is a preferred equity. Will you be able to provide a little bit more detail what that is to our listeners and how does that work?

Robert (20:07):

Yeah, so preferred equity is our, our strategy of providing equity to other sponsors as they’re looking to acquire or recapitalize there, their assets. So the way preferred equity works is it straddles the line between debt and equity. And so when we provide preferred equity to a sponsor, we’re providing debt like equity. So the preferred equity gets paid first out of cash flow after the lender’s paid and then on a, on a sale or refi, our preferred equity is also paid first. So, but in exchange for this preferential treatment, we earn a fixed rate of return and that leaves a hundred percent of the upside to the sponsor and his, or her common equity. So that’s the trade-off that we’re looking to make in our preferred equity strategy is we’re looking to make a fixed rate of return, but focus on downside protection through seniority in the capital structure and rights and control rights and remedies.

Seyla (21:11):

So what is your company’s focus? When is sponsor bringing you as a deals and what are you guys looking at looking for in order to what you guys do, jump into that before equity strategy with that sponsor?

Robert (21:26):

Yeah, so we look at, you know, we look at pretty much every deal that a sponsor brings us for the preferred equity side and we underwrite the deal pretty much just like we would underwrite it if we were going to acquire ourselves. But the difference is the kind of the metrics that we focus on. So when it’s a preferred equity deal, we’re going to be focusing on our sizing of the position. So, you know, for example, if there’s a $2 million of equity in the deal, and we’re going to put in, you know, $1.8 million of preferred equity, there’s really no point there because there’s no equity cushion in terms of the preferred equity in the common equity. So a lot of time has to be spent sizing the preferred equity to the right size, to the right amount. And so, you know, our standard maximum there is 85% of costs.

Robert (22:18):

So the way that works is if, if a sponsor brings us a deal that has a $9 million purchase price, and let’s say a million dollars of Capex, that would be $10 million of cost. And we could fund up to 85% of that. So if the senior loan is, let’s say 7 million, we could fund from that seven up to 8.5 million representing that 85% of cost number. So we would be providing one and a half million dollars there. So that’s one metric of focus. When a sponsor brings us the deal is, you know, the right size, and then it’s not enough just to get that size, right. We also have to know that the cash flow is there. So then we look at the DSCR or the debt service coverage ratio. And so this is exactly the same way that a lender looks at deals as well, right.

Robert (23:04):

A lender is going to underwrite the NOI, and then they’re going to compare that to the senior debts amortize debt service. And so the NOI divided by an amortized debt service is DSCR. And the same thing, we do the same thing on the preferred equity side. As we look at, you know, we add in our preferred equity payment that we are owed every year and we compare that, you know, plus the senior and we say, okay, what’s the NOI divided by the senior plus pref payment combination. And then that’s how we look at the different DSCR metrics for our preferred equity.

Seyla (23:41):

Wow. That that’s a great strategies for you guys to come up with and able, it’s not just you know, like how also helping with the sponsors and like bringing a deals and partnership together and blink a deal moving forward to make it work for, and win-win for everybody. So Rob, you, you already scale up to a hundred million dollars for your companies and you already wrote a book and you have a podcast. That’s really amazing. So what is next for you?

Robert (24:16):

Really excited and looking forward to writing my next book. I already know the topic and I’m planning on releasing it in August of 2021. I haven’t started writing it yet though, so it’s going to be off to the races soon. So I’m excited about that. Otherwise, you know, we’re excited just to continue to grow our business both on the principal’s side, as well as the preferred equity side.

Seyla (24:42):

Wow. I can’t wait to check out your next books once it’s a please keep us posted. So how has real estate investing impacted your life so far?

Robert (24:57):

Well I am always Very you know, purpose driven and focused. And so it’s, you know, it’s really great that I’ve been so fortunate, especially at a young age to find a career path that, you know, really compels me, consumes me and makes me want to work at it every single day. So I’d say, you know it’s not that you know, on the one hand, it’s great to be able to love your work and work really hard. And then on the other hand, it’s great that the type of business that I have set up is one that I have flexibility in terms of you know, where I am, so I love to travel. So that’s, I’m very fortunate to be able to pretty much work from anywhere and, you know, fly and visit properties. And yeah, so I really appreciate that flexibility.

Seyla (25:44):

What is one thing that, you know now about real estate that you wish you knew when you first started?

Robert (25:52):

It’s really funny because when I first started, I didn’t want to write a book or write articles or do podcasts or do any of that stuff. I thought that stuff was, was a waste of time. And so, you know, I’m really glad that I changed my mind and started doing all that stuff because that has really helped me build relationships, grow my business. And you know, those are two very important things. So yeah, I would say, I wish I would have started that sooner.

Seyla (26:19):

What is one thing that sets the successful people apart in the real estate investing business?

Robert (26:31):

I would say, its people apart in the real estate investing business. Well, there’s a few things. So number one would be going back to our discussion on, on kind of the marketing slash equity. You know, that’s really important and it’s kind of like, if you are doing great things, but nobody knows about it, then it’s, it’s not going to help you. So making sure that you’re out there building many relationships, however you choose to do that, whether that’s through LinkedIn or conferences or meetups you know, building relationships is absolutely key. And I think that’s a big differentiator.

Seyla (27:05):

What tools or techniques have you used to improve the efficiency of your business or personal life?

Robert (27:12):

Well, I’m a very goal driven person. I love goal setting. And so I’m constantly setting goals as well as writing my goals. So I try to write my goals down almost every day, and those can be the same goals or sometimes I’ll think of new ones. But I think doing that just keeps that top of mind and allows me to think of, you know, how do I achieve those goals? I may write a goal down and then I might think of a way to get me closer to that goal. And so that’s less of a productivity thing and more so of like a strategy and a vision thing, because I always like to say, it’s not only important to, you know, do things well, you actually have to do the right things well, so it’s important that you’re doing the right things. So, you know, I think when you goal set, it kind of puts your vision in front of you and allows you to actually understand, okay, is what I’m doing, you know, the right thing.

Seyla (28:08):

Rob, thank you so much for coming on to our shows today, to share your knowledge and your wisdoms on underwriting, race, your company, your journeys and turbine tracks that you learn along the way with our with us and also our listeners. So we appreciate your time. So if our listener wants to find out about you, your companies and what you do where can they go?

Robert (28:31):

Yeah. So you can learn more about everything that I’m up to on my, a website, Rob beardsley.me. And on that website, you can find out more about the book that I wrote that we discussed as well as you can get a free download of the underwriting model that we in our business use every single day.

Seyla (28:52):

Awesome. Thank you so much, Rob, for coming on.

Robert (28:55):

Yeah. Thanks for having me.