Rocket Your Dollar Ep. 44: Are You Really Diversified?

Texas commercial real estate expert and president of BV Capital, Rob Anderson, discusses the importance of investing in CRE for accredited investors.

Transcript:

Thomas Young:

Welcome, everyone, to Rocket Your Dollar, the podcast from your friends at Rocket Dollar. In the show, we discuss the power of self-directed investing. My name is Thomas Young, co-founder of Rocket Dollar. Thanks for joining us. Let's jump in. Today, I have with me, Rob Anderson. And Rob is the president of BV Capital, a real estate private equity firm based in Dallas, Texas. He is also the principal of BV securities, a wholly-owned broker-dealer focused on distributing reg-D offerings to accredited investors. Their website is bvcapitaltx.com, which we'll put in the show notes for anybody that wants to check them out afterward. But Rob, thank you for taking the time today and being here with us.

Rob Anderson:

Appreciate the opportunity.

Thomas Young:

Absolutely. So Rob, tell me a little bit about yourself and sort of your journey to being the president of BV Capital before we jump into exactly what it is you guys do.

Rob Anderson:

Absolutely. I am a little different, Thomas. I'm going to warn you that right now. I'm not a real estate guy. I'm just an investor who found real estate. Probably not that all different than many of your IRA folks that you guys work with at Rocket Dollar. I say that because I've been securities licensed since 1998, and worked for a lot of Wall Street firms, a lot of investment houses, mutual fund companies, et cetera. And my clients over the years were the largest brokerage firms on the street, Merrill, Morgan, UBS, you name it. And in all that time in the securities business, I never found better investments than investing in direct real estate.

So you could say that my investment passion sort of changed my career, if you will, Thomas. I started investing in actual syndicated real estate deals about 10, 11 years ago, and I've just never looked back. And I fell in love with it so much that now I prove the opportunity for others to do it as well.

Thomas Young:

Yeah. That's fantastic. And I feel like a lot of our customers have a similar path. You start just investing in good deals, whatever they may be if it's real estate if it's securities if it's startups, whatever. And people keep coming back to real estate because it, as an asset class, I mean it outperforms a lot of things out there.

Rob Anderson:

Oh, completely. And the crazy thing is most people don't have access to this type of opportunity. I love my friends in the REIT industry, but it's so different. If you go into a financial advisor's office, most of them are going to show you the public market, stocks, bonds, mutual funds, et cetera. And there's nothing wrong with that. But I always argue that you're not fully diversified if you don't have any illiquid investments. So for example, think about last March or April that we just went through. Right? It was a horrible time in the markets. It's still bouncing around. When you have a fear-induced panic selling that you can't control, that may or may not be justified, and 100% of your investment dollar is susceptible to that, my question is: Are you truly diversified? And I'd argue no.

Thomas Young:

Right. I mean, we talk about that a lot, about the importance of having uncorrelated assets in a portfolio. If you're all stocks and bonds, you're pretty exposed, even every robo advisor out there has your little pie chart with different ... That's not being diversified. I like what you said about if you don't have illiquid investments, you're not diversified. I never heard that specific one before, but I like it. And it's true because if it's illiquid, you have no choice but to ride out the craziness and allow for recovery. And you can't make very emotional decisions. Right? It's a little more difficult.

Rob Anderson:

Oh, yeah. We sold for years on the Morningstar style boxes, and how you're supposed to be diversified because ... And everybody uses the argument, don't put all your eggs in one basket. And my argument is you're still in the same basket. You just have your eggs spread out within that same basket. So when the market goes crazy, everything you've got goes crazy with it. That, and the ability to have the returns and the tax advantages that a direct real estate investment gives you, I haven't found elsewhere. As you can tell, I'm a little geeked out about this since I just up and moved my whole career to do it, so obviously, I believe in it. But it's just I have yet to see something else that competes with it.

Thomas Young:

Yeah. We get that a lot from a lot of people that we've had on the show and customers of ours. It just turns into this love story with real estate. But I want to touch on: What exactly is it that BV Capital does? It's real estate. We've already skirted around that. But what exactly does BV Capital do?

Rob Anderson:

Sure. So it's primarily commercial real estate, so multifamily, we'll throw into that as well. And I should give you more on my background, Thomas. I used to be a landlord. I used to have my day job, where I would sell investment products through financial advisors for a living, and I did well at it. And then on the side, I was trying to grow my asset base, which probably a lot of your listeners are too. And I got up to about four rental homes, and I was floating five mortgages and all that fun stuff. And that became a job, and I already had a good job. I didn't need another job. And that was what the whole land-lording thing did for me. I talked to a lot of my friends about that, that is in the same boat. And it does work, but it's an extra job potentially unless you want to hire away all the work, and then your returns go down dramatically.

So by finding passive real estate investments, you can take advantage of the same opportunity or greater without creating a second job. And so I like to have that comparison, Thomas, just to say ... Because a lot of people understand single-family rentals. A lot of people do it, and I'm not doubting it. I did it for 12 years. It does work. It's a get rich slow, but it does work. But the problem for me is it created a second job. So if you love the concept of investing hard assets, real estate, having the tax advantages, and all that other good stuff, most people don't realize you can hire professionals that do this for a living and not have to lift a finger. And that's what we do.

So we syndicate real estate deals, so people can invest on a passive basis. Now, this could be multifamily apartment complexes. This could be industrial warehouses, which is just incredibly hot right now. It could be office buildings, which we're not sure how COVID's going to affect that. It could be all kinds of different things. But if you have a ... Why do the wealthy invest this way? It's a tangible, physical asset that is helping to preserve the value in addition to whatever business is being operated in that particular asset.

Thomas Young:

Yeah. And that makes sense. And I like that you guys aren't tied to one specific type of real estate type. You mentioned warehousing. You mentioned multifamily real estate. You mentioned commercial. And I like that you guys keep sort of the flexibility to take advantage of opportunities as they come up, and are not super into one. And you could say that's a good thing or a bad thing. Right? But I think at the end of the day, investing in real estate, once you know the overarching theme of what you're trying to do, there are opportunities all over the place.

Rob Anderson:

Oh, there are. But see, if you're only in one area, I'd say it's the same thing as if you're a mutual fund company, you're only really good at large growth. What if large growth goes out of favor? What do you do? You try to convince people it's coming back, and I've seen that. And so we're the same way. Now in today's post-COVID, maybe it's a little early to call it to post-COVID, but recovering COVID environment, what we're seeing is the industrial space was unaffected. The boom in eCommerce, the reconfiguration of global supply chains, pulling back manufacturing to the United States, or at least to North America, is creating a huge demand for industrial warehouses, industrial manufacturing. You've probably heard of the last mile with all the eCommerce, Amazon, et cetera. And even what we call industrial warehouse retail, like a Home Depot, a flooring company, these are things that Amazon's not going to put in a box and ship to you. Whatever Amazon's not going to put in a box and ship to you, that's not going anywhere.

So we look at all of this type of thing because the credit quality of the tenant in our asset, no matter what it is, is really what you're buying there. And I tell people all the time, "You would much rather own the rent than the bond any day." So if you get a large company that's big enough to either be public or issue public debt, I.E, bonds, which one can they forego paying first, the bond interest or the rent? Well, they can forego the bond interest first because if they forego the rent, they're out of business.

Thomas Young:

No, no. That makes a lot of sense. And talking about the rising in eCommerce and the way consumers, even grocery stores, you can get all that delivered. So do you think that's going to lead to, these warehouses might be expensive to put in primary markets? I'm in Austin, so do you think it's going to be San Marcos that explodes with these sorts of projects? Or how does the geography affect it? Where are these places being built around primary cities, I guess?

Rob Anderson:

Absolutely. That's a good question. They're not downtown. They're not in the central business district. They're not going to be where you want to live. But they're going to be on a major artery, a major freeway. So for you in Austin, it would be on 71, or 35, or a little bit outside of town. It's not going to be in an outlying, a city that's two miles away. They're going to be in the major metros, just on the outskirts. So whatever the edge of town is, the next five miles is ripe, especially if it's got good access to the airport. So wherever your airport is and the major arteries, if it's within a 30-minute drive, you're going to see a lot more industrial pop up.

Thomas Young:

Yeah. I mean, one of the challenges of those types of investments is access, which is what you guys provide. Correct?

Rob Anderson:

Oh, absolutely. I mean, before a shop like ours, or one of our friendly competitors offering this to people, now you have to be accredited, but outside of that, the laws changed a few years back with the CARES Act. I'm sure you know this, Thomas, but before, we had to operate like a private equity firm, which means I could not offer this to you if I didn't already know you. Well, about '13 or '14, the SEC changed the rules a little bit, and I can market. I can come on a podcast with my friend, Thomas, and share this with you. I can advertise a deal on a website. We couldn't do that in the past. So there was some legislative change that happened to where these deals are ... It's easier for us to syndicate, that's just grouping. In other words, opening this up to say, 50, 100, 150 investors to pool their money into a deal, so we can go buy a $20 million, $30 million, $40 million building.

And then what you do is your units in an LLC that owns the building. We do whatever we're doing. We construct it. We rehab it. Or we just take the rent, and three, five, seven years down the road, we either refinance it or sell it. And we pay everybody off a percentage of the profit. So what you're doing is you're investing alongside a professional investor such as us.

Thomas Young:

Got it. And so do you guys syndicate every deal that you guys do individually? And as an investor, I go in and pick what I'm interested in. Or am I investing in a fund that then you guys invest?

Rob Anderson:

It depends on the situation would be how I would say it. A few, about four or five years ago, we saw a giant opportunity. Now we're Texas-based, and we believe in the Texas economy. And real estate is local, so whoever you're investing with, with real estate, make sure that they own their backyard, shall we say. So we generally don't leave the state of Texas just because that's what we know inside and out. Now a few years ago, we saw an opportunity in the multifamily space with the population boom that we're experiencing here in Texas, so we acquired four multifamily properties in major metros, and we created a fund.

And the reason we did that was so we could scale, so we could do four instead of one. And so you look at something like that. Our industrial portfolio has seven properties instead of one, so it just gives you diversification. So if you're invested in a single asset, to your question, I think that's where you were going, Thomas, if you invest in a single asset, your return is only as good as that single asset is. It's like owning one stock. You own one stock, your return is as good as that one company. So the idea behind has four, seven, whatever the number is, is you're a little bit more diversified, either geographically, industry, or just product type.

So we are seeing more of a shift to that. You've just got to look at the details and make sure whoever's sponsoring the deal isn't trying to get rich off fees. The way we make our money is a successful exit at the end. So that's one of the ways that we feel we're different. You've just got to look at the fine print. And I help my friends evaluate this stuff for everybody all the time just because it does get confusing.

Thomas Young:

Yeah, for sure. And I mean, I think there's been an explosion of interest in real estate in the last 10 years, or 12 years, I guess since 2008. It can be sort of daunting to get into it. And for people that want to invest in multifamily, or they want to have that asset type in their portfolio, you said it earlier. Buying a single-family home and renting it can be a lot of work, and it can be stressful, especially if it's your first one. You can end up losing money if you don't know what you're doing. So I am always of the opinion that let the pros do their jobs, and you can benefit from professionals doing their jobs, which is what I like about syndicators, and especially with you guys are doing. So when you guys syndicate a deal, how big are some of y'all's raises? And how many investors do you guys typically take on for each deal?

Rob Anderson:

That would be all over the map, and it depends on a deal. So we've had a deal that's only a couple million bucks, and we've only had 10 people in the deal. Our multifamily fund is 440 investors, I think. And we raised almost $29 million for that. Now the value is about $150 million. So obviously, what we're doing is we're getting leverage. So the passive investors combined with our investment is how we get the money we need to buy the property in addition to the debt, or the loans that we're getting on it. So it could be of any range, but generally, what we're doing, we're going to have upwards of 100 plus investors in each deal.

We do that, actually, intentionally too, Thomas, because if you're in a deal and you're the little guy, and there's a large what we call a senior equity position in that deal, they have voting rights. And therefore, they're no longer passive, and we don't want that. We want 100% of our investors to have the same exposure. So we limit how much people can throw in a deal. We don't let people put more than, say, a million or two million in a deal because we don't want them to accumulate voting rights. After all, that's not fair to everybody else.

Thomas Young:

Right. That makes perfect sense. So one of the things that we talked about earlier is: What's the difference between a private real estate deal, like what you guys are doing, and even your fund, and investing in a REIT?

Rob Anderson:

Yeah. We did allude to that earlier. So a REIT and there's nothing wrong with the REITs, for what they're designed to be used for. Not everybody understands what they're designed to be used for. It's an entirely different purpose than what we're talking about today. The REITs let you, for the most part, take advantage of the national retail stain. But the problem with it is they're daily traded. It's public security, so it acts no differently than stock. So if you look at what happened back in March and April, they were down about 30%, 40% just alongside everything else. And that's quite a ride.

So I look at a REIT no differently than I look at a stock. And what we're doing is entirely different. So our asset values don't change, so if you invested, say, $100,000 and you go to our investor portal and you look at what you're getting, your value's going to be $100,000 until we sell that asset and pay you back your $100,000, plus whatever the profit is. And you probably made dividends along the way because we do that. But the value of your portfolio is not going to be on a roller coaster ride like the stock market is, so that's one of the main reasons. And that's the beauty of the direct real estate, is that you're not buying a stock.

The second thing I would tell you is what we call a preferred return. So every deal has what's called a capital structure. You have a hierarchy of who's important, is what I would say. And now everybody's different, but the way we structure our deals is our investors get paid first. And so that's the beauty of a private deal. When you start to review what's called the private placement memorandum, that's the equivalent to a prospectus. And what that tells you is how people are paid. So for example, in our industrial portfolio, we're paying our investors a 7% annualized preferred return before we do anything, just to give you an example.

So we won't make money until you get at least 7% annualized. And then above that, we're going to pay you this before we get something else. So you don't get that in a REIT, and you don't get that in the stock market. I think it's one of the neatest advantages that people underestimate in a private deal.

Thomas Young:

Yeah, no, that makes absolute sense. It seems like a REIT is just at the whim of what people decide that day, which does not correlate the underlying asset that might be in the REIT because, as you said, the value of that land is still, or the value of the building, or whatever is in that REIT, things don't lose 30%, 40% of value overnight just because people are scared.

Rob Anderson:

Correct.

Thomas Young:

So when you guys are looking at a deal, someone comes to you guys with a deal, or you guys find it, what are some of the first things that you guys look at when you're doing your due diligence, and thinking about syndicating it out to your investors?

Rob Anderson:

Well, it's got to have value. So a lot of folks, I'm going to pick on some people, but a lot of folks will raise money just to make money raising money. We don't ever want to do that. We're in the real estate business. We raise money so we can do real estate deals. And I would caution those listening to hear what I just said because unfortunately, there is that out there. So everything that we're looking at has to make sense to us. We're a real estate firm first. In other words, we put our money in it, and we put our money in 100% of the deals we do. So the point, Thomas, is we're not going to put our money in something that we don't think makes sense. Right?

And so number one, we have to have value creation. It's got to make sense in the specific, I call it the micro GDP. In other words, the five-mile radius surrounding that particular property is what matters to that property. And then are there are macro issues that are going to help? So you could do a management change. Maybe it's poorly managed. You could do rehab or reconstruction. You could do development from the ground up. There's a lot of different things you can do to have value creation. Without value creation, there's no profit.

And then are we giving good debt? One of our senior partners was the number one real estate lender in the country for various large firms in the past. And it gives us an advantage when we're evaluating the debt. So a lot of my friends in the industry are what we lovingly refer to as sticks and bricks folks. They can build something. But can they understand the financials to structure the deal in a way that you can make additional value or profit because you structured your debt correctly? So there's a lot of things that go into it outside of just the building.

I'll give you one quick question if we have time. We bought a multifamily property in Fort Worth off of somebody that was just completely mismanaging it. We put very little money into this thing. All we did is we started taking care of the tenants. We started taking care of the renters. And we managed it ourselves, which a lot of times, we'll outsource. But we had to roll up our sleeves. And in six months, we took occupancy from 71% to 93%.

Thomas Young:

Wow.

Rob Anderson:

Why? Did we rehab a couple of units? We rehabbed a few units, but we didn't put a whole bunch of money into that property. It was being mismanaged. The prior owners were not making repairs. They were ignoring their tenants when they had requested. They were just running out of money. So by coming in, and sometimes it's as simple as just taking care of people, you can create immense value creation. So by taking property from 71 to 93 in six months, we gained about a million five in profit to that overall deal, just by taking care of it.

Thomas Young:

Going back to what we were talking about, land lording a single-family home. It's amazing how much of a landlord's job is customer service. And if you don't want to do that, and if you don't want to be dealing with that, that's when these syndications make sense, and investing passively, because there are people that are willing to, like you just said, roll up their sleeves and take care of people and set up systems to get things rehabbed, or to take care of tenant issues. But yeah, if you're not into the customer service business, you probably shouldn't be in the property management business either.

Rob Anderson:

Very true, and we see it all the time.

Thomas Young:

Yeah. So that's a really good example of a multifamily deal. Do you have an example of a commercial deal that you guys have done that you guys have had success with?

Rob Anderson:

We were really big in the medical office space for the longest time. It was sort of a safer place to be in the office. Now the office has changed dramatically. So when you say commercial, generally we think of office. We prefer the mixed-use aspect of it. So if we're going to get in that space, we want an office building. We want a hotel. We want restaurants. We want multifamily. We want an experience for people to help solidify each of those businesses together. It doesn't need to be on a grand scale, but if you can the least take a city block, so I'll give you one example.

Up here in Dallas, we have a property we call Alpha West. It used to be a Great Indoors. Do you remember the Great Indoors? They were owned by Sears, and it was kind of a ... You go in there and you buy stuff for your house, to redo your house. It was a big box. And so this is a property that had nothing but a big box about the size of a Home Depot on it, and that was it. We have scraped that. We've added 405 multifamily units. We've got a five-story Aloft hotel. We've got a 12 story office building. We've got a parking garage. And we've got about, I want to say about 40,000 square feet of retail, primarily restaurant space, all in a green space so people can have a farmers' market, or events, or whatever, all within the same footprint that used to be a big box retail store.

Thomas Young:

And it also goes a little bit to what we were saying before about diversifying your risk because if you have one big box store that all of a sudden can't pay their rent because they have to shut down. After all, there's a virus going around, that exposes you to a lot of risks. But if you have the multifamily, you have a lot of different things, that can boost up what used to be one big property and a parking lot.

Rob Anderson:

Yeah. There's a lot of dead space in that parking lot.

Thomas Young:

Yeah. Absolutely. So Rob, for someone that's thinking about investing alongside you guys or with you guys, tell me what that looks like for an individual investor, someone listening, that has a Rocket Dollar account, and they like what they've heard today, and they want to get in touch with you or your team. Walk me through listening to you for the first time, to investing alongside you guys.

Rob Anderson:

Oh, absolutely. So the thing I would do is just reach out to us directly. And either I or one of my team will get on the phone with you because it's a personal relationship, and you're giving somebody your money. If you haven't physically spoken with them, don't give them your money. I'm sorry. There's a lot of places out online that you could read about a cool deal. Now you've got to get to know these people. I love showing people the properties they're putting their money into. I love doing site visits. That's been a little bit hard to do as of the last few months, but hopefully, that'll come back.

I'd say let's get on the phone. Let me get to know who you are personally because you've got to understand I'm also regulated by FINRA. We own a broker-dealer. And in owning a broker-dealer, I have a compliance officer. I have regulators. I file my deals with the SEC, I have oversight by FINRA, which is the financial regulatory industry that manages, oversees broker-dealers. So I have to run my deals at a higher standard. And we do that on purpose because we feel it, number one differentiates ourselves. It's also the standard we feel comfortable operating in. And it provides new opportunities for us.

So I guess understand that and ask the folks you're dealing with. How are they ... What is their oversight? Right? My compliance officer has to redo stuff all the time to make sure it's done correctly, and that's a good thing. So I would say let's create a relationship. Let's figure out what your needs are and move from there. And I can explain the various offerings that we have. What we have out today may not be appropriate for you. But if I know what is, then I can call you when we have a good deal that is appropriate for you.

Thomas Young:

Yeah, no. I love that. And time and time again, it's about the relationship and it's about you knowing your investors and your investors knowing you. I love that you led with that because not everybody does. And I also, just to sort of wrap, I love the point that you said earlier about making sure that people aren't raising money just to make money. You can raise a fund and fee. You kind of has that right. If it's not going to a specific deal or for a specific purpose, it doesn't make that much sense. But Rob, thank you so much for joining us. Is there anything that you want to leave us with, anything that we didn't touch on that you want to make sure that people hear before we say goodbye?

Rob Anderson:

I would just say that if you haven't invested in a commercial real estate deal, and you're an accredited investor, then you're not properly diversified. Whether it's me or somebody else, you've got to look into this. This is where wealth creation comes from. The wealthiest people in the history of our planet, for crying out loud, have all been invested in real estate. It's where you need to have a piece of your portfolio. I would like to give you our website is bvcapitaltx.com. Our 800 number is 800-484-0073. So please reach out to us. You can email us at ir@bvcapitaltx.com. That's our investor relations group. Chances are, one of those will probably get funneled to me anyways, or my group, and I'd love to get to know you guys and see how we can help.

Thomas Young:

Awesome. And we'll put all of those resources in the show notes for anybody listening. Rob, thanks again for taking the time. And I'm sure we'll talk soon as this whole COVID plays out and we see the effect it has on the industry. But thanks again, and we'll talk soon.

Rob Anderson:

Happy to be here. Thank you, Thomas.