Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - The Art of Going Full Cycle

Tyler Stewart
September 6, 2021
Podcast - The Art of Going Full Cycle

Pat Poling, Founder and CEO of Mara Poling, joined us to discuss how to Buy Right, how to Invest Right, and how how to Exit Right.

Mara Poling is a total return real estate investment firm dedicated to helping their Investor Clients Build Lasting Wealth. Headquartered in Dallas, Texas with offices in Northern California, Mara Poling’s principals bring over 60 years of commercial real estate experience to the multi family investment market. Experienced asset managers with a proven track record including acquisition and management of over $1B in assets, $1.5B in annual cash flow, and more than 10,000 acquisitions. Mara Poling has acquired 700+ units $40M in Multi Family assets in the last 15 months.

Mara Poling is currently fundraising for Mara Poling Total Return Fund. Click here to learn more about the fund.

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RealCrowd - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Adam Hooper - Hey, RealCrowd listeners, bit of a fair warning here, this is kind of a long episode, about an hour and a half long, so if you have any comments or feedback on whether you prefer longer episodes like this or if you prefer us to split it up into two, please send us a note to Hey, Tyler.

Tyler Stewart - Hey, Adam, how are you today?

Adam Hooper - I'm great and welcome listeners to another episode of the RealCrowd podcast. Tyler, who do we have in the studio today?

Tyler Stewart - Adam, we have our first guest ever back for another series. Pat Poling, founder and CEO of Mara Poling.

Adam Hooper - Yeah, Pat helped us kick off the podcast almost a year ago to the date.

Tyler Stewart - Yeah, kind of fun to have him back on for I guess the one year anniversary.

Adam Hooper - Yeah, it was great to have Pat back on. Another really interesting conversation, covered a lot of stuff. Kind of full cycle of looking at deals all the way to the exit.

Tyler Stewart - Yeah, we went over how to buy right, how to invest rights], and how to exit right. The three rights so you don't get left behind.

Adam Hooper - Wow, that was pretty bad, Tyler.

Tyler Stewart - Yeah.

Adam Hooper - But we did talk about some good stuff. As an investor, again, we talked about the PPM, go figure. We talked about some vintage aging of assets and markets they're looking at and things to look for, so really engaging episode, and hopefully listeners will get a better picture of the full cycle from start to finish and what they can expect throughout the process.

Tyler Stewart - Yeah. This was a very good episode. A lot of information in here. As always, take notes, give it a couple listens and provide us your feedback. This episode actually came to us, an investor had reached out and said hey, I would love for you guys to bring Pat Poling on again. We take that feedback seriously. If there are any topics you want us to cover and guests you want us to bring on, let us know and we'll try to make it happen.

Adam Hooper - Best way to do that is send us an email to We always appreciate those ratings, reviews and whatnot on iTunes, Google Play, Soundcloud, wherever else you find us, so Tyler, with that, let's get to it.

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Adam Hooper - Well Pat, thanks for joining us again here today. It's been almost a year exactly since we had you on our first episode ever of the RealCrowd podcast. How have things been this last year?

Pat Poling - Well, thanks for having us back. We appreciate it and certainly enjoy the relationship with the nice folks at RealCrowd. It's been a very busy year. A really good year for multi-family. Not surprising. It's consistent with what we talked about a year ago in terms of where we thought multi-family was at that point in time and where we expected it to go. Like I said, not surprising, and we continue to be very excited and bullish on this segment of the commercial space.

Adam Hooper - Yeah, and that was a lot of what we talked about last time were the demographic shifts, the usage shifts, just in the general population of how we use a house and that supports this kind of again B class tried and true multi-family approach. Has anything changed in your approach there or are you guys still looking at the same trends?

Pat Poling - We still like all the space that we liked a 2ear ago for many of the same reasons. A number of the metrics we talked about a year ago are not only still consistent with that, but have improved. A good example of that is the supply side. When we talked a year ago, one of the reasons we said we really like the B space is, for all intents and purposes, the supply is essentially static. You can't go out and build a brand new B given what the costs of construction are. We've had I think a year ago we talked about something like maybe 300,000 new units coming online which, at the time, was like a 20, 25 year peak. We've seen less than that in the last 12 months. And again, almost all of that is heavily skewed towards the A space. Which effectively doesn't impact the Bs unless the As overbuild. If you really overbuild As so that you suppressed rent on the A side, then maybe you could start affecting Bs, but it doesn't happen and the reason why is pretty simple. Lenders simply aren't going to let As overbuild.

Adam Hooper - Right.

Pat Poling - And that's the reason that number's pulled back a little bit is there's not as much money available on the lending side. We're all in the business of raising capital, but we all need to keep in mind that that's only a portion of the check that gets written. The biggest check gets written by the bank.

Adam Hooper - Right.

Pat Poling - And ultimately, if they don't see value in that investment, they aren't going to go there. 100, 150,000 a door or more for new construction when somebody in the B space can buy units at 60, 70,000 a door, and maybe put 10 grand in.

Adam Hooper - It's just a totally different segment, right?

Pat Poling - Yeah. When you've got rising demand and essentially a fixed static supply, it's pretty easy to understand what's going to happen and that's why we continue to see rents in the B space move five, six, seven percent a year. There's simply more demand than there is capacity.

Adam Hooper - And have you seen anything on the construction side that would indicate an ability, I guess, to try to fix this B, A gap? Is there anything that's looking like there's going to be a way to deliver new B product, or is that pretty much going to be what it is for the foreseeable future?

Pat Poling - Nothing in terms of new construction. We're busy and focused on markets that actually have a lot of development going on. Dallas-Fort Worth is one of the markets we spend a fair amount of time in. Dallas-Fort Worth has been one of the most active markets for new construction over the last couple of years. It's almost exclusively in the A space. The only stuff we're seeing in the B space is the government funded stuff. Where you're seeing a really tight structure around those transactions, and we stay out of that space. Again, not a bad place to be for certain kinds of investors, but we're concerned when you go two and a half to three times somebody's income, that may give you a floor that you're looking at in terms of maybe 28,000, 29,000, but the government restriction on it is maybe 32,000 a year in income. You've got this really narrow window to try and fit people in. That's just a tough model for us to work with and it limits you in terms of what you can do with rents down the road, so that's really the only new construction we see in the "B space" and we don't really consider those Bs because of the government impact on those.

Adam Hooper - Yeah.

Pat Poling - The other thing you will see on Bs is as As age, they become Bs over time.

Adam Hooper - Right.

Pat Poling - You're talking about maybe the 90s vintage properties which, if you look at the historic build rates, the 90s were one of the lowest periods for new construction. There's just not a lot of older properties aging into the B space. Again, pretty much static supply.

Adam Hooper - Interesting. And now, are you guys looking at any other geographical markets, or is the supply of B available for acquisition in the markets you guys are looking at, are you guys seeing enough in there?

Pat Poling - Two part answer. Yeah, there's more than enough opportunity in the markets we're focused on. We still do what we talked about a year ago which is our annual assessment of the entire country. We are not tied to any one market. We don't like San Antonio or Houston or Dallas because we're Texans, although we love Texans. We like those markets because they're growing faster than the rest of the country. They have really diverse employment bases. They have reasonable regulatory environments, and there are about 25 markets across the country out of 380 that meet all the criteria that we have. And we do that analysis every year. The list hasn't changed a lot over the last few years, which is not surprising. You continue to see movement from the northeast into the south and the southwest, and that's a trend that's actually been pretty consistent for probably 20 or 25 years. That doesn't mean you couldn't take this model and go to Cleveland, or Detroit, or Seattle and make it work. It's just, we think why do that when you can go to Dallas that's growing faster than those other markets and has a more favorable regulatory environment. It simply takes some risk off the table by focusing on these kinds of markets.

Adam Hooper - Pat, it sounded like you were saying the 90s As are today's Bs. Is it normally about 25 years for an A property to become a B property?

Pat Poling - Yes and no. Age is certainly part of the criteria when you're looking at it. Another piece is operational characteristics. What kind of tenant base is that owner going after? One of our favorites is we love buying B properties that are actually operated as Cs. We've got a property we're in the middle of closing on right now and that's exactly the model for it. The current owners had it for a period of time. The run it basically as a C property, and yet it's really a B asset in a very solid B submarket. The opportunity to go in and, it's not really a re-positioning, it's simply putting it back where it should have been in the first place. An A may age out from an age standpoint. If it's still in an A community, if it's an A submarket, has A retail and A residential around it, it's not really a B. Somebody's going to scoop that up and they're going to turn it back into an A. And when you really look at those, A, B, and C, and there are Ds, but we always basically talk about these three classes, they're really very different kinds of models. As are much more of an appreciation play. They can generate some cash but it's a different kind of return model. A little more risk involved because the volatility in the economic cycle can affect As a little more. Cs are a little more of a cash play. Personally, I really like Cs.

Adam Hooper - Yeah.

Pat Poling - It's just our particular investment model we're using for our fund, it doesn't focus on Cs, but Cs are actually a really good play. Bs are kind of that Goldilocks space. They're a little more protected from the volatility that's out there. Age, you mentioned age, we certainly look at age. We look a little more at infrastructure to really determine some of this, especially for the break between a B and a C. If you start talking about boilers and chillers and old technology flat roofs, tar roofs, that kind of stuff, that's really C product, or gosh, worse yet, those wall air conditioning units and that sort of stuff. That's pretty much a C product, but if you can find a product, even if it's a little older, but it has standalone HVAC units, hot water heaters, pitched roofs or modern membrane roofs, that's a B. It might be 30 years old, 35 years old, but that's really a B asset in terms of the infrastructure it has.

Adam Hooper - That's a great overview. And in line with what we're seeing out there where the opportunities lie. We want to try to focus today, we've got three main points we want to try to touch on for listeners out there would be as a sponsor, what is buying right? And that's something we talked about before. As the investor when you're looking at these deals, how do you make sure you're investing right? And then kind of together, what does a correct exit look like? And I guess on the buying right side, let's start with what we've been hearing from a lot of sponsors out there, and we talked about on a podcast a couple episodes ago is this concept of vintage. Depending on what timing in the cycle you're at, you're going to have different return expectations, different return profiles. How has that acquisition landscape or return profile changed from when we talked last year or even a couple years ago, which is when a lot of our listeners first entered this market?

Pat Poling - We have a bit of a different view on that than some of the other sponsors that are out there, and one of the things, and I think your listeners tend to fit in a couple different categories, and we mentioned it actually a moment ago in our conversation before we started recording, and that is, what's the timing that everybody's looking for? Our belief is every investor has sort of a different stack of money. They've got some money that they're looking to maybe be a little more speculative with, that they're willing to take some more risk on. There's money that they might want to be getting back in a shorter period of time. And then there's some money that, this is long term money. This is money I'm hoping I use to send my grandkids to Stanford or to an Ivy League school or it's money I'm hoping my children ultimately inherit someday. Each of those are really going to go into different kinds of models. If you're looking for a shorter return, I want my money back in two years, two and a half years, three years, and I want a pretty good return, then I think the issues you raise about vintage and timing and where you are in the cycle are really critical, and that's absolutely something to pay attention to. And you can look at the various markets and see where they are in terms of whether it's expansion or maturity or if they're actually in decline. Again, that's one of the reasons we like the markets that have consistent growth. We think it tends to flatten that cycle out a little bit.

Pat Poling - We're a little more focused, and we think there's actually quite a few sponsors out there like that, that are a little more focused on being long in real estate. And we think if you're long in real estate that the cycle time for entrance actually becomes a little less critical. There's actually really only one time when you think actually that you care about, where we're at in the cycle, and that's when you're actually truly going to exit. A question we'll often get from prospects is what kind of exit caps do you think we'll see when it comes time to get out of this particular asset? And, you know what, we don't care. Because if we get out when prices are high, that's great, but because we're long in real estate, you're going to roll into another asset which means you're also paying top dollar for that next asset. It's actually strategically a little more valuable to have caps rates have moved up and have a little more favorable buying position. You might not make as much when you sell that asset, but the asset you roll into you're purchasing at a better value, and it's really only when you truly exit the market, which again, depending on what kind of dollars you're using and your capital stack have an impact on that, that you care more about that timing. The whole issue of timing of the market and which market's in growth phase or maturity or in decline, we think it has a lot to do with what kind of dollars you're investing. If you're putting money out there that you're looking to get back in two or three years, you're absolutely going to want to understand

Pat Poling - from that particular sponsor what's that submarket performing like? What kind of evidence do we have that tells us where the market's going to be three years from now? Not so much where it is now, right? That's an important factor, but the real critical factor is what's it going to look like in three years 'cause we are going to exit. As opposed to a sponsor you're working with where you're planning on letting that money ride for a period of time simply because you like being in real estate and that's going to be an important part of your portfolio.

Adam Hooper - You mentioned a little bit ago some of the markets that you guys are looking at or excited about and you also monitor a large number of markets. What in your mind makes a market great for acquisitions right now?

Pat Poling - We use 17 different criteria that we score all these different markets on annually. It's a survey we do every year. In about three months, we'll do the 2018 version of that. We're looking at, it's pretty common sense stuff. Honestly, there's not any rocket science involved in any of this. If you think about it, it makes a lot of sense. We look at things like population growth. Obviously if there's more people, you're going to have more demand. We're looking at employment growth. Are there more jobs and income growth? If we're adding jobs, but we're adding service level jobs at minimum wage, that's going to drive a different segment of the market than if we're adding good, solid blue collar jobs or some white collar jobs. And you want to see that not only historically, which obviously is the data most of us are going to have access to, but you want to seek out the economic forecasts for what the next five and 10 years look like, and that's a big part of what makes us excited about the markets that we look at. As we said, there's markets in Texas that we like. The Carolinas are another good strong group of markets. The markets we like almost exclusively kind of run from the Carolinas over through Texas. Down through the southern, southeastern part of the U.S. There are a few markets north of there that fit some of those criteria. We think they're a little more just anomalies. We like having markets that perform well near other markets that perform well, because we think that means you've got a region that's really strong.

Pat Poling - In addition to growth, we also look at things like regulatory environments. We're big advocates for tenants. Tenants absolutely have rights, those should be respected. Ultimately, having good quality tenants and treating them well is the bedrock of having a successful, multi-family operation. And investors have equal rights that need to be honored as well. And not every market in the country is set up with that kind of structure from a regulatory environment. You and I make an arrangement. I'm going to pay you a certain amount of money, you're going to give me a nice, quality place to live. If one of us doesn't follow through on that, the other should have some rights to be able to remedy that issue. That's not necessarily true everywhere in the country. We also look at factors like absorption. Is there a market that's overbuilt? Some of the demand issues that we talked about earlier certainly on the supply side, we're going to take a look at those factors. Again, looking at that on an annual basis helps us position ourselves in terms of what the future looks like. Like I said, right now Texas is really good. We expect we'll probably be making a move into some of those other markets a little east of Texas probably in the next 12 to 18 months.

Tyler Stewart - Great, and then for the listeners out there, where are you pulling this data from? What are the sources for the data?

Pat Poling - The vast majority of the data comes from the good old federal government. The Department of Commerce. It is amazing the amount of data that's available. Some of the data we get comes from the fed, there's really good fed reports. Fannie Mae and Freddie Mac produce some outlooks on an annual basis that are really valuable. Harvard. Harvard produces a wonderful report every year that looks at a whole host of different components in the commercial real estate sector. And then there's some private data sources that we've got to write checks for to have access to, but that basically pull information about how the markets are actually performing today, which helps us get a real sense about absorption and construction trends. We talked earlier about cost per square foot for existing assets for new construction. We're not just going off of hey, here's an article in the local press that says the future's going to be bright. You're probably going to see that in every community. We want to see real data behind that that helps back that up.

Adam Hooper - And we'll get a link to that Harvard report that you referenced and make sure we get that in the podcast description, too.

Pat Poling - Great.

Adam Hooper - Now you've looked at hundreds of markets on these 17 different criteria. You've identified a handful that are interesting. Once you have those markets identified, how are you looking at specific locations within those markets? Are all locations within a greater market the same? Are you looking at different submarkets? How do you look at that part?

Pat Poling - That's a great question. In some markets, it is possible to say yeah, we don't want to go there, and we don't want to go there, and one of those could be because it's really a C market, or it's a market headed towards C status, and in some instances, it's an A market, or a market that's really moving towards an A status. And the assets, we believe, need to be congruent with the submarket they're in. This notion of I want to go buy the worst property in the best neighborhood, well that sounds really good if you're going to take that property and raise it to the status of the rest of the community. If you're not, well, it's not going to perform well. That just doesn't seem to be terribly logical. If you're buying a C property, it ought to be in a C neighborhood. If you're buying an A property, it ought to be in an A community. If you're buying a B property, it ought to be in a B community. So that's one of the factors we want to look at is how congruent it is. It's one of the reasons we do the one, three, five analysis that we do. We've talked about these previously. We'll scour a market which, a market could be as large as DFW, which is seven million people, or it could be as small as Waco, Waco's a good example. You're talking about maybe 300,000 folks in the Waco area. Whichever size it is, as you begin to get a sense of where there might be opportunities, we really want to understand that asset one mile out, three miles out, five miles. In our belief, probably 90% of the activity that tenants are going to engage in

Pat Poling - is going to happen within those radius. It's where they're going to shop, where they're going to work, where their kids are going to go to school, it's where they're going to recreate, they're going to go to the movies, they're going to do all those other kinds of activities, and understanding what that community looks like really helps us then get a sense of how this asset would fit. Comp studies, looking at the other kinds of assets that are out there. Like I said, looking for retail and looking for movement. Do we see a lot of C level retail that's in the process of being refurbished, upgraded, scraped, and rebuilt, and the market's moving towards a B, or do we see a lot of older B grade retail that's actually not being well maintained and this market's actually really headed towards being a C? Some of the kinds of retail it's attracting or some of the local residential trends are actually moving more towards a C. If that's the case, well, then that's not a market that's going to make a lot of sense for us. It could make sense for somebody else's investment model, 'cause there are a lot of different ways to play all of this. The focus that we tend to bring to the table is a little more risk averse. A little more conservative, and so we're looking to, if we can, check as many boxes as possible that make these safer investments.

Tyler Stewart - Sure, and then with the one, three, five strategy, is it just a matter of checking a box that there are certain elements within one, three, five or are you looking for, say, parks and schools in one, retail in three, jobs and employment in five, how does that break down?

Pat Poling - The entire one, three, five really gets looked at for all of those. Schools is a good example. Probably half, maybe a little more, maybe a little less, of your tenants may have children, and some of those kids might go to a private school, some of them are going to go to the local community schools. There, obviously there's a direct correlation. If you have decent quality schools, you're going to get tenants that'll be interested in your area. We think schools, though, are also an indicator of the quality of the community. They certainly tie back to things like property tax rates and those sorts of things, but they also tie back to the focus the community has and the pride it has in terms of how it conducts itself. Even though a school might be five miles away and it's not the school that actually serves the actual asset we're looking at, we're interested in what that school looks like and we're not looking for the best schools in the state, and we're not looking to be in a community with the worst schools. We want to be in a good, solid school district that has good performing schools, and the same is true for things like crime and diversity of employment and so on. The one place where the distance becomes maybe more of a focus is from the competitive analysis. Obviously, assets that are closer to the asset you're thinking about investing in are going to be more likely to be a competitive asset as opposed to one that's five miles away. That doesn't mean somebody wouldn't live in that one five miles away, they might as it compared to yours, but it's much more likely

Pat Poling - if they come to your asset, well, they're going to drive by the one that's a half mile away and the one that's a mile away if for no other reason than to get a sense of what they might be able to get for their dollar. We're probably going to pay a little more attention to the ones that are closer to the asset, but we'll want to look at all of them.

Adam Hooper - Yeah, that makes a ton of sense and it's interesting that you mentioned you're not necessarily focused exclusively on the schools that serve your property but, again, as kind of more broad reflection of the community, how do those schools perform in that community pride, I guess, and how they handle that. That's a good point. When you're looking at the employment side, you mentioned different wage levels. How are you filtering that information based on the type of property you're looking at, or is it just gross employment as a whole that you look at?

Pat Poling - Certainly gross employment, number of jobs, growth of those jobs, average income on a per capita basis, on a household basis, all of those macro kind of numbers for a submarket certainly make sense. The big kicker for us is diversity of employment. Some diverse sectors and in particular are they some of our really favorite sectors or are there some of the sectors that we actually think are in decline.

Adam Hooper - Such as? What would be some of those favorites?

Pat Poling - Favorites for us would be healthcare. If we can get a hospital nearby. What's near hospitals? You get a bunch of medical clinics and doctors offices and you get a radiology center and you get a memory care center and you get a couple of assisted living centers and there are a lot of really good quality jobs. Now, obviously, there's some doctors that live there. That's wonderful. We'd love to have a doctor live in one of our properties. That's not really what a B grade asset is probably going to be focus on.

Adam Hooper - Right.

Pat Poling - We're looking for nurses, hospital administration staff, maybe some of the plant maintenance folks, those are good, quality jobs, and that's an industry that nobody ever thinks is going to shrink. When was the last time you heard about a hospital closing down? That's just not where we're headed over the next 15, 20, 25 years, thanks to all us old guys that are getting even older. We like that, government. We're all big fans of hey, let's lower our taxes and let's have smaller government. Government simply doesn't get smaller. It may grow at a lower rate but it grows, and whether that's local government or whether it's county or whether it's state, government employments is fairly solid. And for the most part again, government employees fit that B model, higher education. Every school district is obviously a great place. Everybody has a school district, if there's a community college, there's a university nearby. Again you're talking about good quality kinds of jobs that have some tenure associated with them. It gives you some stability and not just those kinds of jobs. When we're trying to attract tenants to an asset, think about this, if you're driving around looking for a place to live, and your drive in, well who else lives here? If you see oh, look there's a couple of firemen that live here. Oh there's a couple of teachers from the university that live here. Oh wow, look there's three or four nurses or somebody that runs the outside plant

Pat Poling - at the hospital lives here. Wow, this looks like the kind of place I'd be comfortable living, as compared with you drive in and you see folks that maybe are from some of the other employment sectors, that maybe aren't as strong in terms of growth or in particular ones that are not diversified. That's really the bigger issue for us. For example, we looked at a property not that long ago and it actually looked really good on paper. And then as you really dug into it, what you found was that there was a a manufacturing plant, which manufacturing's nice. It's always nice when you get to manufacturing jobs. There's not as many of them as they used to be but that's great. Well the manufacturer was producing product that went to an assembly plant that was within five miles of the asset. And then there was a raw material producer nearby that actually fed the manufacturing plant. What we really had was not a diverse, it looked like gee, we got some manufacturing, we've got some raw material production, we've got some assembly work that goes over here. But it was really one big chain that if anything happened in that particular segment all of that was going to dry up and blow away. And so not only are those industries that have a little of volatility to them, but they were not diversified in any way, shape or form. If you had higher education and government and healthcare, if you had those three and one of them takes a dip. Everybody is going to be on a cycle. Somebody will be up when somebody else is down, you still got two pretty healthy sectors

Pat Poling - you'll be able to draw on for your tenant base. And that doesn't guarantee that you're not going to have issues. What it does we think is it takes risk off the table as opposed to if you didn't focused on those things. If you simply looked at the macro numbers and said, "Great, employment's growing." Well maybe it's growing in the retail industry nearby, minimum wage jobs. Well that's nice that there's more jobs there but is that really going to support the kind of property you're investing in? If you're investing in C, you might but B, potentially not.

Adam Hooper - Is there a maximum concentration of any one particular category that you guys flag as too much or is it really hard to generalize at that level?

Pat Poling - From a percentage standpoint now you're really looking for some level of equivalence among those diverse sectors, so if we said, "Well, great there's three diverse sectors but two-thirds of everybody works in the medical industry nearby." That's probably a little too concentrated because now those others, there's maybe only 10% or 15%. What you love to see is 20%, 25% from one sector, same for another, the same for another. And then you're going to have a scattering of a whole host of other employment areas.

Adam Hooper - Okay, and Tyler mentioned earlier that transition from in as you said that A to B over time. What is the right age of asset that you guys are looking for? Newer products, older products or is it really again market dependent on what advantages, construction wise.

Pat Poling - If again A, B and Cs, age is not completely determine generally speaking. A's are going to to be everything from new construction back to maybe the 2000 mark. Maybe a late 90s, maybe up to 2005, it's always a bit of a gray area where these transitions are. Somewhere around there, you start moving into what you could describe as B vintage assets, and that goes back to probably something around the late 70s maybe the early 80s, and then back behind that you get the Cs. One of the things we like to look at though is to go back and look at historical construction rates. The last time, we had a peak was in the 80s, early to mid 80s. We had this big bubble of new construction that went through, which is you look at the demographic charts is not surprising. Because that's when we had the tail end of the Boomers hitting that marketplace, and then that dropped off. And when it dropped off, well there's not as much to demand, so construction fell off. Well if construction fell off then you're going to see less of that supply aging into it. We also think an important factor to look at as we said is not only how the assets being operated, what market segment is being focused on, but also the infrastructure. Infrastructure probably has a lot more to do with class than age so for example, if an asset has not just covered parking but garages. If it has multiple amenities, pools, fitness centers, business centers, concierge-level services, resort style assets. It doesn't really matter if that's a 20 year old asset, that's still an A. Age doesn't have a lot to do with that,

Pat Poling - conversely if you got an asset that there's not a stitch grass anywhere on the property. It is concrete and asphalt everywhere you look. It looks like a 1955 motel that should be on Route 66 kind of thing. Air conditioner sticking out of every window, that's a C, it doesn't matter how old it is right. It could have been built 20 years ago, that's essentially a C grade asset. We're looking for modern infrastructure that's really where we think the B's are defined. Modern infrastructure with modest amount of amenities 'cause we're trying to, in the B's space you're really trying to appeal to the largest segment of the population you can. A's have a relatively small market niche they're aiming at and C's are much more focused on low-cost folks that are looking for a very efficient model in terms of how they live. The amenities, so things like parking and having a barbecue area and some grass to run around in. Those are not critical to him, they're looking for bang for their buck. A B is a blend of that, I'd like to have some covered parking so the hail storm when it comes through doesn't trash my car. I'd like to have a place that I can go do a little barbecuing with my kids or with some friends or whatever it happens to be. And I don't want to break the bank. I often describe to folks, a B is, for most of us if we ever had to go get a place to live. A B is where we live, it's what you think of as when somebody says apartment building. Everybody's mind naturally moves to that sort of B model, that's what people think of.

Adam Hooper - The life cycle of a B, if a B was first built in the 70s, has that property already gone through some value add strategies to help it to be a little bit more modern? The value add you would apply, wouldn't be as significant as say from the 70s that hasn't been touched?

Pat Poling - It certainly could have. I love it when we find it a vintage asset regardless of age that the interior's have never been touched. Shag carpeting is beautiful, honestly.

Adam Hooper - You still see that out there?

Pat Poling - You don't see a lot of Shag, you'll run into it every now and then but look at an asset not that long ago that had a truly vintage cabinets. You know the little scrolls on the woodwork and the countertops that are wrapped with the little chrome edging on them. I know that vintage because I grew up in a house just like that. What's important is how the structures has been managed because when you're talking about a value add, you've got to be able to get that value back out. You're going to put money in, you've got to be able to get a return on that which means rents need to grow. And therefore there has to be some evidence in the marketplace by doing the comps studies that shows that improved assets will drive a hundred dollar in differential rent or 150 or whatever the math is. And that gives you basically a benchmark of alright here's what we could put into the asset. If you've got to put a new roof on or if you got to change from chillers to individually HVAC units or you've got a property that just, it screams like I said a 1955 Motel 6, you know Motel Route 66 stuff. And you've got to throw a ton of money into those features. Well you're not going to be able to raise somebody's rent because you put a new roof on or because you recited the building. It makes the property certainly look nicer and you may get more foot traffic because of that, but you're not getting necessarily see a value return. Fan investment standpoint, the ideal asset is going to be one that's been well maintained.

Pat Poling - That's had the structural improvements done over time to keep it current with the marketplace, but there hasn't necessarily been a focus internally. Where we tend to find those is institutional portfolios. An institution bought an asset, they've gone through their life cycle with it. They put the money into doing the basic maintenance work that needs to be done, so the other parking lots are in good shape and the roofs and those sorts of things. But they haven't necessarily put the money into the interiors, and their spreadsheet says, "Oh time to sell." And we often will scratch our head and go, "You know if you guys just held us a few more years, and you put the money and look at the upside you'd see." Yep, it's time for us to sell.

Adam Hooper - It hits their numbers and they're out.

Pat Poling - Yeah or maybe they've sold that portfolio to somebody else, who says, "Yeah, our focus is here. These assets don't fit the focus we have, so we're going to sell these off and move on to what we want to have focus on." And so those can be great places to pick assets up. It's the one time that we actually like working with institutions. Generally we try to stay out of their way.

Adam Hooper - Right.

Pat Poling - Because they've just got a different model than we do, that's one of the reasons. We look at the size of assets that we think about. But we do have relationships with a number of institution that, listen if you guys are getting into that model, and you're going to do some repositioning, let us know. We'll be happy to pick up your older B assets because we can do something with it.

Adam Hooper - And you mentioned the size of assets you guys are looking at. What is that size of asset in terms of number of units? Are you trying to enter a market with a certain concentration or will you go to a market for a one off deal?

Pat Poling - Don't like going to markets for one off deals. Obviously the first asset you get in a market by definition is a one off deal until you buy the second one. We always like having at least two if not more in the market, given the size of the market. Like I mentioned Waco, Waco is a smaller market. It's a really great market, great growth. Really solid community, I don't know that I want to own eight properties in Waco. I don't know that that makes a lot of sense. Dallas on the other hand, seven million people running around. We could own 20 or 30 properties in Dallas and not be over weight in Dallas. Market size certainly has something to do with that. The criteria are less about the actual number of units and more about two items that we see as the barriers. One I just referenced and that is staying out of the way of the institutions. If you're going to buy a thousand units, there's not a lot of folks that are going to bid on a thousand unit property. But I guarantee you, the ones that are going to bid on it that you're going to be up against have got much deeper pockets than I'm going to have. And so we want to stay out of their way. We're probably going to be 300 or 400 units on the top end. We did a little over 400 units a little over a year ago. That's probably the upper end of where we think the model makes sense. On the other end of the spectrum, we're big believers in on site management. 40 unit complexes, fantastic. You want to get a couple of buddies together and go buy one. Figure out how you're going to manage it, knock yourself out.

Pat Poling - We think that's a great way for individuals to place in the marketplace. It's not a very effective model, we think for a sponsor like us or other sponsors like us because you can't have on site management that's efficient at that level. Somewhere around a hundred units, that starts to work. You can maybe do something a little below that, but not much below that. You're probably in the 80-100 unit on the low end, 300-400 on the high end. When you translate that into 50, 60, 70,000 a door, you're talking about assets that are maybe six million on the low end to 25-30 million on the high end. That's probably the range that you'd be looking at.

Adam Hooper - Yeah and that's right in the real house where we see the deals on RealCrowd rates. Sub-institutional in size but bigger than what an individual owner might be able to take down themselves.

Pat Poling - Right, right.

Adam Hooper - Switching gears a little bit to the investor side of things. You've laid out a great foundation for how you guys look at the deals, and maybe what some of those criteria are. But as an investor, when you're looking at different deals from different sponsors, how can you determine if they're buying something right?

Pat Poling - That's probably the thing we spend the most time on is helping the contacts that we have. Folks that have reached out to us develop a deeper understanding of the marketplace so that they can make an informed decision. We're big believers that one, you don't sell these kinds of investments. As we've often said, none of us are that good a sales people and two, we just don't think you're going to talk somebody into writing the kind of check you have to write to get in on one of these investments. What really needs to happen is people getting educated and learning more about what might happen in terms of how this investment would operate. All of the questions that we just went through, all those topics, those are things that everybody should be looking to understand from each sponsor. Because this might be a dirty little secret inside the industry. We actually don't compete against each other. The other opportunities that you have on your platform, we're not competing against those 'cause we're all doing something a little different. We're all aiming at a different piece of the marketplace and doing something strategically a little different than next person. And so understanding what those differences are help each investor figure out, okay is this a fit for what I'm trying to do with these kinds of dollars that I've got or not. That's probably the most important thing we think for anyone to do is to understand how the sponsor is implementing their program, so that they can then make a decision

Pat Poling - as to whether or not it's a fit for what they want to be doing.

Adam Hooper - That's a great point, and I guess when you're looking at those things we talk about before. Everybody is doing a little bit different. Are there some that you'd weight higher than others as an investor. Again, you mention what kind of capital. Is this more risk capital? Is this more long-term capital? What are some of those criteria that you think would bubble up a little bit higher, maybe for investors to look at first verses some of the other ones we talked about?

Pat Poling - Timing, probably the number one reason I end up talking people out of working with us is timing. When they need their money back. There are absolutely investors out there that want to be long in real estate, that's great and I understand that. There are others that are more focused on I'm not really sure what the future looks like. I'm not comfortable making a long-term investment, I'd like to get in and see how something works and I'd like to see my money coming back maybe on around three years. There are opportunities on your platform that look just like that, and so that's one of the places that I would encourage those folks and I do. I encourage them, go back and talk to these sponsors so that you can get understand how that might work in your model and we also encourage folks. In addition to talking to sponsors. We think sponsors are great to talk to obviously. Talk to your tax professional, talk to your attorney, and if you don't have those, and I continue to be amazed at how many people are exploring these kinds of opportunities and don't avail themselves of that kind of support. Because those are important factors to consider in terms of how this is going to work. If you're investing in something over a shorter period of time. You may see actually a more lucrative return especially if it's a more speculative investment and the tax consequences of that investment are different than if you were in a long investment. And that doesn't mean that one of those is good and one of those is bad. It might that, gee, maybe I need to have one

Pat Poling - of each of those in my portfolio to really have the diversification I want to end up with. And having your own professional team that you can go to that helps you understand that is we think an important part of being a good investor.

RealCrowd - Thanks again for listening to the RealCrowd podcast. If you like what you're hearing, please visit to learn more and subscribe to iTunes, Google Music and SoundCloud. RealCrowd, invest smarter.

RealCrowd (Real User Testimonial) - My name is Jack and I been in the financial services industry for over 30 years. I've done six different deals. When I first started doing these deals, I was looking for core real estate cash flow. I wasn't looking for a lot of upside return. I wanted more immediate yield, and so I went conservative to start and then as I've gone through. I've just looked, really the quality the sponsors first and foremost and their level of experience. Now I'm trying to mix in different types of properties, different geographies. I wanted some cool plus and a little bit of development, so it's still a pretty, in my view a conservative portfolio. Mostly folks own sponsors and then looking at the projections as far as how much of the return would come from current income and yield, and how much of it would be based on appreciation. And thinking through whether or not, how much risk there is and the appreciation being realized. So it's really a portfolio approach for me, looking at different sponsors, different geographies, different property types and even different types of properties as far as core or core plus or development. I'm looking for, I guess I would start with a certain level of return because my investments are primarily in equities. And I look at the direct real estate investing through RealCrowd as being diversification play. But I also want a pretty substantial return, so I typically look for properties that have a yield of 7%, 8% ,9% current income, and then an IRR that's in the mid to upper teens, low 20s in some cases.

RealCrowd (Real User Testimonial) - So I start with returns, I focus on sponsor. I look for property types that I don't have already invested in the portfolio and I guess finally look at geography. Well I think that diversification is important to any portfolio. I looked at a number of different crowdfunding portals and I chose RealCrowd because I like the transparency. I like the fact that the sponsors pay a fee to be on the portal, and that there's not built in fees for RealCrowd in the compensation structure of the deal. Because these deals are, they're fairly complicated to understand anyway because you've got to pay a management fee, an incentive fee and things like that. And if they are embedded fess from the portal provider, it just makes the complexity so much higher. I think the key for me is transparency and I just think that direct real estate is a great compliment to a lot of other stock and bond portfolios. I think it provides inflation protection, current income and appreciation potential. For me, direct real estate is better than REITS which are more subject to market fluctuation in price. And I just think with the minimums that are out there now and the quality of the sponsors, it's a really good way for a lot of investors to access direct real estate without the hassle of property management on their own. I think it's an important advancement for a lot of investors to diversify their portfolio.

RealCrowd - Thanks again for listening to the RealCrowd podcast. If you like what you're hearing, please visit to learn more and subscribe on iTunes, the Google Music and SoundCloud. RealCrowd, invest smarter.

Adam Hooper - And that's great advice. We're always big proponents of engaging your own contacts and legal counsel before you get into these things, 'cause again these are not insignificant amounts of money that people are investing, and always good to consult professionals before you make decisions. One of the other documents that we are big proponents of suggesting people actually look through is the PPM. If you're looking through a PPM on a deal, what are some of the sections that you would call out as more necessary and others that investors should be taken a review at?

Pat Poling - We really appreciate your support of that. I can't tell you how many times I have a conversation with folks in which we will start the conversation with an investor, a prospective investor who's concerned about risk, not sure about how sponsors work. By the end of the call, they're excited about the opportunity, they're eager to move forward. And I usually stop them right there and say wait a minute, all we've had was a phone call. And if I was a bad guy, which I'm going to tell you I'm not, but guess what if I was a bad guy, I'd also tell you I'm not a bad guy. Don't believe me, read the PPM that's what it's there for. Go through that document, it's 75 pages that are boring as possible. And every other page is going to say, don't do this and here's why. And you know what, you should read through that. I've answered a bunch of your questions today but you should read that with a pad of paper next to you and write down the additional questions you're going to have, 'cause if you read it, you're going to have more questions. And it's only after you've looked at the PPM and the operating agreement and any other documentation that you'd like us or another sponsor to provide, that you can know that you've answered all your questions. You don't want to get into an investment and then get a quarterly report, and go, "Man why does this work this way?" And then have the answer be, oh on page 37 of the PPM, it explains how this works. Oh that's not what I wanted to do all. Well your money is gone. It's not like all of us raise money and keep it in a room somewhere.

Pat Poling - We raise money and then we go buy something with it and it's in an asset. It's like George Bailey at the savings and loan. It's not sitting there in a room for people to come get so reading the PPM is critical. The allegory is it's a prospectus effectively for to these kinds of investment. And I joke about it but the segments that say don't do it and here's why, those are probably the most critical pieces to read. To go through and understand okay, what are the risks I'm being exposed to here that are risks of market volatility, the risks of the size of the sponsor, of other activities the sponsor may be involved in. Those are critical, the other piece that probably gets more attention from investors, and appropriately so is fees. Everybody wants to know what fees are and well we explain them as best we can, and I know the sponsors do the same. You've got to read the fine print to really understand how the fee operates. And if you can't understand from the PPM, which they're written by lawyers so they're not necessarily written to be marketing material. If you don't understand, and that's a great place to go back and ask questions. Well how does this work? Can you give me an example? Can you show me something that you've already done that I can look at so I can understand what I'm doing? Because again nobody wants anybody to get into an investment and then realize later on, oh I thought it worked differently. That's what we're trying to avoid with these having these documents available. And by the way, everybody has spent a lot of time and money preparing these.

Pat Poling - It's not like they're an off the shelf thing that you can go do for just a few bucks. There's a lot of energy that goes into preparing them. We strongly encourage folks to take advantage of them.

Adam Hooper - And you made a great point. It's written by lawyers. It's a boring read. We always suggest to listeners, pour your favorite beverage, spend a couple hours go through the PPM. But as a investor or prospective investors going through a PPM. Are there certain areas you would recommend investors really circle and think about okay, when I talked to the sponsor, these are the questions surrounding the PPM that I really want to have focus on.

Pat Poling - Fees, so how does the sponsor get paid. And this is one of the areas where, I don't know how many sponsors you all work with it at RealCrowd. There's that many different ways for sponsors to get paid.

Adam Hooper - That's true.

Pat Poling - There is no such thing as an industry standard. And that doesn't mean anybody's taking advantage of anybody else. It's just there's a lot of different ways to do this and some people are very creative about it. Some people are very simple but understanding it so that you can be comfortable with it 'cause as an investor you are paying that fee. The scope of the investment, our attorneys are very, very fond of saying, "You basically do whatever you want to do with your investor's money as long as you disclose it in the PPM." If I disclose in the PPM that I'm using the investor's money to buy myself a very nice boat for me to use on the weekends. I can go buy a really nice boat to use on the weekends 'cause I have--

Adam Hooper - That's not in docs though.

Pat Poling - Please read my docs and I usually make a joke like that with my investors from the standpoint of so, it's not in there. But to make sure, go read it. Go read it and look for that kind of stuff because so for example, our PPM for the particular fund we have on your platform right now states that we're allowed to invest in equity positions in real estate. So we can't do mortgages, that's off the table for us. We describe the kind of asset we are interested in going after but we're not precluded from investing in an A or C. So if you want to invest with someone, that is only an exclusively going to work in the B space then you may not want to invest with us, after you read that PPM. You may say okay that's not tight enough. I want to look for somebody that's got to tighter PPM. Now I don't know if you'll find that out there but you'll at least know what we've told you upfront, that this is where we're targeting, but we have the flexibility to do these other things and here's things we can't do. So those are certainly areas and then as I said, the third piece is, and while it's rather voluminous and some of the things you look at. It's sort of Act of God kind of stuff, but what are all the things that could go wrong that could cause this investment to lose money. You will see statements inside PPM's that will say your investment is at risk, you could lose all of your money. Here are the things that could potentially cause that to happen.

Pat Poling - And if reading through some of those, it's not that any one of those may scare someone away, if you will, but it might jog a question. I get a very common question, which is, well what's the succession plan? I like you, you sound like you make a lot of sense, what if you get hit by a bus this afternoon? What happens then? And that's one of the items that's listed in the PPM, is that there's a risk of losing some senior management. How's that going to be addressed? So that may raise an area that somebody then wants to ask a question about. Unfortunately I'd say the vast majority of the folks we have worked with probably have not taken full advantage of the documents we provide. Ultimately, obviously that's up to each of your listeners to decide what due diligence they're going to do. We strongly recommend folks do that. It's to their benefit, and we think it's to our benefit as well.

Adam Hooper - And now, outside of the boat for your weekend pleasure cruise, what are some red flags that an investor might come across in a PPM?

Pat Poling - I'm an investor in a number of other platforms, number of other sponsor offerings. I've got some retirement money, and one of the restrictions around investing retirement money is you can't self deal. I can't invest in my own assets. I have relationships with some other sponsors out there. Which is interesting, cause it gives me a chance to see how other folks do the same sorts of things. Reporting, transparency, we think that's a really critical area for this industry to not only perform well at, but to actually improve. One of the places where we think we could all do a better job, and again, the PPM is going to call out what kind of transparency there is, the frequency of reporting, the kind of detail that's going to be provided on a regular basis. We think that's an important factor to understand. I also mention fees. Fees take the form of not just a fee that gets paid, a management fee, a transaction fee, something along those lines, but also the sharing of capital, right? The way a carried interest might be structured. When does that occur, what's the waterfall actually look like, is that carry effectively taking place on the front end of the deal, and while it may mature over time, is there essentially a giving up of some portion of the asset on day one that has to then be earned back, or is it really back end loaded such that I'm going to have money as an investor returned before there's some sharing of profits. And it's not that one of those is better than the other,

Pat Poling - it's that some of those may be inconsistent with what you're comfortable with. And getting comfortable with and understanding how those are structured can then help you know if this is something you want to do. We lose investors, we have folks say, yeah, you know what, we're not going to work with you, I'm just not comfortable with the way your fee structure works. That's great, if you prefer a different fee structure, you absolutely shouldn't invest with us. Fees are one of the places that are different. Like I said, transparency is another that's going to be different. Withdrawal, in general, real estate's not liquid. How do I get my money back? What's it cost to get my money back? What's the timing when I need to get my money back if I say hey, can I get my money back, how long before I can get it back? Can I get it back, or do I have to wait until the investment runs it full cycle before I have a chance to withdraw my funds? And again, the answer could be yes or no to any one of those questions, that doesn't necessarily mean that it's a good or a bad investment. Your question about red flags, I think red flags are going to be in the eye of the beholder in terms of what somebody is looking for. Obviously if somebody has something in their PPM as silly as what I joked about with a boat or some other nonsense like that, and I don't think there's too many reputable attorneys that would actually put something in a PPM like that, but, you know, again, that's said more to get folks focused on the PPM is the rules of the game.

Pat Poling - Marketing materials are just that, they're marketing materials. Every one of them is going to have the same statement on it, this is not solicitation, it's not an offer, the PPM is the sole document that governs how this investment will operate. If that's the rules of the game, you need to back to it and understand it at least to the extent that you want to understand it.

Adam Hooper - Yeah, and then you know, so much of historically when you have access to these investment opportunities, it's someone that you have an established relationship with and you have that trust. Whether it's through a professional network or just being an acquaintance and kind of understanding how that person operates from a trust level. This is very new for a lot of people to try to develop that trust enough to write a 25 or 50 or 100 thousand dollar check. As an investor, what are some of those areas, or how can you determine that trustworthiness from a sponsor as you've invested in other sponsor's deals. How do you go about building that trust from what relates to often times a cold intro, from the first time they see a deal on the platform?

Pat Poling - For many investors, trust is part of the equation, you're right. It's a referral, right? Hey my brother in law told me about this, or I was having a barbecue over the weekend and my neighbor mentioned you guys, and those are great. We certainly get a lot of initial contacts from referrals. We don't get all of them that way, right? A lot of them come, as you said, more as a cold introduction. We kind of don't think you should trust, you know? Remember the old Reagan expression, trust but verify? That's great, you can have a nice phone call with somebody, but it's still just a phone call. You've really got to be able to look at the PPM. We get a lot of requests for historical information. Show me what you've already done, give me some materials I can look at, so I can understand how you've performed in the past. Do you have some sample reports? Can you give me some reports for your... Again, in our instance we have a fund, so it's ongoing. If it was initial and a one off investment, there may not be reports for that asset, but there'd be reports maybe for another asset. Show me what kind of reporting I'm going to see on a regular basis and how detailed it is. What kind of access to you am I going to have? So if I get a quarterly report and I've got a question, how am I going to be able to engage with you? We do a quarterly webinar, for example, members only. It's done about a month after the quarterly reports come out. It's effectively a quarterly conference call like you'd see for a publicly traded entity. And not all of our investors participate,

Pat Poling - but many of them do. It's a chance for them to ask questions and for some, not ask questions, but just hover in the background and listen to the questions others ask, and listen to what the answers are. Those are the kinds of things that hopefully get folks to a place where they can feel comfortable about the investment. Trust is really going to be something that gets developed over time. So maybe after somebody's been an investor with a sponsor for several quarters, a year, a couple of years, maybe then they'll "trust them." If I was investing with somebody I trusted, I'd still read the PPM. I'd still do all the same things. And that's not because I think somebody's going to try and take advantage of me, it's 75 pages. It's impossible for me to cover everything that's in the PPM with somebody on a couple of one hour phone calls. It's just not possible, which is why the document exists. So read the document, ask your questions. If you're not a hundred percent comfortable, don't do it. Go find something else, let your money sit. You're never going to get hurt leaving your money in cash. You know, is there an opportunity cost? Sure, but you know, rule number one and rule number two, right, you know, if you go out of the gate and you lose money, you will never get back to even cause you're constantly going to be chasing a higher and higher returns to try and get back to even. You're better off just letting your money sit in cash until you get to something you can feel really good about

Pat Poling - because you've done the due diligence. Not because some guy sounded nice or some young lady gave you a phone call and chatted you up or sent you some really slick marketing materials. That's all great, right, we all do that kind of stuff, but the meat of the matter is performance, transparency, the PPMs, and so on.

Adam Hooper - Good, and we've talked in the couple past episodes on the podcast about how do you determine more conservative underwriting versus more aggressive underwriting. You mentioned your view on exit cap rates earlier in this episode. As an investor that's maybe not as savvy in the real estate space, how can you look at a few different factors to maybe determine how aggressive a sponsor might be on that underwriting model or how conservative they're being?

Pat Poling - One of the things that we do, we've actually got some material on our website about it, we've done some of our own stand alone podcasts about it. We'll not only talk conceptually about underwriting, we use an 80-20 model as opposed to 50-50. But we also go into detail and actually show folks. We'll go through underwrites with them so they can see what we mean. So here's an example of what we mean by 80-20 versus 50-50. If we've got out and done a comp study, and what we've been able to identify is this particular asset we're looking at has a $150 rent differential to the current market for improved assets. So were going to put some money in, and we could raise the rents $150, and that would put us square in the middle of the market. Well, we think if you underwrite $150, that's basically a 50-50 proposition. Half the time I might be low, half the time I might be high. Cause I'm kind of aiming for the middle of the market. We don't like flipping coins to make money. We would rather stack the deck in our favor. So if it's $150, we may underwrite $100, $105, $110, something like that. And not just on rent, but vacancy, and concessions, and bad debt, exit cap rates, all the way through the entire process. Now that really does two things. One, it makes sure that if a deal gets all the way through our process, it's a conservative deal, and we have a significant opportunity to outperform our underwrite, and relatively modest opportunity to underperform. Doesn't mean we've eliminated all the risk, but we've tightened it up quite a bit.

Pat Poling - It also means there's some really good deals on the cutting room floor, which I would love to get those deals, but I'm not going to put my money or investor's money at risk simply trying to pick up a deal that's got a little more risk associated with it. Now again, that's us, that's a conversation everybody should have with the sponsor is how do you underwrite, do you have an example underwrite you could walk me through, or do you have a copy of a webinar or something you've done where you've explained how you do underwriting so that I can understand. Now that may be a more complicated conversation for somebody to have, but you can still ask the basic question, so would you describe yourself as being conservative, average, or aggressive in terms of how you underwrite, and how do you back that up? Show me why you think you're in that category, and what's the benefit of being there? Again, there's nothing wrong with being aggressive in terms of underwriting. For certain kinds of investments, that's exactly the way you need to approach it. You need to be approaching it from the standpoint of we're pushing the limit because we're really trying to knock this out of the park. This probably isn't where you want to put all of your money. If you're looking to make a big splash with a little bit of your money, this might be a place for you to go. We're going to fit in a different place.

Adam Hooper - As an investor, you would be asking are the numbers you're projecting, are they based on numbers that are below market, at market, or above market, and the key there wouldn't be whether it's one or the other, but the reasons why.

Pat Poling - Right, and again, and whether or not that fits with what I'm trying to achieve. What we offer, and this is one of the things I think most sponsors will do. Most sponsors offer one model. This deal is going to perform this way. This is a conservative deal. This is a middle of the road blended deal, we think there's some risk associated with it, we also think there's some conservativeness associated with it, or hey this is a knock it out of the park, we're going to make 25 or 30% on this thing, we're going to make that in just a few years, and there's some risk associated with it that you out of be comfortable with going in. You tend not to see somebody bundling all of those together in one offering, which is good for an investor. Again, we advocate diversification, and diversification isn't just I own some stocks and I own some bonds, we think, we love stocks, I've got a lot of money in stocks, I've got some money in internationals, I've got some money in US stocks, those have performed pretty decently. They also have a lot of volatility right? Last few days underscore that. Bonds and other fixed income instruments, great, nice solid, steady, income, not a lot of tax advantages to either of those two investments. Cash, always good to have, commodities, yup. Real estate, but even real estate isn't just one place just like stocks aren't just one place. There are stocks you can buy that are more conservative, that are dependable over a period of time. There are others that you're taking a bit of a flier on.

Pat Poling - Yeah, I'll throw a few dollars there. Who knows, maybe I'll hit it big, maybe I'll lose that money but I'm comfortable with the kind of risk profile for the dollar I'm putting in. So it's really matching those things up as opposed to a conservative investment is better than a more speculative investment. They're two different beasts in the same way that you wouldn't compare keeping some money in gold with putting some money in stocks. They're two different things.

Adam Hooper - Okay, so now we've identified what makes an attractive market, we've identified as an investor some of those questions you might ask, how to get comfortable with the great deals. Back to, with your sponsor hat on, how do you know when it's time to sell a property?

Pat Poling - When we buy an asset, part of the modeling is how are we getting out? There's an old adage, and I must confess I never remember which the old adage is cause I've heard it three different ways, gee, we make our money when we buy. Oh, we make our money when we sell it. No, you make money when you buy, you make money when you operate, you make money when you sell. If you're not doing that, then I don't think you're playing the game the right way. You should be making money all the way through. You certainly want to buy as advantageously as you can. You want to operate well so you generate cash and increase value, and you should have a plan for how you're going to get out. And that plan can't be developed the year before you get out, right? It's got to be part of the acquisition strategy. You got to know going in this is what I am planning on, and you need to be prepared for the reality that that's probably not what's going to happen. So we have a planned exit. Generally our planned exits are around five to seven years. It's not only tied to returns, but it's tied to tax strategy and some other things. Some assets, as I said, some investments are going to have a little shorter time frame, some may have a longer time frame. But that's typically the kind of timing that we look for. That's our going in plan. Probably, well, about half the assets that we've been associated with, we have our fund assets and then we have assets that we own outside of this particular fund, about half of them have sold in what we would describe

Pat Poling - as a windfall or an opportunistic expert exit. Somebody comes and knocks on your door and says, "Hey, I like your property, I'll write you a check for X." If that's what the property's worth, well why would we sell it? We know that's what it worth, I'm not making any extra money doing that, I'm just going to keep it. If it's what it might be worth next year, that's not much of a bump, you know? I might as well just hang on to it. If somebody's willing to write me a check for it's going to be worth three years from now, now they've got my attention and we'll take a look at that. And so that's certainly one of the ways that you can exit. The other is to simply run it's course, and you get to the tail end of the asset. Capital structure has a lot to do with that, so if you've put five year debt on an asset, well, you've got a five year hurdle that you've got to do something with. You've either got to re-up or sell or do something, at five years you're kind of locked in. We tend to use longer term structured debt that has a window in which we can do a number of things as I said, sort of in that five to seven year time frame. Taxes fit into it. Because we're a long real estate play, we rely on 1031s as part of our exit strategy, and there's some timing issues obviously around 1031s not only in terms of the actual mechanics of how you do it, but where the market's at. And as we mentioned earlier, if you're going to be long in the market, you're not quite as focused on where the cycle is relative to cap rate movement.

Pat Poling - We're in a pretty stable cap rate environment, and it's difficult to see given the demand for real estate. Significant swings in cap rates over the next number of years, but doesn't mean it couldn't happen, right? Nobody knows exactly what cap rates are going to do. But we always bake in some negative cap rate movement. At least 50 basis points, maybe a hundred, maybe even a little over a hundred. Simply because we don't think you want to make your money by planning on getting out with a more favorable cap rate than you went in with.

Adam Hooper - And so just to clarify that, if you're buying a property at a 6.5% cap rate going in, you're going to underwrite an exit at a seven or higher so you're not trying to show that value by cap rate compression, right? Underwriting an exit at a five cap, say.

Pat Poling - Correct, and more typical for us is, we might buy an asset in a six and half cap market at a seven cap, and we'd underwrite a seven and half for the exit. We're going to buy it advantageously and then we're going to bake in maybe 50 points above what we paid for it, and a hundred above where the market's actually at, and if it actually went to eight when we sold, I wouldn't be really worried about that. And the reason why is this, is if the market's at an eight, well, I got a 10 million dollar property, I grew it to 14 million, maybe I only get to sell it for 13, but the 20 million property I'm buying is on sale for 17 million, why, because cap rates went up. I can buy a 20 million dollar property for 17 million bucks, and the only time I really care about what's going on with cap rates is when I start to unwind this investment which might be 10 years from now or maybe even longer, right? And that's just a function of how you've structured everything.

Adam Hooper - And unwind meaning, you're no longer doing those 1031 exchanges and you're pulling cash out of the real estate game.

Pat Poling - Exactly, when you're actually really exiting. The model I often share with folks is this. Is if you're a home owner, you bought your starter house. Everybody's very proud of their starter house. And many of us when we sold our starter house and we paid a hundred thousand for it and we sold it for a hundred and fifty and we thumped our chests, and wow look at the great job I did, look at all this money I made. And then go buy their family house, right? The house they're going to raise their kids in, the house they're going to have for a very long period of time. And then ultimately they're going to downsize at the tail end. Well downsizing is really the only time when I care about kind of what's going on in the marketplace. I'd actually have been better off to sell my starter house for maybe a hundred and twenty grand, cause the market's still kind of modest, because I could've bought my family house a lot cheaper. And that's really the place I was going to make my money over time. This notion of you want to buy low and sell high, well that's true if you're getting in and getting out. But if you're just going to get back in again after you get out, after you sell that asset, then it's a little more complicated than that. And this is one of those areas where we'll do some education, right? Because a lot of folks will come to us and say, well aren't you really worried that cap rates are going to move against you? So it takes some time to help folks understand that for the kind of model we employ,

Pat Poling - that kind of cap rate movement can, I underscore can, can be actually advantageous for us.

Adam Hooper - I assume that also helps you guys manage, when you're selling an asset, still leaving some value on the table for that buyer coming in that makes it a more attractive proposition for your exit, right?

Pat Poling - Yeah, the two biggest factors in planning an exit are leaving some meat on the bone, demonstrated value. Good example, we've got an asset, couple laundry facilities on the property, we have the ability to add washer dryers to the units, 200 unit complex. We'll take 20 units and do the upgrade. Demonstrate the rent movement, figure out what the issues are around actually doing the improvement and so on, and then that's it, we stop, right? We don't do any more than that. When we go to market, you don't have to go do a comp study, we know how much incremental rent you get for having washer dryer hook ups. We know how much it costs to do it, we know it can be done, we leave that on the table for the next guy. And what that does is it broadens the market of individuals and firms that might be interested in buying that asset when it's time for us to leave. If we do every improvement, and we see this a lot, individuals or sponsors that are very proud of everything they've done to improve the asset, and we walk around just scratching our head trying to figure out well what would we do with it other than clip the coupon? Which now I'm basically making money as a function of the cap rate that I bought it at and the interest rates. And that's really the only two levers I've got to tug cause everything else is kind of baked into it. And there's nothing wrong with that kind of investment. If that's what somebody's looking for is extremely stable, bond like returns over time with some tax advantages, that makes a lot of sense. And there may be sponsors on your platform

Pat Poling - that that's what they're focused on, that's great. That's not what we do, right? We've got this value add component. The other thing that we'll look at, and it goes back to that one, three, five analysis. We want to be in sub markets that are growing, all the great, positive things we talked about. I don't really want to be in the sub markets, I don't want to be in the hot place of growth right now. Sounds great, there are some markets in Dallas that are a really good example of this, and I'm sure they exist in many markets across the country. Toyota's relocating a corporate headquarters. There are about a half a dozen other corporate headquarters being built in this one portion of the DFW metroplex. Everybody wants to get in on it. There's no land left to build anything. It's really, really hot. Wouldn't that be a great place to invest? We don't think so. Cause what are you going to do in five years when it's time to sell? Why is that an exciting market to buy five years from now? The growth's done, it's baked in. Like I said, there's no land to build anything else, what's going to be the upside? Instead, how about buying out on the latest piece of infrastructure that the market has built, a turnpike that they've constructed where all the new construction is going on. That five to seven years from now is going to be booming, because that's where all the growth can happen in that particular market. You need to be thinking ahead in order to maximize the opportunity to exit. What's the world going to look like five,

Pat Poling - or seven, or 10 years from now? Whatever the exit time frame might be. And what are the factors that are going to drive more people to be interested? Because, you know, we talk about cap rates. Cap rates aren't a thing, right? It's not like somebody says, well I'm selling for X cap rate or I looked online and this is what the cap rate is so that's what I've got to pay, it's supply and demand. There's one property for sale, how many people want to buy it? If there's only on person that wants to buy it, that's going to be an interesting dialogue. If there are 20 people that are interested in that, well you're going to get better value out of it. You're going to drive a lower cap rate. The way to get more folks interested in that property is to have more upside that you can demonstrate to folks. And so being in a market that's not only going to grow now but that's going to have continued growth opportunities where there's additional improvement opportunities on the asset, that allows somebody else to come in and look at it and say, great, you paid 10, you're selling it for 14, I can buy it 14 and sell it for 20 down the road. That's how I'm going to be interested. And whether that's true or not I don't know, but you want to enough people be able to do the math to say that's a possibility, that gets more folks biding, the more folks that bid, the higher price.

Adam Hooper - From the investor standpoint, say you've got a property that you've added the value, you've still left a little meat for the next guy, what does that look like from the investor standpoint? Do they notice anything different? What does the communication look like? What does that process show up as for the investor?

Pat Poling - This would be one of the places where I think there's a distinction drawn between the funds that are on your platform, and the individual stand alone transactions, right? So if it's an individual, stand alone transaction, everybody's getting out together, right? There's a lot of communication coming about we're either on the market or we've had an off market offer and we're entertaining it, and you should be able to get some really specific financials back in terms of this is what we think the exit's going to look like, we're looking at this kind of gain, we've made some additional gains from principal reduction, here's how the waterfall works, this is what we think the numbers are going to look like. You should be able to get some visibility to that not with precision down to pennies, but some good ball park numbers. In a fund, there's really a couple of different ways that might happen. A fund may exit an asset and use those dollars to maybe buy out some members that it's time for them to leave, that they want to redeem some of their units. They might use that to make improvements in assets that are already in the fund, they might buy another asset simply by buying it as an investment as opposed to a 1031. They also might do a 1031, and one of the reasons we like the 1031 model is not just the tax deferral, by the way, I always underscore that with folks, it is tax deferrable, there's only one instance in which it's tax avoidance, and that's if you're near the end of the line and you're going to have that wonderful activity

Pat Poling - of a step in basis, and you know, some folks are. Part of their estate planning is I want to have some of my money in real estate, and I want some assets that are going to enjoy that step up in basis. And again, that's why you have a good attorney and a good tax person that can work with you, cause I'm not able to do that for each person. I know how it all works, but I don't know their individual circumstances, nor does any other sponsor. 1031s are great because you get effectively an interest free loan from the federal government. Instead of having to distribute cash to pay taxes, that money stays inside and rolls into the next asset. That 10 million dollar property you buy, you sell it for 14, well you don't just buy a 15 million dollar property, you go buy an 18 million dollar property. And now instead of seeing cash at six, seven, eight percent, you're seeing cash at 10, 11, 12, 13%. And you're seeing equity growth that was nine, 10, 11%, you're seeing equity growth in the high teens, and now you're getting simple returns that are in the mid to high 20s simply because you've been able to leverage up by virtue of this 1031. And part of what this does, and we think this is another component of the tax conversation everybody should understand and have for their tax professional, is you're basically taking cash that would've flown out on the front end and been treated as ordinary income at whatever those rates were, and you translate that into gain on the back end. And by moving it to gain on the back end, at a minimum you get long term gain treatment

Pat Poling - if not as we said potentially a step up in basis and so on. That's one of those places where understanding the waterfall, what's the sequence of how I get my money back, talking to my tax professional about it, really helps me understand one of the most important values we think of real estate. Real estate is, we believe, stable like bonds, returns like equities, so those are two really good things, but the big kicker is you've got tax advantages that neither of those offer. Which none of that is to say you shouldn't have money in bonds, you shouldn't have money in stocks. Again, I've got money there. I think probably everybody that's listening does. But you ought to have some real estate as well, and if you're going to have real estate, you should take advantage to the extent that you can of the unique tax capabilities that real estate provides. Again, not because you're getting out of paying tax, but because you can defer that tax, and by deferring it, you get house money to play with. And if you've got house money to play with, you can either take some of your chips off the table, right, which lowers your risk even more, or you can leave it all and let it ride and grow that money even faster, still in a fairly stable investment.

Adam Hooper - And now what does the end of life of a fund look like? You just talked about the difference between an exit with an individual deal what that might look like as an asset versus a fund exit. But when you're winding out the fund, what does that look like for an investor versus closing of just an individual deal?

Pat Poling - There may be sponsors out there that will initiate a fund by either seeding the fund in advance with some assets, or potentially they've got a portfolio lined up, right, buy a portfolio all at once. And that may in fact be the exit strategy, right? We're going to do some things, and then we're going to sell this portfolio at the end and we've actually got some institutional relationships and we're going to sell it all at once. There's probably less of that that goes on than the way that we structure our model, and that is, you purchase assets on what we call an asset ladder. Over the course of 18 to 24 months, you ladder assets into the fund, and when the day comes, and in our particular structure, it's a function of when enough investors have said, time for me to go, give me my money back! It could be five years from now, could be eight, could be 10, could be 20 years from now. But whenever that day occurs that you get to that critical point that enough investors have said hey, time to leave, well then you start the dissolution process which, hey you didn't buy everything in one day, well you're not going to sell it all in one day most likely. You start that process of 18 to 24 months and part of that then is going to be looking at the current tax environment. Is there some advantage in addition to market forces to doing things in one particular way or the other in terms of which assets might go when and so on. The other opportunity could be along the way... You know our opinion on capital gains rates right now

Pat Poling - is they're actually pretty good. Everybody would love tax rates to be lower. That's a given. If you are of a certain age, I'll put it that way, my age, or maybe a little older, you remember when gains rates were a lot higher than they are now. These are actually pretty favorable rates. They could go down even more. There could be a capital gains holiday someday. Who knows, right? Given what's gone on in the political environment this last year relative to tax code, it's very difficult to forecast what the future might look like. But let's say that some number of years down the road we saw a dip in capital gains rates, or even a holiday for some period of time. Well then probably everyone would want to go through some cycle of harvesting assets, paying what little bit of tax you had to pay, and then immediately starting the deferral process again, because it's a pendulum and most likely the next administration would say that was a bad idea, let's raise rates, and let's move them in the opposite direction. There could be some of that that goes on along the way, but ultimately, yes, they'll be an exit, and that exit's going to involve some long term gains. They'll be some depreciation recapture, which is still at a favorable rate relative to ordinary income rates. You're not getting out of this thing without paying some tax unless you're, I just said, taking the ultimate exit. But you're paying that tax way down the road with future dollars that have a different value associated with them,

Pat Poling - and you've been given that interest free money to play with for a long period of time, and potentially one of your options along the way, as I said, you invest say a hundred thousand dollars in a fund, it performs well over time, at a certain point in time, you may be able to take your entire hundred thousand out, your original investment, and still have a sizeable investment. 50, 75, 100, 150 thousand dollars left inside that fund that can continue to grow and so on, but effectively, it's all house money. You can take your hundred and go invest it somewhere else, do something else with it. This all ties back to that PPM, right? Some funds, some investments can do what I just described, some cannot, some are not structured that way, some are not allowed to do that. That PPM will give you some guidance as to what can and cannot happen in terms of how these structures might work. And it certainly gets... This is pretty esoteric stuff so like I said, if you're an investor who's either new to real estate or real estate is not your chosen profession, you're in the medical world or you're in tech or some other piece of the economy, this may be a little difficult to understand. That doesn't mean you shouldn't understand it, and a good sponsor's going to help you understand it and provide you with educational materials and models and walk you through what that might look like so that you can be comfortable. And like I said, if you're ultimately not comfortable with understanding how that works from a tax standpoint

Pat Poling - and your tax advisor doesn't help you get there, then don't make the investment. Go somewhere, go do something else.

Adam Hooper - That's a pretty good full cycle look there. That takes us start to finish, doesn't it? We asked you about a year ago to do some prognostication. We're going to put you on the spot here for the crystal ball again. What are we going to see this year? New markets are going to come into vogue, other markets might not? What's your take on how we're looking for 2018 given the new tax environment, given the maturation of the cycle. How are things looking?

Pat Poling - Well, in some respects, I'm probably going to give you the same answer I gave you last year, which is I think, last year I said we've had seven years of growth, the recession is coming, it's not a recession, it's the recession, there is absolutely going to be a recession. We just don't know when it's going to happen. Well, it didn't happen in the last 12 months, is it going to happen in the next 12? I wish my crystal ball was that good. I kind of don't care. Again, if you're long in these models, you're going to own real estate during a recession. And if you haven't purchased it and done your underwriting with that in mind, then being long is going to be difficult. It's even more difficult we think if you're playing a short game. If you're playing a I'm going to get in and out within a brief period of time. You're really taking a risk that gee, when it's time to get out, let me give you an example. Find a great property, it's a rehab, right? And this is not value add, it's a rehab property. I'm going to get a bridge loan on it, I'm not putting traditional financing, I'm going to get in, tune this place up, more than just a coat of paint, going to flip it to somebody that wants to do the long haul work and then we're out of here. Well, if that recession hits eight months after you take that project tdone, now you're kind of in a bind, you know? And that's tough. hat's kind of that timing risk on a shorter term property. If you're looking a little longer term, the economics cycle's not as big of an issue. We're actually looking forward to the next recession.

Pat Poling - And the reason for that is this; is we're not worried at all about our properties. We know we bought good assets, we structured them to perform well. I know everybody hasn't done that, and the folks that haven't done it, those are going to be opportunities, right? The person that went in with 80% leverage up front, that levered some of their improvements, that was trying to time a quick in and quick exit. When they get caught, either they're going to be looking to sell on the cheap to just get out, or the bank's going to sell it six months later. And those are opportunities, and you can't take advantage of those opportunities if you're worrying about your own stuff. We know a recession's coming. There's no way we're going to string 20 years of growth together. This is already the third longest period of growth economically in history, and within the next, I think it's 14 months or something like that, if we continue to grow, it'll be the longest. The odds are against us. This tax change certainly will give a bit of a spike, but ultimately it doesn't put substantial dollars in average Joe's and Jane's pockets for them to spend so the whole of the economy moves forward. And that's to be seen, then we won't see real growth out of it. If we stay in this 2% range that we've been in for seven, eight years now, then we'll see a dip. It may not be a deep one, it might be a short recession, it might be two quarters, it might be three quarters, it might be very modest decline in economic activity.

Pat Poling - There doesn't appear to be the same kind of bubbles that we've had in the past, but you know, you can't tell. And probably the bigger challenge is the Fed, God love 'em, nice folks, they have not moved monetary policies substantially such that they've got many bullets in their gun. When we do turn down they've only got a couple of quarter points to cut, and then they're back to some kind of QE strategy. There's not a lot that they're going to be able to do so we're just going to have to see how it plays out. We're absolutely closer to it than we were a year ago, which obviously that's just the calendar moving, but I can't imagine that any of your listeners think that we're going to string together five more years of uninterrupted economic growth. We're going to have a down turn, it's just a natural part of it. Now on the real estate side, right, you know real estate has cycles as well and individual markets have cycles, and again, that's really timed to that timing issue, but you can also mitigate that, and that's part of what we try to do with our strategy of if you focus on markets that have a demonstrated history of growth and have a growth runway in front of them, that doesn't mean they're not going to experience a cycle of maturity and then decline before they begin to grow again, but the volatility of that may be much smaller. The wave is going to be a lot tighter than what you might see in a market that doesn't have that kind of growth supporting it over time.

Adam Hooper - Okay, there we go, we'll see how it plays out, but I think that takes us to a pretty good ending point here today, Pat. We really appreciate your time on the podcast again.

Pat Poling - Great, thank you, appreciate it, and we love listening to 'em. Even we learn something every time we get a chance to listen.

Adam Hooper - Good, well listeners out there, we appreciate you tuning in for another episode. As always, if you have any questions or comments or topics you want to hear us cover, please send us an email to We also appreciate those reviews and ratings on iTunes, Google Play, SoundCloud, and anywhere else you find us. With that, we'll catch you on the next one.

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