Grow Your Cashflow Podcast

Pascal Wagner (00:00)
Have you ever wondered what it would be like to see hundreds of real estate deals before making your first investment? In this episode of the Passive Income Playbook on the Best Ever CRE Show, we are joined by Ryan Duff, a former mortgage broker who started investing as an LP in the very deals that he was underwriting. He didn't take the typical path, so instead of jumping straight into syndications or buying rentals,

He leveraged his front row seat in the lending world to spot strong operators, learn how deals are structured, and build conviction in passive investing. Today, he runs a capital advisory firm helping others access these types of investments. And in this conversation, we unpack basically how Ryan has a unique edge when it comes to being an LP, what he looks for in sponsors and deal structures,

lessons learned from the years of being an underwriter and what his firm is doing now to support other investors on their journey. And I thought there would be a lot that we would be able to take away from this as LPs. And so I'm really excited to get in here. So if you want a sharper lens into underwriting, operator quality, and what separates good deals from great ones, this one will be for you. And with that, welcome to the show, Ryan.

Ryan D (01:16)
Thanks, Pes, I appreciate it.

Pascal Wagner (01:17)
Yeah. So, I gave, I gave the, the big stick away. I would love for you to, to take us back, ⁓ give us a 30,000 foot view. Give us a little bit of story. ⁓ maybe not exactly how you got into underwriting. ⁓ but maybe more about, you know, I think you spent over 14 years as a, as a mortgage broker. So, so talk to us about.

what it was like when you started and your access to these deals and what you do or did in your day-to-day job to give us a background.

Ryan D (01:49)
Sure, thanks. So as you mentioned, spent 14 years originating loans and underwriting debt for a large seller servicer, predominantly in the agency lending space. So Fannie Mae, Freddie Mac, FHFA and HUD. Throughout that timeframe, I worked directly with owner operators, GPs that were developing multifamily, acquiring existing apartment buildings.

⁓ you know, doing value add reposition type plays and over that timeframe, you know, don't lend on every deal we see clearly. but you know, what we do is, is we underwrite.

the credit side from the sponsor standpoint, we underwrite the operations and really try to put the right debt vehicle or instrument in place on behalf of the owner operators disposition period, their hold period, what they're trying to accomplish throughout a period of time and obviously try to optimize the returns that they have on behalf of their investors. And throughout that timeframe, we underwrote and originated thousands of deals across the country.

Personally, I was involved in about four and a half billion dollars worth of closings. And over that time period, I started to develop pretty close relationships and reports with a lot of the clients that I had created ⁓ and managed and helped advise to the point where I started investing with them from time to time on deals where I sought yield and appreciated the value proposition and the upside.

Probably about 10 years ago, I think in 2014 is when I first really started to dial it in on the equity side and take some of my commission checks little by little and put them in. And obviously started rather small, but as you can kind of continue to compound and grow and grow with these individuals and these GPs as their deals get larger and their equity checks continue to grow, you become a bigger and bigger part of that.

And so, you know, fast forward about a year, year and a half ago, the lender I was working for was very active in the short-term variable rate bridge space. And so, you know, for probably about 2018 to 2021, you know, we were putting a lot of leverage in the marketplace. you know, probably underwriting deals a little more aggressively than they should have been. And.

You know, it was at that point where I really started to see some cracks in the industry, um, you know, where we were over leveraging folks, making rent growth assumptions that we knew probably wouldn't pan out. And then lo and behold rates started to run up against everybody else. Right. And so, you know, where we were underwriting deals with three, four, 5 % interest rate exits, you know, those rates went from that level to, you know, seven, eight, 9 % effectively overnight. And so.

that caught a lot of people off guard, created a lot of dislocation in our industry. And it was at that point where I decided to understand how I could capitalize on this disruption. And based on the access that I had to the GP and the deal flow, I wanted to create a platform where I could leverage my expertise on the debt underwriting side.

bring the equity that I've created and compounded over the last 10 or 12 years myself and try to introduce that experience and that offering to my network. And so that's what we've been doing over the last year at Seaport.

Pascal Wagner (04:58)
Fascinating. Okay, so you basically work for a private mortgage firm that would look at all of these loans, figure out which ones you wanted to participate in, and you probably only accept X percentage of the loans. Can you walk us through what that process looks like from end to end? And I would love to kind of maybe understand what separates a

good loan from a bad loan in each step of the process.

Ryan D (05:27)
I'd say there's probably three pillars that lenders look to when they're underwriting a deal, right? Clearly it's the credit quality of the borrower. Okay. And what I mean by that is experience, track record, their REO, what other properties they own and operate. Do they have any stress in their portfolios? How long have they been in the business? So, you you go from kind of underwriting an individual

to underwriting a property, which I'd say is pillar number two. Obviously you take a look at the historical performance of an asset trailing three, six, nine, 12 months of income collections. You take a look at current occupancy rates. You know, is there any bad debt at the property? Are they offering concessions at the asset to fill the units up?

Is the expense ratio too high? Right? So you can really kind of look at, you know, an asset, understand its historical performance, how it sits with kind of within its comp set in the marketplace, and see what type of opportunity you can get to by, you know, coming in, doing a little catbacks repositioning.

improving the tenant experience or quality on site. And then I think the third pillar is the market, right? There's a lot of markets that got oversaturated in the last five or six years. You saw a lot of over leverage in the Southeast and the Sun belts, parts of Texas. And that's where this whole syndication world was formed five and six and seven years ago, where a couple of people got together and they had some buddies or some friends that had some dollars to rub together and put a deal together.

lot of these operators were a little bit inexperienced in my opinion. you know, they over levered themselves. they weren't able to kind of predict the outcomes or really see a reposition through. and so from an underwriting standpoint, you really get a deep, deep dive into what it takes to get a loan, to get financing in the multifamily space, but also what makes you finance a bowl as a bar.

And so, you know, that experience that I had working with thousands of folks across the country, all in different forms, know, mom and pop operators all the way up to the institutional developer that, you know, develops and operates 10,000 units across the country. You get the good, the bad and the indifferent, you know, within that spectrum.

And so that was an invaluable experience for me to really find out who the good operators are, how they execute the business plan and the day to day. And I've really tried to take a lot of those characteristics with me ⁓ while we continue to build our bench of GPs.

You know, meet new individuals, new operators that we're investing with across the country. so, you know, I would say at this point, you know, probably 70 to 80 % of the deals we invest in are with sponsors and GPs that I've known for five or 10 plus years. However, I would also say that, you know, 20 to 30 % of the deals that we now invest in are with new GPs, guys who I know are doing the right thing, have good track records, and I have the ability to underwrite them and their asset.

to make sure that it's a good equity investment for myself and my investors.

Pascal Wagner (08:23)
So what would be an example? Let's dive into the first one of where we're underwriting the sponsor and their track record. You're looking at distress and I am at like, what does that process look like?

Ryan D (08:36)
Sure. It's an underwriting package, right? in order to first things first, you get a deal into what's called screening. Okay. You get the T12, you get the rent roll on the property. If it's an acquisition, you usually get a pro forma or a borrower's budget, which basically tells the lender where they feel they can get the property to within the next year, two or three. That's part of the screening package. The second part of the screening package is on the bar is on the borrower, right?

⁓ We get a private financial statement, a PFS. We get an REO, which is a real estate owned schedule, which basically breaks down all the properties that they have currently ownership in, whether you're an LP or GP in these deals, whether it's new construction, whether it's mixed use, multifamily, industrial storage, single family. And you run credit on these people. You do background checks, Lexis Nexus searches.

So you really understand what their credit worthiness as a borrower will be. again, depending on the lender or the bank or the institution you're borrowing from, everybody's going to have a different set of criteria lists as far as what makes you a valuable borrower or what enhances your credit. Obviously, just getting going, it's a challenge, right? Your first deal is always going to be the hardest one. You know, we just closed a Fannie Loan.

about two months ago in Charleston, South Carolina. And that was one of my first underwritings from Fannie Mae. And it, you know, it is a cavity search, right? You know, they, pull you in and, know, they ask for all your operating agreements and your LP contracts. And, you know, you have to build out your REO that you may or may not have done in the past. So it's, it's a little bit laborious. It can be pretty intense. But there's a reason when you're, you know, borrowing from

Fannie or Freddie, the largest liquidity provider in the multifamily space from a debt standpoint, they have a right to look under the hood and really try to figure out who they're lending millions and millions of dollars to. They want to know that you're solvent. They want to know that you have skin in the game. They want to see where your liquidity position is. Generally, there's a net worth requirement or a cash requirement that they like to see in place post close. So there's a lot of different variables that

In my time, I just became like second nature to me on the lending side. And so, you know, I have a pretty clear idea and indication of just looking at an individual or a new borrower, a new operator, and asking for very surface level information and documents that give me a really solid inclination as to, okay, these guys are the right guys to invest with. you know, at the end of the day,

the GP and the operator make or break deals, right? In my opinion, it's who you invest with, it's not where or how. And that's why track record is pretty crucial. Having cycled through deals in certain markets that you're investing in is important. Understanding your comps. know, obviously we do a lot of work with appraisers and, you know, get a pretty deep dive into kind of just market data.

where rents are, where the property sits within that rent comp set and having a good idea of what the competition is.

Pascal Wagner (11:35)
So this, I imagine that there is a minimum threshold that they need to meet in order to get the loan. For example, you mentioned some of these things like having a track record or full cycle deals is important. And I imagine that helps make your case easier when you're applying for a loan. But you don't necessarily need to have, I mean, if every deal had to go full cycle, one would be able to get money in the first place.

Can you talk a little bit to that?

Ryan D (12:03)
about minimum thresholds.

Pascal Wagner (12:04)
Okay, so I've been a part of deals where the assumption has been that the bank is underwriting the sponsor and that there is at least been a basic level of diligence done.

background checks, credit checks, like you mentioned. But I'm imagining that as an LP, we might have more or more conservative ways of looking at probably the data that you find than a lender does because lenders are in the business of loaning money.

And equity investors are in the business of not losing their money. I feel like there's maybe a different threshold that LPs really should be looking at deals than debt funds. Do you agree or disagree with that statement?

Ryan D (12:53)
⁓ Now having been on both sides, I will agree and disagree. I'll agree in the sense that it's very challenging for LPs to understand what to ask for, especially if you're a little bit on the earlier side in your investing career or you're a bit more inexperienced. I would say, personally speaking, given my understanding of what lenders require,

in order to qualify for debt and borrowing. There are a handful of items that I ask for upfront, and these could be diligence, you know, related documents. They could just be simple questions. You know, for instance, your REO, you know, I think that's one of the most important.

Pascal Wagner (13:34)
Explain Ario.

Ryan D (13:35)
REO, so real estate owned schedule, right? So every operator in the business, asset agnostic doesn't matter. You you have a basically a data spreadsheet that breaks down every piece of property that you have equity in. It breaks down the location, the name of the property, the unit count, the square footage, the income, the expense, the leverage that you have on the property.

the DSCR, the debt service coverage ratios, which basically is your income to debt ratio. And it breaks down your equity. so oftentimes operators in our industry, that's what drives predominantly most of their net worth, right?

And so net worth is crucial in the lending space. A lot of the debt in, in multifamily specifically is what's called non-recourse, right? And so when you're borrowing non-recourse dollars, the onus is even more evident on the lending side because the borrower, if something were to go wrong, can basically throw the keys back at the bank and walk away. If there's a recourse scenario, obviously that individual is on the hook.

for a part or all of what is owed to the bank or the lender. And so in that case, from a lending standpoint, they might be a bit, to your point, more conservative about what they look for because they know they have a backstop. They know that they can hang their hat on that borrower, that individual who has global equity of X and cash sitting in certain accounts of Y that they can tap into in the event something goes wrong on site or at the property.

So I would say one of the first things I ask for is somebody's REO. And if they're not able to provide it, clearly that's kind of an indication that A, they don't have the experience they say they might, or B, there might be an issue within that REO whereby they're going through a foreclosure or a workout or some type of nefarious action has occurred where they're trying to hide something.

or mislead an LP or investor in some capacity. So that's really, you know, one of the key kind of, you know, document, that's really a document or a spreadsheet that I asked for upfront, which obviously along with the ability to underwrite the property to your point, you're underwriting the individual as well. And that's, know, what lenders do, I would say in the screening stage before an application is even submitted or, or any type of loan terms or structure and agreed to.

Pascal Wagner (15:50)
There are still firms that have non recourse loans that lose money.

Where do you feel like there's not enough due diligence being done or is there just that part of risk in the game?

Ryan D (16:04)
I think right now the game's changed a bit, candidly. There was a pretty big wake up call over the last two and three years with a lot of debt funds that were doing the 80, 85 % levered bridge loans that were not solvent. Obviously debt funds are debt funds. They're only debt. They have no equity or cash, right? so lenders and banks have smartened up.

I think there's more solvency in the system now than there really has been over the last several years. You know, to your point about non-recourse lenders still losing money, that's called loss sharing, right? And so, you know, every Fannie and Freddie lender now, as mandated by the FHFA, are required to have a minimum liquidity covenant on a balance sheet that can cover a loss. And so, ⁓

The way that the agencies work is, you get a loan from Fannie Mae through a seller servicer, which effectively is a broker, one that I worked for, there's a loss sharing system in place between the agency and the lender. And so if something were to go bad, obviously both participate in a loss. And so back before 2019, these liquidity covenants were not in place.

And so the entirety of the loss share was absorbed by the agency. And we know how that's gone. Right. so lenders have smartened up their underwriting criteria, credit enhancement of a deal, both on the individual and the asset has tightened as a result. I'd say the goalposts have kind of moved a little bit. and what that's done is, you know, created better lending standards.

made it probably a bit more difficult for people to get loans, which obviously makes that track record and experience that much more important when you're going through the underwriting process with these lenders. And it's cleaned up the system a little bit. You know, I think the whole syndication world that was formed, you know, eight years ago, maybe at this point, a lot of that.

I wouldn't say abuse, but aggressive lending practices have been flushed through the system a little bit. People have lost capital. People have lost the entirety of their LPs in a lot of these deals. You know, that's why you're seeing a lot of rescue funds out there right now that are trying to basically, you know, raise capital on an existing portfolio of deals that are underwater or need, you know, capex repositioning.

or they have to extend their loan and they don't have extension fees. They have to buy a new rate cap. They have to replenish interest reserves. So there's a lot of capital requirements that are coming up and have been for the last 12 or 18 months since rates have remained elevated that people were ill prepared for. And so I think the lending screws have tightened and you're seeing a lot of opportunity right now as a result of this distress flushing through the system.

Obviously the dislocation, as long as rates remain elevated, a lot of these banks and debt funds can't exit their loans because in order to do so requires a massive cash infusion that these operators just don't have access to. you know, LPs are not answering capital calls, nor should they be, right? It's not their fault that they're in the position that they are in necessarily as a passive LP. You know, that's on the GP's

aggressiveness or, you know, poor pro forma underwriting projections. and so there's a confluence of events right now that is creating a massive opportunity for folks that have access to the deal flow and the cash to get these deals done. you know, and we're uniquely positioned, obviously from a debt standpoint to have access to the financing, but you know, we're investing in deals that are, you know, off market that are coming from good quality operators that.

don't have those blips on their REO that have good reputations in the marketplace. And they're getting calls from pocket listings and sellers looking for execution. Right now, there's a lot of people that are getting deals under contract because they're willing to overpay for it. And it falls out 60, 90 days later because they can't raise their equity or they can't get their financing. it's a good market to be in if you're plugged in and kind of have the access.

Pascal Wagner (19:58)
So as an LP, I'm trying to figure out what can I take away to improve my process. I think something I've never thought to ask an operator if I could see their real estate schedule. Somehow that feels a little too personal. But you don't know what you don't know. I imagine if they have to produce that for a bank, will already, by the time they're raising capital for a deal,

they should have all those documents and it's a matter of, they willing to share that with an LP instead of, you know, maybe you're in the, in the stream of getting the loan. And so you have, you have that unique access. What's your, what's your take on, that?

Ryan D (20:37)
I'd say ask for it. Why not? You know, obviously it depends on what type of scale LP you are. you know, if you're interested in a deal and you don't know somebody, you know, and obviously they're, they have the property under contract and they're going through the diligence with the lending side to your point, they have this diligence prepared. and so it's like, what are you hiding? You know, I think if, if you want to kind of take a step back from that ask, you know, a better question would be.

How many deals have you cycled before? Or, you know, what's your experience in this market? Can you give me a breakdown of, you know, similar sized properties in the area that, you know, you guys are currently operating through or repositioning at the time?

Pascal Wagner (21:15)
Yeah, I guess maybe I have seen this pretty often. I guess when I think of my real estate schedule, I have it in a Google Sheet. And I guess oftentimes when you see the real estate schedule for an operator, it is their current assets under management slide or their full cycle deal slide. Is that the equivalent? Is that good enough? is this, I mean, a lot of times they're only showing like the investor presentation version, right? And yeah, is there any benefit

to getting up, like I'm imagining myself asking an operator like, hey, I mean, shouldn't your fund, like, could you share a real estate schedule of all the properties they own?

Yeah. And then maybe they say like, here's the investment deck. is that good enough? What am I looking for? I mean, I'm looking for deals that have gone full cycle, right? On these things, they say the purchase price was this. Yeah. What should I be looking for? that the right?

Ryan D (22:11)
It's tough to sift through

some of that, right? You know, obviously somebody's going to prepare an investment deck the way that they want it presented or taken, right? So it can be a challenge to kind of see the forest with trees a little bit sometimes, you know, in similar fashion where, you know, an LP is just looking at a return metric and not understanding the underwriting as to how you get there.

Right. It's, kind of the same idea where you're looking at just an IRR and a multiple over a four year period and saying, okay, this is a good deal. That's, that doesn't tell the whole story. you know, I think what I would, what I would look for as an LP, is exposure right now, especially, you know, what is the activity been in the last couple of years? have they taken on bridge debt?

you know, or floating rate debt, floating rate loans. Obviously that's a key indicator of either a, you know, they recently acquired a property or they've been in a property for a while. Uh, so like when were these bridge loans originated? If it's 2019, 21, 22, chances are, you know, you're going to be in that bridge loan for a little bit because you probably overpaid or overlevered, you know, rates are extremely high right now. Uh, or there's going to have to be a little bit of a rescue.

slug equity to get out of that loan, you're going to have to take out preferred equity or MES in order to cover that shortfall. So really track record in the last three years is key. ⁓

Pascal Wagner (23:27)
So

I'm looking at that and I'm just saying anyone who has that, you know, is a red flag and I don't invest with it. Are there instances where we think that's, you okay or they have a handle on it? How do you think about that?

Ryan D (23:39)
Totally.

There are absolutely instances where that's okay, right? I think timing of those investments is important. I think, you know, the positioning, like what's the business plan on these deals? And you can ask these questions, you know, and if a GP is legit in these experiences, he's used to answering them, right? Cause you know, you're not going to be the first LP to come in and ask something that's a bit more intimate on a particular deal that.

could be in their investment memo that they've advertised. So, you they should have some pretty good clarity on the positioning, the timing, you know, when do they look to exit that deal? When does a refinance look like? How much equity is in the deal? You know, I mean, if it's, again, if it's over levered and there's less equity, obviously there's fewer things that have to go wrong in order for there to be a problem. So, you know, I think the last couple of years of track record is key on these individuals.

you know, and it, it, the, lending side is big too. you know, when you get a reputation in the lending space and you have a portfolio and, you know, something goes wrong. It's pretty evident, across the board, right? Lenders talk, you're put on, you know, do not lend lists, watch lists, things of that nature. So that can put you out of business pretty quick.

And those are global databases, right? There's a lot of, you know, public forums and public databases as well that you can just Google an individual or an entity or an operator, and they'll give you kind of a breakdown of, you know, what assets they currently hold, what the current occupancy rates are.

know, who the lender is, things of that nature. So there's, a pretty decent amount of public access that you can pinpoint to as an LP.

Pascal Wagner (25:11)
Can you give us

a couple that we can use?

Ryan D (25:13)
sure. mean, CoStar is a big one. you know, that's a pretty good platform. You know, it's public. there are obviously certain subscriptions and memberships that you can get that will elevate your, your access and your kind of content. the, there's, there's, you know, municipal databases that are basically, city by city, state by state, region by region. you know, County Assessor's Office, like, believe it or not, you know, I look up, you know,

individual performance and kind of asset positioning on public municipal assessor databases. And again, it's a little granular, I get it. But if you know what you're looking for, you can get a pretty good picture of an individual situation without having access to personal financial data.

as far as how performance is going on a particular.

Pascal Wagner (25:59)
Just like, are

all their entities in good standing? their, have their county taxes have been paid for all the properties they own?

Ryan D (26:06)
Yeah.

Totally, all of the above.

Pascal Wagner (26:08)
Yeah, I love that. I have not done that. ⁓

Ryan D (26:10)
Yeah. No, it's good. It's

good. And, we, have a couple of guys, that run a lot of these traps. Obviously, you know, our positioning is a bit unique because, you know, I'd say a third of the deals that we're investing in, we're also procuring the debt for. So we have obviously a tremendous amount of access into their, you know, personal kind of financial information and,

But I, you know, there's a lot of little hooks and kind of tricks that you can play as an LP to really get a good feel for, you know, the solvency, the credit worthiness, and the overall execution, you know, for, for these individual operators across the country.

Pascal Wagner (26:44)
Okay. So I'm, I'm imagining you're working at what you would consider your W2 and you are, you are looking and processing loans every week. And there are some deals that you're in, that you, that you're like, these, these are incredible enough to where you're like, I want to put my own money in the deal. And, and then there's clearly probably most deals that, that you don't do that. So.

Walk us through, like, what is the range of the deals that you would see and what makes a deal one that you invest in from that purview?

Ryan D (27:18)
I got to be honest, it's the person running the deal. You know, a lot of what LPs need to be considering is their trust and transparency with an individual operator. you know, to your point, I saw a hell of a lot of deals in my career on the lending side. Um, I probably invested in 15 of them, 10 of them, 15 in that range, right. And closed maybe 500 in my career, 600. Um,

You know, lot of operators I wouldn't touch, just for the simple sake of they're in different markets. I don't really believe in the demographics, migration trends. I don't believe in the upside of a particular property. They might've been overpaying for it, but I'm going to do the loan anyway. Cause I was a W two and I was getting commissions on fees. So, you know, I would say that there were really a handful of guys that, know, in the last 10 years.

Most deals they would do, I would get involved in. And I'm a sucker for the East Coast from say, Carolinas, Tennessee, Georgia, and Florida. Really believe in the economics of those states in particular. they have good economic drivers, good macro, they're tax friendly for both the tenant and the landlord.

And I saw upside and I saw growth in those areas. so, you know, when I come across a deal, you know, in that worked well on the lending side or the underwriting side and the numbers looked solid and these guys had good track records. Um, how would get involved? How would you get involved? Um,

And some of those deals, candidly, I, you know, there's one scenario I like telling the story. I think it was my first investment in 2015. The operator was out of Long Island. This property was in East Atlanta before that market kind of took off. Since then, he's 1031 this original capital four times. And so that original investment has probably six or seven X at this point in that 10 year timeframe. And.

That's a concept. Obviously it's, it's unique to do a 1031 into another property and preserve your gains, but to do that multiple times, you know, obviously keeping the equity intact because nobody can pull their cash because you know, that's what preserves the gain exposure. Um, that's, that's kind that's a win. Yeah. That's a compounding LP win. And, um, you know,

That wouldn't have been the case if it weren't for that operator. This guy's probably my top tier one guy. And, you know, I've known him probably for 12 years. You know, it's at the point now where, you know, we're very friendly. Our families know each other. take trips together. So, we've partnered up on deals. We've co-GP'd a couple as well. And so that trust and transparency, when you start to, you know, understand how people operate and how they respect their LPs, that...

is what the business is all about. And that's what creates wealth and cash flow and growth. And those are the guys that you want to continue to go back to and invest with because they're doing the right thing.

Pascal Wagner (30:09)
What do you think you're looking for out of ⁓ GPs that you invest with today? And how has that shifted since you started? Right? Because you had to get all these reps under your belt. And I'm sure you were much more open to investing with certain people maybe in the beginning and you've become smarter over time. How is that? How did that start and how has that changed?

Ryan D (30:31)
Yeah, I think early on, ⁓ you know, you're, you're taking a waiver sometimes, you know, obviously I don't think, you know, any LP in our industry that's entering it for the first time is going to have the wealth of knowledge or the ability to access all the data points that you really need to be a hundred percent certain on someone or something. Right.

There's always going to be an element of risk. There's always going to be an element of ambiguity or doubt. However, being able to check some of those variables off gets you comfortable. And so I think early on in my career, I was probably 70, 75 % the way there to comfort. And so that 20, 30 % of risk or doubt was always at the forefront of where I was placing capital.

I think over time, given my reps and my ability to understand the underwriting of both the individual and the asset and the market, I now can look at a situation and within five minutes say a minimum. and that just comes down to experience, right? And, know, having, you know, we've cycled probably 10 deals now at this point. ⁓

I've invested with probably a dozen different operators, GPs. Obviously the top end is pretty heavy, you know, three or four guys that I kind of consistently go back to, even before I left my W2, but now as well. And I think where I'm at right now is, you know, I mentioned it in our, when we first started chatting. I can't, we need activity and you can't expect.

the best operators and GPs to be doing five deals a year. It's just, you know, that's not prudent, right? It's not prudent for your equity, your ability to manage and oversee. And a lot of these guys self-manage, you know, they're, they're fully integrated platforms. And so I don't like to invest with institutional guys that can probably do 10, 15 deals a year and have the operation to support it. I like to sit in mid market and really pick GPs that

have a couple thousand units, you know, maybe 3000 at a time, but they're constantly cycling through, you know, optimizing their operations, finding ways to, you know, excel on a consistent basis. They're never over levered. They're never over saturated. You know, they pick the right moments. They don't overpay for things. They're getting calls, you know, they might bid on, you know, several properties a week.

but they're losing 95 % of them because they're not the top bidder, right? And so, these guys that are top bidders today are oftentimes falling out of contract because they can't execute, whether that's on the raising side, on the equity side, or they can't get the financing that they need in order to get the deal done.

Some of the guys that we are actively working with and investing with are that second or third or fourth call where those contracts fall apart. These guys are now getting the shot to close at a 20, 25 % discount than what the previous guy went under contract with six months prior. So their ability to kind of, you know, sift through the noise a little bit, you know, ignore.

sticker shock and immediate pricing and really sticking to their underwrite, their conservative numbers and, you know, knowing I'm not going to overpay for this deal. Even, you know, no matter how bad I want it, how great of a compliment it would be to the portfolio in this market or whatever. These guys are conservatively positioning themselves to do none of those things. And those are the types of GPs that you know can execute in any market, let alone.

you know, the one that we've seen for the past three years.

Pascal Wagner (34:02)
What made you see you had to get into LP investing and obviously at a front row seat, what made you decide to finally pull the trigger and do it?

Ryan D (34:10)
I think it was, you know, I was doing okay. You know, my old employer, I had some liquidity. You know, I wasn't a big crypto guy, public equities guy. You know, I wanted to invest in what I knew.

and what I knew that I was committing my career to. I started in this space 15 years ago out of college. I was an analyst at the same company that I grew a large book of business with in the production side. And so I understood what it took to kind of get a seat at the table. And I also knew that if you stuck with it,

what this industry can offer you in terms of passive cashflow, tax-free distribution cashflow, capital appreciation over a period of time. This isn't a pop tech AI investment that you're going to get rich quick on. But I knew that over time, compounding equity is king. I always try to...

stay cash poor, if that's a term and, you know, put as much as I possibly could, even to the point of discomfort at times into deals. because I knew that, you know, once the reposition play or if there was cashflow day one, you know, that benefit compounded over time was going to allow me to do what I'm now doing, which is leave my W2 and do this full time and bring others along with me.

And so that's kind of, you know, the, ⁓ the sequencing, you know, that I went through, as to, as to why I got involved.

Pascal Wagner (35:39)
Is there a way you wish you got started?

What is the ideal way for someone who's new or thinking about dipping their toe in?

Ryan D (35:47)
⁓ I think again, I mentioned kind of the 70, 75 % comfort thing before, you know, with the individual, with the deal, with the industry. ⁓ I think getting to that point is important for folks, you know, sitting in the seat I'm in now, you know, 90 % of our investors are outside real estate. They're in different industries, right? And so it's a great diversifier for folks. It's a good alternative. you know, I think kind of.

getting outside of the cloud of the magnificent seven and kind of sexy stocks and equities and what the market's doing publicly every single day. It's a good, stable, consistent place to be. And I think as soon as you can kind of get comfortable with that concept and understand the benefits of it, which are not just on paper, but over time.

is a challenging spot for people to get to, but I think it's one that needs to happen in order to kind of take that first step.

Pascal Wagner (36:41)
Yeah, I mean okay, so you're basically saying get in get in it mean like do you have an idea of a good tip for us? Do you have like a like a man? I made this mistake I you know I mean if you're listening to this I think you're brought into to alternate investments, you know

Ryan D (36:56)
I listen, it's about the

GP. It's about the operator. It's about investing with the right people. That's it, right? ⁓

Pascal Wagner (37:02)
Yeah.

You've got a unique seat at the table. Is there anything that ⁓ you're seeing in the market right now? mean, I imagine you're still looking at loans all the time.

Ryan D (37:12)
Yeah. Yeah. So I, uh, I'm a, I'm a consultant for my former employer. So my book of business survived. Uh, I have a team there that now runs the day to day without me being an employee. I'm a 10 99 for the company. Um, I still see deals that I don't invest in that we're lending on. Um, but I think, you know,

my one of my goals is to offer significant value, not just to my investors, but to the GP as well by offering capital markets debt placement. And so what that does for me now is, you know, I can underwrite it alone and I can back into my equity return profile for our capital much easier, right? Cause I understand the leverage, the interest rate going in. Do we have any interest only things of that nature? So, I think right now there's a lot of just dislocation disruption.

Um, you know, we're seeing interesting, unique opportunities come from different markets across the country. I think that's. I like, um, regionally, regionally. like, I like the Midwest. I like, you know, uh, pockets of Texas. Um, you know, these areas have good wage growth, stable economics. Um, you know, I mean, there's a supply demand imbalance right now, right? I mean, we have a massive cliff.

Pascal Wagner (38:06)
Give me examples. These are all generality in vague terms. Like, of course you were seeing dislocation. Like, give us examples.

Ryan D (38:26)
of new construction developments that are hitting the market or not hitting the market in the next couple of years, right? So that whole shift in dynamic is happening right before us. And I think that's a massive push into the rental market.

Pascal Wagner (38:39)
Yeah, I mean, so what I'm trying to pull out here is like you have a seat at the table that no one else has. You're seeing how your former employer is underwriting loans. What I want to know is what is happening in the market? Are firms writing less loans? You kind of hinted that people are increasing their lending standards.

What's happening as a result of that? Like, what are they asking for now that they didn't previously? Like, give us the juice of what you have a front row seat to.

Ryan D (39:08)
Volume's down 60%. So that gives you an idea of what lenders are seeing, which is less. They're seeing less volume. There's less trades in the marketplace. There's still a massive amount of capital and liquidity sitting on the sidelines. And so from a lending standpoint, that's allowed them to tighten up a little bit. What I mean by that is more credit enhancement.

more liquidity reserves, right? When I first started on the originating debt, you know, 10, 12 years ago, GPs would have no skin in the game. Now they are being required to put five, 10 plus percent equity into these deals. And so that's a big difference where, you know, you have a lot of GPs that were otherwise just fee guys. They take their acquisition fee.

They take their asset management fee post-closing and now they're having to come up with a million plus, two million plus dollars out of their general partnership in order to qualify for a lot of these loans. We play in the fixed rate space. So on the floating rate bank space, debt fund space, interest rate caps, reserves, which are very cumbersome.

you know, significant amount of capital. Obviously, if there's a value add reposition play on some of these deals, you know, these lenders are going to require 12, 14, 16 months of interest paid upfront so that they can draw from it. you know, so they, they cover a shortfall. and so there's a lot more cash, I would say required of these operators and these GPs coming in than there ever has been before. another thing, you know, the way that these agencies are getting around,

The volume aspect of things that the cut in trade activity is going after what's called mission rich business or affordable housing. So there's a huge push to preserve the affordable housing stock of America. Okay. And what I mean by that is not the new construction class A builds. It's these BC assets that were built between 1985 and 2005. And what these lenders do is they take those rents.

as it relates to the median incomes of those areas. And they give you what's called a pricing waiver based on the certain percentage that you qualify for. And so what that's doing is that's tightening the spreads on these interest rates that Fannie Mae and Freddie Mac are now putting out in the market. So instead of your 6 % interest rate, if you qualify for some of these affordable buckets, preservation buckets, they call them, instead of 6%, you're just gonna sit at five.

or five and a quarter. And so that's 75 or a hundred basis points worth of Delta obviously drops to the bottom line. Your debt services lower, your operating incomes go up. And so that's a way that these agencies have been getting out from underneath the volume drop by incentivizing operators to continue to trade because they're able to reduce their interest rates as a result of these affordability requirements that they're in place. they're good.

Pascal Wagner (41:59)
Who's that sat by?

Ryan D (42:00)
FHFA.

Pascal Wagner (42:01)
So they're adjusting these policies year to year as they're seeing interest rates rise and maybe like issues in the market and they decide, okay, we're tightening up our restrictions and that comes down and incentivizes how you write loans.

Ryan D (42:04)
Correct.

Yeah. Yeah. And so every year, FHFA resets what's called caps, right? So Fannie Mae, Freddie Mac, HUD, they have lending caps, which obviously over the last couple of years, they haven't hit, but agencies are incentivizing lenders to get there because obviously the government does better. They write more loans. There's more interest payments. Investors buy those loans. They get coupons and so on and so forth. So there's a lot of hands involved.

in the volume that is expected out of this industry. And so in order to incentivize that in a low trading environment, they're offering a lot of these pricing waivers. Pricing waivers come in different forms. It's not just affordability. It can be on leverage. So, you know, if an operator is taking, you know, a 50 % LTV loan instead of 65 or 70, you're going to get a pricing break for that leverage.

If your DSCR hurdle, instead of a minimum 1.25 X DSCR, you know, you're underwriting at a one three or one four, you're going to get a pricing waiver. So there's all sorts of kind of hooks that the agencies are now offering operators to incentivize the trading activity to accelerate a little bit while we're in this high interest rate environment.

Pascal Wagner (43:24)
How do see this happening moving forward? mean, we're in 2025. Interest rates don't seem to be coming down. What do you think is going to continue to happen here?

Ryan D (43:34)
⁓ I think we're in a period of rent growth. You know, that's a simple supply and demand answer. I think that, you know, the fed, I think it's inevitable. The fed will start cutting rates here in the next six, 12 months, but the common misconception that people don't realize is a lot of the debt in the multifamily space is long dated. Okay. Five, seven, 10, 12 year fixed rate loans.

When you have a market that looks that far out, what the Fed is doing today doesn't matter because the expectation is already baked into the, to the rate market for a five or a seven or a 10 year loan. Right. What it does impact are these short-term floating rate loans that are basically pegged to the. So for which used to be LIBOR, which is basically a 30 day index that resets every month. And so when the Fed cuts rates.

it's cutting what's called the Fed funds target rate. And so, you know, that's sitting at five and a half or some percent right now. So that, you know, when the feds do cut, there will be an immediate impact to the short term yield curve. However, the expectation that they are already about to cut has already been baked into the long dated curve. So what I see happening is

assuming the velocity of the Fed picks up a little bit in the next 12 to 18 months, I see that bailing some folks out that took out bridge loans that might've over levered themselves because obviously that drops their immediate debt service payments that allows some flexibility on site. They can reallocate capital replenish reserves, but what it doesn't do is give them the refinance ability to go out and get that 10 year mortgage loan. Cause that's still high. And

I think we're in a new normal. know, I think property valuations are being reset right now. I think cap rates are going to be, you know, have kind of moot range from peak to trough. But what I do see is rents going up in certain parts across the country. Obviously that drives property values, but

what people used to rely on to drive property values isn't what it's going to be going forward. It's going to be more of an organic growth going forward based on income, not based on cap rate compression. And so a lot of people would previously buy properties in these markets at, you know, a five or a six cap. You know, once they stabilized it, they would assume a four and a half cap exit. And so that value creation wasn't necessarily on the income side. It was on value increase based on

Pascal Wagner (45:59)
Alright.

Ryan D (46:02)
cap rates. And so if that variable is eliminated, it's going to be organic growth based on rent increases and the sure demand occupancy rates, things like that. So, you know, I think a lot of, you know, the wealth that was created in the 2000s, not to say that it's gone, or it's plateaued.

Pascal Wagner (46:10)
population growth. Yeah.

Ryan D (46:23)
but it's going to come in a more organic fashion than it has in the past in our industry, which is a good thing because that alleviates a lot of the froth. A lot of the paper equity. I think it's going to, you know, promote stability in our industry, which, you know, we've seen the last 12, 18 months, but for the three to six years prior to that, there wasn't much. There was a lot of, you know, floaters and a lot of leverage. And a lot of that's been flushed out through the system.

And I think going forward, people are underwriting deals a bit more conservatively. Rent growth is, you know, instead of six, seven, 8%, you know, it's more two to three to four. And people are making super aggressive exit cap rate assumptions like they used to be. You know, if anything, you see a lot of deals I'm looking to invest in right now, or, you know, maybe you're buying at a six, five, seven cap. You know, you're stabilizing the asset and you're assuming an exit cap rate of maybe 25 basis points inside that.

versus, it used to be 100 plus. So.

Pascal Wagner (47:15)
Ryan loves the finance speak, cap rates, basis points. Ryan, this incredibly fascinating. Thank you so much for sharing. Kind of just your journey in the seat that you sit in. I think it's always fascinating when you talk to different LPs, how they got into the industry, how they, you know, the types of deals they invest in, why, you know, how did they see everything from their point of view?

Ryan D (47:19)
Thanks.

Pascal Wagner (47:39)
I appreciate you coming on and sharing that. Where can people learn more about you, the types of deals you invest in, and maybe just have a conversation with you?

Ryan D (47:50)
sure. I, you know, reach out on LinkedIn. you know, I try to have a decent presence, stay consistent with what we're doing. you know, we have, you know, a database now that's, that's, grown to probably four or 500 folks. And, know, we put out weekly newsletters, we put out new offerings. we have a portal to the extent somebody's interested in getting a bit more intimate, with our fund offerings or individual deal offerings. you know, we raise.

capital for the funds, but we also raise side cars and individual kind of LP participations on a per-deal basis too. So, you know, we're in the process right now of sifting through our latest kind of grouping of deals. You know, we typically close, I'd say two to three every couple months. So we'll be, we'll be launching those here coming up in the next couple of weeks and, you know, reach out, you know, do a lot of education.

try to commit to podcasts and speaking with folks such as yourself that have kind of a wider audience that can benefit from what we have to offer and kind of the value proposition that we add for folks. So all of the above.

Pascal Wagner (48:51)
Cool. As I said, thank you so much for joining us today. For those of you listening, you may have heard of me talk about this before, but if you're looking for deals, maybe like some of the ones that Ryan is offering, you can grab or find a big list of those with my passiveinvestingstarterkit.com. Just one of the best ways if you're struggling to find deal flow.

⁓ And maybe we can get Ryan featured on there. As for that, this is the Passive Income Playbook on the Best Ever CRE Show. As a reminder, we drop episodes ⁓ every Thursday. So be sure to tune in for some more conversations with other successful LPs, operators, and vendors to help you become a better passive investor. As always, if you enjoyed today's show, please subscribe, leave us a review, or just reach out on LinkedIn and tell us you loved it.

It just helps us know that we're on the right track and reach more investors like you and thank you for tuning in and we will see you next week for another episode of the passive income playbook.