Wealth Development Strategies With Multifamily

WealthChannel co-founder Andy Hagans moderated a panel at Multifamily Investor Expo 2023, a one-day virtual event hosted by WealthChannel. In this panel discussion, Ashley Tison, DJ Van Keuren, and James Hance discuss wealth development strategies using multifamily.

Panelist Participants

Webinar Highlights

  • Why multifamily has the potential to help investors grow capital over the long run.
  • The appeal of multifamily investments to family offices and ultra high net worth investors.
  • Summary of tax efficient strategies that can be used to enhance multifamily returns.
  • Discussion of the macroeconomic environment, and predictions of where we go from here.
  • Suggestions for stress testing financial projections made by fund and deal sponsors.
  • Live Q&A with webinar attendees.

Connect With Panelists

Panel Transcript

Andy: Today’s panel is called “Wealth Development Strategies with Multifamily,” right? That’s the name of the ballgame today. That’s why we’re all here. Joining me today, I have three panelists, James Hance, Ashley Tison, and DJ Van Keuren. I wanna introduce them each individually here. So, James Hance is founder at Green Bison Capital. At Green Bison Capital, James helps connect investors to commercial real estate investments that deliver passive income. He’s a licensed securities professional holding the Series 63 and 82 registrations with FINRA, and he’s also a registered representative of a New York City based broker dealer. James, welcome to the panel.

James: Hey. Good morning, Andy. Thanks for having me. Glad to be here.

Andy: Absolutely. And next we have longtime friend of the show, friend of Jimmy’s, friend of mine, Ashley Tison, founder and CEO of OZPros. Ashley, I’m gonna introduce you as The OZ Sherpa, if that’s okay. So, as founder and CEO of OZPros, Ashley specializes in helping asset managers and high net worth investors form their own opportunity zone funds. As an attorney and expert advisor, Ashley also consults with high net worth investors regarding tax advantage structures and investment strategies. Ashley, thanks for joining us today.

Ashley: Andy, it’s always a pleasure to be on the show with you and with Jimmy. I love the energy, I love the guests that you guys put together. I love the topics, I love the interaction, and an honor and a privilege to be here today. Thanks again.

Andy: Thank you. And, you know, I appreciate that, Ashley, because to me it’s also about having fun, right? Just because it’s investing doesn’t mean it needs to be dry and boring. We can have fun.

Ashley: It doesn’t have to suck.

Andy: Exactly. Exactly. Last but not least, we have DJ Van Keuren, co-managing member at Evergreen Property Partners, as well as founder of the Family Office Real Estate Institute. DJ has experience working with three different family offices, and he has been ranked as a top 10 family office investment professional. Aside from co-managing his investment consortium, DJ is also a podcaster and an in-demand keynote speaker at leading events for family offices and ultra high net worth investors. DJ, welcome to the panel today.

DJ: Thanks. Thanks for having me. Glad to be back.

Andy: So, let’s start with a big, big question. The big question, why multifamily, why does this specific sector have the potential to help investors grow and protect their wealth over the long run? James, why don’t I start with you?

James: Yeah. Andy, this is something that’s resonated with me for a long time. It’s the intrinsic value of a building, and it’s where people have to live. People always need a place to live. You have the stability of many units. So, you know, it’s much more stable than single-family. The cash flow is there. You can get value out of the income. So, if it’s an income producing asset, it’s got the value that’s there. And you can drive that value, and force appreciation through good operations of that asset. So, it’s very easy to kind of understand the financials when you’re looking at it. The tax efficiency is there as a direct investor. As opposed to owning a paper asset, you can really take great advantage of what real estate provides, which is depreciation. So, you can become a limited partner, and invest in an asset, and enjoy the depreciation to offset the tax liability. And really it is a deferred tax strategy. And again, I think the value add piece, and that’s what we kind of specialize in and focus on, is wonderful where you can drive the value by increasing the income, and, you know, decreasing expenses. And we can kinda talk through that some more. So, that’s all the things that kinda come to mind high level on that.

Andy: Yeah, and I don’t know if anybody was counting, I think James listed five good reasons. Like, each of them was a good reason. And there’s probably even more reasons.

James: Oh, yeah.

Andy: Income, price appreciation, capital preservation, tax advantages, plus it’s something that’s just easy to understand. Everybody needs a roof over their head, right? So, DJ, I’ll ask you next. You know, you have experience working with family offices. These are ultra high net worth investors managing, you know, very large portfolios, tens of millions, hundreds of millions of dollars. Multifamily is so, so popular with family offices. Why is that?

DJ: Yeah, we do, as you know, Andy, we do the largest family office real estate investing study in the world. We just finished up our fourth year, we’re starting our fifth year now. What’s happened over those years is multifamily has continued to be the main property type for families to invest into. You know, and some of those reasons are exactly, you know, what’s already been said and what James brought up which is very easy to understand, for one. You’re also able to mitigate your risk on having so many units, right? So, unlike an office building, if one tenant leaves, you could have a pretty big problem. But on a multifamily side, if one leaves and, you know, if you had 100 units, now you only have 1%, you know, release in the occupancy perspective. But the other thing too is that with the way that, you know, student loans have been so expensive or has caused a lot of people not to be able to buy a home, homes have really gone up in price over the years. And so, you know, the easiest way for that shelter is to rent. And that’s really what’s been driving demand is, you know, people moving to these different areas where there’s affordability and new jobs, and apartments is the easiest place to go, and affordable.

Andy: Yeah. And, you know, DJ, you just made a great point about the student loan crisis. And the fact of the matter is, during periods where the economy’s in recession, historically, multifamily has been one of those sectors that has held up very, very well. Have to give a shout out to Scott Hawksworth, our business development director, because he wrote a white paper on this that we released just showing some of that historical data. And so, that’s that capital preservation, you know, angle. And of course, we want returns, but when you’re talking about families, you’re talking about people that wanna leave a legacy, right? Multigenerational wealth.

Ashley, how about you? You know, you work with so many individuals both in the OZ world and just in general, high net worth investors. And you kind of, you know, you work with them one-on-one, you get to hear what they’re really thinking, right? What is it that attracts them to multifamily?

Ashley: So, you know, I think that one of the things, and both DJ and James kind of alluded to this, but it’s the opportunity to be able to scale and to scale effectively, right? So, you have the ability to be able to condense an enormous amount of these people, right, that are looking for a place to stay. They have to have a place to live, right? But you can take them and you can consolidate them into a very small area, right? So, it…

Andy: Ashley, that sounds almost Soviet.

Ashley: Well, and here’s the thing, right, is that it’s not Soviet. It’s really green, right? It’s an ability for us to be able to consolidate the amount of sprawl that’s happening. I mean, it’s all of the things that are out there that we talk about in the Urban Land Institute, but it’s also the ability to be able to effectively manage that with significantly less infrastructure. Because if you’ve got all of these folks there, you can do that with way less people because you don’t have to go all over the city in order to manage a bunch of single-family rentals. And I think that that’s, you know, the key piece, even if it’s in a horizontal play, right?

Whether that’s a mobile home park community, an RV park, or single-family rentals where you’re doing buildup, ground up development of single-family houses that you’re renting out, it’s still it lines up kind of with the multifamily concept, right? And so, I’ve seen a lot of folks do that both inside of the opportunity zone play and, you know, folks that are doing it outside. And where I’ve really seen it at play are folks that have done that and that have done that historically.

And, you know, to DJ’s point, and to James’ point as well about the value add play is that these folks are incurring massive capital gains based upon the demand for those assets. So, they’re exiting stuff that’s outside of the opportunity zone. They’re realizing that, “Hey, the opportunity zone program allows me to defer those gains, and then ultimately what, you know, I invest in next, right? And I’ve got experience doing multifamily, so why don’t I go and do some of that stuff just in the zone. And now my next play, right, where I’m adding value or I’m doing a ground up development, I’m gonna exit that for zero capital gains.”

And the fourth benefit of, you know, the opportunity zone program is that it eliminates depreciation recapture. So, to James’ point about being able to harvest that depreciation to offset income, you know, when you layer on top of that, you know, the opportunity zone benefit, it’s amazing what you get relative to kind of an after tax bump. Generally, it’s around a 3% increase in IRR. And let’s face it, right? If you’re a multifamily investor and you’re looking at a deal that’s, you know…I mean, we’ve seen cap rates that are down in like the high twos and the threes, right? And obviously, we’re seeing those creep up because of interest rates, but they got that low.

And so, if you were looking at a deal that’s a three cap, and then you’re looking at the same deal and it’s a six cap, that’s real estate investing nirvana, and that’s what opportunity zones do to the same deal. And so, that’s why, you know, we’ve seen people that they’re attracted to all of, you know, the components of multifamily. They’re like, “All right. Yeah, man, if I could do this in a zone or I can exit on the backend tax free. Wow. Holy cow.”

Andy: Yeah. And Ashley, we’re gonna get to the tax advantages of multifamily. You gave a really good, I think, kind of recap of when you put this already attractive asset class in a tax advantage wrapper. You’re making it that much more attractive. But you made another point that I thought was really interesting is that multifamily is green, it’s eco-friendly, it’s environmentally friendly. So, if there’s any future politicians listening right now, or maybe developers that, you know, need to go to their local planning commission and trying to fight nimbyism, let’s try and play up this environmentally, you know, friendly angle, because that’s important, right? And it’s almost like I’d almost say it’s like using jiujitsu or something, you know, against some of the NIMBYs that don’t want any housing built anywhere. Well, guess what, we need housing, and they’re part of…

Ashley: No, we need it bad. I mean, it’s crazy how bad we need it, particularly in high growth areas. And it’s interesting is that it’s the high growth areas that are like… And they’re starting to turn the corner on this. They’re starting to realize, “Oh, Ruh Roh Rog, we got a problem, right? We got 100 people a day moving to Charlotte, North Carolina. Oh, and we’ve historically been kind of frowning upon these really dense multifamily type deals. Oh, you know what, actually, that’s actually probably a pretty good idea.” And then what’s really kind of cool, and what’s really neat about this too, is that they’re now starting to realize that, “Hey, let’s not try to figure out where we’re gonna park all these people. Let’s actually discourage parking, right? And let’s encourage people to take, you know, light rail or let’s encourage people to take that kind of stuff.” And so, it’s fascinating to see the evolution of, you know, people’s perspective on multifamily.

Andy: Absolutely. And so, Ashley, you already did kind of a good job, I would say framing the opportunity zones rapper, but I wanna talk about some of the other wrappers. You know, hosting the podcast, and Jimmy and I with “Wealth Channel,” we’re always talking about triple net returns. And especially, if you’re a high net worth investor, if you’re a family office, or if you’re an RIA who works with high net worth clients, it’s all about the triple net, right? It’s not about the gross returns. It’s what returns are you able to take home and reinvest after taxes, after inflation, after fees. So, DJ, I wanna ask you, aside from Opportunity Zones, which I am excited about, I think we covered those a little, are there any other tax advantage wrappers or tax programs that high net worth investors should be looking at right now? Maybe DSTs, 1031s. Is there anything else?

DJ: Yeah, the 1031 exchange is by far I would have to say the other tax benefit that people should be looking at. You know, going into our fourth year, 80% of families don’t use 1031 exchanges, which is pretty astonishing to me. There’s, you know, various reasons. A lot of it has to do with education, which is also why there’s a lower portion of people that go into OZ’s that are, you know, large, hundreds of millions, billions of dollars families which just having to do with the rules and understanding, but it’s an education perspective. But, you know, 1031 exchanges is a great way to continue to grow your gains and having a compounding effect. I mean, if you got 15% return on a deal, it turns into 21% pretty quick. And then you can have that continue to compound, and it’s also tax free at def.

The other areas that, you know, a lot of people aren’t notice as much about are low income housing tax credits that they can purchase. There’s also new market tax credits that can be bought, you know, as well. And even with, you know, outside the multifamily space, there’s even carbon credits that can be tied in. You know, you talk about green and doing good, there’s some of those opportunities as well. But, you know, I think the biggest one after the…you know, including the LZ is the 1031 exchange. And, you know, there’s no reason to pay tax today. They always try to get rid of it in Congress, but there’s too much of a benefit. And, you know, so I don’t really see that going away.

Andy: I agree, DJ, they can pry the 1031 exchange from my cold dead hands. James, how about you? You know, you work with a lot of high net worth investors seeking passive income, you know, are folks that you work with, are they looking at those tax advantages and using some of those strategies?

James: Yes. What DJ was saying about the 1031s, about 20% of the capital that our group’s raised over the last 2 years has been from 1031 exchanges. And it quite frankly, could be a lot more just getting the word out there. And what’s interesting is you can accomplish that in certain states through a syndication. So, you know, you can still accomplish the goals and the rules of a 1031, but also become a passive investor in a syndication deal through a tendency and common structure. I’m not an attorney, but this has worked, and worked well for a lot of our high net worth investors where they can… It really works well as well, not only from a tax standpoint, but from somebody who maybe their family owned a large apartment community or a commercial property, and they’re tired of managing it, and they want to switch from active to passive, so they can take advantage of the 1031, but also there’s a huge ROI on their time switching into a syndication as a passive investor, and particularly something that’s cash flowing right out of the gate, they get nice income as well, and a step up in their basis.

So, that’s come to me and to some of our folks who some folks were pursuing DSTs and they were kind of getting squeezed on their returns a bit. This was about a year or two ago, and we’re kind of coming into the 1031s with the syndication. So, that’s the extent of our work on that.

Andy: Interesting.

DJ: You know, Andy, I was just gonna say too is that, you know, you mentioned triple net properties and, you know, that’s a way that you can 1031 into it, and that is for the most part passive. You know, if you’ve got a Walgreens and you have a 20-year lease, you’re not doing much, you have a Starbucks, you know, you’re not doing much at all. And when you take in what was brought up before, I think Ashley might have brought it up, depreciation, you take interest rate expense deductions and everything that’s provided for you in real estate, you really are gonna come down with no taxes even on the income. And so, it’s a great way to 1031 your money into another property that you own even yourself, and you’re gonna end up washing out, you know, any of that income that you do receive. So, you know, that’s one of the reasons why I love real estate so much. There’s just so many benefits to it.

Andy: Yeah. Absolutely.

Ashley: So, Andy, and I’ll follow up on that, right? And what James was talking about. So, I am an attorney, and that’s what I did in a previous life was I did 1031, we did tenant in common syndications. So, we would effectively put… We called it buying real estate by the gallon and selling it by the scoop, right? Is that we could syndicate, you know, up to 35 TICs, right, tenants in common, and we could go out and get, you know, CMBS loans, right, non-recourse debt on it. And, you know, when you’re able to marshal all of those things together, it’s magical. And, you know, the level of returns and pass through losses that you’re able to get are spectacular because you’re able to participate in something that’s way bigger than what you would normally be able to do.

Now, one thing about 1031 that you need to be careful of though, is that if your net estate is approaching $10 million, that after, you know, 2025, the lifetime exemption amount comes from, you know, 11.7 per person down to 5, or roughly 5.2 per individual. And so, your now lifetime exemption amount is right at $10 million. And the challenge with 1031 is that you do get a step up in basis at death. And so, anything that’s above that $10 million threshold is gonna be potentially subject to that estate tax at the then current market value. One of the benefits of opportunity zones that, you know, people don’t really talk about is that it freezes the amount that goes against your estate of what you contribute into the fund, as opposed to what the then current value of it is. So, just something to be thinking about for folks, right? You know, this is informational, right, relative to multifamily. That’s something to be thinking about in the context of 1031 that not a whole lot of people are talking about.

Andy: Yeah, I know.

DJ: Yeah, I would… Sorry, Andy. I would question now is that even though you’re gonna pay that tax in the future, the compounding effect that you’ve realized over a long period of time is gonna wipe out any of those…

Ashley: Yeah. Sure.

DJ: …additional tax components, you know. Yeah.

Ashley: I absolutely agree. And I love 1031. I just think that people need to be paying attention to it that if their estate is approaching, you know, $5 million to $10 million right now… And I mean, you can solve the estate problem with lots of other stuff, right? You can do, you know, life insurance, and you can do other types of strategies in order to solve that problem, but people need to be paying attention to it.

Andy: Yeah, 100%. And, you know, we can duke it out, 1031s versus DSTs versus OZ.

Ashley: Just odds, right?

Andy: I love that conversation, but to me, it’s almost missing the point, which is that a lot of high net worth investors, very high net worth investors, and even the ultra wealthy and family offices, a lot of their investments are not tax advantaged at all. I mean, aside from the depreciation and the stuff that you get from pretty much any real estate project, they’re not doing that upfront work to work with an advisor, to work with someone like James, or Ashley, or DJ, to sort of game plan and think about, “Okay, I want to invest in this asset class. How do I do it in a tax advantaged manner that’s gonna enhance my triple net return?” So, to me it’s, you know, OZs, or DSTs, or 1031s, and all of the above, yeah, for me, it’s a Thanksgiving dinner. I want Turkey, I want mashed potatoes, I want stuffing. Give me the whole multifamily feast.

But, you know, I think we’re all sold on multifamily as a sector, we’re sold on the long-term benefits and that long-term philosophy, but my question is on 2023. This is my question next, which is interest rates are a lot higher, and as an investor, I’m wondering, and I mean this literally, as an investor, I’m personally wondering, is this a good time to invest? Have cap rates expanded enough to really compensate for the fact that interest rates are so much higher? So, is this a good time to be investing, or should high net worth investors, should they be holding cash maybe for opportunities later this year or next year? James, what do you think? Let’s start with you.

James: Yeah, it depends. That’s a great answer, right? It depends. I think this year…well, the days of cap rate compression are over. I think as an investor, you have to be particularly astute to look at the sponsor and make sure this sponsor is rock solid from an operations standpoint, preferably vertically integrated, that they have a great track record, that they’re well-capitalized. That’s very important. And, you know, with all of that comes great broker relationships and those types of things. But this will be a year, I think, for opportunities, particularly with debt and things that are… Properties that are under distress. We’ve seen it recently where one property came about because the current sponsor, current operator, wasn’t capitalized well, didn’t have a good business plan executed the last few years, and they had to… They couldn’t refinance the debt.

Andy: So, James, not just opportunities later this year, we’re already starting to see…

James: Already seeing it. Yes. Already seeing it. We’re seeing it in next month the property is gonna be closing and it’s from a deal that the current owner couldn’t refinance and has to sell because the loan’s maturing, it’s coming due. So, I think there’ll be more of that and we’re kind of seeing some signs of that. And particularly, folks over the last couple years where maybe they were picking… You know, doing the financial analysis between fixed rate debt versus floating rate, and maybe buying a cap on the interest rate, and the cap, maybe it’s a only a one or two-year cap, and that’s coming up and they have to, you know, buy another cap. So, these things are, I think, gonna be unfolding more this year, but again, the opportunities are gonna be with the folks who are well capitalized and can strike on this.

Andy: Speaking of well-capitalized folks, DJ, let me ask you your opinion, but also the families that you talk to, you know, are they making moves right now, or are they thinking about later on in the year or next year?

DJ: Yeah, so the short answer is that, you know, they’ve been sitting on dry powder, they’re waiting. What happened during the last recession was families waited until everything started to take off. So, toward, you know, when the recession started coming out from the bottom and going up is when they hopped in, rather than bottom of the market, right? This time, families have learned from that. And so, now they’re like, “Okay, I wanna take advantage of this.” And that’s the same thing happening in COVID, we really didn’t see the changes that we thought, but they’re like, “Okay, let’s sit back and see what’s gonna happen.”

And, you know, like James said, there’s a couple things. I’m gonna say the first caveat is that you always have to look back to the fundamentals, and do you have the fundamentals in a certain area, right? Cost of living, quality of life. Is there the demand that’s there? And you can make money in any market, an upmarket, a down market. So I don’t think people should necessarily say, “I am not investing at all,” because you could miss an opportunity. But with that said, you know, there’s a reckoning that’s coming, and anybody could… Let’s put it this way, if we’re an operator and you start investing in 2012 and you didn’t make money, well, you probably shouldn’t be in this business.

And I think we’re gonna really start seeing how good and who’s real from an operator perspective, like James said, which is it always should be underwriting the sponsor anyway. But, you know, we have negative leverage potential. We’re gonna have a lot of these floating rates that are happening. People were saying, “Hey, we’re gonna refinance and we’ll take the money out.” Guess what? That’s probably not gonna happen. You know, we have a friend over that works for the Best Buy family, and he was talking to somebody that heads the banking, you know, on a national basis. And he’s like, “This is gonna be worse than a lot of people imagine from a debt perspective. And this time we’re not gonna bail them out,” is what they’re saying. And so, there’s definitely gonna be opportunity.

And at the end of the day, you know, I still think that you need to say what happens if, you know, people would always say, “We’re gonna buy at a five cap, sell at a four cap.” Well, guess what? That’s definitely not happening. So, if you are looking in a new deal, you should be saying, “Okay, they’re buying it at, you know, a five cap, for example. What happens if they have to sell it a seven cap? What happens if vacancy rates go from 5% down to 15% vacancy rate, right? What happens if the interest rate that they’re quoting at 6% ends up being 7.5%, you know?” And if you take those considerations, those things in consideration, and see what those returns come back and you’re like, “I can live with that,” then definitely go ahead and invest. But there’s definitely gonna be opportunities that are coming up, but don’t also miss out on something just because you think the grass is greener when you’ve already got a great deal in front of you.

Andy: Yeah. And Ashley, I wanna give you a quick minute to respond, but then I also wanna move on to our last question, but Ashley, one of the things I love about you, you’re a positive, optimistic guy, your positive energy always rubs off on me. And my thing is, there’s always a reason not to invest, there’s always a reason not to act, nothing is ever perfect, and it seems like a lot of people are kind of scared off right now. In a way, is that a bullish sign?

Ashley: So, I mean, I love what DJ was talking about a stress test, right? And I think that inside of, you know, my exuberant optimism, right, and energy, and that kind of thing, that I surround myself with people that are way more practical because I understand…you know, I’ve never met a projection that I didn’t like, right? Projections are always fantastic, but they’re just projections and they’ve got lots of assumptions built into them. And so, I want real down to earth people. It seems like DJ’s, you know, kind of like that, right? That says, “Well, hey, no, let’s look at this, right? And let’s think about what happens if something goes awry.” And I think that that’s one of the things that you have to do inside of that exuberance.

But it’s also gotta be balanced to his other point, right, about, you know, missing out on opportunities. The interesting thing about my space is that most of the people that I’m dealing with, they have a clock that’s going relative to, you know, the time periods of investing because of the opportunity zone program. Now, they’re very extended out, right? So, they’ve got a lot of time to make investments. But still just having a clock, you know, is causing folks in the back of their mind to be like, “You know what, I need to get this money into play. I need to put it to work.” And so, I think that folks inside of opportunity zones are a lot of times probably a little bit more bullish because of that, because they’ve got that clock going on in the back of their mind.

You know, the other, I guess kind of good thing about it is that there’s typically, you know, still a value add play. So, there’s usually upside there because of where they are, and that there’s growth coming, and that kind of thing, that is not necessarily maybe at play in a mature asset in a really mature location. That you’ve gotta be really concerned about, you know, those really fine assumptions. There’s usually lots of room and lots of upside that people can deal with, you know, if there’s certain market conditions that go down.

Andy: That makes sense. Yeah. And we have a couple questions here in the chat, but I had one more of my own questions that I wanted to ask DJ specifically. And, you know, with our audience here, everyone watching this, everyone listening to this is a high net worth investor, right? You have to be an accredited investor even to register for this event. But, you know, it kind of runs the gamut from high net worth accredited investor to very high net worth, ultra high net worth, family office, RIAs representing the ultra wealthy. And DJ, my question for you is, what can high net worth investors, you know, independent investors learn from family offices, from folks who are managing generational wealth, legacy wealth? What are the philosophies? What are the habits of successful family offices that we can learn, that we can take from them?

DJ: I laugh a little bit because the amount of money that families lose by the second generation and third generation could make you question if they really know what they’re doing after the patriarch and matriarch, but that’s why we’re on a quest, you know, with the institute to help that. You know, the one great thing about real estate is that the fundamentals are the same whether you’re investing $100,000 or $100 million, you still have to look, if you’re gonna partner with somebody, comes back to the quality of the sponsor, you know, it comes back to the market and everything else. I think that, you know, the biggest things that they can learn is patience, you know, and making good decisions.

Now, just like Ashley said, you know, I call it money in motion. OZ money is in motion. 1031 capital’s money in motion to the point where you’re like, “Oh my God, I gotta make a decision,” right? But I think it’s patience to be able to go in and take a long-term perspective, really take a long-term perspective. And, you know, that’s another thing great about real estate, which is it’s liquid. Or not liquid, I’m sorry, it’s illiquid. So, you can’t necessarily go anywhere. But I think, you know, you find a good partner, somebody you like, you trust, that you have a good relationship with, that they’ve been successful in the past, be patient, make good decisions, you know, quantify.

And like I was saying before about these stress tests, I would ask sponsors and say, “Well, what happens if this happens? Or what happens if that happens?” Let them show you because they should. And if they don’t, then I would hold tight and I would question, is this somebody I wanna go with? Because they’re saying they bought it a four, they’re selling it at a one cap. I mean, it’s just not, it’s not realistic, right? And as for and referrals too. I think, you know, talk to people. Families do that all the time. They refer people to other families, or they’ll ask families, “Who do you know?” And I think that’s a great lesson.

Andy: Well, that makes a lot of sense, DJ, and the point is well taken that, you know, a lot of these families, you know, it should be legacy wealth, but it becomes not legacy wealth and it does disappear. So, I think that’s part of our mission here, is to help folks make smarter decision. Ashley, I know that you work…you know, we can’t name any names or anything like that, but, you know, I know you’ve had clients call you that might be sitting on a capital gain of 100 million or more from the sale of a business or, you know, technology stock options or whatever. What are some of those success stories? What are some of the mistakes maybe that you could share with us, you know, every day high net worth investors?

Ashley: Yeah, so I had a gentleman that did have a substantial capital gain from the sale of a business and we dropped it into a fund. And, you know, inside of his fund he was concerned about not making any money in the bank account. And so, we’ve got, you know, a program where you can loan it out to yourself so that you could put it into something that’s giving a little bit more traction. And, you know, typically, you know, we are absolutely recommending, “Hey, listen, put it into like T-bills, or put it into something that’s, you know, liquid because you gotta cycle it back through in, you know, between six months and a year.” And this gentleman put it in the market and the market went down. And so…

Andy: The market does that sometimes.

Ashley: Exactly. And so, you know, he is really hesitant to sell. And so, he’s either looking at, “I sell these in order to generate liquidity so I can run it back through the fund and comply with that, right? Because if I don’t, then I’m gonna get hit with the tax bill. Or I’ve gotta come up with cash from somewhere else in order to basically run it through.” And so, you know, once again, right, it’s caution in the context of avoidance. And I think that that’s, you know, the thing that…

Andy: Well, this is so interesting, Ashley. I feel like you’re saying the same thing DJ…

Ashley: I was just gonna say, I’m saying the exact same thing, and the biggest issue is being able to understand that, surround yourself with professionals who can assist, and then educate your kids about how to do that same thing, to rely upon the professionals and to build those relationships, so that that way they don’t do dumb stuff when they get married to the girl that really likes money, you know.

DJ: That is the biggest thing. And this is one of the things, Andy, why it’s important for what you guys are doing, which is, you know, the patriarch, matriarchs, our definition is 250 million or more for a family is that they knew how to create the wealth. As you start going down those generations, it’s like a lottery winner, they didn’t know how to make the money, so it’s very easy to lose. And so, that education component, understanding, learning, right, how to maintain that wealth, how to invest is very important. And so, listening to shows like this is what needs to be done. And people should be inviting, you know, younger family members, to be honest with you, listening to some of this stuff so that they can start today.

Andy: Yeah. And it’s, you know, kind of this theme is, I guess it’s humility. It requires humility, because a lot of the folks attending this event, you’re a business owner, you might be a developer, but you might be a tech executive. You might have a startup that you sold, you had a liquidity event. You know, if you’re running…if you have a family office, if you’re the matriarch or patriarch, maybe you had a business that sold copper wire, I don’t know, something random, or a chain of restaurants, or sporting good supply store, a chain of sporting good stores. You know, you have to be cognizant that, “I don’t know everything. I’m not an expert in everything. I may have amassed a fortune in one area, doesn’t automatically make me an expert at real estate.”

But typically, the really good CEOs, the really effective business leaders, they know how to surround themselves with talented people, you know, and to lean on the talent and expertise of others. You know, folks like Ashley, and DJ, and James, and then partnering with quality operators, quality sponsors who have the track record. I think a lot of you kind of mentioned that already, that track record’s so, so important. You know, you wanna have a sponsor that has done at least one market cycle. I mean, preferably two, three, four market cycles, and it’s not their first rodeo when you’re trusting your hard-earned capital with someone else. So, to me, that’s the actual smart thing is to say, I can’t be an expert at everything, right? I’m gonna find the folks who are best at this and I’m gonna partner with them.

Ashley: So, Andy, and this is, and I don’t wanna go too far down this rabbit hole, but one of the things that we’ve started to do and to really… You know, so people come to us for opportunities zone consulting, but we’ve seen it relative to enough of these folks, because a lot of these folks it’s not family wealth, it’s recently earned through some kind of event. And so, we’re walking them through that they’ve created a core value statement, and a mission, and, you know, things that define who they are in their business so that that way they can communicate those to their employees, but they haven’t done that for their family.

And so, we’re encouraging them to say, “What are your family core values? You know, what was it that allowed you to get to the place where you are right now? And then how do you delineate that in like a family constitution so that you could pass down those values to folks? And then you can also utilize that for your trustees when you die, relative to how they guide how the money should be dispersed out of the trusts.” And so, that’s the beginning part of it, and then there’s lots of stuff that you can add on, and DJ’s smiling because he’s probably got like a list of stuff that could be added on to that, but it’s really awesome to see them start to work and, you know, the lights to go off on that.

DJ: Yeah, I do. And I won’t go into this in detail, but I gotta tell you, it’s amazing to me how people create all this wealth by having all of this infrastructure and planning and goals and objectives, and then all of a sudden they get all this money and it’s like they forgot that, “Oh, we need to, you know…” All you’re doing is replicating what you were doing. And they just… So, that’s why I was laughing.

Ashley: It’s weird because it’s like, “Well, it’s my family, so I don’t need to do that, right? It should just happen.” And it’s not, you gotta be very intentional, even more so intentional with your family than you are in your business. And I think that I’m stoked about being able to call DJ and be like, “All right, DJ. I got some folks that need your assistance,” right? They need that education process. They need to be able to run and find contacts and people that they can work with. And so, man, thanks again for, you know, asking. I know we’re not done yet, but…

Andy: Yeah, absolutely. We have about three minutes left, so I have one or two questions from the chat here, but that’s a really good point for all of our registrants and attendees, whether you’re watching this live or watching the replay, all three panelists here are experts in their own area, and we’ll be sure to, you know, link to their websites and their LinkedIn pages in our show notes. So, I mean, that’s the whole point of a show like this is to connect high net worth investors with folks they can partner with, that they can trust who are actual experts. So, 100% to that point.

So, let’s try and do like a quick hits lightning round here with some of this Q&A. I have one question in the chat, I’m gonna put everybody on the spot. I’m gonna demand that you answer this directly. “Curious if you see ground up or value add having a better outlook in the current environment?” James, let’s start with you.

James: Ooh, well, yeah, for me it’s value add. I don’t have the stomach for ground up, it’s a long segment. We’re struggling to identify what’s happening in 2023. So, you know, it’s more my personal preference. I’m more kind of on the lower end of the risk return spectrum than the opportunistic side with ground up.

Andy: It’s okay to have a personal preference. That’s totally okay. Ashley, how about you? Lightning round. Ground up or value add?

Ashley: So, in the stuff that I do, and I’ve been doing opportunity zone since 2018, and it’s almost exclusively ground up because it’s so hard to value add and actually hit that substantial improvement threshold. So, I’m a ground up guy.

Andy: DJ, how about you?

DJ: I’m gonna say it depends on the property type and, you know, because you might end up taking over an apartment deal, you know, we’re talking about multifamily that is sort of stalled, you needed to development, well, that could be a great opportunity, right? There could be a property that the operator really didn’t know what they were doing, that could be a value add. You know, you look at cold storage, there’s 200,000 units that are needed square feet, only like, 50,000 are in the pipeline. Well, you have to go ground up. So, I think it depends on the property type.

Andy: Right. I can’t argue with that.

DJ: Once again, there’s always a good opportunity, but you gotta analyze it to say, “Okay, and is the return worth the risk?”

Andy: Yeah. Well, I wanted to put you on the spot, but I think you did give it… I think that’s fair, that it depends, it’s sector by sector, and it’s also geographic location by geographic location. So, I think that’s fair. You hedged a little bit, but I’ll allow it. I’ll allow it, DJ.

I wanna thank all three of you, Ashley, DJ, James for joining the panel today for just sharing your knowledge. I know we didn’t get to as many questions as I wanted to get to, but Jimmy and I will make sure to put your all’s LinkedIns, and your websites, podcasts, all that stuff on our show notes page for this replay. So, I’m just encouraging all of our registrants, all of our attendees, to get in touch with these guys. In their various fields they are definitely the experts, so I’m very pleased that they joined us today.

Michael Johnston
Michael Johnston

Michael is the President at WealthChannel and the host of the Tax Efficient Investor podcast.