In this video, we dive deep into the strategies and techniques that can help you navigate through uncertain times and thrive in a volatile market.
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Transcript:
Chris Bounds
The market has been able to push performance very heavily over the last few years. Performance now is going to be primarily met by strong operations and typically with budget management, how are you able to budget properly to maintain your income and increase it as necessary, but also, cap your downside, cap your expenses, because insurance taxes and labor materials that are just skyrocketing? Any thoughts there any advice there for other operators that, they’re starting to shift their game plan to shoring up the ship?
Alix Kogan 37:37
I mean, I think if you own assets, it’s a lot easier to look at those assets and find where there’s a little bit of fat, where you could trim in cap your expenses. There’s, I mean, there’s so many different little levers that you need to look at. That’s a real time monthly sort of evaluation, you could have a seasonal dynamic, where you’ve got to put more money towards x, and then a different season, you could scale back some of that expense. It’s really, again, we could talk for hours on that, but it’s a very granular, real time analysis of expenses. I’m not going to bore you with all the typical stuff, you know, utilities, management, and all that stuff.
I would say, the biggest thing that operators should be looking at which I don’t believe that many were in the last several years is I don’t think they’re doing good diligence upfront on your costs. Where insurance costs are unpredictable today, they’re all over the board and they’re different from we’re buying an asset in Louisiana LSU, that we’re closing out in 30 days, the taxes they are the imaginary the insurance being a cat area is insane. It was almost a deal killer. Don’t guess, and make sure you’re getting insurance codes. Make sure you’re hiring a professional to do a tax study. We do a tax that in every deal that we buy, we don’t just say, gee, let’s let’s get on the county website and look at the mill array.
And let’s just guess we’re not experts in tax analysis, but the national firm that we use, they are and I’d rather pay a couple 1000 bucks to ensure that I know my worst case, my best case, and my base case of insurance. A lot of those things, I think are not being diligent, straight upfront and underwriting for it, as well as CapEx, you know, guys are just saying, hey, it’s an average of 10 grand a door. We’ll have you check, viable vendors today in your market that are validated with those with higher number bids and multiple bids.
That’s probably my best piece of advice right now in the market that we’re in because we can’t afford to be wrong, right? We can’t afford because we’re not going to make it out up on unranked growth, right, we’re going to plug in a very conservative number. I’m not going to get it on right row, if I do read, but I can’t depend on that on the front end, I’ve got to have all my numbers set.
Chris Bounds 40:13
Yeah, that way, if you do get the positive rent growth, or more than expected, it’s your LPs are happy with. Not that you came in a little bit below. They’re questioning why the returns lower than expected.
Alix Kogan 40:29
Yeah. The other thing, I think, expectations of returns, we’ve all been spoiled. I’ve told our investor base, I mean, our portfolio track record is exceptional, but I keep telling him do not have those expectations going forward. I feel like that’s okay, because we’re still in an asset class, that’s very tax efficient. There’s other things you can invest in, there might be ordinary income rather than long term cap gains. You know, are you going to be in the market that’s volatile? It’s not for everybody. I’m not saying don’t invest in the market, I invest in the stock market, but the majority of my wealth isn’t real estate. I’m okay, it’s saying, hey, if I was doing an average of 15 IRR. In the years past, I’m okay with 13. Because, you know, it’s still a great asset class, but let’s not have unreasonable expectations.
Chris Bounds 41:26
Yeah, that’d be interesting. See how just LPs, get it because you’re educated and you’re educated through experience, through opportunities and all that on, hey, these are what these opportunities shouldn’t be performing that. It’s almost like from a GP’s perspective, if you’re putting out something lower than that, like, it’s already harder to raise now. But even though you may be honest, it’s going to add some extra headwinds on the rays and how they react to that. It’ll definitely be interesting to see how LP’s react to that. But at the end of the day, when they go through a few cycles and see it in real time, they’ll get it.
Alix Kogan 42:05
Yeah, I mean, the thing that I’ve been hitting, we’ve just raised for a couple of projects successfully knock on wood and my LP’s said, well, why are you in this 13, 14 IRR range? I said, I’m in this range, because I’m assuming that four, five years from now, interest rates will be the same as they are today. They say to me, well, that’s probably unlikely, they’ll probably be a little bit lower as I agree with you. And if they are, your IRR will be not 13, 14 will be 16, 17. Are you okay with that? Oh, yeah, great. Well, so it’s an education with our investors saying, we’re projecting this because we’re not projecting interest rates will be lower. If they are, that’s an arbitrage because cap rates will come down, and we’ll be able to do better, but let’s just be conservative, all things are equal, will be in the lower teens rather than the high teens.