Table Of Contents
In this episode, we're joined by Daniel Cocca, Esq.. Dan is a former corporate attorney at two top law firms and current Managing Director and General Counsel at Alpha Investing, a private equity real estate firm that acquires residential real estate across the US.
This episode is sponsored by Landlord Studio and Tax Smart Investors.
Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.
Thomas Castelli 0:00
You're now listening to the real estate CPA podcast. Your source for all things real estate, accounting
Brandon Hall 0:05
and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process
Brandon Hall 0:13
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Brandon Hall 0:15
Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.
Thomas Castelli 0:30
Hey everyone, thanks for tuning in. Brandon Hall and Thomas Castelli joined here today with Dan coca former corporate attorney at two top law firms and current managing director principal and General Counsel of alpha investing a private equity firm that primarily invests in multifamily and senior housing across the US. In today's episode, we discuss a variety of things, some from both an investor perspective as well as an attorney's perspective, including managing investor relations, what investors need to know when looking at an operating agreement, what recourse or lack thereof you have when dealing with a bad sponsor or manager, and why he's bullish on single family rentals. Dan, thanks so much to Intel to come on the show today. Would you be able to give our listeners a little information on your background and kind of how you got involved in real estate?
Daniel Cocca 1:15
Yeah, absolutely. Thanks for having me. Guys. I started out my professional career as an attorney in New York City was a capital markets lawyer did a lot of high yield debt bank financings IPOs transition to working on earlier stage company, mostly tech company financings, and then your met a group of guys from the school, I went to law school at who were doing something really interesting in the real estate space. And this was kind of following the Jobs Act in 2012. And all this movement into, you know, individuals can invest in real estate when, you know, before then it was challenging, right? It was it was Country Club, it was friends and family equity. And that's why, you know, if you actually look at the data, as a country, as individuals, you know, we're very much under allocated into real estate, even with all this wave over the past, you know, eight to 10 years of people starting to kind of get exposure to that asset class. Now, most financial advisors say 15, to 30%. And, you know, if you look at most folks, particularly those outside the 1%, that number still effectively rounds to zero. And so this is a group of guys are saying, hey, the crowdfunding model doesn't make a ton of sense, you know, building up these huge marketplaces, what we want to do is grab, you know, a group of, you know, high net worth ultra high net worth accredited investors, put them into a private capital network and act really like any other real estate private equity firm does. And so, I made the decision, you know, much to the dismay of my friends and family to leave the cushy law firm life and start a company where I was making about 10%, of what I was previously making from a salary perspective. But I did believe in this and I believed in it because I was a perfect example of the type of person who had capital to deploy, but didn't have the know how, or the resources to actually deploy it into real estate in an efficient way. Right, I knew a handful of people in and around New York City that worked on a couple different types of transactions. And some seem interesting, you know, others didn't, but I didn't really know how to tell the difference at the time. But I wanted the ability to deploy my capital into cash flowing real estate, across the country get diversification in terms of groups, I worked with asset classes, what have you. And so that's when we started this company, alpha investing. And, you know, we've really been full steam ahead for the past, you know, six years now, just deploying capital into real estate deals, I think we just eclipsed the kind of $2 billion mark for asset value in our portfolio earlier this year. And we're really full steam ahead. We do a lot of workforce multifamily investing, we do a lot of senior housing, assisted living, memory care investing, we just started doing a good bit of single family rentals. It's a space that we're very bullish on over the next five to 10 years. And that's really my story in a nutshell.
Unknown Speaker 4:10
What's your role at alpha?
Daniel Cocca 4:12
So it started out with the intention of me being a general counsel, you know, putting together our you know, form operating agreement and subscription agreement and making sure we were following all the compliance rules. And I think that lasted maybe five to seven days before it became Hey, like, this is an early stage company, you're part of the founding team, what's do all all hands on deck, right? And so, you know, I think my primary responsibility when I take my my lawyer hat off, which is probably 95% of the time at this point, is working on sourcing sponsors and deal flow and then taking that through the execution process, right evaluating underwriting, you know, getting the deal ready to be shared with investors, etc. probably spend a quarter of my time talking to your investors when we have live deals. to generate a new interest in our platform, we have a pretty substantial waitlist right now, for we kept our network at 1000 People just because we didn't want a ton of competition for equity, and we didn't want to talk to people we didn't know in the network. And so there's not a ton of work that we do on trying to bring new folks into the network anymore. Like when we started the firm, it's mostly about building real relationships with those folks. And so that's kind of where I spent my time. And then, you know, there's the the business of alpha investing, which is, you know, finding good real estate deals and investing. And then, you know, the business of actually growing a company that does that. And so obviously, I spend a bit of my time on the ladder as well,
Brandon Hall 5:40
how large is your team at alpha now,
Daniel Cocca 5:42
so we're at nine full time people, I think we will probably cap it out at 11, or 12. That's really always where we landed. And it's an interesting comparison to, you know, some of these, like, what I'll call a crowdfunding platform, or even, you know, private equity, where you'll see hundreds of employees, you know, for us, this business always made much more sense, when you have a small team, you know, everyone is kind of highly skilled. And, you know, you can generate meaningful, you know, revenue and ultimately profit with a small team. And then, you know, when you have that small team, all of that incremental revenue as you grow, you know, is getting distributed to the members of the team. And it makes a bit more more sense from, from a business perspective, the challenge with these platforms, when you grow to a massive scale, where you have 10 20,000 investors, if not more, as you need to build up these massive teams to, to handle all that. And that's just never been our vision, right? Like, we wanted something that felt like real estate, private equity from a relationship perspective. And so that's what we effectively built.
Brandon Hall 6:47
Awesome. Now, you mentioned that, like, earlier on your buddies that you were talking about, they were looking at crowdfunding, and they're like, yeah, that doesn't make any sense. What were some of the cons that you saw with crowdfunding? Or that you discussed with them?
Daniel Cocca 7:02
Yeah, I'm happy to talk about this topic actually like to talk about because there are so many, you know, positive narratives about crowdfunding. And then there's kind of the underlying, you know, foundational issues, right. And so I actually worked at a law firm that had what they call the crowdfunding incubator, but it was really just a group of lawyers who were knowledgeable about the jobs act as it came out in 2012. And, you know, could speak to raising capital through online platforms, right. And, you know, the first wave of crowdfunding was in that early stage venture space, right. And that is really what the Jobs Act was intended for was, we want to find ways to get capital to companies that couldn't otherwise access, right. And then real estate came along and said, We're going to apply a very similar philosophy, and we're going to find deals, we're going to create marketplaces, we're going to let people invest, who hadn't historically had the ability to invest for the reasons we talked about earlier. And that will make sense. And in theory, I'm a huge proponent of what crowdfunding did for the real estate industry, you know, it became very popular and effective means for people to get Alex allocations to real estate, private equity. The challenge, though, that I think we saw in practice, particularly as you're kind of behind the scenes, with a lot of these early adopters of the space is that, you know, when you raise 50 plus million of venture capital dollars, you own, you owe rather, a return on those dollars. And you owe a venture capital return, which is, you know, greater than, you know, what you'd expect on on a private equity deal or something of that nature, right. And so what that leads to is this incentive to build a very large platform and marketplace. And so now, instead of having 1000, investors, you want a million people signed up on your platform, you want anyone who's on the internet to see your platform and sign up. And then you create this massive marketplace of deals, right. The challenge, though, is that when you are pushing hundreds of deals a year through a platform, your quality control just kind of goes out the window, right. And from our perspective, like we wanted to be investing into institutional quality real estate with, you know, sponsors, who had experience and track records. But also the deals have to make sense, because anything that we put on our platform, and we probably share eight to 10, maybe 12 deals a year with our network, you know, even though our investors are ultimately making the investment decision about whether to participate in a transaction, but we are putting ourselves on the hook both financially and personally right, for any deal that that we share. And so, for us it was let's find those eight to 12 deals a year that come from good sponsorship groups that make sense that have strong downside protection and achievable upside. You know, let's find those deals and share them with this network of people. When you build up a massive team of you know, 100 200 people, your incentive is now we need to figure out how to pay the salaries of all those people. And the way that we do that is by pushing as many deals as possible through a marketplace structure. And it's shouldn't be a surprise to anyone that quantity takes priority over quantity or quality rather, at a certain point in time.
Brandon Hall 10:13
Yeah, that type of model. It's so funny, because we've been talking about something like that with our own CPA firm, recently. But it's just, it's funny how that type of model really only works when you're selling seats. You know, like, if I build a software tool, or some sort of software system, I can sell seats, and I can scale the seats very easily. But when you're buying real estate, or when you're trying to scale a crowdfunding platform, the profit that you make on each real estate deal is what is ultimately going to come back to you it's not you're not selling a seat, it just takes a lot of work to make profit on a real estate deal. And so I can see how you can almost out scale yourself, and then ended up like just accepting a bunch of low quality deals coming into the firm just to keep cash flow up, which, you know, we've had clients in the past that have done that, and on a much smaller scale, and it just doesn't work long term. Eventually, things start to crack, which is really interesting. You know, it's also been interesting, too, because I feel like crowdfunding was a really big thing, even just a handful of years ago. Now I hear like, nothing about it on the social networks anymore. It's like, I don't know, it just it's just, I know that they're still out there. But I just don't maybe I'm just not plugged in anymore.
Thomas Castelli 11:31
Well, I'm not gonna mention any names. I think one or two of them actually went out like when business so I kind of had to shut down because you know, do quality or issues with financing what have you. So
Brandon Hall 11:42
it's one of them that went out one of them that went out. They had we were, we were wrapping one of the clients and, like, gave us all their stuff beginning of March, and the crowdfunding team was all mad like, like sending us nasty gram emails, asking why we couldn't get the return done by March 15. Talking about a two week turnaround time for 300 investors.
Daniel Cocca 12:06
Yeah, the the the k one process for us is a disaster. Just having, you know, 50 Plus, yes, patience. But, you know, it's the natural evolution really, in any industry. And sometimes I think people forget, as it relates to crowdfunding. No, we're still in the infancy, right, the space evolved through the Jobs Act, but the jobs act really doesn't apply to a lot of what folks are doing, which is just syndicating, you know, capital, right? And like any new industry, you know, crowdfunding kind of came in and knocked down the wall and said, Hey, this is possible. There's a ton of capital behind it, we're going to show you how you do it. And then groups like ourselves, and others have kind of come in and said, let's create something that we think is more refined that's designed for the investor like ourselves, as opposed to, you know, what would be the best fin tech type crowdfunding business to build, right? Because we don't actually view this as FinTech, right? The technology is very helpful and efficient. You can look at deals online, sign your documents, track performance, what have you. There's nothing actually novel about the technology, right? I know, some firms are trying to implement like AI into the real estate underwriting space. Like maybe that makes sense, if you're going to look at 2000 deals a year, and you're going to try to share a few 100 of them with your network. But if you're gonna, you know, look at maybe 100 Plus deals a year, and you know, you're going to invest in 10 to 12 of them, you know, having an individual is flying out to the property and touring it. And the comps makes a ton more sense than spending your what's probably 20 to $50 million, and building out artificial intelligence that can underwrite real estate deals, right. And at the end of the day, this is still very much a relationship based business, right? For the most part, we don't buy deals that are marketed. Because the prices particularly in the market we're in today are crazy a number of times, we'll get an email from a group that we work with that says, No, we got a deal in, you know, Dallas, Fort Worth, which is a very hot market, we think we're going to lock it up for 55 million. Let us know if this initial underwriting potentially works for you guys. And then two hours later, sorry, it's under contract at 64 million. And that's not something that happens infrequently in this current market. And so you got people on the ground that can find these these off market deals. That's really important. I've gone on a little tangent from crowdfunding but you know, it all kind of ties in
Brandon Hall 14:30
Yeah, well no, I think what you're what you're kind of highlighting there is just that real estate is a it's just a complex business to run from top to bottom right. I mean, we started at the k one process and you went all the way to the finding deals and I mean, you know, we can obviously talk about the k one process inside and out and it's way harder than people think. I think people go to these like courses or like online things where they go and they learn how to syndicate deals and do this at scale. And, you know, they're they like learn that their accounting budgets 1000 bucks and We get the tax return. And we're like, yeah, that's gonna be a $10,000 tax return. And we have to do XYZ. And there's no way we're going to get all these k ones out by March 15. And by the way, this is what's priority service like this is this is our entire team dedicated to you. It's just a lot of work. And I think that it's when it's just a good business lesson in general, like, like, there's nothing against crowdfunding in particular, I love the decentralized approach anything where anytime you can decentralize anything, I'm all about it. But he just saw, so you have to be careful, you just can't out scale yourself, you can't go and, you know, set assumptions that are just wildly unrealistic. And in real estate, you can do that not only on the buy side when you purchase, but you can do it when you manage when you rehab. When you start renting, you can do it in your legal you can do it in a tax, there's just a lot of places where you can mess up to get this true about any any company. So tell us what a capital markets attorney is, what does that actually mean? What what type of work? Did you like, dive into the work a little bit more?
Daniel Cocca 15:54
Yeah, sure. I'm happy to chat about it. No one's ever interested about the capital markets, legal world, but I'm happy to talk about it. And so, you know, you have companies that exists in various states, some private, some public that, you know, need access to capital, right. And so when I came out of law school in 2010, there was there were very few avenues open to companies, in large part because the credit markets were effectively closed, you weren't seeing IPOs at any degree of scale, right. So a lot of these smaller companies, were going to the high yield space, right. And that could mean 789, you know, 10% interest rate, you know, corporate bonds, sometimes with notes tied in there, a lot of these were being done for deals that were like pre revenue, oil and exploration companies, right. And, you know, other companies just needed growth capital, but couldn't get it, you know, from private equity, they're going to go out in there going to access the capital markets. And then, you know, at the more common scale, what what most people see is something like, an initial public offering, right, you're going out, you're selling shares of your company, you're bringing that capital and and so generally refers to, you know, any activity whereby you're bringing capital into the firm and kind of taking your deal out to a marketplace. And then of course, you know, it's the investment bankers that are structuring those deals, you know, packaging man, getting them in front of the right institutional buyers. And so, you know, your job as a capital markets lawyer, first is kind of structuring, what is the transaction look like? But the reality is, the deals all take a very similar, like market driven approach, right, the terms and the documents, all look very similar deal deal. And so even though, I'd probably, you know, bill you for 100 hours of putting these documents together and reviewing them, the reality is, they don't look all that dissimilar from every other document that is kind of out there in the space, right, with varying exceptions. And then, you know, you do a lot of putting the offering memorandums together. And, you know, they tend to be like 120 Plus pages. And so, by the time you've read through for every comma and kind of fun comparison, you just spent a lot of time doing what I would call glorified administrative work on these deals. And then, you know, the heavy legal work is negotiating the purchase agreement between the investment bank who's buying the securities first from the company, and there's a lot of legal work that goes into that process. But at the end of the day, it's it's very market driven.
Brandon Hall 18:20
And so you were able to take your learnings there and apply them at a, I'm assuming a much smaller scale with alpha being the GC. General Counsel, because we have a lot of people that might think General Contractor but this does, you're able to take that and apply it to alpha and bring immediate skills to the table and structuring ppm, offering memorandums and operating agreements.
Daniel Cocca 18:45
Yes, so my personal story, right, I, I ran in a very entrepreneurial social surfer circuit in NY City, or NY, in New York City. And it was at the time when Bloomberg was was the mayor. And there was this huge, like, just movement into this grassroots tech scene. Like there were meetups, like 100 of them every night over the city, I'd go to all these like, cool, you know, events. And here I remember when I first moved to the city, I showed up at this event at NYU, and this is before anyone knew who Uber was, and they were kind of pitching their story and like, what a cool idea. And I went back and I like met with these guys. And like, at the time, I said, Hey, I'd love for you guys to be able to set something up so I can tie my corporate card in and not have to wait 30 minutes to get a car home when I when I leave it, you know, midnight every night from the office. And I came back and remember I told the person I worked for I said, Yeah, this seems like a really interesting company. And he's like, no one will ever get in a car, you know, with an unlicensed driver, like this is New York City. And I was like, Yeah, you know what, you're probably right. And I think that mentality became very clear to me in the true like white shoe corporate law firm. It's like there are types of companies you want to work with and early stage is Got it. And that's effectively why I transitioned to working at the second firm in New York that I worked at, which is much more of a startup, no venture, it has one of the largest venture practices in the country. And I really kind of dug into that space. And I think what I realized over my time there is that, you know, as a lawyer, there are a lot of things that go into kind of forming, structuring a business how you think about growing, but at the end of the day, for me, it was much more interesting to get to put my business hat on, right and say, how do I grow this company. And so, you know, when I joined alpha, the idea was like, let's create a foundation that allows us to grow in a legal compliant manner, let's look at all the regulatory issues, because when you're in financial services, you know, there are dozens of applicable you know, rules and regulations, you have to follow whether it's, you know, how you deal with state compliance issues, or you know, the number of investors you can bring into any given entity. These are all things that you have to be thinking about, you know, but beyond that, you want to create something that works for your investor group, right? Because as an investor, I don't really care about the regulatory burdens that Alfa investing has, right? I want to deploy my capital into the deals, I want to deploy them into, you know, in the amount I wanted to play it. And that's really all I care about. And so a big part of my job is really just bridging that gap between what we need to do and what is appealing to investors. And how do we create something that checks both boxes?
Brandon Hall 21:31
So knowing the other side, right, the actual structuring side the drafting side? What should an investor be looking at? When they look at an operating agreement? Like what are some of the key things that they should always be checking?
Daniel Cocca 21:47
Yes, I think there are two two answers to this, right. And the first one, I'll keep the lawyer head on, as I walk through it, right? You know, it's always important, in my assumption, any real estate deal that most folks are invested into, its into some type of limited liability entity, right? You don't want to put your personal assets at risk in any way you want your loss, the maximum loss you can take to be the value of your investment, right. And, of course, nobody wants to lose their principal, but you certainly don't want to end up in a scenario where, you know, you're on the hook for some type of disaster that happens on the property, and people are coming back to you looking for capital. And that's just from a general, like, protect yourself from liability. But any deal you're investing in, should be doing that already. It shouldn't require you to form a new LLC to invest into a real estate deal, although that's something you should check. And then, you know, the important terms, I think, to look at, you know, one are kind of voting, you know, what are your rights? Do you have the ability to remove a manager, if you and other shareholders think, you know, they're not behaving properly, or even if they're just not behaving, you know, effectively, and then beyond that, in practice, it's not something that would ever make sense to do, right. And then you always want to look at the the waterfall provisions and the fees, I think, generally people understand how you know, waterfall works, where you're entitled to the first, you know, 678 percent of returns, and then above that there's a split between you and the sponsor, or the manager. But what a lot of people don't fully understand is there a lot of nuances that can be tucked into that structure, right, and one I'll throw out there just as a, as a high level is this idea of like, catch up, right, where what happens is the sponsor agrees to those waterfall terms. But as soon as you exceed those terms, there's a catch up that goes into place. And so if the sponsor was entitled to get, you know, 30% above and a, once you get above an eight, the sponsor gets the catch up through the incremental distributions that are made. And so in effect, if they get above the A, they're doing a straight 7030, not a 7030 above and he right. And that's something that's usually not in the marketing materials that's kind of tucked into an operating agreement, but it dramatically dilutes your return. And now that listen, there's a question of know, what is a market set of returns? I know, for us groups that bring mid seven figure checks into any given deal, we're expecting institutional terms, right. But if you're someone that is coming in through a crowdfunding platform, and you're writing a 10 $15,000, check, like you might expect terms that are that are less favorable. And so I think it's important to understand, you know, what those terms are and how they make sense. But at the end of the day, you know, you're oftentimes, as an individual investor, you are a term taker, right? Here are the terms if you want to invest, go for it, but there's no ability to negotiate where, you know, for us and other, you know, groups that are pulling large amounts of capital. We're gonna come in and say, These are the provisions we need to see in an operating agreement. These are the terms that we need. This is how our kind of approval rights work. We want to be able to say yes to a sale to a refinance. We will look at your budgets. We want the right to be on weekly Property Management calls, we want to do quarterly inspections of the property, right? That's the process that we go through. But as an individual, you really just need to know what's happening. And then the second part of the question, or the second answer, you know, with the lawyer hat off is, you really just need to be comfortable and trust the group that you're working with. Because in a scenario where they do not act in good faith, your recourse is extremely limited in practice, right? Everyone likes to think that if a sponsor does something to kind of screw you over and take advantage of the investors, you're gonna go to court, you're gonna show them, you know, why they were wrong? And the courts gonna say, Yes, like, you're correct. And, you know, sponsor, we need you to pay these guys. X dollars, because you made a mistake. And that's just not how it happens in practice, right? You know, you'll go through probably a year of sending, you know, demand notices and draft complaints before you get a response. And then you file a lawsuit in court, and you spend hundreds of 1000s of dollars and maybe three to five years later, you get the judgment that you're looking for. But it's an exhausting process. And so everyone should know what's in the legal documents, they should feel comfortable that if they need to enforce an agreement, they're able to, but at the end of the day, you have to understand if you're ever in a position where you actually need to enforce an agreement, it's a bad place to be in,
Brandon Hall 26:28
we should talk about that a little bit more lightly just kind of expand on the actions that an investor can take and what the expectations can be. And I like that you just kind of laid out the timeline. And the reason that I want to expand on a little bit more is, I started the CPA firm in 2015. And I started like learning about syndications, probably around the 2016 timeframe, when people started asking me about them both on the buy side, on the LP side, and the GP side. And there was always this thing of like, oh, yeah, you know, it's like risky, potentially lose your money and all that stuff. And everybody just kind of blows it off. Because, like, it's not gonna happen to me. And for me, it's like, why would people act in bad faith? It's it's real estate, but then you actually see it happen. And then you see happen again, and then again, and then again, you see people's 401, K's go bust, you see people lose hundreds of 1000s of dollars. And I don't know why just laugh It's not funny at all. It's more of just like a nervous laugh, I guess. It's so I think I think one thing that I have learned personally, is that investing in syndicates and funds is by no means a bad thing, I mean, that you can make great returns, you just have to understand that you're like, I've kind of built this belief that you're investing more in the team than the actual underlying asset. Because we've seen bad teams would were marketed as great teams, but bad teams turn a great asset into a really bad deal. And we've also seen great teams turn a really bad asset that nobody else touch into an amazing deal. But I think it's just important for people to really understand that there, there is actual risk of losing money here, and what their potential recourse is, because you you're going to invest a lot of money, and you've got to know that, that there is risk associated with that. The one thing that I would love for you to expand on in this conversation is, when can an LP take the deal over? And is that a faster course of action or a faster way to get recourse than like trying to sue the GP? Because I could we've seen people try to go the sue the GP route, and it's just kick the can down the road for years and years and years. So can you talk about that a little bit?
Daniel Cocca 28:32
Yeah, absolutely. And so usually, there will be some type of mechanism and the operating agreement whereby, you know, the LPs, collectively are through if there's a majority partner can replace the manager under a number of circumstances, right. And sometimes it'll just be, you know, if they're acting in bad faith, right, like they're clearly stealing money or doing something that otherwise isn't isn't kosher, right. And then other scenarios that will be like, if they just aren't performing? Well, the LPS can, you know, replace the manager, right? I think there are two practical things to think about, though, one, there's almost always going to be a first lien debt in place. And that lender is going to have, you know, similar if not stronger REITs than the LPS. And so in a world where there is bad faith, you have to assume the lender is going to be the first one to act. Or if you realize at first, the second, the lender does realize it, they're going to be the ones to act right. And they're going to usually have no priority control over the deal. But let's say it's a smaller transaction, it's a local operator and urine LP that actually does have the right to remove the manager in the event they're not performing well. The Challenge of Practice is that if you remove the manager, you've got to replace them and someone else and so there's a question of like, Who is that? Is there another, you know, a sponsor out there that just wants to jump in and take over as the manager of this deal, even though you know, the economics for them compared to other transactions are probably working on or not? comparable, are you and the other LPs gonna step in and start running the project? And the answer in 99.9% of scenarios is, is no. Right. And so, you know, you may have the actual, you know, means and the legal mechanism by which to replace the manager in these deals. But again, you know, once you get to that point, I think you're already in a very bad position. And it's more about, you know, salvaging your principal at that point. And so my advice and consult with your, your lawyer, this is not legal advice, if you run into that situation, look, to get a buyout, right, look to get your principal back and exit the deal. You don't want to be holding an asset that has all of these fundamental issues, because again, most people that are LPs, they are passive LPs, and they want to be passive investors, not active investors. And so you know, your role, the time you spend thinking about a deal changes dramatically when you're running the project. And it just doesn't make a ton of sense.
Thomas Castelli 31:04
You know, one of the biggest problems we have in the CPA industry is people, the CPAs are too busy preparing tax returns to ever really provide any planning on how their clients can minimize their taxes, which is often costing their clients a lot of money. And Tom
Brandon Hall 31:17
and I have worked with over 1000 real estate investors on tax planning over the past six years, we've saved them millions of dollars in taxes. And the reality is, is that tax planning, especially one on one is really expensive. It's not in the budget for all real estate investors. But real estate investors are near and dear to Tom and I's heart, we're real estate investors, our parents are real estate investors, we want to help every single real estate investor out there. So we created tax smart investors.com, there's three subscription tiers, you can get a content subscription tier that gives you access to gated content, and we write it in a way that you can digest it. But there's also citations that you can go to your own tax preparer and say, Wait a second, this is how it's actually supposed to be. And here's the citation. On that content subscription, you also get access to a weekly tax strategy newsletter. On top of that, we also have a subscription that gives you access to our insiders Facebook group, which just allows closer access to Tom and I and our team of CPAs. You can schedule paid calls with us. And you can get access to our monthly workshops through that subscription tier and those monthly workshops. We're doing tax planning, financial planning, we're going over accounting strategies and how to automate your systems. And then we have a top tier
Thomas Castelli 32:25
and that top tier, that's really where you get access to us and our team of experienced real estate tax planners. And you could do that through two calls, where we'll take a look at your situation and determine what strategies you can use to minimize your taxes based on where you are, where you're looking to go. And in addition to that, what a lot of our clients have loved over the years is the ability to send emails where you could send in your question, and we'll get back to you with an answer within 48 hours. And you should definitely check that out. If you're sending questions to your CPA, and they're taking weeks to get back to you if they ever get back to you. Or they're not providing with any planning, we can take a look at your situation and determine what can be done to help you save on taxes.
Brandon Hall 33:01
So if I'm about to put $100,000 into a deal, or let's assume that I put $100,000 into a deal, how can I verify? You know, so I get a stake in the entity I signed the operating agreement, all that stuff, but how can I verify that the $100,000 that I just put into the deal was actually used to acquire a property? Right? Like, is there a way that I can go and do that check, because I don't want to invest in a Ponzi scheme, and I'm gonna trust the Verify type of guy. So I'll give you the 100k. But then how do I go and look at whether or not this entity actually acquired or whether or not the sub entity actually acquired the property?
Daniel Cocca 33:38
Yeah, it's a really challenging thing to do in practice, right? When you give your money, you assume that it's going to the place that you thought it was going to and being used for the purposes that you were told it's being used for, right? The challenge is, when you have someone who's you know, a bad actor or doing some type of Ponzi scheme, the information you're getting them from them is probably not accurate, right. And I think the other thing people need to keep in mind as they invest into real estate is there's somewhat of a perfect storm for fraud in this current environment, right? You have all this demand for access to real estate, right? We're on this massive Bull Run, where everyone is seeing, you know, returns that are above projections over and over and over again. And then real estate deals. And this is unique to real estate deals as opposed to other securities, like a high yield debt bond, for example. They're marketed based on forward looking projections, right? You see, this is what I'm supposed to get. Whereas, you know, when you do a high yield offering, there will never be a word about what's supposed to happen in the future. It's all about the trailing financials, can they support this debt issuance? You would never let someone say we expect you know, our revenue to grow by X percent like that's, that's one thing as a lawyer as an absolute non starter. And so one thing that was very unique to me as I got into this space, just how forward looking everything is right, you know, we're comfortable saying this deal is gonna get you a 15% average annual return over five years. And it's kind of crazy when you think about it, because, you know, you can look at the the deal and say the underlying assumptions support this position. But you really have to be open and transparent about the fact that there are underlying assumptions that may prove to be correct or incorrect. And a lot of the work that we do is trying to assess the validity of those underlying assumptions to determine if a deal makes sense. And so all of that is just to say, you know, it's a challenging time, if you are dealing with someone who's acting in bad faith, because you also typically don't have, you know, regulatory pressure or some type of, you know, police force that's looking over these transactions, right, until a deal blows up, and investors lose their money. And then they go to an enforcement, you can see, that's the only time where any of these groups are actually going through the process of being held accountable. And even when that happens, oftentimes, there'll be a lawsuit, there'll be a settlement, investors are happy to get their principal back, as opposed to actually going after damages. There are very few situations outside the biggest cases that you hear of where it actually goes through an enforcement proceeding. And you know, the guy who stole everyone's money, you know, goes to jail. And a lot of times, what you've seen over the past 10 years is, maybe someone takes your 100 grand, and they send it to another deal instead of yours. And your deal performs worse than otherwise would have, but you still got your principal back, and maybe you got to return because we've been in this compressing Capri environment for so long now. And so you don't notice it, right? Because as an individual investor, you're getting a quarterly report, you're getting your distribution, you're not going back and saying, I want to audit, you know, the the property level financials, I want to see how the cash, you know, flows through maybe you guys are because you know, that's, that's your space, but the average investor doesn't know how to do that. Or if they do, they just don't have the time right to go through that process. And so the unfortunate answer to your question is, you really have to trust the groups that you're working with. Because the only time you really become aware of these issues is when it's too late
Thomas Castelli 37:17
100%, definitely, I trust the group here. And we're investing as an LP that's always been one of the things that I've always looked at is, you know, the group, right, the group, if you're going to put up 100k, or however much money going to put up, you know, do you trust that the group is going to do what they say they can do? Shifting gears a little bit, you know, like you said, this markets been super hot for the last 10 years, eight to 10 years. What types of deals are you currently looking at at alpha? And like, how do you? How do you make a determination? Okay, this is a type of deal that we want to we want to invest in?
Daniel Cocca 37:45
Yeah, it's a really good question, because there are a lot of options out there. Right. And I think we, our general strategy is to acquire cash flowing, need based residential assets, right. And the underlying thesis is, people need a place to live, they need a place to grow old. That's true in a good economy. It's true in a bad economy. It's true in whatever economy we're in today, right. And so for us, we focus a lot on multifamily, specifically, you know, value add workforce, class B acquisitions, with the theory being that in good economic times people move from Class C to Class B, in bad economic times, they move from A to B. And so in all times, there's always someone in B. And if you can create an affordable product that looks better than the competition, that's a really good place to be in. And so we look a lot in demand markets, we also look in stable tertiary markets, right? The challenge with demand markets, you know, take a Phoenix, for example, is that, you know, deals are trading, particularly value add deals that have you know, potentially have a lot of upside at sub four caps, if not lower. And you know, that just creates a much smaller margin for error than when you're buying a five and a half cap, right in suburban Cincinnati. And so all deals like that, you know, when you look at the merits, they can make sense. It's just important, they have good downside protection, you want to be able to absorb enough economic vacancy at the property, you know, before you run into an issue, you know, paying off your debt. That's kind of step one. And then beyond there, you want to make sure you can find some degree of achievable upside, right, because it's not just about protecting principle. We want to earn an economic return commensurate with the risk we're taking on any given transaction. And so we do a lot of multifamily, you know, different parts of the spectrum, but mostly Class B properties that are already cash flowing, so no ground up construction. These are all acquisitions of properties that had in place cash flow. We also liked the senior housing asset class, specifically the assisted living and memory care sectors. It's a very fragmented industry, meaning mom and pops own a substantial chunk of that space. And typically their retirement is tied up in whatever one or two or three assets that they own. And so COVID has been particularly problematic for those groups that are not institutional managers, right, because you have to deal with the fluctuations in labor costs. And so you have to bring in new employees, you have to figure out how to deal with COVID put different protective measures in place, you have a lot of folks out, you need temporary labor. And so we're expecting to see a fairly robust acquisition market over the next 12 to 18 months in that space, I think the Delta variant has put that on pause a little bit. sellers want to be in a position where they believe there's some degree of stabilization, they can sell their assets at a price that they want to sell them at. But we're expecting to see a lot of action there. And then the last area, which is somewhat new to us, and I'll throw a few stats at you that I think are particularly compelling, is the single family rental space, right? About 53% of the total rental stock in the United States are actually single family home rentals, the remaining 46 or so percent, is in the multifamily space. And I think that one factor is always really shocking to people, they don't realize how many single family homes are actually being rented in the company. But more interesting to me, if you look at institutional capital and their ownership, they own about 50% of multifamily assets, right. And even with everything you've heard in the news about institutions deploying capital into the single family rental space, they only own about two and a half to 3% of the single family rentals in the country. And on one hand, that does make sense, right, it's much easier to buy a 250 unit apartment building than it is to buy, you know, 250 single family homes that are scattered across the market, and manage them, that makes perfect sense. But as we think about that space, and if you actually go back to the early 90s, the multifamily asset class was not considered a institutional asset class, you know, by any means, right. And today, you know, it's one of the more if not the most robust, you know, recipient of institutional capital. And so our perspective is that, you know, the single family rental space is going to see an influx of capital that's going to drive that institutional ownership up to the 20 25% range over the next, you know, five to 10 years. And so our strategy there is to go out and acquire three to 500 properties in any given market, stabilize, and then sell them off to an institution who wants access to the space but doesn't have the time or the resources to go out and buy, you know, 500 $150,000 homes, right. And so that's a big part of why we like that space, we think there's a lot of room to run a lot of upside. And then if you just look at the properties on a one off basis, not that you acquire these deals on a cap rate basis. But if you look at our portfolio, they're like eight to nine cap acquisitions, which, you know, yields really get great cash flow for investors right off the bat.
Thomas Castelli 43:01
It's really interesting when it comes to debt, you know, kind of as you as you were going through that one of the things that we see some some groups doing is, you know, controlling the amount of debt they take on like, relative to any specific deal. What kind of loan to value ratio? Are you looking at, you know, at least maybe on the multifamily side?
Daniel Cocca 43:16
So I think that's a really good question. And it's one that we get often, you know, particularly whenever we share a deal that has, you know, leverage above 75%, right, because everyone says that 70 to 75% range is kind of the sweet spot. And in a lot of deals, that is the case. But what you really care about, again, is downside protection, what is your debt service coverage ratio, right? How much room do you have? Because debt can be accretive, particularly at these current interest rate levels, right? Where you're looking at a, you know, 300 plus L with a, you know, 25 bit LIBOR floor, right? That's really attractive in a creative debt. And if you can go up to 80% on a deal where you still have a, you know, 1.5x, you know, coverage ratio in the first year, that deal makes more sense at 80% leverage than it does at 70% leverage, even though in the grand scheme of things 70% is less risky, it's always a risk reward calculation, right? And where are you getting the best risk adjusted return? You know, assuming in a downside scenario, you can still pay your debt, right. And so, there will be deals where, you know, we go up to as high as 80% leverage when the downside protection is there. And we believe the debt is accretive to returns. But there will also be transactions that we will buy in all cash, there'll be deals that, you know, we buy 65 or 70% levered because that's where we think the sweet spot is on that transaction. And so the long answer to your question is or the short answer to your question is, it really depends on the asset and and the business plan. But most of our deals are falling in that 65 to 80% range, which is where I think a lot of folks end up
Thomas Castelli 44:58
makes a lot of sense. So at this point, if someone wanted to invest you, they're considering funds out there. Like you mentioned before, there's about 1000 people you have in your network, how does someone get involved in that network? Or how do they learn more about investing with you if they have something they were interested in?
Daniel Cocca 45:14
Yeah. So we have kind of our investor portal, our website, it's alpha i letter i.com. And no investors can kind of see a little bit about us there, they can request access through through our portal, we do have a pretty substantial waitlist. And that kind of goes into some of the reasons I talked about earlier, where you have investor limits into individual transactions you have, you know, you want to limit competition for equity into any given deal. And so we typically go through a process or we always go through a process where anyone who wants to join the network, you know, fills out a bunch of questionnaires about kind of who they are, and their sophistication to investing in their net worth and their current assets, etc. And then everyone has to get on the phone with, you know, one of the founders of the firm, and we typically like to spend an hour. So you're really just chatting about, you know, who are you right? What do you do? Where are you from? You have a family? Why are you investing in real estate? Are you already doing it? You know, what are your goals, right? Because the really important thing for us, especially because we have a smaller network is that everyone's on the same page from from day one, right? If you come into our platform, and you say, I'm looking for 30 IRR, no construction deals and high risk markets, you're never gonna see something from us, that is going to check your boxes, right. And so we want to make sure that we're just all on the same page from day one. So you're going to chat with us, we're going to share our story. And then we're going to dump, you know, an unreasonable amount of information on top of you, you know, new investor resources, our portfolio, our track record, all the white papers we've ever written. And we're gonna say, take a look through all this stuff. And we want to chat again, after you've done it, because you're going to have more questions. And you know, there's a difference between someone who is a sophisticated real estate investor and how in depth we can go on call number one, and someone who, you know, wasn't all that dissimilar from my self, you know, seven to 10 years ago, I know I want to invest in real estate, for all the reasons people like to invest in real estate. But I don't really know how to do it. And I don't know how to think about it. And I don't know how to evaluate a transaction. And so we want to make sure we're giving those people all of the information to make a very informed decision about whether or not they want to invest into deals that we're doing. And then if they do, how to think about it, right. And so that's really what our process looks like, it is not a sign up. And you know, a few days later, you get access to our deals, we keep a pretty close grip on the projects that we have and who we share them with. But it's all with the goal of creating a group of people who actually understand what we're doing and are like minded in the way they think about real estate, because there are, you know, dozens, if not more strategies out there that, you know, make sense. And it's important that if you're investing with us that your strategy and our strategy coincide. And so that's what we're looking to do. As we bring people into the network.
Thomas Castelli 48:10
No, it makes a ton of sense. ton of sense, everything you just said because at the end of the day, you're really building a community of people and you want everybody be on the same page march in the same way had the right expectations set from the beginning. So that can't be understated investor relations. And we just did an episode our last episode, we talked about the entire k one process and how to set expectations and all that. We won't go into that today. But there's any final words or any parting words you want to leave our our listeners with before we wrap up for today?
Daniel Cocca 48:37
You know, as I think about the the tone of what we've been talking about today, I feel like I've made real estate investing sound like a very like dubious undertaking, right. And that's not the case in practice, right? Everyone should be looking for ways to allocate capital to real estate, in one way or another, whether you're, you're buying a rental property, and you're actively managing it or, you know, you're a passive investor who's, you know, just investing with a group who knows what, what they're doing, right? The key thing I believe, is to make sure you are properly vetting the groups that you're working with, and you're not just taking the information they're throwing at you at face value, right. And hopefully, that means you know, someone else who's already invested with that group has had a good experience can vouch for them. You want to do the same things that you would do when you know you're you're trying out any new new service, right? Or even really, you know, as a New York City guy, you know, a new restaurant, right? I talked to my friends if you've been here, I check out the Google reviews, I check out the Yelp reviews before I say hey, I'm gonna go and spend, you know, my $300 eating dinner at this cool new restaurant, I want to know that it's legit. And that's an oversimplification in a lot of ways. But it's really important that people spend time diligence in the groups that they work with. And then also understanding if you personally don't have the time, the knowledge or the resources to vet a group yourself, make sure that you have a party that you trust, who's actually going through the process of doing it, right. I cannot stress enough how many shady players there are in real estate. And that's always been, you know, kind of a broad, you know, a high level view of real estate is it's, it's kind of shady when you get down into the weeds, so to speak. And it's just really easy for me to tell you that I've been, you know, crushing it on every deal I've done for the past 10 years. And I'm continue to do it. And there's very few ways for you to figure out whether or not that I'm being honest or not. And so, long story short, finding a way to get access to real estate is incredibly important. You want it as part of your portfolio. You want the diversification, you want the hedge against inflation, you want the tax advantage returns and distributions that come with real estate. But do it in a smart way.
Thomas Castelli 50:54
Absolutely. It's great advice. So I want to thank you so much for taking the time to come on the show today and share all the knowledge with our listeners. I think, you know, like like you've been saying the biggest takeaway here is you need to know who you're working with when you're investing in real estate. So make sure you do your due diligence. This is definitely an asset class you do want exposure to so thanks again for coming on the show.
Daniel Cocca 51:13
Yeah, thanks for having me guys. Happy to be here.
Brandon Hall 51:15
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