Andy Sinclair delves deep into the strategies that have catapulted Midloch to success, discusses the importance of diversification in property types, and offers predictions about the future of interest rates and investment approaches in uncertain markets.
Key Takeaways:
- Value of Diversification: Sinclair emphasizes the importance of diversifying across property types, explaining the risks and potential rewards of focusing on multifamily, commercial, retail, and industrial real estate. He offers insights into how being versatile can provide protection against market fluctuations.
- Strategic Debt Management: Understanding and managing debt is paramount. Sinclair shares Midloch's strategy of stress-testing deals and the importance of not overleveraging. He highlights the interplay between fixed interest rates, future buyers, and market conditions.
- Liquidity and Preparedness in Uncertain Times: Sinclair underscores the importance of staying liquid and the challenges and opportunities it presents in the current economy. He provides a forward-looking perspective on accumulating "dry powder" to capitalize on future property investments.
Andrew Sinclair | Real Estate Background
- CEO and Principal of Midloch Investment Partners
- Portfolio:
- $600 million+ of JV interests in multifamily and commercial real estate mainly in the Midwest
- Based in: Milwaukee, WI
- Say hi to him at:
- Best Ever Book: Game of Edges by Bruce Schoenfeld
- Greatest Lesson: There is nothing wrong with having a little cash on hand. You will never regret it when you need it.
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Transcript
Ash Patel:
Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Andy Sinclair. Andy is joining us from Milwaukee, Wisconsin. He is the CEO and principal of Midloch Investment Partners. Andy's portfolio consists of over $600 million of JV interests in multifamily and commercial real estate across the Midwest. Andy, thank you so much for joining us and how are you today?
Andy Sinclair:
I'm doing well. Thanks for having me on the show.
Ash Patel:
It's our pleasure. Andy, if you would give the Best Ever listeners a little bit more about your background and what you're focused on now.
Andy Sinclair:
No problem. Happy to do so. So my name is Andy Sinclair. I'm one of the founders and principals of Midloch. investment partners. Midloch is a real estate investment company at our core. I'm going on my 15th year in the business. I started off as the low man on the totem pole hanging leasing signs and buildings saying, for rent, come here. And I've been in the investment space now for quite a long time. And every year I keep growing in how we do our real estate investments.
Ash Patel:
Andy, you do commercial and multifamily.
Andy Sinclair:
That's correct.
Ash Patel:
You don't find that in very many... companies or very many people. Why not pick one?
Andy Sinclair:
That's a great question. At our core, I will tell you that it's not as normal now to be old school and be diversified. Most groups pick just apartments or just office or just retail. And I'll give you a quick story. I had a client who was doing retail with an institutional investor here for many years, and they called me up and they said, well, we're out of money. I said, what do you mean? Well, we don't have any money because Wall Street decided they don't like retail properties anymore. So they pulled all of our funding. And so certainly when you're only in one property type, you have to be worried about the swings and the minute changes. At Midloch, we make those changes. For instance, for the last five years, we were a little sour on apartments. This year we've been a little heavier on apartments. We've been a little more pro-commercial or industrial warehouses or retail. And by being diversified, you gain experience about what's happening in different parts of the economy and sectors. And it's okay to make money from more than one property type.
Ash Patel:
What a great strategy. Cause today we have lenders that obviously don't like office. They think it's toxic and they're shying away from development. So retail is still good. Multifamilies good terms are of course not as good as they were. If you had to start all over again and pick one asset, what would you pick?
Andy Sinclair:
Well, that's a tough question. I like to say I love all my children equally, right? For different reasons. Office, I probably love a little less. It's less than 5% of our portfolio. If I had to pick just one though right now, I would tell you I would still go long industrial real estate. Overall, the joke with industrial is the buildings are big and the dollars are small. There's a lot of truth to that. Apartments are a little bit easier to get some scale and that's often how people start off because you can buy a duplex, a fourplex, or even a 100 unit deal if you're a picker group. I would still go long distribution, warehouses, the backbone of America. I see that only growing in demand and not changing anytime soon. Though if I had to give you a runner up, I might tell you retail.
Ash Patel:
Andy, do you strictly focus on properties between five and 50 million? And if so, why?
Andy Sinclair:
That's correct. And the reason we focus on this space, just like you have large cap companies in the stock market, you have small to middle market size real estate deals. And I often joke they're the normal size real estate transaction below 5 million. There's a lot of competition. It could be a doctor, a lawyer, individual investors buying trip centers or apartments. And they often bid up the price on each other on the other side of the spectrum over 50 million. You also have Wall Street insurance companies, people like Invesco, Goldman Sachs, Northwestern Mutual, different pension funds. Same thing. It's very efficient. So Midloch likes to play in that middle. And by the way, five to 50 million is a lot of buildings. So you've got a wide variety of things to pick from, but yet you don't have a competition from the small investor or the ultra large investors. So you can typically find some discrepancies on pricing. And sometimes those operators in that space, they make some mistakes. I hate to say it, but one of the ways we make money is fixing problems and improving the real estate. And if we can fix problems, hopefully that will lead to making money for everyone.
Ash Patel:
Andy, you are a value add investor. How much value do you want to add? Will you buy vacant properties or just partially vacant or just mismanaged or mispriced?
Andy Sinclair:
Value investor is one of my favorite terms. What I will tell you often gets abused, misused. I'll keep it simple for the audience here. Being a value investor in my eyes means we're looking at anything from two to three ways to make money. If you can find two to three levers to pull, you're going to find that you're going to be okay. Sometimes option one doesn't work out. So often these business plans people put together, they're really built on two things, which is hope and speculation. They hope the rents go up and they continue to speculate, the price goes up. Well that works when things are good, but doesn't work when times are bad. So it's always good to be in my eyes a value investor and look for different ways to make money. Especially when times get lean, now is the time to be a value investor and not be a speculator or sometimes it's referred to as a growth investor.
Ash Patel:
Andy, in terms of your investors, do you only do joint ventures? Are they syndications? Do you have a fund set up?
Andy Sinclair:
Yeah. So let me break down Midloch's backbone because our people ultimately is what make Midloch successful. Our people are core. We've got backgrounds in development, investing, lending, property management. And I always think that what makes us different makes us stronger. Sometimes it can lead to healthy discord where you argue about the right way to run a property or improve it. We wanna protect our investors and that's why I don't want all yes people necessarily trying to run an investment. To answer your question, Midloch has several affiliates, one which is a property management development company. So we're a real estate company at our core. But we also happen to be an investor. So who better to be a real estate investor into assets than someone that's actually had to run the real estate. So we often use the term joint venture, or that means we're partnering on real estate with other local developers, property managers. Often we will take best practices, some that we learned from our partners and some that we've learned from ourselves or other people, and we'll share that. Kind of view it as like a community overall. Because at the end of the game, we want to make money as a group. So. For instance, right now, one of the big things is we're rebidding a lot of our waste or trash contracts. And so often we'll go to our partners and say, we've learned that this property is getting a better waste deal. Let's use that practice and do it here. So Midloch, we're an investor, a developer, a property management company, but at our core, we're an investment group, but with many different backgrounds.
Ash Patel:
That's quite a diverse set of skills and...
Andy Sinclair:
Diversity is the word of the day.
Ash Patel:
A lot of different ways you can make money. So will you property manage properties that you don't own if you partner on the deal with the current owner?
Andy Sinclair:
Typically we'll only property manage properties through our affiliates if it's in our home market of either Wisconsin or the Minneapolis, Minnesota markets, something that's local to where we have people in operations. If for instance, we invest in a property in Cincinnati, Ohio or in Denver, Colorado, where we've made investments. We'll partner up in our joint venture model with a local developer or local partner to make those investments. Now that doesn't mean we let them off the hook easy. We hold them to the same standards we would hold ourselves, but we're not looking to manage it from afar, which can cause issues. You really wanna have local people boots on the ground to run the property.
Ash Patel:
And do you take on retail investors or is it only private capital?
Andy Sinclair:
We're only allowed per the way we're regulated to have accredited investors. Sometimes accredited investors are referred to as retail investors. Our investor base runs the gamut from a doctor, a lawyer, a business professional, to a family office, or even a wealth management group. Those can all get lumped in with retail investors, but unless they meet the SEC criteria, which is a million dollars of net worth or household income of a lease 200 grand a year or higher. then they're not allowed to invest with us for rules the government has regulated.
Ash Patel:
How long do you hold investor capital for?
Andy Sinclair:
At our core, I think people like to go in with a long-term strategy, but long-term changes from the minute you buy it. We always say we're medium-term here at Midloch, which is three to seven years typically. It means if we do our business plan and we're successful early, we're not afraid to sell it, take a win, or maybe even put new long-term debt on it. But markets change. I think right now is a great example. We've got several great properties. We've done a good job of finding our two to three ways to make money. And we're considering, do we hold them a little bit longer than we expect because the markets are frozen? So three to seven years typically, but open on when the right time is to sell.
Ash Patel:
What type of debt do you typically put on these properties?
Andy Sinclair:
Well, I'm a Midwestern person at my core, Ash. So I'm not looking to over leverage. We try to keep our debt. 65% or lower. Our portfolio overall is about 55 to 60. So we're below even our own targets right now. I think that's important. I think the second you get above 70 or even pushing 80% those are the properties. Unfortunately, you're reading about the news that can't refinance or the equity is getting wiped out into foreclosures. So you got to be really careful with debt. Debt helps you increase your returns, but it also cuts both ways. It can help you lose money. if you don't manage it appropriately. My personal belief, this is hard to do in real estate, is to try to amortize as much debt as possible, which means you're paying down your loan. Seems like common sense, but a lot of real estate loans are known in the industry as interest only. So we try to have a good variation in how much debt we have and to pay down our loans to the best extent we can.
Ash Patel:
There's a lot of big time developers, real estate investors that will say, borrow as much as you can. for as long as you can. What's your response to that?
Andy Sinclair:
Yeah, that's certainly one strategy and I've heard that throughout my career. I think that's great advice when the market's moving up, up and up. I think that's bad advice when the market turns on you. So I wouldn't bank my whole career on it. It sounds like a quick way to lose a lot of money. I would take as much debt as you're comfortable with, but not too much because you can always pay it down and take on more debt later. It's always easy to add. But the second you need to pay down your loan when you're lease expecting it, that is when there is a cash crunch. So do not recommend it. Let it fly high on your debt levels. Keep it manageable.
Ash Patel:
Andy, you started out this podcast with telling us that you used to hang the leasing signs on the window. Now you're the CEO of Midloch. Can you give us two, three minute story of how you rose to where you are today?
Andy Sinclair:
Sure. I like to give this advice to any intern or even college class where I teach it. Ultimately don't get stagnant while I might be the CEO. I still believe there are things I need to learn and improve upon. So I seek out mentors, business partners, clients, colleagues, anyone that can help me improve my knowledge base. So don't get stagnant. I started off at the very bottom of the real estate industry, hanging signs, walking through a building and seeing if tenants were even there. I started in 2008. right as the market was still hot and quickly turned. From doing leasing, I went into the investment brokerage division of CBRE, working for one of their top producing brokerage teams globally. So I learned as much as I could before the last decade, I'd been firmly in the investment space for real estate. So just because you're starting in one area, don't ever stop learning. I know I don't ever try to stop improving myself. And one last bit of feedback is it's okay to make a mistake. Just try to make a small mistake and learn from it.
Ash Patel:
Yeah, great advice. Do not be stagnant. There's always opportunities. Seek them out. What's your buying criteria today?
Andy Sinclair:
So for our buying criteria, we're trying to keep firmly not only in our space, which is between 5 million and 50 million. We're also trying to hold firm that it needs to have two to three levers to pull. That's just the base level. From there, I will tell you it needs to be comfortably underwritten with less debt. And we run everything through what I would call as a stress test, which is, let's assume cap rates, which are similar to price earning ratios in Wall Street for stocks. What happens if cap rates change? You don't want cap rates to go higher. It means the price is going down, but you should be ready for it. So for instance, on Monday, when we had our deal review, there is a short sale, which is similar to a foreclosure on a warehouse building we're reviewing. And we said, well, what happens if interest rates and cap rates go up another 1% and then 2% what happens? And can you live with that return? So we're being very careful not to take on deals that don't stress test. Well, one thing we are seeing more of and have done is we're doing more debt positions, either buying debt. which means we're buying the property at a lower basis or providing a sliver of debt, such as a preferred equity or a mezzanine position because leverage levels are down and allows us to have a safer position in the deal. But I would say criteria is a little stricter these days than you might have in a market where everything's rising and appreciating.
Ash Patel:
And do you mention when you're stress testing a deal, you look at if you are still comfortable owning this deal, if interest rises a point or more, do you not get fixed interest rates on your loans?
Andy Sinclair:
We do get fixed interest rates on our loans. However, it's important to think about who is your next buyer for right now. Well, my loan may be fixed. My next buyer is going to be borrowing to buy my property at likely a very different interest in buyer. The hope across the marketplace is that by 2025, the Federal Reserve will be dropping rates. However though, time will tell how accurate that is. So certainly if they're dropping rates, I will tell you that cap rates will likely be stable to doubt. However though, if they don't drop rates and interest rates stay higher for longer or go higher, we need to be ready for pricing to move. So you need to ask yourself, if I like it at the price today, how does it look? if my price and the future that I sell it for changes. And that is a question that you don't know until you look at the numbers and stress test it. And sometimes that means you don't do the investment.
Ash Patel:
Yeah, we're recording this as the Fed is meeting. We're literally minutes away from hearing their decision. You're probably one of the first people I've heard saying that rates should start coming down in 25. It's amazing how many people out there had said. rates will be lower in Q4 of 2023, or as we start 24, rates will start coming down. It seems like it's Wall Street people and real estate people are the only ones that feel rates are coming down any minute. What's your advice? No. Our Best Ever listeners are pretty savvy. Give them advice on interest rate outlook, not what you think is going to happen, but how they should handle the current market. and any buying or selling decisions.
Andy Sinclair:
There's not a day that goes by that this isn't a conversation I have with clients or with our own internal team here at Midloch. Ultimately, we did a blind vote. So everyone on our team, this is about a year ago, we've done it twice. A few months ago, wrote down where they thought interest rates were gonna go for the Fed funds rate, the short-term rate, as well as the 10-year treasury. The reason we do it as a blind vote is you don't want one person to say something and lead to group things. And at the time we voted that rates for short term would go between 5% and 7%, which had never been done in a long time. So we're predicting what's occurring right now. So I know the market is saying that we're going to hold interest rates. I would be ready for a little more pain. Probably like a lot of listeners here, you've got relatives or parents that bought a house at anywhere from 8% to 15% interest rates. While it's high, it's not high by. long-term standards. So I think interest rates could drift higher and I would be prepared to have more loan term not less. Certainly if rates come down then yes you should try to sell or refinance but just be ready for more paying. As much as I wanted to come down it's okay if it doesn't because we haven't had a reset in so long. One last bit of feedback if you were to look at the money printing and circulation. we basically doubled and tripled the money supply during COVID. So the money supply was steadily, we were printing, but then when COVID hit, we went like this. So if you print that much money into circulation, the only antidote is higher interest rates and to bring money out of circulation, which is what's happening. So just be prepared. We printed a lot of money. We have to take a little bit of pain.
Ash Patel:
Yeah. It's so important to understand that you can't have 12, 15 years of good times. without having a fair amount of pain to offset that, right? Correct. And you keep hearing soft landing. We already had the recession. It was a COVID crash. Personally, I don't buy into any of that. I feel like there's going to be quite a bit more pain on the horizon.
Andy Sinclair:
I am with you. We're on the same page, which is why Midloch, by the way, we're staying liquid. We're sitting on more cash, less debt. You know, we're looking at both discounted and distressed real estate to acquire. We believe that the best times to buy is when the market's at its lowest. And I'm not sure we're there yet. I still think there's more pain to be had.
Ash Patel:
Are you looking to accumulate a massive amount of dry powder to capitalize on these properties?
Andy Sinclair:
To the extent we can, we're always looking to add more dry powder. The one caveat I will give you is the market is dry. So as much as you would like to add dry powder, the people you would go to ask for dry powder, they're not feeling super deep or super happy about where the economy is. So yes, Midloch is always looking to add our own liquidity and grow our pile. Better to have more cash than you need. However, though, the economy is in a spot where people may not be willing to invest because they're afraid. So that's not uncommon. That's not the first cycle for this to occur, but hold on to your cash. And then to the extent you have excess cash, yes, I'd be ready to invest it. If you give it to a group like Midloch, we'll be ready to be on the offensive, not the defensive side.
Ash Patel:
Will you take on investor capital if you don't have a specific property or fund to deploy it into?
Andy Sinclair:
We will. The conventional wisdom is that you should only have enough cash to buy the properties on hand. And that does create the highest possible IRR, so highest possible return. However, the one thing that all of your spreadsheets cannot predict is a liquidity crisis. So there's a great book that I would recommend to anyone, which is The Market in Six Cycles. And it talks about going back to the 1800s, runs on the bank to the 1900s to the 2010s. And the one commonality you'll find in every market crash is that the absolute peak moment when you need dry powder liquidity, it's gone. So it's okay to have extra cash on hand. Yes, it will dilute your IRR, but you'll never regret it. You will regret it though, if you need the cash and can't get it. So don't be afraid to hold a little more cash. That's our theory here at Midloch. I know once again, the two words of the day are old school and diversified. And that's exactly what we want to be. We're okay not to be new school of no cash.
Ash Patel:
Andy, you're a young guy, but you and I have both lived through a couple market cycles and we understand that liquidity dries up at the bottom of the market. Right now, there is tremendous amount of liquidity out there. What are your thoughts on that? People know that this buying opportunity is coming. Do you feel like there's going to be an event where liquidity does in fact dry up?
Andy Sinclair:
I think we're already in it. I personally think liquidity has already been drying up. So I actually thought liquidity was going to start drying up in Q4 of 2022. So almost a full year ago from today. Now what's happening is liquidity is just starting to dry up. People are running out of all that excess cash they had during COVID. Or maybe they're not selling properties, which creates profit for them, extra cash for them to hold on for a new investment. So I think the liquidity is getting less and less, and I'll take that a step further. One of the biggest sources of capital is bank loans. Well, banks are running out of money. So the Lekwada Valley Bank imploded, several other banks imploded. If banks run out of money, they're not going to lend to you, nor are they going to be a source of capital. So I would be ready for liquidity to keep drying up. I believe we're already in the start of a liquidity crisis and it's only going to worsen before it gets better. So I would be ready for 2024 to see less debt and equity available, which will lead to low prices. Might be a good buying point. And if you primarily buy in just a couple markets, why not expand further into the Midwest? We do invest in quite a bit of the Midwestern markets. There's certain markets like Omaha that we've always admired but just never owned in. And then we own in a few markets that I would say are a little bigger or sexier. For instance, we own in Orlando, we own in DC, we own in Denver, we own in Dallas. Now, I always joke that sometimes you're better off to invest in what you know. So I'm a big fan of the Midwest. Invest in the markets you know the best. And if you're gonna invest in markets like Dallas or DC or Phoenix, You got to be really careful and it's probably going to underwrite to a better standard. So I don't subscribe just to put money there simply because it's a sexy market for the investment community. Andy, we have a lot of Best Ever listeners who own multifamily or commercial properties between five and $50 million in the Midwest. Can they reach out to you if they're interested in selling? Of course, or more importantly, too, we're always interested in partnering up with you, whether it be partnering on an existing building you own. or buying a new building to co-partner up with you. That's at our core as Midlog. We are a partnership oriented firm to buy real estate or invest in real estate. So happy to take their call or email.
Ash Patel:
Andy, you're among the top of the food chain of real estate investors out there. What's your advice to people that are starting out today? What's your best real estate investing advice?
Andy Sinclair:
Sure, I think it depends. There's different ways to get into the real estate investing space. I think the first question you have to ask yourself is, do you want to manage your own real estate? I can tell you that a lot of people, they think the answer is yes, then later decide they want to be passive, which means they just want coupon clippers, get a mailbox money, right? So I would decide quickly, do you want to manage it and be in the space, or do you want to be receiving the checks? I think that's the first part. And then if you're a manager, I would look to buy a small building. Mainly, I would tell you a duplex, fourplex or retail building. with a couple of tenants and take care of that. If you're more the passive side, then I would do everything you can to learn how to grow and enhance your knowledge. I would read up as many investment books on real estate at Ken. And then I would try to find the best groups out there, someone like a Midloch or what they call a real estate investor operator, and I would park my money with them. So that's how I would approach the space.
Ash Patel:
Andy, are you ready for the Best Ever lightning round?
Andy Sinclair:
I'm ready.
Ash Patel:
All right, Andy, what's the Best Ever book you've recently read?
Andy Sinclair:
I just finished a book in the last two weeks called Game of Edges. So for anyone who likes sports and more importantly like sports analytics, it's a great book. It's a quick read. It talks about how we've gone from moneyball to sports betting and how all these analytics have changed all the games we grew up and know and love. So if you like numbers and sports, this book's for you.
Ash Patel:
Andy, what's the Best Ever way you like to give back?
Andy Sinclair:
I'm going to give you one that's not as common. So I've had several family members who have suffered loss because of cancer. So every fall I actually shaved my head. So I have a full head of hair. Every fall I shave my head for cancer awareness and at times raise money for cancer research. I look a lot different bald, but I like my hair more usually.
Ash Patel:
Andy, please tell the Best Ever listeners how they can reach out to you.
Andy Sinclair:
I have a very simple email. It's andyandy at Midloch, which is M-I-D-L-O-C-H, like the Loch Ness Monster. So Andy at Midloch.com. Give me a shout.
Ash Patel:
Awesome. Andy, I love the diversity of your company, your asset agnostic, your ownership agnostic. You'll actually partner with other operators and I wish more people would look beyond multifamily or beyond mobile home parks and look at all these other great assets out there. So thank you for sharing your background and your advice with us today.
Andy Sinclair:
No problem. Thank you for having me and happy to discuss further.
Ash Patel:
Best Ever listeners. Thank you for joining us. If you enjoyed this episode, please leave us a five star review. Share this podcast with someone you think can benefit from it. Also follow, subscribe and have a Best Ever day.
