All Forum Posts by: Brian Burke

Wow, Ryan…I don’t even remember posting that so thanks for the trip down memory lane. Reading that again kinda gives me chills because here I am six years later and checked every box.  I guess there is something to setting goals if you want to achieve them!  Even though I wrote this here and never revisited it.

I did upgrade the plane two years ago.  Great decision because not only is it a lot more capable but I bought right at the beginning of Covid, and since then prices took off so it’s worth more than I paid. Got the oceanfront condo on Ka’anapali beach five years ago and that was another great decision because now I live on Maui about 25% of the year and run my business from under a beach umbrella with the ocean only a few feet away.  I just don’t set my laptop on the sand because occasionally a larger wave comes up.  First-world problem.

I hit my real estate goal, too, buying about 4,500 units over the last 5 years.  One thing that played out differently than my post from 6 years ago was that I didn’t wait ten years to start selling. I’ve sold about 3,000 of the units already, many for nearly double what I paid, so there was no reason to wait. 

One goal that wasn’t even on this list also came to fruition—I co-founded a real estate lending company 5 years ago and then loaned over $1.5 billion to other real estate investors and now we’re selling the company to a public company. Didn’t see that one coming but sometimes when life presents you with an incredible opportunity, you seize the day.

Another one I didn’t foresee was writing a book—but BP published The Hands-Off Investor two years ago and I’ve received a lot of really great feedback from so many people who got a lot out of it. 

Now that I accomplished all my goals (and then some) I guess it’s time to come up with new goals.  I suppose some good ones might be to get better at golf, fly the airplane more (maybe to some golf trips?), maybe upgrade the plane again.  Business goals?  I don’t really have any at the moment. I’m going to watch what happens in the world and be ready to act when I see the right opportunity, in whatever form that might take. With all of the volatility, I’m not feeling rushed to act, nor am I seeing very compelling deals…but that could change next week, for all I know. 

@Tyler Todhunter using your own example where the $100K NOI went up to $110,000, that's assuming roughly 5% rent growth (assuming expenses make up about 50% of the rents it would take 5% rent growth to increase NOI by 10%). So you're right--if you buy a commercial multifamily property, and cap rates go from 5% to 6%, and rents grew 5%, and you sold in one year, you'd lose money.

But if you hold for one more year, and rents go up another 5% (increasing NOI by 10%), your NOI is $121,000 (I'm over-simplifying, but this is close). At a 6% cap rate you're back to your $2MM price. So just don't sell in a year.

But what if rents grew 10%?  Or, as we have seen in some markets like Phoenix, Tampa, and Atlanta, rents grow by 15% or even more?  Some markets are forecasted to increase at that rate over the coming quarters--this is why people are buying at such low cap rates, even with the threat that cap rates decompress somewhat.

Eventually someone is going to lose this bet.  The ten million dollar question is, "when?"

@Danny L., glad you are enjoying the book!

This appears to be a case where distributions are return ON capital first. It isn’t the best drafting, but one clue is where it says “Distributions of the Preferred Return do not reduce a Member’s Capital Account.”  That isn’t true, distributions always reduce a member’s capital account, but I think what they meant to say here is that distributions don’t reduce a member’s capital balance.

Another clue is that the preferred return is calculated using annualized return, not IRR. In the case of an IRR hurdle, all capital must be returned in order to hit it. That doesn't change much from a practical perspective until the percentage is exceeded—it just delays going to the next tier until capital is returned, that's all.

Another clue is that if preferred return is based on an annualized return, the waterfall language would have to say something like, "first, to the Class B Member to the extent of their unreturned capital," if the first distributions were to be return OF capital. This one doesn't say that—it says first to preferred return, and we now know the preferred return is not IRR.

You might also want to look up the definition of “Capital Return” because it’s mentioned in the definition of Preferred Return, just to see if that alters anything.

@Danny L., not enough information here to answer.

First, what do you mean by “deal was based on Return on Capital or Return of Capital”? Are you asking if distributions are first return OF or return ON?

Also, notice that the words “Preferred Return” and “Preferred Return Balance” are capitalized. This means that somewhere else in the agreement you should find the definitions of these terms, usually in a definitions section at the beginning of the agreement.  Can you paste those definitions here?

I might be happy selling at an 8 cap even. Like I said above, interest rates aren’t driving the vehicle.  Instead, think of it like an airline cockpit—there’s a captain and a first officer. Sometimes the captain is flying while the first officer watches, and other times the first officer is flying while the captain watches.

Right now rent growth is doing the flying.  That’s why cap rates are in the 3s and 4s. It won’t be long before rent growth slows and interest rates play a greater role, and caps start to rise.

If I buy a property today at a 4 cap and sell in 5 years at an 8 cap, have I made or lost money?  Well, there’s no way to tell without more information.  You need to know what happened to the income during the hold period.  If the income tripled, thanks to rent growth (rents wouldn’t have to triple for that to happen, BTW), the property would still be worth 50% more than I paid for it.  Assuming I put 30% down, I’d more than double my money in 5 years, and that’s not even counting the cash flow during the hold.

This is why I couldn’t care less about cap rate.  Used alone, it tells you nothing.  A full analysis of the total picture is necessary when evaluating whether a property is worth the investment.

Market cap rates have less to do with interest rates than rent growth.  So the real question is “what will we do when rent growth tapers off.”  The answer is simple—buy at a higher cap rate.  It’s the only way to achieve the returns that attract capital.

The only reason 4% cap rates make any sense at all is because in some markets rents are climbing 20% or more in a year.  Income will be far greater in years 2 & 3 which means that the resale value is considerably higher even if sold at a higher cap rate. It isn’t low borrowing rates driving the bus here…that’s just the backseat driver. 

I'm interested in NNN investing, but if I were searching for a book on the topic I'd be drawn to #1. It gets straight to the point. There are countless books touting "freedom" using real estate—I'd probably chalk #2 off as another one of those. But the first one gets to what's more important to me and that's learning the strategy, versus the second one which is selling the dream.

My opinion (not worth much) is that active and prospective NNN investors tend to be people somewhat more advanced in their investing journey and have likely already reached a level of freedom. Thus, #2 speaks less to me (but still somewhat relevant as it relates to seeking freedom from tenants, toilets, and trash, so keeping it in the subtitle makes sense).

But @Taylor L. is probably right that #2 sells more books…because it seems that more people want to buy a dream than learn a strategy.

One more big shout-out goes to @Tarl Yarber, who co-MC'd the live charity auction at BPCON with @J Scott, and the other BP powerhouses that helped the auction run smoothly, like Matt Faircloth and Nate Robbins.  We raised over $100,000 in twenty minutes from generous BP members and we are so appreciative!

If you are looking for the website Jay missed an "s" in the thread title, it's aheroshome.

Very well said, @Jake Wiley.  It's amazing how little you learn when things go well versus how much you learn when they aren't.  Plus the tougher lessons stick with you for a lot longer.  I remember back in the day how I'd flex every principle to get a deal to work, and contrast that to now where I feel like I'm trying harder to make it NOT work than to work.  Good deals are hard to find, bad deals are hard to exit.

I'm glad you're enjoying the book!  For those that might not know, it's The Hands-Off Investor.

 Hmmm…not sure why the link didn’t work, it’s working for me. I’ll try a different way.

Click here for article.