Welcome to the untold stories of real estate investing. Hosted by Wayne Courageous III. A place where active and passive investors come to hear the good, bad and ugly of real estate investing. Our guests consists of experienced operators and investors who want others to succeed by sharing their stories. If you're looking to syndicate deals or grow your wealth passively in real estate, you've come to the right show. Now it's time to sit back, take mental notes, and enjoy our next episode of The Untold Stories of Real Estate Investing.

All right, well, welcome everybody. This is April 24, 2023. We're going to talk about a really important topic tonight about how to save a deal. As an LP, you are not powerless. So, pretty timing topic with the one and only Sonia Sadre, a good friend of mine. It's the one I really look up to in this space. Have a few slides here if you're first time at this meetup. We meet on the fourth Monday of every month other than December. But ultimately we created this meetup so we can have dialogues like what we're having today where we can really dig in on the good, bad and ugly of real estate investing. With any type of risk or investment, there's risk. So we like to have that discussion and ultimately educate as many passive investors as much as possible. We just finished our networking breakouts, typically about 700 and 05:00 P.m. To 07:15 P.m. Central time. Then we'll go into our guest presentation and then open up to Q and A. One thing I wanted to show on this slide here is I didn't realize this, but my team found this on Meetup.com. This particular meetup that you're in today is the second largest passive investor meetup in the world. It's actually the first in the country, which I think is really cool. So who beats us? Hamburg, Germany, 1418 members. We've got 1341 members. Pretty cool. And then New York followed third. So really excited about this because I mean, we've really been trying to put as much great information out to those that attend and hopefully it's valuable for everybody. A little bit about myself. I'm Wayne Courageous, based out of Central Texas. I've been in commercial real estate close to 16 years, but been investing in real estate for at least 19 years. It started my investing journey in the Marine Corps back in 2003 2004 on single family and it's been my passion and what I've been doing ever since. So right now we've about 33 million assets under management between Texas, Louisiana and Alabama. I like I said, I've been working in commercial real estate for many years and primarily focus multifamily storage and builder rent investments. Couple slots here. Untold Stories of Real Estate investing. There's a podcast. Check this out if you're getting into real estate investing, not only do we talk about syndications, but we've talked about single family, mobile, home parks, et cetera. So hopefully a podcast that would be useful for everybody. Also go to CREI partners.com where you can learn more about our company and what we're doing to build wealth for our investors. And then lastly, enough about me is this last slide is we just launched our Passive Investor coaching course. It's Passivevestorkoaching.com. The reason behind this course was really just to educate as many investors who are getting into real estate in general. Whether it's multifamily or storage, real estate, all in all has very similar foundation and so really uncovering the strategies and techniques that hopefully will give you the tools. So definitely check that out. Passiveinvestorcoaching.com. All right, enough about me. Let's talk about Sonya and what we're going to be talking about to help our limited partners out there. Sonia Sadre has invested as a limited partner, key principal and general partner in over 3000 doors, holding 200 million in assets throughout the United States. She's been a leader in the equities markets for over 30 years and moved to commercial real estate due to the tax advantages and the ability to uniquely force appreciate each asset become her mission to help others capitalize on all the benefits of real estate investing. Sonya is based in Dallas and take it from me, she only focuses in Dallas. I've tried to get her outside that market, but she's really an expert in Dallas Fort Worth area and very well known across the communities with podcasts and conferences and meetups such as this. So I want to welcome Sonya and I'm going to stop sharing my screen and we're going to get to it. So for the recording out there, we typically have a speaker just talk on a subject, have some slides and such. But what Sonia and I decided to do is let's really make this more interactive. So I'll start off with asking some questions to Sonya, and then if anybody has questions, I'm going to be checking the chat box. Or if you all just unmute yourself and just want to have a question to ask right now, we're in a weird real estate market going on right now. It's been a hyperactive real estate markets over the last few years. As we know, there's cycles in real estate, and that's okay, that's just part of any investing. It's normal in investments, but when you're as a limited partner and you don't have the control, potentially you may have questions or get a little concerned. So that's why we're having this conversation. So let me start off Sonya. During the intro, did I miss anything that you want to cover before we dig in?

That intro is slightly old. I think it's from what I did, your podcast. I've gotten a few more deals bought and sold since then, but it's all good. I've had three full cycle deals so far. They've all consistently beaten the S and P 500, which is why I think all of us are here because we know that if we buy real estate and wait, we will probably beat the stock market in return. I've seen many very good syndicators in the audience as well as passive investors. And the main purpose of this conversation is to say, instead of being afraid and worried but not taking action, what can you do as a general partner, as a limited partner, as a key principle, et cetera, in this environment? What are maybe three or four little clues you can see right from your financials that tell you right away, okay, this is the start of trouble, or okay, we're doing just fine. What are KPIs you should be looking at that'll give you that clue, and then what can you do about it? Should you be taking action immediately? What kind of time windows do you have available to fix problems, or are you running out of time? And how do you figure that out so that you know not to panic and sell or, oh, it's only going to get worse, I better sell, right? Those kind of decisions, how do you make those decisions? And that's really the purpose of this meetup, because there's a lot of great syndicators, again, I'll repeat that in this room. But the thing is, sometimes we might have bought these properties either at the wrong time, like 2021 was the year of bridge debt, which is floating rate debt, and what happens then? We might be stuck in a situation where that mortgage has gone up more than twice what we had underwritten for, et cetera. So we're in situations. So we really want to understand how much of that is within our control, how much of it is beyond our control. Should we be giving grace SLPs? Like, I'm a passive investor in 26 deals. I'm an active general partner in nine deals, of which three have gone a full cycle. So I'm more passive than active. And so as a limited partner, I have a lot of deals, some of which have made capital calls. So what I do is I look at those deals and say, has the general partnership team done everything they're supposed to do with regards to things within their control? And as I review the financials of my other passive deals, it's like, what trends am I looking at? What spells trouble? And when should I start having interesting conversations? So this really stemmed from going back to 2020 when the Pandemic hit, and a lot of people hadn't planned for the Pandemic, and they had acquired these deals in 2019. And one particular passive deal that I was in, and so was angel, who's in the audience, all the trouble we had with that deal and how because I had absolutely nothing going on, because everything was shut down. I had only two active deals I was kind of helping a little bit with. So we're at home and I'm reading all these passive reports across the deal at different deals and looking at this one deal going, okay, this isn't right. What this person is doing is not right. Month after month after month, I can tell you this is a train wreck. And sure enough, a train wreck happened, right? So that's why I'm saying, as a passive investor, you want to be a sophisticated passive investor. You want to take the course kind of stuff that Wayne's offering. So you really know what to look for and spot those signs of distrust and take action early. Because I think all of us know about these foreclosures that just happened in Houston, right? Could those have been saved? What could you have spotted early on if you were one of those LPs six months ago, eight months ago, was there any room to save those deals? Or is your deal kind of headed in that train wreck kind of direction? What could you do today, even though you don't have authority as a limited partner, you could start asking general partnership enough questions, you could write letters to them, et cetera. So that's the kind of main framework under which I wanted to have this discussion.

Yeah, no, it's great. And I think in the beginning of real estate investing, as a passive investor, you put your trust into someone on that general partnership team. There was a reason why you felt comfortable investing whatever you did. Right. And transparency is the foundation of all this. And that's the thing I love about real estate investing versus investing in other investments. And I do the stocks, and I know you as well, but you really don't have any control there. And there's really not much power at all. You have but you have some type of trust with this team, whether it was track record that you've heard about or you know this person. So I think starting with transparency is key. So what do you want to see in that transparent manner to help you then figure out if what you're seeing is, as you said, a train wreck? So what are those things that you want all limited partners to be asking for? From a transparency standpoint, at a minimum.

On a monthly basis, you should have full access to all the financials. It should not just be the revenue expenses. NOI, it shouldn't stop at that level. You should get the numbers below the line as well, all the way down to net cash. You should have access to all bank accounts, for example, the operations bank account, as well as if there's another capital account where the sponsors are keeping that. You should ask for that. If there is a rate cap and bridge loan, et cetera, involved, you want to know how much of that is getting reimbursed every month. In other words, you want a complete map, a full financial picture of the property. And you want to be having asking for what's called a variance report. That means what was my budget originally? And what is my actual performance and what is the delta, for example, collection, the top line revenue or collections is unaffected by interest rate hikes. Are you collecting the same amount of revenue that you said you would when you initially started this project? Are you collecting the same amount of revenue as your budget? Like, let's say this is year three of your project, right? You probably put together a budget last fall for 2023. Is the project going along the budget numbers? How does that compare to the initial projections? When you have that webinar that you listen to, right, they usually give you a nice five year projection. What kind of revenue did they say you're going to have in year two or year three? How is it going month to month to month? Nobody can fudge that number. That's the actual collections in a property. So that's a very easy number for you to look at. The second one is operating expenses. Part of that is controllable. Part of that is non controllable. The controllable part is your personnel, your admin, your repairs and maintenance, all of those, the marketing costs, et cetera. How is that? I know costs go up every year. Was the initial underwriting budgeting for proper increases in costs or was it off? So that's your controllable side. What's your non controllable side? Insurance is one of the non controllable in your operating expenses. But did you shop for it? Is your insurance expiring in 60 days? Well, you should be shopping around for it because especially in Texas and certain other coastal areas, et cetera, it goes up like crazy. So are they shopping around for it? And then the next one is taxes. In Texas. That's huge. So is your tax protest company protesting enough for you? In one of our properties, we had to actually litigate to get the taxes reduced. And so that's a big increase. So every year when you write your budget with your property management company, when you think about taxes, insurance, and all these other increase in operational expenses, how much is that? What percentage is that? And is your revenue stream keeping up with that? Because otherwise you're going downhill, right? It's just like your family. Your expenses went up. Like, I suddenly had to pay for a kid's college tuition as an example. I don't have a plan for it. Then my revenue has to keep up with that, otherwise I'm going down in net cash, right? So it's just fundamentals like that. Just take it as your household's budget and think about these basics. Collections, nobody can blame that on the interest rate hikes, operating expenses, nobody can blame that on interest rate hikes, your taxes and insurance, make sure you're shopping and budgeting for those increases. And then if all the costs of your rehabs are going up, what are some ways that you can cut those expenses? Maybe you can pass along some of those expenses, like your pest control and trash. Maybe you increase the fee for that. If it's $5 more across 200 doors, that's an example. Those operating expenses, you've got your top line revenue and then you've got your operating expenses. That's what leads to your NOI. Revenue minus operating expenses is NOI. That's the first and most critical number I ask every passive investor to watch. The net operating income is what determines the value of the property. That's the number your lender is looking at. That's the number your listing broker is looking at. And that's one number to scrutinize. So if you remember nothing from this entire evening, NOI net operating income, is it enough to cover your mortgage payment? So at home, is your family's paycheck enough to cover your mortgage statement? Right. The same concept when your NOI is for less than your mortgage payment, that's the first sign of a distressed deal. You do not have what is called debt service coverage ratio to pay your mortgage. So then if that's what's happening in one or more of your passive or active deals, look at your loan agreements. If this is a bridge loan or floating rate loan deal, some of the lenders will start looping in slowly. You are now in some rough waters. Your head is starting to sink a little bit below water. That's the sign. Now you're trying to tread water and stay alive. That's where you are. So what does that mean? Your lender can start taking control. So the first sign is debt service coverage ratio. Less than one NOI net operating income is insufficient to cover the mortgage. The first sign of distress, you're not in compliance with your loan agreement. Second thing right after that is the lender takes control of the lockbox. So they suddenly say, you no longer have freedom to spend money the way you want to. We're going to be in charge. We're going to control this. All the money that's collected by your property management company, monthly collections, is going to go sit here and I'm going to decide what gets paid. So, yeah, I'll let you pay the normal bills like pest control and trash and utilities, et cetera. I'm not going to let you just spend it on something else that you like. And in most bridge loan, floating rate loan deals that a lot of us got into in 2021 and even early 2022, lender also is funding some of your capital expenses, like your interior upgrades, exterior paint, et cetera, and even some of your deferred maintenance. They will control that. They may not pay you that right away. So let's say I spend $100,000 on a parking lot repair. Well, and then I submit all the receipts and I'm waiting and waiting and waiting. The lender could very well take a couple of months before they reimburse me. So that's 100K in cash that I've got to kind of float and hope that the property can meet it. But my mortgage just went up by another 50K as an example. So you're in a bind, right? So be aware of that. Is this property in a bind? So what's the question you ask your GP if you're an LP, is my NOI enough to cover the mortgage? Is the lender taking control of the account? What happens next? You don't have enough money to pay the mortgage. Your net cash negative, so know your net cash. My net cash is negative. What's happening? When are you going to run out of money? That's the next question I ask. So it's like, let's say my household suddenly has this big expense of paying for a kid's college, but I haven't generated that money or got a college savings plan somewhere. I'm going to be that negative twenty K a year. Twenty five k a year or more in cash. Well, when am I going to run out of money? So you need to know that. Is that in two months? Is that in six months? If you're running out of money in two months, that's when you're going to see a capital call. That's the next sign of this drug. What happens after a capital call? Well, you need to understand what is the path to recovery? Let's say I have a capital. I've got three deals right now where I'm passive that have come up with capital calls. I'm not clear on at least two of them. What is the path to exiting? So let's say I contributed it's 100K investment, and I contribute 20K today, 20% to the capital call. It's not clear to me in five months, six months, a year how I'm going to recover all that capital call money, let alone get out of this bridge loan. And how the new underwriting looks like that wasn't made clear. So if you think a capital call is where you're headed because you need 2 million suddenly, and that's too big an amount for US GPS to put into the deal, then I say start talking now to your investors. Investors need time. If I need to put in another 20%, 30%, whatever it is, as a limited partner into the deal, give me some warning, give me some signs. Don't surprise me with an email today and saying, by the way, you've got ten days. You need to provide me another twenty, thirty k, whatever the amount is. Investors won't be ready mentally. They may not be ready with the cash either. So you've got to give them plenty of warning. It's just like when you prepare that webinar, right? Go to a lot of trouble to prepare a webinar because now you're presenting them with a new underwriting, a new presentation. Maybe it's additional perfectly, whatever it is, it's called a member loan. I don't know what you're going to call this capital call or you're going to dilute their shares, but how do you see yourself coming out of this hole to make them at least back to break even. What does it take for you to break even? So spell all that out. Just like all the effort you put into that first investor webinar. If you are in the general partnership team, tell them, listen, I'm in a Freddie floater loan. My rate cap is not expiring for another year. My bridge loan doesn't. My floating rate is still good for another year, but Freddie is asking me today to put up reserves as if I needed to buy that rate cap today. So every month I have to escrow an extra blank number of dollars. That's why I'm asking for money or whatever your explanation is, and then actually show how that plays out in the next twelve months. So it's an extra, I don't know, fifty K a month or two hundred K a month I need to come up with for 2.4 million. How is that going to end for the limited partner? Show them the whole story, the best case scenario, the break even, all of that. Right? You've now coming up with a whole new deal where you're asking them to put more money. You got to prepare them for it. You can't just surprise them and expect them to just say, okay, I got cash, I still blindly trust you, even though this deal is not performing, that's not going to happen. So just put yourself in the shoes of a limited partner and really prepare them for it. Now, if you are a limited partner, you've looked for these signs. What's the first sign? I want somebody to type in the chat box. What's the first sign of a distress deal? And then Wayne can read that out for us. The first sign of a distress deal is crickets. The net operating income NOI is not enough to cover the mortgage payment. Your DSCR, which is debt service coverage ratio, is less than one. That means the net operating income of the deal is not enough to make a mortgage payment. That's the first sign. The second sign of a distressed deal is the lender takes control. Okay? And then the third one is your net cash in. The deal is negative and they don't have capital to pay for it. So revenue, right? The top line revenue collection minus operating expenses equals net operating income. That NOI has to be enough to cover your mortgage payment. That's the money you need to pay the debt service. And if you don't have it, your debt service coverage ratio is less than one. That's the first sign of distress of a deal. The second sign you ask your sponsors is, what is the plan? What are your plan to increase the NOI? Do you see yourself increasing the NOI to cover the mortgage payment? If not, read that loan agreement. Ask them to read the loan agreement. Explain that to you in their next update. Either in a phone call, in a monthly update, et cetera. Under what circumstances is the lender going to take control? When the lender takes control, then what's the next step? What conditions are they asking you to meet? What is your plan to exit this floating rate loan into a Fanny or a Freddie fixed rate loan? What's the exit path or are you going to try to sell the deal? What's another basic question you can ask? If we sold the deal today, are we going to break even or are we in the negative? If we're in the negative, how much money am I going to lose? If I made 100K investment and you had to sell the deal today, would I come back with break even or even less than that? How bad is that? What is that gap? So if you are a general partner, there's two things you should be doing on a quarterly basis. The first person, there's two people to whom you should be sending your financials. So take a look at your quarterly financials and send them. Send your teachball variance. Report all these numbers, one to your lender. You're required to do that. Probably the second one to your lender broker. If you have such a person that's the person who shops for your refi for you. And then the other person is your listing broker, the person who's going to sell the deal for you and for both your listing broker as well as your lender broker, you want to give them targets. When I refi this deal, I need to get at least, I don't know, 10 million in proceeds or 20 million in proceeds. And so today, maybe the lender broker comes back and tells you you're only going to get 8 million in proceeds instead of 10 million in proceeds. But you need to do these five things so that you can get those 10 million in proceeds that you want. So then on a quarterly basis, you get direction from your lender broker as to what you have to do. Right now, you're in peak leasing season, so if anything, now is the best time for you. Try to increase those rents and sources of other income, et cetera. So get that direction right now from your lender broker so that you can position yourself for a refi. If the Fed increases interest rates in May and then stops after that, then it's another nine months. Let's say next March, maybe you might see a slight decrease. So if you have that level of runway because your rate cap is still good to the second half of 2024, that's what you need to be doing is get quarterly direction from your lender broker as to what you have to do with your financials, your rent, your other income, your expenses, et cetera, to position for the refi dollars that you want. Same thing. Give it to your listing broker. They analyze it. They come back and say, hey, today if you sell the property, you're only going to get 15 million for it. You're really looking for 18 million. So I need you to do blah, blah, blah. They'll give you a list. So same way, take that list right from the lender broker as well as listing broker. Turn that into targets or a budget for your property management. Work together as a team, your general partnership team and property management team to see how you can get there. Is there a way of getting there? Let's all put our creative thinking hats, see how we can get there. And if it looks hopeless, then are you better off cutting your losses and run? Right? Because if your rate cap is expiring in 2023, there's not a lot of time left because a loan application and actually going through takes 60 to 90 days, easy. So look at how much runway you have. If you have a rate cap. Like, I have two deals where the rate caps are expiring in the second half of 2024. So I've got a longer runway. So we just did that analysis last week for a deal, and we got direction from the lender broker, and he said, increase your revenue by 3% and you'll be here. Increase your revenue by 8% and you'll be here. So we have two targets. So 3% is the minimum initial target, but then 8% is like a stretch goal, right? That's where we want to get to by April of next year, but immediately, this is our peak leasing season when we can affect the most increases in revenue. That's what we want to do. If you are a limited partner again and you see your deal in distress, ask questions. Ask for a plan. Send your questions in writing. A lot of them will say, let me give you a call. It's going to be fine, don't worry. And if they tell you that without concrete numbers and dates, that's a problem. Say, I appreciate you trying to make me feel better. I would feel a whole lot better if I saw an actual action plan. You're a household. Just imagine. All of this instead is your own little household, and you are bleeding cash every month. You're at a negative 20K every month. When am I going to get positive? Isn't me or my spouse or somebody increasing the income? How are we going to catch up? It's just the same principle, except maybe the numbers are a bit larger. But it's the same thing. So tell me how I'm going to break even. When am I going to break even? How do you see us exiting this loan? How do you see us exiting the deal? And give me numbers, specific in writing. Take the time. If you need a week, you need ten days. Go figure it out. But get back with me with solid answers. Don't just come back to me with fluff that it's going to be fine, don't worry about it. You're a limited partner. Well, I'm. Worried about it because four deals foreclosed recently in Houston, and they all lost every dime of their principal, right? So maybe if you sell it now, I'm only going to lose 10% of my principal and I'll at least get 90% of it back. So at what point can you break even? I need to understand how you will break even with today's interest rate, today's cap rate. How much of a runway do you have with your floating rate loan? Do I have? Six months, one year, 15 months? What are your terms? Do you understand your loan terms? So these are very important questions to ask. If you're in a deal, especially with floating rate, if it's a fixed rate loan with Fannie Mae or Freddie Mac, as long as you pay the mortgage, you shouldn't be in much trouble. But even those deals, I would keep an eye out for any signs, any trends. I wouldn't worry about one month financials, but I would definitely worry about a three month trend. Is my occupancy going the right direction? Is my revenue going the right direction? If the occupancy dips like we took the occupancy down because we evicted a large number of tenants, but that was part of the plan, that was part of the takeover and value add in the property. So you explain that to investors, then they won't be in panic. This is part of the plan. We're taking it down, but now we're in peak season. Give us three months, you're going to see it ramp up. We're already at 90%, which is what lenders like to see your agency lender, anytime it falls below 90, that's not a good sign. So you want to get it back at least up to that 90 and do a break even analysis and present a webinar. If you are ever at risk of a cash call. The other thing we did on a couple of our properties is we had a twelve month webinar anyway, just to say, hey, it's been twelve months here's. All the great things we've done here are the risks we are facing here's, what we're doing about it, et cetera. This is how we're walking the tightrope. We think we're going to be okay because of these factors, but just be open and transparent about everything, the good, the bad and the ugly, so that the investors feel better knowing you're on top of it. The biggest other sign I see is some deals. I stop receiving communications, I stop receiving monthly financials. I've got to go chase down a sponsor. That's a problem. So if you've got a deal where you're a passive investor, this is a good time to go back to those original slides and get the name, emails, everything of every sponsor in that deal, and just email the whole team with specific clean questions. Don't be emotional and say, I'm really scared about what's happening with my deal. Don't do that. Just say how I'm looking at the financials and I'm seeing the NOI at this number. It doesn't appear to be enough. Discover the debt. What are your plans to make this okay before we have a capital call, et cetera? Right? Be very logical, measured, give them some time, give them some grace, especially if they are hardworking sponsors and they just happen to only get maybe a two year rate cap instead of a three year rate cap. Understand their situation, but be alert. Don't assume everybody is watching their deals. Some of them may have acquired too many deals in a row and not really kept tabs on those numbers. So you have to be vigilant and look out for your own. You have to be that alert passenger. Now there's turbulence in the aircraft. Oxygen mass might need to be dropping. So even though you're a passenger and you're not the one steering this plane, it's good to be asking questions. Look around. Who are my other passengers? So in some cases you can review your Ppm docs. One of the most important questions to ask is, is a capital call mandatory or optional? Am I required to contribute to it? What happens if I don't? Another question is under what circumstances can I ask for a list of other passive investors? Is that something to be disclosed to me or not? Because you can band together. Some of you may know Charles Lamar. He's a very popular, well established passive investor for a very long time, and he can tell you some very interesting stories. He was mostly a passive investor in all his deals, but he was also a KP in a deal where he signed the loan and the KPS had to take charge. So that's a very interesting story where the main sponsor kind of neglected the deal and the KPS had to take charge and turn it around. So you never know in what cases those circumstances will come up. So read this is a good time to read your documents. If you're not hearing from sponsors, give them grace, give them some time, and then if the financials are clearly declining, as you can see from the numbers, that's a good point angel just made. So read the chat box. You can find your list of investors, apparently through the SEC. Are there any other questions I should be answering, Wayne?

I haven't seen any come through, but I think you said it really well. There's turbulence in the air. It's not across the board. All deals are failing and all this stuff. There are a lot of deals that are doing extremely well or as the business plan. Right. The purpose of this is just to start being, for the most part, we all invest passively to stay passive. Right? And that's the goal. But when you are getting those monthly reports and looking at the financials and if there's negative cash flow on new deals that were intended to negative cash flow, that's always business plan year one. Because they're renovating that's okay. Because as long as you know the story, as long as there's that transparency. And I always say to people, don't make it more complicated than it is. It's revenue, it's business, right? So revenue, whatever you may be thinking in your business, is all the sun or miscellaneous incomes and stuff in our world, it's rent, it could be storage, antenna, et cetera, all that rents minus expenses. NOI. Is it positive? Negative? If it's negative, I think it's good for sure to ask questions and get the answer that you need to hear. The thing that I also am seeing in the market, one question Sonya was brought up earlier, I should have said that is what has caused all this. What I'm seeing that's caused all this is you've got this perfect storm where interest rates have gone up. If they had bought a few years ago or a couple of years ago, rate caps weren't really a discussion. And if it were, maybe they just did a two year or so because they were thinking about refinancing. But now that that rate cap is expiring, interest rates have gone up, they're having a hard time refinancing because as you said, the debt service coverage ratio was not adequate enough to get them to positive cash flow. So they're having a hard time refinancing. You've got interest rate or insurance that's gone crazy because year after year we have these name storms that just cause havoc throughout the United States. So you have a lot of carriers being a lot more conservative on their capacity on certain markets, and then you have property taxes. So you have this perfect storm of a lot of things going on. I will say that this is an exciting time for real estate investors. It's not all doom and gloom, right? Because if you have investments under control in a syndicator that's communicating, there are a lot of distressed deals out there that are going to make a lot of money for people down the road. Right, so it's an interesting time for sure. But anyway, do you have more to say on sort of how we got to this point and sort of your outlook in real estate investing moving forward?

Yes, at the beginning, if you look at 2015, 2016, all the way through 2021, I had two deals that sold in 2021 where I was the general partner and I have several deals as a limited partner that sold at that time. All of those years was like a nice downslide, meaning the cap rate kept coming down, your interest rates were super low. So somebody could have bought a property in 2017, done absolutely nothing with it, sold it three years later, not even been careful about controlling expenses, et cetera. And just because of the cap rate compression, made good money. People are used to getting 10% kind of cash flow, double your money in two, three years. And so a lot of passive investors and syndicators got spoiled with that. Like, I have some great passive deals that doubled my money in less than three years. And what the problem is after that, when interest rates started going up, it became an uphill battle. So instead of having tailwinds on your flight, you've got this huge headwind. Then you also ended up having the storm, which is you didn't buy a rate cap. Some people who got floating rate loans, their lenders did not require them to buy a rate cap. What is a rate cap? Rate cap is like an insurance policy that protects you if the interest rates keep going up. So I have a deal in which our initial interest rate was under 4%. We got a rate cap, that's a step rate cap. So the first twelve months our rate could only max out at 5.25%. Year two it's 5.75%, and year three it's 6.25%. The real interest rate actually is more than six and a half percent right now, or 7% kind of rate. So I'm only required to pay up to that 5.25%, and then I get the remaining reimbursed, like an insurance policy, and so my deal is able to handle it. What if I didn't have a rate cap, which is what many deals ended up doing, and I had to pay a 7% interest rate, when in fact I underwrote it for three and a half, or 3.8% interest rate, my mortgage effectively more than doubled. And if I had just acquired the deal in less than a year, I haven't really had time to fully implement my value add business plan and get it up to its cruising altitude, as I call it. And I'm hitting turbulence and a storm and everything too early. And that's what happened to those foreclosed Houston deals, is they had too much trouble early on and they did not have a rate cap, and the NOI was low and could not cover the mortgage payment. In addition, some of those deals were in very, very troubled areas, d kind of areas with murders, stabbing, fire, all kinds of signs of neglect. I mean, charred bodies found weeks later, they were in the news, tenants were complaining, there was such filth everywhere, PEPT issues, rats, trash everywhere, et cetera. Right? So there were a lot of different things happening with the properties that also led to clear signs of neglect. City citations, mayor, city council getting involved, resident folklore. So a lot of different bad things all happened at once, and a lot of acquisitions in a short amount of time, as well as a property management company that went out of business and completely neglected the property. And so if you were a general partner or a limited partner, and you were not aware of where the property is located because you're sitting remotely somewhere else, these are the things you want to look for is how often is my general partnership team physically at the property? Is anybody closed by at least once a month? Is someone visiting the property and physically posting pictures, facebook Live, something to show that the property is not just completely neglected? Right, so those are some signs, but the deals that foreclosed in Houston were because their net operating income just wasn't sufficient to pay the mortgage in the short amount of time that they had before these interest rates shot up. And they did not have a rate cap to protect it. And a lot of their projections and underwriting was not good. The leverage was too high. So they had a highly leveraged loan of 80%, and then they had private equity coming in, providing almost an additional 10%. That means you're extremely leveraged. Right. You owe too much money. 90% versus some of our Freddie deals that we closed last year are in the range of 65% leverage. So when you do a breakeven occupancy test, a breakeven revenue kind of test for that, you will know, oh, I could take my occupancy down, my physical and my economic occupancy down as low as, I don't know, 75%, to give you an example, and I'll still be okay to pay the mortgage. So you want to keep doing stress tests like that when you're presented with a new alternative, hey, our deal is going into a capital call. You've got to give us a little more money. So ask them to completely explain the new underwriting and stress test it and explain how they're going to get out of this hole that they have dug themselves into because of some things within their control and some things beyond their control. And that's the question you want to be asking. I noticed there were some questions in the chat box, Wayne.

Yeah, I'll read it. One of them is if a capital call is requested, LPs, if you don't participate, your ownership is diluted. If you do, you maintain your ownership. But since the deal is in trouble, likely the initial projection is lower. Are you then essentially investing more for a lower return? And is this benefit for the LP that you not lose the deal initial principal? Why would any LP participate?

You have to ask your sponsorship team to go through a detailed underwriting and explain how raising this additional capital as part of the capital call, let's say $3 million, how does that help them recover? When are they realistically hoping to refi or sell? How is that looking? Is that a realistic projection of interest rates that's going to lower their monthly mortgage payment? Because I'm looking at it across multiple deals right now, where I know that even today's rates, my monthly mortgage payment is going to reduce by anywhere from ten to month, which is nice cash. But to get to that stage, I've got to increase my revenue to a certain number, and I only get enough proceeds to break even, not a little extra. I want to get proceeds to not just break even, but I want to get another couple of million to pay back a certain percentage of my LPs and have cash left over to cover for other expenses that may come up. So those are the targets you want to understand. What's my break even numbers with this new capital call being made? What is your occupancy, your collections, et cetera, have to be if I contribute towards this 3 million, what does six months look like? What does nine months look like? Where am I exiting? And what does my total return look like? What are the risks? What all things have to happen in perfect sequence for this to work. What happens if you want to sell the deal today and forget this capital call? How much money do we lose? Are we better off cutting our losses today? Is there probably a potential buyer? I mean, you look at this room right now with Wayne's Meetup. It's a room full of syndicators. They're all friends, too. There's a lot of syndicators here. Talk to them and say, would you buy a deal in this location at this price? It's a great property. The only problem is we're in the wrong loan. And today my passives may walk away with only a 5% loss versus if I keep waiting, do a capital call a year later, hope for things to improve. How much of it is hope and speculation that interest rates will come down versus reality that maybe it won't come down? Maybe you have to survive two more years, not just till the beginning of 2024. So work out all those scenarios and assess the risk and have the general partners explain it to you, because only then can you make an informed decision based on your risk tolerance and your understanding of the current scenarios.

Yeah, you got to know the business plan and how they're projecting moving forward. The thought of if you're having to raise more capital and bring more money, it is diluting. Right. You're bringing in additional capital absolutely is.

Diluting, and it's pushing you down. And sometimes they might bring it in as a layer of pref equity, too, in which case they get paid out first. So the first payment goes to the lender next to this pref equity to fully catch them up, and only then the remaining LPs. So that's not necessarily a great option either, but in some cases, that's what they're doing to bring in an additional influx of capital, right? Yeah.

And I think the private placement memorandum, the document that everybody should read and familiarize yourself and be specific, at the end of the day, the webinar of the PowerPoint and the marketing of a placement goes out the window when times are in trouble. It's what's in that Ppm, what's in that operating agreement. That's what you have to look back to. So in that Ppm, there'll be a section on capital calls and what they can and can't do and more on that. So just understanding what the Ppm is, communicating with the sponsor syndicator, getting that transparency, seeing those financial reports that are really done by property management. I know at the Ivy, at the Galleria, every month we upload on another deal in Houston. We upload the full monthly financial package. We've done that since day one. It's hard to do that on a development deal because we don't really have a loan on it. And that one's a little different. But for your traditional multifamily, I mean, the management company, especially third party, they're providing a full report that has that operating income statement, that has delinquency, that has executive summary, the variance report that you talked about, those are all things that are readily available and in my mind should be fully transparent to investors.

So let's say you're spotting signs of distress in your deal as an LP. You are doing your best to communicate to the general partners. You are not getting satisfactory answers. Make sure your questions are in writing. And then the next step is get more LPs involved. The more LPs get involved in terms of emails, phone calls, et cetera, you have a louder voice. So it's not just you that whiny annoying LP like a fly that they want to SWAT. It's all of you asking reasonable questions, requesting a meeting. You always want to mediate. I mean, every syndicator is hopefully trying their best to deal with the circumstances we've been handed. But if that's still not working, one of the things you could do is at the very least talk to the syndication lawyer who wrote up these agreements. Remember that they are working for the general partners, that's who they represent. But you can request like the original copies of all the documents if you don't have access to it. And then you can find another lawyer and write a simple demand letter saying, this is what we want an answer to, and write out those questions and say, we would like a webinar, or we would like a meeting to discuss these problems and give us clear answers. Your monthly update seems to be fluff. It's not getting me any concrete answers and you can definitely do that. Now, it's not really a huge legally binding thing, but the fact that if you bother to go to a lawyer and send them a letter, hopefully will make them take it more seriously. And that would be the first step. And you only go to this after you've made repeated attempts for at least several weeks. You're not getting answers and you're seeing really declining financials and you think your deal is in distress, then you want to definitely do that. If they're reasonable and they show you an action plan, I would definitely give them some leeway because these times are unprecedented. I know owners of tens of thousands of doors huge, big name people all across the country making capital calls. So it's not just, oh, the poor little syndicator who assumed everything is going to go well. No, there's people who owns tens of thousands of doors, highly respected, highly looked up to in these communities for making capital calls. So it's happening across the board because nobody predicted this interest rate hike in 2022. So you definitely want to give people grace, but at the same time, you want to make sure you get enough answers to where you believe that the team is doing their part in rectifying the current situation to the best they can. Or, I mean, discuss the scenario. Do you want to just quit now? Because you will at least recover close to 100% of your original principal, because you can't last another 1215 months. Everybody's hoping that it's election year next year, so interest rates will come down by the middle of next year. But what if it doesn't? And you got to hold on, can your deal last? Because you're going to have more distress deals. Feeling the pain by early 2024, I'm certain there are deals with rate caps expiring in 2023, so look at how much of a runway you have in these deals and make a smart choice.

Yeah. And if you got dry powder on the sideline ready, this is the time to be ready to launch. We're all in on trying to find opportunities to buy distressed real estate investments, so doesn't help those that are struggling in a particular deal. But if you're getting into investing now, this is the time to get really educated and be on the lookout for some opportunities. I'm looking in the chat box, everybody. If you could put some questions, if you all have any. I know we're getting we're a little past our time, but a lot of great content. Sonia, so thank you. So I'll summarize a little bit and give you some final words, but not every deal is trouble. Ultimately, what you need to do is just the deals that you are invested in is communication and transparency. It's seeing where your business and think about every property as a business, where does your business stand today? And to do that, you have to look at the financials and that should be a very transparent thing that the syndicator will provide. If it's negative, NOI. Net operating income, revenue minus expenses, NOI. Before debt service, that's negative, then you don't have money to pay your debt service. Or it's a bridge debt, there's reserves, there could be more in the business story. Right, so you want to ask those type of questions if it's positive, NOI. And things seem to be going well, fantastic. But it's that transparency and asking questions and then digging in and, as Sonia pointed out, grouping with the unlimited partners that are on that deal to be a louder voice if needed. Sonya, have any final words before we stop recording.

Just the thing is, to be aware of what is actually happening with your deals is a good thing. To understand the length of runway you have before the time window of opportunity closes, to break even, at least on the deal, and to be aware that when it's fixed rate deals, it's not as urgent as long as the general partnership team has a clear communication as to how they're going to get there. Real estate is a long game. It's a marathon, it's not a sprint. But those who are hoping for a quick flip, quick turn kind of cycles like we've seen in the past, are suddenly seeing these headwinds. And sometimes you are better off selling to recover your principal and capital call rules will be clear only by reading your Ppm.

Make sure there's no other questions. Last comment here is be willing to dive into the detailed income statement because it's easier to read and gives you a great idea of what's going on. Absolutely. Again, it's in the financials that provided.

Look at the income statement and look for trends. Don't worry if one month something happens. As long as a three to six month trend, it's happening in the right direction and sponsors have an explanation for maybe a dip in Occupancy or something. One month, but get worried if it's a repeated trend for over three to six months.

All right, perfect. Well, thank you so much, Sonya, for joining us today. Anybody that's looking to learn more about passive investing can go to passiveinvestorcoaching.com. Sonia, how can people reach out to you as well?

They can find me through our host, Wayne. I'm very active on Facebook and LinkedIn. You can also find me@engineeredcapital.com, which is my website, and if I can do a tiny little plug, I have a book, Next Level Your Life, where I've written a chapter. If you order it on Amazon, you can find out more about me and my story of coming here as an immigrant with two suitcases and how I ended up here as my third career. Thank you.

And it's a number one bestseller right on Amazon.

Amazon number one bestseller. It's got great stories from people like Robert Helms and Kyle Wilson and many other amazing people whose stories will inspire you. There's like over 40 stories in here, so at least one of them will definitely resonate with you. So check it out. It's nice, light, fun reading and inspirational. Thank you.

That's all for this episode. We hope you subscribe, share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to creipartners.com ebook. Also follow us on Facebook by searching CREI partners. This was the untold stories of real estate investing.