#57 - From Handshakes to High Stakes: The Best Ever Blueprint for Building Wealth Through Connections with Joe Fairless

[00:00:00] Welcome back to Passive Income Pilots everyone, Tait Duryea here with Ryan Gibson. What's new

[00:00:04] with you brother? I'm doing well. I just celebrated my 40th birthday and we did a roller skating

[00:00:11] party where we rented out a roller skating rink. Fun fact about me, I know how to shoot

[00:00:14] the duck. I was the Shoot the Duck champion from 1991 to 1997, whatever, however many years

[00:00:19] running. It's on a speed skating team. So my wife put together a lovely birthday party

[00:00:23] for me and all my friends and family at a roller skating rink, which we've never

[00:00:27] done before. So it was super fun. That's hilarious. I saw the photo. I actually can still shoot the duck.

[00:00:30] So you saw the photo, yeah, the photo is on Facebook so we can put that on the show notes

[00:00:35] or something. Yeah, I couldn't make the party. I was at the TPNX conference in Minneapolis,

[00:00:40] which was fantastic. Boy, just getting home after about a month straight of travel. Three

[00:00:47] conferences in four weeks been super busy around our shop. We got deals, we got investors

[00:00:52] coming in. It's crazy, but I'm sorry, I missed your birthday party. It's okay. You were invited.

[00:00:58] You can come again. We'll invite you again, but I don't know if we'll have a once-in-a-lifetime

[00:01:02] roller skating party. So 80s theme. Not exactly what I had in mind from my birthday,

[00:01:06] my 40th, which is coming up, but it's funny. That's the nice ying-yang between Ryan and I.

[00:01:12] Ryan's got two kids. No kids in our household, but I love spending time with yours. They're

[00:01:19] great. Oh yeah, they love Mr. Pilot. So today's show, we have the one, the only Joe Fairlis, who is the

[00:01:27] co-founder of Ashcroft Capital. They owe over 2 billion in multifamily assets spread across

[00:01:33] multiple states, high growth market, high niches in their bedroom community. They do a great,

[00:01:38] fantastic job of taking value add property, buying a 300-unit building, taking 100 or so

[00:01:44] units offline, renovating them, putting them back into service, doing incredible value add.

[00:01:50] If you go to their website, you can see all the great things they've done. I personally love

[00:01:53] their company because they are a vertically integrated shop. And just as a disclaimer,

[00:01:59] I do invest with Ashcroft. So that is a place that I've actually put my personal bucks.

[00:02:04] But Joe has also done some fantastic things. He started the Best Ever brand, which has

[00:02:12] the podcast associated with it. It has the conference that's associated with it, which is

[00:02:17] actually how Tate and I even know each other. Yeah. And so...

[00:02:20] Yep. Met seven years ago at that conference.

[00:02:23] Yeah. Joe provides a community where really people can get to know each other and network

[00:02:27] and build awesome relationships like the one that's here. In fact, some of the relationships

[00:02:32] I built with Spartan on the investing side and on the partnership side were birthed through

[00:02:37] the Best Ever conference. So Joe is a tremendous guy. And what I love about Joe is he's just so

[00:02:42] open about everything. He's very transparent. He's to the point, he's direct, and he's willing

[00:02:47] to share his knowledge and insights on multifamily and investing in general.

[00:02:52] One last thing I'll say before I hand it off to Tate and we get into it.

[00:02:56] Joe has invested in over 100 different syndications and 80 different operators

[00:03:01] in addition to the probably 20,000 plus units that he operates with his own company.

[00:03:07] And so I think it's just an incredible story and journey that Joe has been on that I think

[00:03:13] the listener is going to take away. Welcome to passive income pilots where pilots upgrade

[00:03:21] their money. This is the definitive source for personal finance and investment tactics

[00:03:26] for aviators. We interview world-renowned experts and share these lessons with the flying community.

[00:03:33] So if you're ready for practical knowledge and insights, let's roll.

[00:03:37] Joe Fairless, thank you so much for joining us. Well, for anybody that doesn't know who Joe

[00:03:41] Fairless is, as I said prior to the show, the man, the myth, the legend, thank you so

[00:03:45] much for coming on. We read your bio prior to bringing in here, but do you want to just

[00:03:49] give us some background on who you are, where you came from, how you got into real

[00:03:53] state and where you are now? How about who my brother-in-law is? He just got

[00:03:57] promoted to be captain of triple seven for American Airlines. Yeah, so he's a pilot.

[00:04:06] Your brother was a pilot. He's part of your crew.

[00:04:13] He was in the Air Force before he worked for American Airlines. And yeah, so now he's

[00:04:17] flying the triple seven. Fantastic. Yeah, he's really proud of it as he should be. He really is.

[00:04:24] That's great. Everybody's going to be searching their roster now to see if the captain they're

[00:04:27] flying with next month is Fairless. Oh, brother-in-law. Oh, brother-in-law.

[00:04:31] In-law. Okay. All right. If you were looking for a captain, Fairless,

[00:04:36] you would have had to found my brother who was a captain in the Army, but now he's a

[00:04:43] Lieutenant Colonel in the Army and working in the Pentagon. And he took flying lessons,

[00:04:50] but you don't want him flying your plane. He's better than a tank. He's much better than a tank.

[00:04:57] I mean, my background, I from Texas, I moved to New York City. I was making 30k a year as

[00:05:05] a junior project manager, had student debt of 18k. Those numbers don't work real well

[00:05:11] to live off of. And then I climbed the corporate ladder relatively quickly, became the youngest VP

[00:05:18] of an advertising agency in New York City. I started the whole time over those 10 years

[00:05:25] while in New York. I kept my living expenses really low,

[00:05:30] relatively speaking for New York City standards. My friends would make fun of me because I was

[00:05:36] living like a college kid, had a roommate from Craigslist, different roommate every other year,

[00:05:42] and crazy stories from all those crazy Craigslist roommates, which I'm sure they'd say the same

[00:05:48] about me, I guess. But it was interesting living in New York and just meeting people

[00:05:54] from all over and living with them off of Craigslist for a year or two. The apartment

[00:05:59] didn't have any window, well, it had windows in one room, but not in the other bedroom. It's

[00:06:05] just two bedrooms, a hallway and a bathroom and a stove basically. And so I got the bright idea one

[00:06:13] time because I was in the room that didn't have windows and it's hot in New York City in the

[00:06:20] summer. And so I thought I'd get a window unit for my windowless bedroom and put it on my dresser

[00:06:27] and plug it in. Do not do this at home kids. It actually was slightly cooler air blowing out

[00:06:34] of it, but then piping hot air would come out the top of it. And so it's like boiling a frog,

[00:06:41] right? Like, oh, it feels slightly better, but oh my God. And I'm getting dizzy too. I don't think

[00:06:46] it's safe to be breathing in those fumes either. I think we've all had those physical

[00:06:52] lessons that you learned firsthand. Yeah, I had a few with a bike ramp as a kid that I went over

[00:06:57] the handlebars because that's not it. Yeah, I'm sure I could participate in those stories too

[00:07:02] with the bikes. So anyway, I kept my living expenses fixed, stayed in that apartment instead

[00:07:08] of upgrading to one bedrooms or two bedrooms like my friends were doing. And instead I was

[00:07:14] putting that money into real estate. Specifically, I was buying... I bought my first single family

[00:07:20] home in October of 2009 in Duncanville, Texas. Even though I was living in New York

[00:07:26] City, I bought it in Duncanville, South of Dallas for $76,000, saved up 20K. And then

[00:07:31] I bought another a year later, another a year later, another. I ended up with four. And what I

[00:07:36] realized at the end of the fourth or after I had the fourth is I was making in a spreadsheet $250

[00:07:44] a month on those homes, but I was not making in my bank account $250 a month because when someone

[00:07:50] would move out, it'd be about $5,000 to get it moving ready. And from that realization,

[00:07:56] I thought, well, I need to do something larger. And I actually was teaching a class in New York

[00:08:02] City on how to... On the side, I just decided to teach a class on it, how to invest in real estate

[00:08:08] markets that cash flow like Texas, like Dallas, Fort Worth, for example, while living in New

[00:08:14] York City. So I was teaching these New York City people how to do that, how I was doing it.

[00:08:19] And it was cash flowing just not as much as I'd like. And I heard from a boss of mine,

[00:08:24] hey, if you ever do something larger, let me know. And so he liked the model, but it just,

[00:08:30] he didn't want to go do all the work. And I heard that a couple of times and I realized that I've

[00:08:36] got customers before I have a product. I have people who want to invest in larger stuff, but

[00:08:43] I need to learn how to invest in larger stuff and need to have actually something for them.

[00:08:47] And so that's when I started learning apartment investing and ended up doing my first deal

[00:08:52] a couple of years later after I decided to leave the industry, the advertising industry and do it

[00:08:57] full time. And where are you now? Where am I now? Yeah, let's talk about, okay, that was the

[00:09:02] origin story, right? Can you tilt your horn a little bit? And anyway, where are assets under

[00:09:06] management? 2.8, 2.9 billion dollars worth of apartment communities of assets under management.

[00:09:16] And I should just say apartment communities under management. So we only focus on apartment

[00:09:22] communities and we only buy in high growth markets in the Sunbelt. Fantastic. What's the one thing

[00:09:29] you've learned from going from those four single families to having customers before a product

[00:09:37] and then just having 2.2 billion dollars plus of multifamily? What's that one lesson you're

[00:09:42] going to pull away from all of that over all those years and experience?

[00:09:46] Be aware and then act on my strengths and weaknesses.

[00:09:50] And what do you mean by that? What do you mean by kind of acting on...

[00:09:53] I am good at things and I'm bad at things and I'm average at things. And all those things

[00:10:01] I need to be aware of, I need to have self-awareness of where I will excel

[00:10:08] and where I will falter so that I can identify people on my team or vendors or joint venture

[00:10:17] partners who will have those areas where I'm bad at to rise up and actually excel.

[00:10:26] Everybody listening, everybody on this call with a microphone in front of their face

[00:10:32] is really good at some stuff and we're also pretty damn bad at some stuff.

[00:10:38] And I have to be aware, I'll speak for myself, I have to be aware of what those things are

[00:10:45] so that I can course correct proactively because if I don't course correct proactively,

[00:10:50] well guess what? The world will force me to course correct and it won't be proactively.

[00:10:55] I love that. I feel like... Yeah, that's a good reflection. How do you think you come to realize

[00:11:02] what you're bad at and what you're good at without... I know we're off on a little bit of a tangent but

[00:11:07] I love these topics because sometimes I just think I'm good at everything.

[00:11:11] Most pilots do. And I don't have that awareness, especially pilots, right? We all think we're

[00:11:17] good at everything, right? We're good at flying an airplane so we must be good at

[00:11:20] everything at the house as well. I definitely want to be good at one thing for sure.

[00:11:24] Yeah. The landings, right? Yeah.

[00:11:27] Well, I mean... Totally.

[00:11:28] So how do I determine that for myself? Well, in some cases it's after the fact,

[00:11:35] unfortunately. It's after I try to do all of it and then I mess up and then I realize, man,

[00:11:43] I'm in over my head because I don't have the decades of experience so I need to

[00:11:48] bring someone in. I'll give a specific example. On the first deal I did, a syndication deal,

[00:11:54] before we formed Ashkahn, before I even knew my current business partner. I just did it on my own.

[00:11:58] First deal, lost money, I had 12 investors and I tried to do it all. Tried to underwrite,

[00:12:06] tried to execute the business plan, raise the money, everything. I ended up paying those

[00:12:12] investors back plus a return out of my own pocket over two plus years after we sold.

[00:12:17] That's a lesson I would prefer not to repeat again. And so I identified, okay, what went wrong here?

[00:12:24] Well, there are three components to the business. Money deals, execution.

[00:12:30] Have to have the money to buy the deal that you identify and you've got to be able to execute

[00:12:33] on the business plan. And what I realized is that, hey, my background was not working at

[00:12:40] a property management firm or being an asset manager for a decade plus. I need someone

[00:12:44] in my team who has that experience. I met my current business partner, Frank, after that first deal

[00:12:50] and we compliment each other really well. He focuses primarily on the execution deals.

[00:12:56] And I focus primarily on the money. There's overlap, but that's primarily where we focus.

[00:13:01] And looking back on it for someone who doesn't want to try to make the mistakes first and then

[00:13:09] reflect back. One suggestion I have, and this is what I do now moving forward as much as possible,

[00:13:16] anytime I'm entering a new venture, whether it's learning a new skill or doing a new,

[00:13:21] looking at a different and passive investment that I might invest in, there are three things.

[00:13:26] One is what skills are required to effectively do this? And then two is,

[00:13:33] what skills do I know I have of those required skills? And then number three is,

[00:13:38] where's that gap and let's identify how to close that gap. And so that's essentially what I did for

[00:13:44] my macro level business approach for Ashcroft. But that's also something we can do on anything,

[00:13:51] any new venture. Show me the person or the people who are successfully doing this

[00:13:58] and then let's identify all those skills that are required or the main ones that are

[00:14:02] required. We'll go crazy if we try to come up with all the skills required, but the main

[00:14:05] skills are required with the background. And then what do I have that can be filling those

[00:14:12] and then what don't I have? Joe, that's been really great. And you mentioned something that

[00:14:16] I want to pull a thread on, which is you mentioned that you have passively invest

[00:14:21] and you have a very big organization, a lot of your own active real estate that you actively

[00:14:27] manage through your company Ashcroft that you co-founded with Frank and I think identifying

[00:14:32] a good person to balance out your strengths and weaknesses. I think Frank is a shining example

[00:14:36] of that in a great way to do that. And we want to talk about that a little bit more, but

[00:14:40] I want to talk about the passive investing side a little bit. I think you're in over

[00:14:45] 100 different passive investments across a multitude of asset classes with multiple

[00:14:51] operators. Would you mind talking about that a little bit? How you identify those operators

[00:14:56] for a pilot that's listening who's thinking, I want to start doing syndications. I want to

[00:15:00] start investing. Who do I invest with? How do you find those people? What is your criteria for

[00:15:07] being a passive investor? Because I think it's fascinating that you're doing a lot of

[00:15:10] that passively and a lot of it actively as well. Yeah. I looked at it recently. I'm in 121

[00:15:16] current deals as an LP. That includes our own deals, so call it like 80 or so deals across

[00:15:26] other operators and of those 80 or so deals, I believe it was 56 or 59 different operators

[00:15:35] that I'm invested with. Oh wow. And Spartan being one of them. And how I approach it,

[00:15:42] and this is how I've approached it. This is what works for me that doesn't mean it will work for

[00:15:48] others, but how I've approached it is first thing is I have to know the individual

[00:15:54] and they have to be involved in a social circle that I am aware of and I'm a member of because

[00:16:03] when I invest with someone, I want them to, if they're a bad person,

[00:16:11] let's just assume the worst case for a moment. If they're a bad person, it decreases the likelihood,

[00:16:16] doesn't erase it, but it decreases likelihood that they will approach me with a bad investment

[00:16:22] because they're a bad person because we're connected with similar people and more will get out.

[00:16:29] That's just how I think. And so that's how I filter out. Now, certainly if they're

[00:16:34] a bad person, they might say screw it. Just going to try and get away with it and

[00:16:39] do some shady stuff, but at least it also helps people second guess if they're a good person,

[00:16:46] but they're not sold on their investment. They'll second guess if they share it with me

[00:16:52] because we're in a similar social circle. So that's one thing. I've got to be connected

[00:16:57] and I've got to have a similar social circle as them. So that filters out a lot

[00:17:03] because if I get an email from someone who I don't know about an investment,

[00:17:06] the answer is no. It's simple. So that filters out a whole lot. Then it's just a matter of

[00:17:13] the execution. Do I believe in their ability to execute the business plan?

[00:17:18] Yeah, and this isn't just my philosophy. This is the tried and true philosophy of

[00:17:25] a whole lot of people who have done much bigger things financially speaking investments

[00:17:31] than I have who might not invest just in real estate, but also invest in venture funds and other

[00:17:38] alternative assets. They won't invest with a founder who is a first time founder,

[00:17:46] the people who I know. They'll they have to have an exit under their belt in order for them

[00:17:51] to invest in with. And that's how I feel too. Now previously I didn't feel that way because

[00:17:58] I've refined my approach since I've started passively investing. But now that's my approach.

[00:18:04] There have to be some successful at exits, at least one successful exit where they were the lead

[00:18:09] general partner and they brought the business plan from start to finish. And then also digging

[00:18:17] into that lead general partner because in our industry there could be multiple general

[00:18:23] partners, multiple companies partnering up. And it can be misleading who is actually doing the work

[00:18:31] to get the deal to the finish line. And so I would dig in to make sure they're the right operators

[00:18:36] who are actually doing that work to get to the finish line.

[00:18:40] I can't echo Joe's sentiment enough that the execution piece what we were always looking

[00:18:46] at at our firm is the underwriting, the operator, the deal, right? But anybody can

[00:18:52] underwrite conservatively. It doesn't matter if it's conservative. If they can't pull off the deal,

[00:18:58] if they get a year or two in and things aren't going well and they just give up,

[00:19:03] well, it doesn't matter that the underwriting was conservative, right? Like it has to,

[00:19:07] you have to be able to execute. So that's fantastic. Can I back up Joe and ask a really broad

[00:19:12] question because we have investors in our audience that have never really considered

[00:19:17] real estate as an asset class prior to listening to our show. And Ryan and I try to stay

[00:19:21] unbiased as much as possible and bring in people from VC and from the equities markets

[00:19:25] and all sorts of stuff. But why real estate? Why syndication? Why real estate is an asset class

[00:19:31] versus investing in the S&P? Can you share, because you're on episode 3,519 of your podcast,

[00:19:39] which we'll touch on later. And very few people know as much about real estate as you do.

[00:19:44] So why do you choose to invest in real estate versus other asset classes?

[00:19:47] Cash flow, appreciation and the depreciation benefits, the tax benefits. And I'm sure there's

[00:19:55] other things, but those are the three things that come to mind off the cuff. The ongoing cash flow

[00:20:01] because I primarily invest in assets that are making money day one. And then the business

[00:20:07] plan is to increase the cash flow through interior renovations or some sort of value

[00:20:13] ad component and get that appreciation. So get that pop at the end. And then along the way,

[00:20:20] during the hold period, assuming that the general partner passes the depreciation through to

[00:20:25] the limited partners, which in my, as far as I'm aware, every one of my investments,

[00:20:29] the general partner does that showing a loss on paper on my K1 that I get every year

[00:20:35] from the deals. And so that helps from a tax standpoint. Now, the catch as you two know

[00:20:42] and others might know is that when this property sells, that depreciation gets recaptured.

[00:20:48] And then do we do a 1031 or do I pay the tax person? And it just depends on what the deal is.

[00:20:57] I recently, 1031, my LP investment was spartan on a deal that they exited on where I was LP.

[00:21:03] And so it depends. But those are the three things that come to mind and why I like it.

[00:21:11] And I'll say a fourth, I understand it. It's simple to me to understand. And I like to

[00:21:18] invest in things that I understand. Great answer. Yeah, that makes sense. Out of all those asset

[00:21:22] classes that you said something about 80 different deals outside of your own, does that make up

[00:21:28] multiple asset classes? Generally, I know you do storage with us and multi-family,

[00:21:32] of course. But is there any other asset classes that you really like or that you've

[00:21:35] been attracted to? Well, I'm in retail, a marina, self-storage as you mentioned,

[00:21:44] office. I believe I'm in one office. It's with a local operator who does really well.

[00:21:50] And ATMs, I mean ATMs, ATMs are tax flowing really well. That's what they're supposed to do.

[00:21:59] Eventually though, they don't appreciate that they depreciate in reality, not just on

[00:22:05] paper. For real, they do appreciate. You got to get as much cash out of those investments during

[00:22:12] the whole period as possible because at the end you're going to be left with zero. So that you're

[00:22:17] in a race to make that happen. Again, I'm just an LP on that. Right now, what I've been doing

[00:22:26] that has been beneficial from a financial standpoint and also for whom I participate

[00:22:32] in this with is I've been providing personal loans to people, general partners or others who have

[00:22:40] a cash crunch due to increased interest rates. And they need a loan of whatever amount and then I give

[00:22:47] it and it's personally guaranteed and it's above market return. And so that's what I've been

[00:22:54] doing lately. We dig into that. That sounds really interesting and very on point with where

[00:22:59] we are on the market today because there is a cash crunch and one of the best things you can do

[00:23:04] right now if as a passive investor is one of the things you can do, I shouldn't say the best,

[00:23:09] but one of the most lucrative things right now for cash flow is to invest in private lending,

[00:23:14] doing some kind of private credit or private debt or direct lending or in a debt fund or

[00:23:19] something like that. Would you mind kind of talking us through sort of high level,

[00:23:23] how that works and sort of what your experience has been like?

[00:23:26] Sure. I have lent this time last year, I lent $500,000 to an operator. It started at 10%

[00:23:39] for the first quarter I believe and then next quarter it was analyzed 12%. It went all the

[00:23:45] way to I believe 16% or 18% with a point for each quarter that it was still outstanding.

[00:23:54] And I think all in they paid it back this past December, I believe and all in it was around

[00:24:02] 18% or so percent including what I received at the points. If you think that's great.

[00:24:09] So then the other one I did was $300,000. I lent that out in October of last year

[00:24:19] and they offered $75,000 in profit on the $300,000 to be paid back in March.

[00:24:32] So, you know, lend $300,000, get paid $75,000. They needed to extend it and they offered another

[00:24:40] $25,000 actually supposed to be paid back in I think January. So they extended it and it got

[00:24:45] paid back in March, mid-March and I received $100,000 profit in mid-March for lending $300,000

[00:24:53] for October, November, December, January, February and about five months, five and

[00:24:58] a half months. So five and a half months earned $100,000. I was personally guaranteed

[00:25:04] and it was helpful for them because they had a cash crunch, they had a refinance,

[00:25:08] they got the refinance, they paid it out and then they moved on and I'm actually

[00:25:13] an investor with them too. So, you know, I have access to that because of the

[00:25:21] 80-some deals with other operators that I'm in and, you know, they come to me and so

[00:25:29] those are two examples. I believe those are the only two that I've done that I can think of recently.

[00:25:37] Can we talk about the nuts and bolts for maybe five, between five and 10 minutes to kind of

[00:25:43] break down the how debt and equity work in a syndication deal? So I don't think there

[00:25:50] would be anybody better to explain this than you. Investors come in with equity like a down payment

[00:25:55] on a house, you get lending. Can you explain a little bit about how commercial lending works

[00:25:59] versus residential? Why we're in such a bind right now in the commercial real estate space

[00:26:05] because of bridge debt and things maturing and where we are and why operators who have done

[00:26:11] everything right and have even done, have outperformed what they had promised that

[00:26:16] they were going to do are still in trouble and are needing these kind of private lending products?

[00:26:21] Yeah, the reason for the challenges, the primary reason for the challenges obviously depends on

[00:26:27] the individual deal but we'll paint broad strokes is because interest rates have gone up

[00:26:32] faster than they have historically two to three decades. And I don't know of anyone who

[00:26:39] anticipated that to the degree in which it happened. And the value add business model

[00:26:48] generally lends itself to a floating rate debt because it allows for the flexibility of an exit

[00:26:55] once the value add business plan has concluded. And so if you have fixed interest rates,

[00:27:02] generally speaking, then you don't have that flexibility on the exit whereas floating you do.

[00:27:10] So a lot of the value add operators ourselves included had a floating rate debt. Now

[00:27:18] all the operators I know ourselves included had rate caps. So even though there's a floating

[00:27:24] rate loan, you have a rate cap on it which you're essentially prepaying interest.

[00:27:30] It's say it's a 2% cap and you get the loan at 3.5%. You're effectively prepaying, let's say 3.5%

[00:27:38] yes, you're sort of prepaying up to 5.5% interest and once interest rates hit that level,

[00:27:46] your cap. So that's great. Your cap that 5.5 even though interest rates might be 7.5%,

[00:27:51] 8%. That's great until that rate cap expires. And when that rate cap expires during a time

[00:27:59] when interest rates are rising, it's going to be exponentially more expensive to purchase

[00:28:05] that new rate cap. A specific example, a rate cap we bought, a two-year rate cap, $31,000 on a property.

[00:28:13] When we went to renew it, $1.2 million. Same rate cap. So that's a problem.

[00:28:22] And when you are operating, you very well as you mentioned, you could be operating effectively.

[00:28:30] You could be executing on the business plan the right way. You could be increasing NOI.

[00:28:36] But that's a challenge that has to be solved for. And what a lot of people

[00:28:42] and there's different ways to solve for it. Fortunately for us, we don't have any loans

[00:28:47] that are due at this time because a problem, if you bought a property in say 2021 and the loan became

[00:28:57] due now, then your property is not going to be worth what you most likely paid for it.

[00:29:04] And so you're going to have to get, you're going to have to extend or you're going to have to

[00:29:09] refinance into a new loan. But guess what? If you refinance a new loan, you're going to bring

[00:29:14] money to the table and where does that money come from? It comes from a capital call,

[00:29:19] comes from prefect equity or it comes from the general partner's pockets if they can afford it

[00:29:25] and or a combination of all three. And so that's the challenge in the marketplace right now.

[00:29:34] And there's good and bad news. The bad news is that if there's a challenge in with a property

[00:29:44] and the loan is becoming due, again, fortunately we're not in that position, but there are operators

[00:29:49] that are. If you're, if a loan is coming due, the lender is much more inclined to take back

[00:29:56] a property if you have a multifamily property. And the statistics show that.

[00:30:01] And the reason why, and this is the good news, the reason why is because lenders believe that they can

[00:30:09] get the value from the multifamily property now or in the future. They believe in asset class.

[00:30:16] However, if you look at office in particular, I'll pick on office, lenders, if a loan is

[00:30:23] due right now with office, it is unlikely that the lender will want to take back the property

[00:30:30] because what are they going to do with it? They'd much rather work out, work with you.

[00:30:37] And again, we don't do office, but they'd much rather work with the general partner

[00:30:40] on a plan to kick the can down the road and hopefully things will change in the future.

[00:30:47] And so you're, it's an interesting time and depends on the asset class you're in. It

[00:30:52] depends on how the loan structure depends on the how you're going to identify the solution

[00:30:58] if you're in one of these challenging spots. That was a really good overview. And I think

[00:31:04] one of the things that has attracted me to invest with Ashcroft has been your vertical

[00:31:08] integration. And I'm curious, what I mean by that for those who might not understand what I mean is

[00:31:14] Joe's company does all the property management through Birchstone

[00:31:19] and they do all the construction management through Birchstone Construction. So effectively

[00:31:24] they have two operating companies that service their assets and that makes, that kind of keeps the

[00:31:29] chain stronger in the trust that they have to go out and find a property manager or find a

[00:31:36] contractor to do the units. And the other thing that I liked about Ashcroft is

[00:31:41] they have rented warehouse space and it's done this unique approach where they buy a lot of

[00:31:46] stuff in mass like cabinets and countertops and appliances and get a more efficient

[00:31:52] cost per unit, right? Because they do renovations and things like that. Can you kind of speak to,

[00:31:58] okay, we're all in this environment, everybody, most multifamily operators took this floating

[00:32:03] rate debt and it strained the investment. I feel like Ashcroft potentially could have been better,

[00:32:12] is better positioned in this case by having vertical integration. Is that true or do you

[00:32:17] feel like vertical integration has benefited you more than maybe someone who just has to outsource

[00:32:23] everything? Do you feel like you've really been more anti-fragile in this environment for that?

[00:32:29] Having our buying supplies from overseas directly and shipping them to our warehouse in

[00:32:36] Dallas where you said, as you said, we kit them up and then we send them out in nice

[00:32:43] pallets to the properties so that the on-the-ground team simply unpackages the shrink wrap and then

[00:32:51] has all the materials right there on a pallet to then do the renovation. That has absolutely

[00:32:56] benefited us. Inflation has perhaps been tamed, we'll see, but it certainly wasn't tamed

[00:33:04] over the last two years. What we have done with this process is we simply, what we lock in our pricing

[00:33:15] and so in an inflationary environment when you pay, when you write a check for $3.5 million

[00:33:21] at the beginning of the year and buy all these supplies that they get shipped

[00:33:24] and you have them for the rest of the year, you're locking in your pricing. Not only are

[00:33:28] you locking in your pricing, but you're mitigating any supply chain issues that might come up with who

[00:33:35] knows what's happening and what might happen in geopolitically. It has been a big advantage for us,

[00:33:43] a real help from a financial standpoint. We save on average 35% on our renovation materials compared

[00:33:50] to retail costs from a financial standpoint but also from an on-the-ground speed to market

[00:33:56] standpoint doing the renovation. Would you mind speaking to the basic business plan of Ashcroft?

[00:34:02] You're buying a Class B, B plus would you say and in a good market and then you're taking some

[00:34:07] units offline and renovating them. Kind of speak to what your bread and butter is of a deal.

[00:34:12] We find property in a high growth sub-market of a high growth city. We identify a property

[00:34:21] in a high growth market and all of them in the Sun Belt as I mentioned earlier.

[00:34:28] The property needs to be within, what are we, 2024 now? Within 30 years of construction, generally

[00:34:40] speaking. We're buying properties that, but we won't buy properties that are within five years

[00:34:46] of construction because generally there's no value add to be added to those.

[00:34:51] The sweet spot is properties that are a little bit older but not that old and we can renovate them.

[00:34:59] And the reason why we want a little bit older but not that old is because CapEx will sneak up on you

[00:35:04] if it's that old, early 1980s or earlier than that. The CapEx, the stuff at the property

[00:35:12] that will go out, roof, parking lot, things like that, they'll start deteriorating faster.

[00:35:21] Even if you try to address it all up front, you'll still find some sneaky stuff with those

[00:35:25] old properties. That's not something that contributes to rent. If you replace the

[00:35:28] countertops in the cabinets, that means you get a rent bomb, nobody's going to pay you

[00:35:32] more rent because you replaced the roof. Exactly. So that's the model. We go in,

[00:35:38] we renovate, we find those properties, we renovate and make it a better living experience for residents

[00:35:43] and then we sell. I want to highlight the syndication model here for listeners because

[00:35:49] I know there's a lot of new listeners that are jumping on and hearing all these things for

[00:35:53] the first time. The syndication model is general partner, limited partner. Limited partners do

[00:35:58] none of the work and keep 70%, 80% of the profits. Operator like Joe here and like Ryan

[00:36:04] and like ourselves on some projects are doing all the work and keeping 20% or 30% of the profits.

[00:36:10] And it's this symbiotic relationship. And I want to point back to the beginning of this episode

[00:36:16] when Joe was like, I had to figure out what I was good at and know what I wasn't good at.

[00:36:21] And one of the things that rang a bell for me was when I was out there buying small

[00:36:25] multi-families on my own by myself doing everything, I sucked at shopping insurance policies,

[00:36:32] finding good property managers, chasing contractors around. I loved buying deals,

[00:36:37] but I wasn't good at that stuff. And that's why I transitioned to syndication because it's like

[00:36:41] I could just be a limited partner, let a team of professionals do the heavy lifting.

[00:36:47] And that was the, if you can't beat them, join a moment for me when I saw that teams like Joe's

[00:36:53] are shipping materials in from overseas in containers and they have all the relationships

[00:36:59] with the brokers and lenders. It's like, I can't compete with that. There's no way as sophisticated

[00:37:06] as I wanted to become as an individual buyer of real estate. And I'm not saying don't go buy your

[00:37:12] own physical real estate. We always say what we do LP investing doesn't necessarily replace

[00:37:17] going out and buying your own physical rental property. But you just can't compete with

[00:37:21] some of these big operators who have teams and systems and relationships at that level.

[00:37:26] So I just want to point back to that. Yeah, and that's the same feeling I had

[00:37:32] whenever I was in the middle of that first deal that was going sideways. I thought, man,

[00:37:38] I'm swimming with sharks here. And yeah, I am in way too deep. And I have got to bring in

[00:37:47] different people for my next deal to who have that experience because you're playing in the

[00:37:53] big leagues with commercial real estate and you're with people who you're competing against to

[00:37:58] have the decades of experience and have on the ground operations. I mean,

[00:38:03] I invest with a GP in Cincinnati and his company only does deals in Cincinnati.

[00:38:10] And they started as fix and flippers on single family homes and now they have

[00:38:17] apartment communities that they operate on the ground with their own management team.

[00:38:23] And there is it would be incredibly challenging for an outside group or outside person to come to

[00:38:30] Cincinnati and to beat them at their own game on their own on their home turf.

[00:38:36] It'd be incredibly challenging unless that person has some economies of scale or cheaper

[00:38:44] source of equity or something. And they probably won't even see a deal that group hasn't already

[00:38:51] seen behind the scenes and has turned down because they're going to get first red of refusal because

[00:38:56] they know all the brokers there, right? And they're in with that community. Right. Yeah, I see that

[00:39:00] all the time where brokers are like, Hey, did you see this deal? I'm like, yep, three times.

[00:39:03] And we saw it when it was listed 14 months ago as well. So that's what

[00:39:09] retail investors at times, right? Exactly. Joe, let's pivot a little bit more. Let's

[00:39:13] talk about the state of the multifamily market. I love multifamily and I love multifamily value

[00:39:19] ad, but where we are, you touched on the interest rates and things like that. But

[00:39:23] what's your outlook on it? Where are we headed and is it an investable? Were the

[00:39:28] space still? Are there still opportunities? Are there more opportunities now that

[00:39:32] interest rates are higher and maybe some there has been some distress in the market?

[00:39:35] What are you seeing? Well, I certainly would say that it's an asset class

[00:39:44] that we should be investing in now and in the future. Obviously, I'm not objective.

[00:39:50] Let's get that out there. The reason why I say that comes from as an objective

[00:39:57] perspective as I can have. And that is simply supply and demand. Right now,

[00:40:03] the multifamily industry across the country is absorbing a record high. We have a record supply

[00:40:16] of new multifamily product coming to the market right now since the 1980s. So

[00:40:24] that's a long time, like 40 years or so. This is the most supply that's come to the market

[00:40:29] within this period of time since the 1980s. And the reason why is because loans were cheap

[00:40:34] a couple of years ago. And so now those loans that were cheap, the construction projects penciled.

[00:40:41] And so now here we are. The projects are being leased up right now. That will subside at the

[00:40:47] end of this year, beginning of next year. It's stopping or largely stopping.

[00:40:54] The new construction permits are down 70%. And why? Well, it's obvious. Loans are

[00:41:01] expensive relative to what they were before. Prices have gone up. And so construction projects

[00:41:09] generally don't pencil right now for multifamily. And so what's that mean for the

[00:41:15] multifamily owners that own property? Well, right now it's challenging. You have to be a

[00:41:20] really good operator. In two years, it will be significantly less challenging because you're not

[00:41:27] going to have the competition from new product coming to the market. And you're going to have

[00:41:33] a whole lot of people who need a place to live. Our portfolio occupancy is around 93%

[00:41:39] right now. And that's when we're facing this record number of new product coming online.

[00:41:47] Well, in a couple years, I mean it's not a far stretch to think, well shoot,

[00:41:51] when there's not as much supply and you've got the product everyone's demanding

[00:41:55] in a couple years, you're going to do pretty well. And so I believe just simply from a supply

[00:42:02] demand dynamic, it's the right time to buy now. And people are going to do really well

[00:42:08] in a couple years once the penny moves. We literally put that graph in our last

[00:42:13] newest letter to investors. And it's staggering to see the drop. I haven't seen it in the graph.

[00:42:21] I'll send it to you. I'll forward you the newsletter. Yeah, it's staggering to see the

[00:42:25] drop off it starts. I mean there was a huge boom post-COVID with cheap debt and now with

[00:42:33] interest rates the way they are and the increases in material and labor costs,

[00:42:37] nothing pencils. So I'm completely with you there. What about the, we talked about

[00:42:42] the supply side. What about the buying opportunities? Something we've been saying is there aren't

[00:42:46] quite, there isn't quite as much distress as we thought there was going to be in market. And

[00:42:50] that's yet banks are more than willing to take multifamily back because they believe in it

[00:42:55] as an asset class, right? So that's telling of how banks view it as a great asset.

[00:43:01] Are you seeing more buying opportunities? Are you seeing cracks in the market?

[00:43:06] We're not seeing a lot of buying opportunities right now. We are seeing cracks, but we're not

[00:43:12] seeing a lot because what I'm saying about two years from now isn't a secret to those in industry.

[00:43:22] And it's not a secret to the lenders. They know it too. We see the opportunity and so

[00:43:30] certainly there are some foreclosures here or there, but not really seeing it right now.

[00:43:35] And that's why we've been doing funds where we buy multiple properties, put in a fund and you

[00:43:41] invest in a fund. We're not doing a fund right now while we're closing out our third fund,

[00:43:46] but after the third fund closes out, we're not going to do a fourth fund right now.

[00:43:49] We're going to just buy an individual deal because I don't know if we're going to buy

[00:43:54] multiple deals and I don't know over what period of time that will take place

[00:43:59] because of the deal flow and being so low. So we're just going to go back to individual deals.

[00:44:04] Well, can you tell us a little bit about the Best Ever Brand? I know we're coming up on time.

[00:44:08] Thank you so much for joining us. Like I mentioned, 3,519 episodes in. This was a daily

[00:44:16] podcast that you started that many days ago. Yeah. That many days ago. Yeah, that's

[00:44:21] whatever that day is. That's almost a decade. Coming up on a decade. So can you tell us

[00:44:25] about the Best Ever Brand, which has become a powerhouse in the real estate industry and just

[00:44:30] give listeners some info on how they can find out more about you and follow the podcast and all

[00:44:35] that. You made me get my calculator out. That is almost a decade. Wow. I did not know that.

[00:44:42] Yeah. And I don't do those daily interviews anymore. People on my team do because that would

[00:44:47] be insanity. But I did it for the first 1,500, 2,000 days daily interview. I batch them.

[00:44:53] I did like seven in one day on Thursdays or nine actually. 3,333, 30-minute break,

[00:44:59] 3,333, 30-minute break, 3,333. I was not a happy camper by then.

[00:45:04] Who's the first daily real estate podcast in existence? People told you you were crazy.

[00:45:09] Yeah. Tell us about it.

[00:45:12] Yeah. It's certainly the longest running daily one. I don't know. Some crazy person might

[00:45:17] have done it before me daily, but they haven't kept doing it. I know that because nobody

[00:45:22] else is at the point. I did it because it was a way for me to get to know others in the industry

[00:45:26] and learn a whole lot. I don't know anyone who's interviewed over 1,500 real estate investors.

[00:45:34] So that was incredibly beneficial. It's best ever real estate podcast is the podcast.

[00:45:44] We also have a conference once a year. Now it's in Salt Lake City. It just happened,

[00:45:49] but you go to besteverconference.com and you can check it out, get your tickets while they're cheaper.

[00:45:54] I'm quickly googling which episode I was on with you, Joe.

[00:45:58] I know you're on multiple times.

[00:45:59] But I know that it was in the fall of 2017.

[00:46:02] Yeah. You've been on multiple times. So that's the brand and it's all free. It's all free.

[00:46:09] It's just a way to educate people on commercial estate.

[00:46:13] Well, we'll link to that in the show notes. Joe Fairlis, thank you so much for joining

[00:46:17] us and being here to share your wisdom today. We really appreciate you coming on.

[00:46:20] Grateful to be on. Thanks, guys. Thanks, everyone.

[00:46:22] Thanks, Joe.