TLP16 Transcript
EPISODE 16
[INTRODUCTION]
00:00:01
Announcer: The Limited Partner shares in the potential outsized returns of a well-planned and executed investment. But as a passive investor with no day-to-day operating requirements, whose liability is limited to the extent of their share of ownership, the limited partner has the maximum leverage on their most precious asset – their time. Now, they say you're the average of the people you surround yourself with. Are you looking to elevate your network, connect with individuals that bring your average up? The Limited Partner is more than just a podcast. It's a community to learn, to participate to connect. There's no other community out there like this for limited partners. So, subscribe to the podcast. But most importantly, join the community at thelimitedpartner.com. Welcome to the podcast with your host, Jake Wiley.
[INTERVIEW]
00:00:49
Jake Wiley (JW): Welcome partners. This is your host, Jake Wiley. This week, I'm joined by Luc D'Abreau. Luc, thank you so much for being on the show. Glad to have you here.
00:00:59
Luc D'Abreau (LD): Yeah, definitely. Thanks for having me on, Jake, appreciate you reaching out and looking forward to chatting with you.
00:01:05
JW: Yeah, I think this is going to be a great conversation. But for my listeners sake, if you wouldn't mind, give us a little bit of background on how you got to where you are, the journey that took you there, and we'll go from there.
00:01:15
LD: So, I was exposed to real estate growing up. My parents, they had a primary residence, and they ended up getting another residence. And so, they ended up renting out the previous one, it was a single-family. And then I just kind of ended up seeing as a high schooler, you know, the, I guess the different difficulties that can happen if you become a landlord or an investor by default instead of by like being very proactive or intentional about it. And that kind of like turned me off a little bit in terms of like single-family. And so, and we can get into that more, of course. But ultimately, the real estate was something that was always in the back of my head. And so, once I ended up finishing grad school, I actually read Rich Dad, Poor Dad, everything in there ended up just making sense to me, I think that's the case for a lot of people. I think that resonates with a lot of people. And so, a lot of those concepts that were in there ended up just really making sense. And so, from there, I ended up looking at different options, I didn't really look at single-family at all, I was like, in my early 20s and didn't look at single-family just wasn't attractive to me for the reasons I mentioned before about just seeing my parents own experience. Ultimately had the opportunity to become an LP just over four years ago now. And so, you know, I ended up becoming an LP in a deal and then another deal and then recently became a general partner as well earlier this year. And so yeah, the journey just kind of continued on from there. That's like the high-level overview on all that, you know, dive in where you feel like it makes sense, though.
00:02:39
JW: Sure. Yeah. I love the mention of Rich Dad, Poor Dad. That book gets mentioned on this show, probably more than any other book in the entire world. It was a foundation for so many people. I'm going to take it in a little bit of a different direction now. What about Rich Dad Poor Dad did you find to not be true or not well-enough articulated?
00:02:56
LD: I've never heard that question before. I think it's a really good question. I think part of it is rightfully so it simplifies the process of moving from, you know, an employee and self-employed over to a business owner and investor, it simplifies it. But part of what it doesn't talk about is the amount of education that's needed, I think, and this is me kind of remembering 10 years ago, right, but I'm thinking the education that's needed, and probably the level of responsibility if you are going to move over and become either a business owner or being an investor, like the amount of responsibility that you either need to take for yourself or for other people because you're either responsible for their paychecks or responsible for their investments. So that's probably something that wasn't talked about as much that is really relevant for anyone who's looking to you know, move over to that side of things.
00:03:42
JW: The other thing I'd be curious to see how this dovetails with your experience because you specifically said you weren't interested in single-family but I think that the single-family is one of the key starting points and kind of a Rich Dad if like go out and make an investment like you can do this.
00:03:56
LD: Yeah, for sure. Yeah. And I think you know, at the same time I ended up seeing you know, either duplexes, triplexes, fourplexes and so I ended up thinking well if there's a way to kind of start there as opposed to starting with single-family, well, why not end up doing that? I think single-family ends up making, now that I've 10 years removed from it and I have all this other investing experience, I think single-family is not making sense for a number of ways I think if like renting out by the room is an awesome option. I think if it's something like a short-term rental then that can be great, right? Because then the, I guess the risk versus reward ends up I can make more sense of it in my head. But I think that there's just a lot of different options out there whether somebody wants to start on single-family or they do multifamily right off the jump.
00:04:39
JW: Keeping with the Rich Dad Poor Dad theme and in terms of one of the things I really liked about the book is for some reason, it gets people to take action, people read it and then they go do something. So, what was your jumping-off point? What did you do first?
00:04:52
LD: Wow. So yeah, the first thing that I did was I started paper trading options. That was the first thing that I did. So, it wasn't even real estate-related, right? I started doing that. And then I actually like traded some options, I realized it wasn't, I did fine, I did well, but it just was like, this isn't sustainable. But in terms of actual, you know, tangible action, my parents had a single-family, and it was actually the house that I was in until I was four or five. And my brother and I, we ended up going and changing up the property manager. And so that was probably like the first real tangible action. And it wasn't even, you know, investing, it was more of like an asset management perspective. Right? But that was super valuable. Because you know, it's something that I think a lot of people don't think about quite as much if they are going to have a third-party property management company, I'd said that was the first tangible action that was when I was 24, 25, something like that.
00:05:42
JW: That's great. Yeah, I think property management is probably one of the most important things that you can do for managing real estate. And it's probably one of the least I want to say, like, dug into aspects of it, right, because you find a property manager, they're like, oh, they've been in business for a long time, like, here are the keys, like, go do your thing. It's so important to get that right. Because, you know, a good property manager can make you money, a bad property manager can cost you a ton of money and or just kill you in the process. And I think from a single-family, I think I'm hearing between the lines, a little bit of what you're saying is that you know, it can burn you out because there's so many problems. And when it's small, like one single-family property, it's, you know, the property manager’s there, but they just take the initial call and then they call you, right, with the problem, they just drop it in your lap. But it can be really expensive. And you know, people don't care about your property the way you do. And especially if at one point in time, it is your house.
00:06:34
LD: And a lot of times I mean, if you're, you know, single-family, I mean, property management fees, run seven to 10%. That's, that could be your entire bottom line, right. And so, if you're a third-party and the property management on single-family, I mean, I just don't know if the juice is worth the squeeze. And that's where I say, Jake, I'm like, well, what about renting by the room so that you can get a higher premium, or if you're doing short-term rental, like, yeah, that's more operationally intensive, but then maybe the operational costs and making sense for how much you can get with the revenue, like, of course, I mean, just renting out the house can work, too. It's just, I just don't know that that would ever end up working for me, you know, obviously, it wasn't the path that went down.
00:07:10
JW: I think that's good. It's interesting, too. And that, like your first action item was options trading, wasn't single family, which is where most people started. And I mean, I personally am just getting out of like, the single-family long term rental game, and switching into short term rentals for you know, 1031 exchanging straight into it, because, you know, to your point, is the revenue and the income is higher there. But there is more operational work that needs to be done. But I think when you're working in that space, there's also better property managers that are used to dealing with that stop, right? There is an expectation of, of cost and right, it's kind of budgeted into the operating plan, as opposed to like, you know, with a single-family rental, you got one, you're hoping for the best. Hope nothing happens this year. It's like when you have a short-term rental, like, you know, stuff has kind of happened. Therefore, it's got to be budgeted. So, the revenues are higher, the upside is higher, but let's shift into like limited partners. So, you started really kind of this journey somewhere along the line as a limited partner before you became a general partner. Talk to me about that a little bit.
00:08:05
LD: You know, I was interested in investing in some form of fashion. And for me, the quickest way that I saw to really get involved within multifamily, I had enough capital to become an LP, you know, four or five years ago, but I didn't have enough to actually become a GP, at the time I lived in California in Southern California. Now I live in Central Texas. I live in Austin there with my wife, but yeah, back then I didn't I just didn't have the capital to become a GP, right. And so, I ended up looking at what can I do now to start getting a return, but then to also learn and that's why I ended up going down that route. By the time I had saved up enough money, I was ready, I was ready to already invest at that point. And so, I found out about the opportunity through a friend of a friend essentially old roommate who I went to college with he ended up knowing one of the lead sponsors and so yeah, just got introduced, found out about it did due diligence of my own and then you know, wired the money and I was like, alright, let's, let's go I'm ready to start getting my checks.
00:09:05
JW: In a work-out-well, I think the diligence aspect is such a crucial part of it. But you know, for your first deal or two did it go like you expected, did you feel like you got lucky?
00:09:14
LD: You know what? I honestly do feel very fortunate because I know some people like so for context, they were five-year holds. One of them is just selling now, and on a four-year hold, which is great. But I've heard horror stories about the whole gamut, right? It's like sometimes people, they never get distributions, or there's capital calls or they never end up getting their capital, they never get a return on their capital just to get all their money back. And that's, that's great. But yeah, for these I mean, the distributions were 2% per quarter, every single quarter, one quarter was paused due to COVID. Right, right when COVID started they decided to pause distributions, and rightfully so. And you know, communication has been good. Have a relationship with one of the lead sponsors. Honestly, it's been pretty, there hasn’t been a lot have hiccups, honestly, I mean, you know, there's been different things that they've done, like change out property management, there's, you know, bad debt that's collected because of COVID and other issues. But, I mean, honestly, they've done a great job. And they've gone very, very well, in comparison to other horror stories that I've heard on, on the LP side of things.
00:10:18
JW: Let's dig in there a little bit, because I think that that's one, you know, the idea of being an LP is to be a passive investor, which means that you don't have to be active and you don't have to be worrying about the operations. But there is a diligence phase at the beginning that you need to be really thoughtful about, right, because your money is locked up five, seven, you know, possibly longer, and you know, how you may one, capital preservation and then two, like getting the return that you're expecting from the horror stories that you've heard about, or you've experienced, you know, what advice can give people that say, like, well, if you've done this, then this wouldn't have happened.
00:10:50
LD: So, I'll go off of the advice that I have what I did, and then now as a GP, the advice that I give to LPs as well, I mean, first and foremost is who is the team? Right? Like, do you have a relationship with that person? Have you already built a relationship with that person? Do you trust them? I mean, that's extremely important. I mean, you can underwrite to anything, and make things look pretty. And in terms of returns, I mean, actually trusting the team that's there is important, like on a personal level, you know, do you actually want to talk to them? Will they pick up your phone call? Would you go out for a meal with them? You know, can you actually connect, making sure that they have some sort of competency in what they're doing? If they are newer, then that's fine. Everybody has to start somewhere. But there need to be other people on the team who do have that experience within that specific type of asset class, right? So, if they're used to doing deep value add C-class and they have an A-class now it's like, okay, well, who's on the team who's actually because they're completely different beasts, you know. The other thing that I did as well was secret shop them at the time, this has gone above and beyond granted, but I figured I'll spend 1000, I’m investing $25,000, $50,000, I'll spend $1,000, for a weekend to go and secret shop, see the area actually get boots on the ground and have an understanding of it. And that way, I can have a greater level of comfort in what I'm seeing there, you know, secret shopper properties. I actually, underwrote the properties too. So, I have an engineering background. That's what I studied in school. And so, I just took the underwriting that the GP team had created my own spreadsheet, which was helpful for me to understand what the levers to push and pull were and kind of what was driving the deal as well. So, I guess it would be those three things, right? There's diligence on the team. But then there's also diligence on the deal. And you can do diligence from a qualitative perspective. Or you can do it from a quantitative perspective as well.
00:12:33
JW: Yeah, I think that's great advice. I mean, I doubt most folks are going to jump on a plane and go like walk properties. And I do think that's a little bit probably above and beyond, I'm not saying that it was a bad idea. But you know, it is so important for you to be comfortable with the asset that you're buying. And one way to do that is probably just to be super comfortable with the team and their track record. And if they've got a long track record, you know, to being somewhat familiar with the asset class itself. And I mean, I think he brought up a great point, and that, you know, a C-class property and A-class property, well, maybe they're both multifamily apartments, maybe they're both 400 units, you know, they are very, very different beasts in the way the returns work. And the types of tenants that are moving in, the longevity of their leases, all of those things are very, very different and can make a big impact on the returns if you get any of your assumptions wrong. But what about the team itself? How would you recommend people get comfortable with the team?
00:13:27
LD: I mean, the big part that I end up looking at is like, this is someone that you actually want to talk to, at the very least, like, if you get a you have to trust your gut a bit. But if you know, if you feel like if it's not a fit in terms of literally just a fit, like do you get along? Or can you see yourself getting along? Then that's something to look at and evaluate? It's not too dissimilar from a friendship or dating, right? Or a business relationship. They are different in different ways of course, I mean, there has to be some sort of connection there. I personally think that that's important, for sure. And then I mean, the other part is actually looking at their resume and asking for what the resume looks like. Right? If they are newer, or if it is a different type of deal that they haven't done in their track record. I mean, they're aware of that, right? So, they should be able to address that and be able to speak to that as well. If that's the case, then have somebody else on the team who has that deep knowledge and experience or be able to say, hey, we have strategic advisors, or whatever the case may be, right. So, there's that as well to be able to think about.
00:14:27
JW: maybe we'll turn the conversation a little bit. I think it's along the same lines, right? You've become a GP. So, one, let's talk about that transition. And then, two, I guess, some of the lessons that you learned along the way to help you be a successful GP.
00:14:40
LD: So, the transition was that my wife and I, we ended up looking at where we were and what our goals were not only financially but just lifestyle and what we wanted out of life, and we knew that okay, well, we've been involved with multifamily for a couple of years passively in order to be able to get to where we want to go being a GP is the best bet. And so, for us, the strategy that we used was moving into the market. So, both of the deals that I've invested in and that she's invested in, they both been in San Antonio, Texas. And so, we ended up looking to move there or move to Austin or move to maybe Dallas, right? If that's North Texas, it took the better part of the year, but we ended up moving from Southern California, we lived in LA for five her five years, me nine years, I ended up deciding to move to Austin, we moved there just about a year ago, right at the beginning of 2021. And then from there, that ended up being pretty beneficial, because of a couple of reasons. One is just the cost of living, right. So, I still have a full-time job. But with her, she was able to actually transition out of that and focus full time on real estate and doing multifamily as opposed to trying to have one foot in, one foot out, which can be difficult if all of the partners in a group are doing that, right. So that was super helpful with being able to become a general partner and then just literally being local in the market. So even you know, the deal, our first deal as general partners where we live 10 minutes from it, like we know the area, you know, it's we know that area from a data perspective, but then boots on the ground, like block-to-block, street-to-street, how things transition, we have a good understanding of that. So that was the transition. And it's been a good decision for us. And it's worked out well I would say.
00:16:22
JW: That's great. It's really intense, I guess, moving into the market specifically to make, which I love. Right, I think that's a great story. And if somebody asked me, like, how serious are you about this, like, well, we've picked up and moved to be here in the market, you know, like, obviously, then you probably have a really good story about Texas and why you chose, you know, Texas of all places to go. I mean, obviously Texas is a great market, but I guess what else? What else is important for your limited partners? I mean, what are some of the toughest questions they've asked you?
00:16:50
LD: A big part of it is I mean, some are, you know, some people stay safe stay super high-level, and they're just looking at, okay, what's the general business plan? Okay, does that make sense? Okay. And that's it. Other people drill down into, like, looking at what the loss to lease trend looks like over the course of the hold and how that underwriting is done. People will look at bad debt, and what's been underwritten to a good one. In particular, in Texas, if you're an LP and looking to invest is looking at what the GP has underwritten too for property taxes, because it's fairly aggressive in Texas, there's not a lot of taxes, but if you own property, that's where all the tax revenue comes from basically. Other, I mean, other things that are really looking at what the break-even occupancy is understanding the GP team, how local they are, what their experience level is with that with the type and sort of deal. Those are the questions that kind of stick out to me. And some people, you know, different people are different types of investors, right? I mean, some people, they focus more on numbers, some people focus more on people, and some people focus more on the area. So, there's a number of different ways to go with it. Whatever the questions are, that somebody's asking, you, like talking to you, as an investor right to your listeners, as limited partners, whatever questions that are asking, I mean, it's just, it's just important that they make sure that those get answered. And if somebody isn't willing to answer them, or can't give you the time of day, that sort of thing, then that's also something to consider as well. You have to be respectful of people's time, of course, right? Everybody's busy. But if somebody's not willing to jump on a phone call with you, or like exchange a few emails, that should tell it all right there as well.
00:18:20
JW: Yeah, that's an interesting dynamic, right? Because if you do have an experienced team with a large track record, you know, they may be saying, well, look, I I've got a stable pool of investors, I don't necessarily need to spend a bunch of time like training you to be one of my investors. But you know, on the flip side, one of the number one issues that people have always pointed out to me is underappreciating investor relations, right? So no matter what, being on top of it, being able to answer questions, being proactive, and I think that that's so often underestimated when you think like, Okay, we found a deal, we underwrote it, things are working, like the way they're supposed to, but communications and making sure that those are on point, I think that you may find yourself in a situation and you can correct me if I'm off base here, where maybe you're not getting the time of day, but you've got a team that's kind of a deep track record. And you're like, hey, look, they're just if I want to get in, I just got to, you know, it's their way or the highway type of deal. But I would actually probably say that if they don't have an investor relations team built up to handle the questions that are coming in, that is problematic, regardless of how long they've been in business.
00:19:22
LD: You know, if we take a step back and understand it for what it is like it is a sales process, right? If you look at any organization that has a group of either count managers or customer success managers, relationship managers, whatever they might end up being, they're there, they're there for a reason. It's a matter of maintaining those relationships. It's a matter of being responsive. It's a matter of educating and providing information back to the potential investors to the “customers”. Right? So, I agree with you like honestly, I do. I mean, I'm thinking of large organizations like large tech companies, they have customer success managers, account managers who are there who are built out you know, the person that you're speaking to your listeners here to the limited partners, if you're investing with somebody who has, let's say, 5000 doors under their belt, right? You may not be speaking to them, if you're going to go and ask a question, right? They may have ended up putting different people in different spots in your organization, to your point that this person deals specifically with investor relations, potentially, if things escalate, then it goes to the person whose name is on the door. Right. But otherwise, they have this person here, because that's what you know, their superpower is, and they're there to make sure that that all those sorts of questions are being answered to. I like, and I appreciate your point of view. And I think it is, I think it's pretty appropriate for sure.
00:20:39
JW: Yeah. So, I would say that the takeaway there right is to ask your questions, as many as you need to, to get comfortable. And if you're not getting responses, like you can move on, because, you know, even if somebody's got a long and deep track record, if they're unable to or unwilling to answer the questions on the front end, then how are they going to respond in a crisis, right, like maybe a little bit cocky at the beginning of time, but like when things go south, that they can't handle your upfront questions, like, just imagine what it's going to be like, when things are not going well, okay? Well, this has been a great conversation. And I know you didn't get to where you are on your own. And what I like to do is, I'd like to wrap up every show with a little bit of gratitude, giving a shout out to somebody personally, that helped you along the way and kind of helped you get to where you are. So, who out there would you like to give a little shout-out to you?
00:21:25
LD: Geez, I mean, I would think my parents, you know, that's where I'd go back to, you know, my dad, he very much was entrepreneurial mindset set a tremendous example for myself and for my brother. And I feel very fortunate to have had those all those experiences that I had, you know, I mean, granted, he didn't know about multifamily and all these different things that I'm doing now, but there was I was in this environment where it was normal to go out into the world and try to start something and do something. So, I would say him. And then for my mom, I mean, seeing somebody who's supportive, right? And who's on the same page of trying to do those things together, I guess thinking about it. Now, it kind of informed the fact that you know, my wife and I were doing this together now, if I just realized that, so yeah, I'd have gratitude for them. And you know, the foundation that I ended up having grown up, Jake.
00:22:13
JW: I love that, you know, I think that you know, my legacy, what I want for my kids about for is for them to see that we try and we push and we do things that are a little bit uncomfortable. And we have conversations and we learn who you know, and all of those things. Exactly what you're saying is that when you grew up, and you're in a situation where you're out ready to try, like it wasn't like, oh, yeah, this seems really foreign. This isn't what my parents did. Like your parents gave you a platform, and then you took it and expanded it significantly. And now you think you'd like you can just keep paying that forward. How cool could that be?
00:22:44
LD: Yeah. 100% Yeah. And I mean, I feel that way for you know, I don't have children yet. But you know, planning to have some here in the very near future. And I feel the exact same way too. So yeah. 100% agree with you, Jay.
00:22:55
JW: Luc, this has been a great conversation. Thank you for making the time to be on the show.
00:22:59
LD: Yeah, thank you, I appreciate it. Appreciate you providing the platform. Yeah, for out in the same for anybody who wants to get in touch, feel free to reach out to me, you can always go to our website, it's makeitrain.capital.com. Or you can shoot me an email, it's [email protected] And more than happy to answer questions, you know, jump on a call be a resource, any way I can help.
00:23:20
JW: Awesome, you know, and I think just to really kind of reiterate the point that you're making is that the show is about building a community. Right. And I think it's about connecting. And it's not about just being the center of influence here. But like, I want my whole network to be a network of nodes. So, you know, one, I really appreciate you being willing to connect with the audience and to like, that's the point, right? Like the show is just the platform for starting to make these connections. So, thanks for doing that.
00:23:45
LD: Yeah, absolutely. Thank you. I appreciate it.
00:23:48
Jake Wiley: I hope you've enjoyed this episode of The Limited Partner Podcast. Please subscribe and leave a review. If there's any reason you wouldn't leave us a five-star review, please email me directly at [email protected] Your feedback is always appreciated. Now the show is just the tip of the iceberg in terms of the limited partner community. It's a community where limited partners can come together. Learn about what best in class looks like, opportunities, and most importantly, a place to connect. There is nothing out there like this. So, head over to thelimitedpartner.com and sign up. We'll see you next time.
[END]
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