JF2201: The Hands-Off Investor Author Brian Burke

Brian Burke is the President and CEO of Praxis Capital, a vertically integrated real estate private equity firm and in the past 30 years has acquired over half a billion dollars in real estate. He has been in a previous episode about 5 years ago, episode 305, and in today’s episode he will be sharing why he wrote the book “The Hands-Off Investor”  which is catered to the passive investor to teach them the ins and outs of investing

Brian Burke Real Estate Background:

 

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“Don’t take on too much debt” – Brian Burke

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we’ll be speaking with Brian Burke. Brian, how are you doing today?

Brian Burke: I’m doing great. How about yourself?

Theo Hicks: I’m doing great as well. Thanks for asking and thanks for joining us again. So Brian was on the podcast all the way back in Episode 301. So that’s five years ago from when we’re recording today. So make sure you check out that episode, and today we’re gonna talk about what Brian’s been up to since then.

As a refresher, Brian is the President and CEO of Praxis Capital, a vertically-integrated real estate private equity firm. In the past 30 years, he has acquired over half a billion dollars in real estate, which covers 3,000 multifamily units and 700 single-family homes, using a proprietary software. He’s also the author of The Hands‑Off Investor. He is based in Santa Rosa, California, and you can say hi to him at his website praxcap.com. So Brian, do you mind telling us a little bit more about your background and what you’re focused on today?

Brian Burke: Absolutely. So I started out in this business 30 years ago flipping houses, and then grew into what you’d call a production house flipper where we were doing about 100 and something houses a year for a while there. We built a big rental portfolio of single-family homes at the bottom of the market, and then about 20 years ago, we shifted some of our focus over to the multifamily side. And then about 10 years ago, actually about 12 years ago now, really started going full speed in the multifamily side.

So our primary business focus right now is multifamily real estate. We acquire assets from Arizona all the way to Florida in the southern parts of the US and right now we own in Arizona, Texas, Georgia and Florida, and shopping in several other markets as well. Our portfolio now is approaching 3,000 units, and that’s really all we’re doing right now, is just focusing on operating our portfolio through the pandemic and looking for opportunities to grow the portfolio as we cross through to the other side.

Theo Hicks: Sure. So I definitely wanna focus on your multifamily business, but I know you recently released The Hands‑Off Investor book, and I actually have it in my bookshelf behind me. So that book’s focused towards passive investors, right?

Brian Burke: Yeah, it struck me that there was no book out there really written to show passive investors how to invest in syndication offerings. There’s books out there, and you guys did a great one on how to be a syndicator, how to raise money from other people, how to structure syndication offerings, but there was no book to show those “other people”, when you’re using other people’s money, there’s no book to show the other people what to look for in those offerings to make sure that they’re suitable for them, and I set out to change that and help fill that gap.

Theo Hicks: Perfect. So do you want to give– obviously, it’s a very long book, but maybe some tips on how to select the right sponsor, because obviously, there’s hundreds, if not thousands, of sponsors out there who are investing in apartments. So how do I as someone who does not know anything about real estate or at least not a lot about real estate, decide which sponsor to give my hard-earned money to?

Brian Burke: Well, the worst answer I can give is read the book first before you do anything. But it’s a true answer, because if you don’t know a lot about real estate, the book is going to teach you a lot about real estate. Because if you’re gonna be a building inspector, you need to know about construction techniques before you can inspect buildings. You might not have to be a contractor, but you have to know building techniques in order to know if contractors are doing the right thing. This is similar. If you’re investing passively in real estate, you don’t have to be buying real estate on your own, but you have to know enough about how to buy real estate, how to operate real estate, what things to look for to make sure that you’re making smart decisions when you’re looking at passive opportunities. So I always say that the sponsor that you’re investing with is the number one most important factor. If you find a good sponsor to invest with, chances are they’re going to be bringing you quality offerings to invest in, and you can spend a little bit less time worrying about the real estate itself, as long as you can get past the sponsor that you’re investing with. So my number one top tip for a passive investor is carefully select the sponsors that you invest with, because they can make or break you.

Theo Hicks: Okay. So let’s transition into the active side now. From my perspective, you see a lot of information when it comes to multifamily focused on raising money, focused on finding deals, maybe not so much underwriting deals, but since it’s a little bit longer to elaborate on, something you don’t see a lot on, at least from my perspective, is asset management. So can we focus on that in this conversation? Can you maybe walk us through some of your best practices for asset management and more specifically, maybe separate them between asset management tips for someone who has 50, 100 units, as opposed to someone who has thousands and thousands of units?

Brian Burke: It’s funny you ask that question because a lot of books out there, guru courses and that stuff, they always focus on the acquisition. It’s always about “Oh, you can find a deal, you can buy a deal, you can get the money for a deal”. That process only lasts a few months, maybe a few weeks, maybe a few months for you to find something, get through escrow and buy it. People neglect the part that actually takes several years, and of course, that’s the part of asset management and property management and operating all the way through to success. It’s a very, very important piece and a smaller operator who owns a few units, maybe you own a few hundred or maybe a few dozen or maybe just a few, it’s probably most efficient for you to use third party property management where they can come in, manage the asset for you. You can leverage their expertise, you can leverage their team, their resources, their scale, their local market knowledge and all those things to manage the property. And then managing the asset is really a job of managing the manager or managing the management company, in this case, making sure that they’re sticking to budgets, they’re hitting targets, they’re producing the income that you’re looking to produce, that they’re containing expenses.

So when you’ve acquired the property, you’ve probably (or at least you’ve hopefully) gone through and done a financial analysis forecast of what you think the income and expenses are going to look like. Your job as an asset manager, in this case, is to make sure that the management company is delivering to those objectives.

As you scale and get larger, there’s going to be a point where you might decide to manage your own assets, and that’s what we did. We made this decision about three or so years ago to form our own management company. We have an expert that’s in charge of the management company that runs it and gives us complete control over our assets, start to finish. So as you grow, now you’re going to be thinking about enterprise-grade property management and asset management systems, software, technology, all those things.

So for us, we have an enterprise-grade management system where I can look in there at any time all the way on the property management level to see rent rolls, income and expense reports. I can look and see move-ins and move-outs, and all those things, all the way up to the asset management level, where I can get key performance indicators for individual properties, the portfolio as a whole or a subset of the portfolio at a glance in a single dashboard. So having those kinds of tools is critical as your business grows, because now you’re actually running a large company here, not just managing a small property at that point.

Theo Hicks: When you made the decision to transfer from third party to in-house management, was it a certain dollar amount? Was it a certain number of units? Or was it something else that made you decide to make that transition?

Brian Burke: There were really three factors at play. One was, we felt that the scale that we were looking to achieve and we were beginning to achieve – we were at about 1,500 units when we made this decision – was such that we felt we could support a dedicated property management team. When you’ve only got a few units or a few hundred units, the management fees associated with that don’t support having an entire company dedicated to property management. As you get larger, you add up those management fees, you realize, “Okay, I could hire a full-time person with these management fees and we can start to do that.” So that was one of the aspects.

The other was that we were looking for institutional investors to invest alongside us in our assets, and our experience has been institutional investors prefer to invest with groups that manage their own assets. So in order to have the key to unlock that door, we needed to bring it in-house.

And third and finally, and probably most importantly, the team that I needed became available. In other words, I met through mutual contact someone who had started national multifamily management company footprint six times in his 40-year career, had done it for large institutional owners and had about 45,000 units of property management experience, and I had the ability to bring him on board with us to head up our management company. When all the stars align and the time is right, you pull the trigger, and that’s what we saw. All the stars were aligned; it was just time.

Theo Hicks: So logistically, how does that transition work? Is it very similar to the transition when you take over a property where it’s just an instantaneous thing? Or was there a longer transition where your new team worked with a third party team to make sure they knew what was going on first? Can you walk us through how that works?

Brian Burke: We did it a little bit differently. So it’s interesting, because the CEO of my management company, he had previously with another organization that he worked for, took about 25,000 units from third party management to in-house management in about a 90-day period of time. So he’s got experience doing that. We chose not to go that route. Instead, what we did is we just started folding in all of our new acquisitions into the internal management company and left the existing portfolio with third party, and then we just slowly started moving it over as the time was right. So really, all the new acquisitions went into the new management company. Most of the stuff that we had with third party was getting a little bit towards the end of its life where we were going to be selling anyway, and so we could let it ride with the management that was in place. And then as we sold those off, the management company — we had just management company attrition. We did this change about three years ago. We still have one property left that’s third-party managed, and maybe we’ll transition that one someday or maybe we’ll just wait until we sell.

Theo Hicks: Transitioning a little bit to what you’re talking about with the software and the technology and the management system. So for you, is that what you’re doing to track the progress at the property, just going into that software? Or I’m assuming you still have meetings with someone at the property management company that you own. So what’s the frequency of those conversations and what are some of the important things you talk about? Maybe what’s the recurring agenda for those conversations.

Brian Burke: Just like a third-party management company, we have the same high-level conversations on a regular basis. So we do a weekly to bi-weekly call with the senior management team where essentially, everybody on the capital and acquisition side is on that call, along with the property management operations team. So our org chart on the management company side, we have a CEO that’s in charge of the company, we have a Chief Operating Officer that’s in charge of the on the ground, street-level stuff, and then we have area vice presidents that are in charge of a certain region. So those individuals will be on the call with us, we’ll discuss each property and its performance, anything that has come up that we need to be aware of. We’ll look at all the KPIs to see “Okay, this property may be running a little lean on occupancy. What are we going to do about that?” and have conversations that are targeted based upon what we’re seeing in the data.

So we treat it just like a third-party management company. Really just the advantage to us is that because we own the management company wholly, we have complete control over all those personnel. We have the access to all the software so that we can see the entire portfolio through our business intelligence platform, and you have everything in a unified spot. This system is pretty robust. It drills all the way down to the property level. The property managers on-site use the same software that I’m looking at for day-to-day property management. So when they do a move in, it’s going in this system. The rent rolls are generated through this system, the invoices go through this system. So it’s an entire property management company in a box.

Theo Hicks: Perfect. Before we get into the money question, as the head of this massive multi-company organization, what does your week to week look like?

Brian Burke: Well, I would say that the majority of my time is spent on answering emails. It’s really just that exercise of — you’re getting pinged constantly from different directions for, “Hey, we need this, or there’s that, or here’s a deal coming up, or here’s an issue at a property we need to address.” But really, I spend a lot of time in the office. I like to tell people I’m just chained to my desk… Between investor communications and oversight of the assets, and I’m a pretty hands-on guy… So that means that I just had to spend a lot of time looking at absolutely everything, which means I don’t get very far away from a computer very often.

Theo Hicks: Alright. Well, Brian, what is your best real estate investing advice ever?

Brian Burke:Well, it’s 2020 as we’re recording this, we’re in the middle of a coronavirus pandemic. I think the best real estate investing advice I can ever give is most applicable to a time just like today, and this advice is actually designed for the climate that we’re currently in, and that is – don’t take on too much debt. Investors who buy with conservative leverage were the ones that survived the last recession. The ones that took on too much debt are the ones that failed in the last recession. So don’t take on too much debt, but couple that with always have plenty of cash. So if you’re a syndication sponsor and you’re raising money from individuals for your deals, make sure you’re raising plenty of cash to have excess reserves for those downturns, which they’re certain to be one year in the coming months. If you’re a passive investor looking to invest in an offering, make sure that the sponsor is raising plenty of cash, so that they don’t run short and put your investment at risk.

Theo Hicks: Can you be a little bit more specific? So how much extra money are you raising? Is it based off of the purchase price? Is it per unit? Is it a lump sum? Did you always do this for every property?

Brian Burke: Yeah, we tend to do ours as a percentage, and that varies, too. So I guess about a year ago, our percentage would be 1% of the purchase price of the property just for free cash. And then you’re also going to have additional cash that you’re going to have for funding impound accounts, funding utility deposits, funding first month’s mortgage payment; all of those are in addition to the 1% free cash.

Nowadays, I’ve been increasing that. We’re looking more at 1.5% free cash, plus we’re also abiding by the agency requirements for nine months principal and interest reserve that goes into a lender controlled account. So in that case, sometimes we’re raising as much as 3% or even 3.5% or 4% sometimes of the purchase price of the property just for cash reserves.

And then the other thing that we do is a lot of people like to use extra leverage to boost investor returns by funding capital expenses, like unit upgrades, new roofs, that sort of stuff, through a lender controlled reserve that’s through a bridge loan, where you’re borrowing the renovation dollars and you’re drawing them off as you renovate. We’re not doing that. We’re raising the renovation money ahead of time in cash. So in that case, we may have a few million dollars that are available for us to do renovations. But if things go really bad, that’s a lot of excess cash that we also have that allows us to survive an adverse event. So when it comes to having cash reserves, all I can say is the more, the merrier.

Theo Hicks: Alright, Brian. Are you ready for the Best Ever lightning round?

Brian Burke: Let’s hit it.

Break [00:19:34]:05] to [00:20:37]:02]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Brian Burke: I really liked this book called TED Talks, and it was written by the guy that is in charge of the TED Talk organization. It was a great book that talks about techniques for public speaking, and as an author, as a business executive and as someone who is in the financial services industry raising money from high net worth individuals and family offices, it’s really important that we’re able to effectively speak in public, and this is a great book to help find new ways to engage your audience.

Theo Hicks: If your business were to collapse today, what would you do next?

Brian Burke: I’d do it again. I’ve already been through this before. I’ve survived multiple market cycles; the Great Recession. 30 years’ time, I’ve had the chance to reinvent myself several times so far through different market cycles, and I’ve been very fortunate that in 30 years of doing this, I’ve never lost a nickel of investor principal. So I would first do everything I can to safeguard the investors that I have already, and then I would build the business right back up to where I have it now. They can take away the business, but they can’t take away the knowledge.

Theo Hicks: What is the best ever deal you’ve done?

Brian Burke: Well, I’ve got a lot of those. I’ll take a recent one. We’ve got one right now that I’m really proud of. It was two properties next door to each other that we bought for about a little under $40 million for the two of them, from two different sellers that were listed by two different brokers at almost the same time. We ended up buying both properties, and then what we did is we just cut down a small section of fence on a driveway that connected the two properties, and then we were able to make the two properties into one. One of the properties was using an apartment unit as a leasing office, so we ran all the leasing out of the other property that had a real leasing office, converted that unit back into a rental unit. But by combining the two properties, instead of having a little over 200 units each, we have one property that’s almost 540 units. By doing that, we achieve some incredible economies of scale, we saved a ton of expenses. We were also able to increase rents at a dramatic amount because the property was under rented. We were able to make some really good improvements. Within about a year to a year and a half’s time, just based off of the increased income, we resubmitted that to our lender to look at a refinance and found that we’d increase the value of that property by about $10 million in about a year and a half’s time. So a 25% increase in a really short time is a great accomplishment, and $10 million is a really meaningful number.

Theo Hicks: What is the best ever way you like to give back?

Brian Burke: Ours is through a charity organization that I started with Jay Heinrichs, a friend of mine. It was really his idea; I can’t take all the credit for it. It’s called A Hero’s Home. You can find it at aheroshome.org. We’re raising money for the purpose of providing a fully fixed up renovated home, free and clear, to a deserving US veteran, service member, first responder, something that’s near and dear to my heart. I just can’t wait to hand those keys over one day here soon. We’re about two-thirds of the way towards our goal.

Theo Hicks: That’s awesome. Lastly, what’s the best ever place to reach you?

Brian Burke: The best ever place is just as you said at the top of the show, through our website, praxcap.com. You can also find me on Instagram, either @investorbrianburke or at @praxcap, and also on biggerpockets.com quite frequently, answering questions on the forum. So you can frequently find me there as well.

Theo Hicks: Alright, Brian. I really enjoyed our conversation today; a lot of takeaways. We focused mostly on asset management. But before we get into that, we did briefly talk about passive investing. So the most important decision for a passive investor is selecting the right sponsor, and your advice was to read your book or to get educated on the process that you will know if the sponsor is doing the right thing.

From asset management, we talked about the difference between being a smaller operator and a larger operator, which is really who was actually managing the deal. So when you’re smaller, it’s better to go with third party, but eventually, you get to the point where it makes more financial sense to go with the larger operator, and we talked about the advantages of that, which essentially gives you complete control over the personnel that allows you to have access to the same software that the management company does.

You mentioned when you made your transition, and the three factors were one, that’s scale we just talked about. The second one was when you want to work with institutional investors, they prefer in-house management. And then the third one was that the team you wanted happened to become available. We talked about how you actually did the transition, and there’s really two ways to do it. You mentioned that the CEO of your property management company had experience doing full transitions over a nine-day period, whereas you guys instead decided to include new acquisitions into this new management company, and then the existing ones remain in the third party. And then whenever you sold those, they obviously left a third property management. You got one last thing you need to sell before you’re fully managed by your own property management company.

We talked about the communication with your management company, which is the same as it is with a third party – bi-weekly calls, everyone in your team is on those calls. We’ve talked about each individual property and their performance, anything that has come up with those properties that you know about, focusing on those high-level KPIs as well.

We talked about what your week looks like, which is just answering a lot of emails and staying at your desk. And then we talked about your best ever advice, which was twofold, which was  don’t take on too much debt, because those are the investors that did not survive during the last recession, and the ones who did not take on too much of that did survive. Then we talked about having plenty of cash in excess reserves. I really like when you said the reason why you are raising the capital for renovations is that it gives you the opportunity to have even more excess cash. If something were to happen, you can pause renovations and have all that money, as opposed to borrowing that from the lender and you have access to  none of that money. Then you gave more specifics on the numbers for raising extra money for free cash.

So I really enjoyed the conversation, Brian. Best Ever listeners, as always, thank you for listening. Have a best ever day and I’ll talk to you tomorrow.

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