Investing in real estate is flexible in one important way. Depending on the time you have available and your willingness to go down the weeds, you have the choice to either invest actively or passively. Either way, you have to educate yourself to succeed. Lisa Hylton takes the time to talk with the President of InvestArk and the Chief Compliance Officer of Baylor University, Randy Langenderfer. Randy talks about how he got into real estate investing, and talks about the finer points of active and passive investing in real estate.
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Investing Passively And Actively In Real Estate With Chief Compliance Officer Randy Langenderfer
I’m super excited. On this episode, I have with me, Randy Langenderfer. He is the President of Invest Ark Properties, LLC, focusing on creating investor value and passive income returns for the busy professional. He has been in multifamily real estate since 2014 as a general partner/key principal to 250 doors and a limited partner to over 4,000 doors. Invest Ark offers the busy professional who wants to include multifamily into their portfolio an opportunity to partner with experts who are aligned with their investment goals. Thank you so much, Randy, for coming to the show. I appreciate it.
Lisa, it’s my pleasure. I’m grateful for the opportunity and hope we can provide some value to your readers.
Your audience should decide what's best for them, but they should invest in their real estate education. Share on XI ran across you on other podcasts. I saw that your background in financial services, compliance work and investing in real estate syndications, I was like, “I want to talk to that guy. I want to have him on my show,” because my background is the audit. My readers are business owners and entrepreneurs but a lot of them are still in the audit space. They look at me with a side-eye when I am telling them about real estate syndications because it’s a highly unregulated space. There is regulation but it’s not as regulated as some auditors would like. We are getting into that on this episode of how you have been able to bridge the gap to help some other people who can resonate with your background invest in their next multifamily or real estate syndication deal in general. To kick things off, where in the US do you live?
I am residing in Missouri City, Texas, which is a suburb of Houston, Texas, the Southwest corner of Houston. I have been here for many years. I came down here for my W–2 job. I’m a lifelong resident of the great State of Ohio and, specifically, the Cleveland, Ohio market, where I’ve first got into the real estate journey there.
When you started, were you in multifamily or single–family? What was your start forte?
Your audience is finance and accounting people who are generally risk-averse so I tell this story that I was working for a private equity firm and saw that tenure coming to an end shortly. I was looking for opportunities to grow my passive income a second. I was going to do a W-2 but I wanted passive income as well. My brother-in-law, who was a JD/MBA and if you think I’m a little wacko on the investing side, came to me. He ran a mutual fund for a big regional bank in the Cleveland market. He wanted me to help him become a hard money lender for single–family flips in Florida while I lived in Cleveland, Ohio.
He had gotten displaced. He got all on fire and went to Armando Montelongo’s school. He came back and said, “You’ve got to do this with me.” I said like you said, “You are crazy. You are thinking nuts. Am I going to lend money to somebody in Florida who I never met on the house to flip?” Long story short, then he said, “You’ve got to use your self-directed IRA to do this.” I said, “You lost your mind. You are official. You are a loony.” The bottom line that we can talk more about is we’ve got involved in it, got educated and understood the risk parameters on what we were doing. That was the start of my journey. I came to Houston in early 2013, learned about multifamily and never turned back.
Before we get into the serious stuff, what do you like to do for fun?
I am blessed to have four children. There are four grandchildren. We love to spend time with them. I play golf periodically, not near as much as I used to. My wife and I spend a lot of time going for long walks at night, trying to be physically fit. I have a son who‘s still in the house. We are still involved in his life. I still have a W-2 job and all the other urgent-related activities.
To get started here, someone similar to you is reading. They have a compliance audit background, accountant. I jumped ahead of myself. Could you share your background professionally?
Professionally, I grew up like many Baby Boomers. I grew up in rural Findlay, Ohio, which is a rural town in Ohio. My father was an engineer. My mother was a nurse. I was taught like most of us, “Go to college, get a good degree, graduate, go to work for a big company, work hard, maybe you will get promoted, stay there, climb the corporate ladder and retire at 65 or whenever you choose to.” That was a great model. Many people criticized it. I don’t. I’m educated from a four–year degree in my undergraduates in Accounting and Information Systems. I started to work in the oil and gas industry. I’ve got my MBA and CPA at nights and weekends, working as a lot of people. I’ve got into healthcare. I’m the Compliance and Privacy Officer, Chief Audit Officer and IT security guy for an academic medical institution in Houston, Texas.
Starting right there, when you were looking at making your first investment into a real estate syndication, what were some of the things you had to get comfortable with to make that first investment?
Passive And Active Investing: Multifamily is a business. It’s evaluated on the NOI – net operating income.
I had become disenchanted with single–families only because it’s a lot of stinking work. I attended a conference and heard about multifamily. The first thing on that, what we would call the things we talked about in our day job of risk mitigation, I was fascinated by the fact that I can buy a multimillion–dollar asset and have a non-recourse loan. I had looked at buying businesses on my own. In all of those, you have to sign personal guarantees and take all kinds of debt on. I can buy $10 million, $20 million, $30 million and $100 million with real estate on a non-recourse loan. That means that I don’t have any personal liability. They will take the asset back but I would lose my investment in the very worst case but non-recourse.
It was understanding the syndication that it’s a team sport. If I put a team together and we require a property or I invest as an LP, I can invest in a beautiful cashflow. I studied and learned the model. I saw the three big things that everybody in real estate should know. There are positive cashflow, tax incentive, tax advantage and forced appreciation. In multifamily, it’s not like single–family. In a single–family, I can have a beautiful house in a bad neighborhood and I get dragged down by the comps in the neighborhood.
In multifamily, it’s a business. It’s evaluated on the NOI, Net Operating Income. My finance–accounting colleagues on this understand that a lot better than most of the people I talked to. It doesn’t matter where it’s sitting. It can be sitting in the hood. I don’t do that. As long as it has got a positive NOI and turning cash, it can be a good investment. Cashflow, tax incentive, forced appreciation and non-recourse debt were the big things that attracted me to it.
Moving from there, can you talk about the key things that you had to overcome in terms of investing in real estate private offerings?
The biggest one for me is I break it into four different pieces. The first one is education. I said it’s learning the model. As with most of your audience, the finance–accounting mentality is fairly risk-averse. You want to understand the risk, for me, it was understanding what the risks are very simple. I always point to the fact that we, as financial people, talk about diversification as a strategy. I’ve got a quote here. I’ve got to read Warren Buffett. He’s against diversification. “Diversification is a protection against ignorance.” Buffett once said, “It makes very little sense for those who know what they are doing.” I have studied Warren enough and he would say, “The Modern Portfolio Theory teaches diversification across multiple classes.” Buffett would teach that, “If you know something and know it very well, do it.”
I have a significant portion of the net worth I have in multifamily. I’m going to say 40% or 45% of my personal net worth is in multifamily. I’m all in. It’s education and understanding those risks. Multifamily is a proven methodology. I’m not reinventing the wheel here. Many have gone before us. It’s easily studied and learned. One of the other areas I did to gain comfort was I joined a large educational group, the Sumrok Group, out of Dallas, Texas. I still have a mentor and I’m part of Rod Khleif‘s mastermind. I’m a coach in his organization. I continue to educate myself even to this day. Investors, to get comfort, I started passively investing first. I became a limited partner because I had the head knowledge but I wanted to see how it was practical. I dipped my toes in the water. I used a self-directed IRA, which we can talk about even later if you want. That’s another whole discussion. I developed a partner in a self-directed IRA. I didn’t even have to meet the minimum requirements because I was so risk–averse. I wanted to take all the steps I could.
You don't need to hit home runs. You just need to be in the game. Move and do it. Share on XThis is a great show. There are so many meetup groups and educational groups out there. When I get in the car with my wife, she’s tired of listening to real estate shows. She’s asking, “Can we listen to something else, please?” No matter where you are at in the journey, you want to continue. If you are starting out, you want to understand those risks, about underwriting, the property and all that stuff. You have to take the time to educate yourself. I’m probably like many of your audience. As a finance–accounting guy, I was diametrically opposed to spending big money on my real estate education. Some of these educational groups are pricey. I was bound and determined. I wasn’t going to spend $20,000, $25,000 or $30,000 to join a membership. I could have done it if I chose to but I wasn’t going to do that. I started investing in learning as I was going. Since then, I have invested a lot in my education, going to conferences and seminars and buying books and materials.
Your audience should decide what’s best for them but they should invest in their real estate education. I don’t know your audience well but I bet they have invested maybe hundreds of thousands of dollars in their undergraduate and graduate degrees. If you are going to spend $50,000 or $100,000 in an investment, it’s worth a couple of thousand or whatever you feel comfortable with to educate yourself. Go to one of the conferences. Meet the general partners. I will have coffee with anybody anytime, anywhere or a Zoom conversation. Develop a network. Ask questions. It’s not rocket scientist stuff because it has been done lots of times before. The thing I wanted to say in that education is, all those things are part of your education. Don’t be afraid to invest in it. If you are not going to invest in your education, then you are speculating or throwing money at deals. “I like Randy or Lisa. I will give her money and invest in this deal.” If you’ve got it, that’s fine. That’s your option. That’s the difference between investing and speculating.
Moving from there, the difference between investing versus speculating. Can you talk about the risks and the things you have done to get comfortable with mitigating or decreasing the risk to the lowest levels possible?
I love talking in terms of what you are talking about because most people don’t have to use other languages at risk mitigation and all that stuff as part of our vernacular. It‘s so true. The second step in the process of investing is understanding the risk. The first step is education. The risks are, what every investor should do is should know the sponsorship team. The simple illustration to that is not original to me but it’s the horse and the jockey. You may have heard of the illustration that, “What’s more important in a horse race, the horse or the jockey?” They are both important.
In the multifamily world, the jockey is the general partner and the horse is the submarket. What is more important? The general partnership group or the asset? “I’ve got a beautiful asset in Houston, Texas but I don’t have any experience. I have never done this before.” I say the sponsorship group, the general partners, are the most important thing to get your arms around. Do you know, like and trust them? Are they competent individuals? How do you do that? You don’t just do it on one call. It’s a relationship that you have to build. You have to understand their approach. Every sponsor will say, “We underwrite things very conservatively.“ What does that mean? That means different things to different individuals.
The first one there is to understand the sponsorship team. What’s their experience? What’s their history in paying out distributions? You, as an investor, are doing this because you want distributions. Where do they specialize at? Are they all over America? Do they specialize in Houston, Texas or San Diego, California? Ask them assumptions they are going into their underwriting. They are going to come out with a pitch deck for property and show the financials. You can ask, “What are your rent and expense growth assumptions?” “We are projecting a 20% rent growth.” That’s not very reasonable in the market. Maybe one day. The expense and rent growth, what kind of fees are they asking for it? How are they going to get compensated as a sponsor?
There are investor–friendly deals and sponsor–friendly deals. The sponsor–friendly deals are very fee-laden. The sponsorships are taking complicated, none of these are bad in themselves but their acquisition fees, divestiture fees, refinance fees and waterfalls on the back end. Investors have to understand how the general partner is getting paid. What’s their incentive cap rate? What’s the buying cap rate? What’s the reversion cap rate? Numbers people love this stuff. Change that reversion cap rate to 50 basis points, it changes the returns a lot. If your audience hasn’t been at the price of that stuff, who’s going to manage the property?
Passive And Active Investing: All those things we talked about, education, knowing the risk, developing your own personal strategy and risk tolerance help you mitigate the risk.
Another risk is, “I’m buying. It’s my first time I’m doing in Houston, Texas. I’m going to try to self-manage.” That’s a giant red flag or, “I’m using a property management company that has got 2,000 doors in Houston and they have known this market inside now.” That’s a big risk mitigation factor for the passive investor to think of. The other big element to look at is read the legal document. In every private placement, there is a private placement memorandum called a PPM. There’s an operating agreement. Many people don’t even read them at all. I was looking at one to invest in myself, I know, like and trust the sponsor. It was the first time I was invested with them, though. They have a good track record.
I have heard of and know about them. They were educated in the same group I was in at that time. I started talking to them. I said, “Great returns and projections. I love the market and sponsorship team. What are the investor rights?” That was when people looked over. In this particular group, the LPs didn’t have any rights. They didn’t have any voting privileges. It was all up to the general partners to decide if they were going to refinance a property and when they were going to sell it. Those are two parameters you generally see that limited partners get to vote on. That was a red flag for me.
The private placement memorandum is a legal document. For your audience, if they haven’t seen one, it explains all the risks. It can be fire, natural disasters and fraud. It’s designed like a prospectus. It’s a lot of legalese. You need to understand the operating agreement. The operating agreement shows and tells how the company, the LLC, will be operated, how distributions will be paid, and in the rare event, there’s a capital call, how that will take place. That’s where the rights of the LP come in and the rights of the manager. What can and can’t the manager do? You must read those. You need to see a couple of them to understand your investment strategy because it comes down to every investor. What’s good for Randy may not be good for Lisa and vice versa. You may want a value–add play. I like a yield play. I want a cashflow and different parameters.
As you mentioned that, that brings me to my next question here. What are some of the things that passive investors like in terms of the key things they need to think about before investing in these deals, in terms of getting clear on their side before looking at even a deal?
There are several things there. It comes down to, “What are your goals as an individual?” As I started to say, that varies from person to person. What do you want out of investing in real estate? Are you looking to educate yourself so you can become a general partner someday? That’s fine. That’s not a bad strategy. Are you wanting to invest some of my retirement funds for a return to get a yield? I will say, “I’m 25 and I’ve got some money. I want a large capital distribution on the backend.“ There’s nothing wrong with any one of them.
I encourage the students I talk to, on paper, to write down their investment goals. Maybe I like the submarket of Dallas-Fort Worth. It’s a hot market. I’m going to mitigate risk by jumping into a hot market versus Topeka, Kansas. I don’t know if Topeka is good or bad. I know Dallas is hot. You got to find that general partner that you know, like and trust. This requires time on the investor’s part. It’s not something you can speculate and throw money at it. If you want to invest and mitigate your risk as a traditional finance accounting professional does, you need to understand those things. Do you want to be a passive investor? There’s nothing wrong with that. I’ve gotten people who invested with me that that’s all they do. They are in 20 to 30 different passive deals. They keep turning it. If no one sells, they reinvest it. Those are many of the key things to think about.
The last item I will talk on is, in introducing you, I did mention that you have experience as a key principal. Can you share with my audience what a key principal is and the role that a key principal plays?
My accounting–finance friends on your show here are going to think I’m wacky after you do this. Most everybody probably understands the general partner and the limited partner. Let’s say you find an apartment building you want to buy for $10 million. Most people want to go after agency debt. That means a Fannie Mae or a Freddie Mac loan that’s backed by the Federal Government. To do that, the general partners and the key principals have to have a net worth of $10 million cumulative to get that loan. I don’t know about you, Lisa, but I don’t have a net worth of $10 million. Maybe someday but anyhow, that’s why you joined rent-to-rent. A key principal signs on the loan.
Agency means Fannie Mae or Freddie Mac. To get an agency loan, you can’t just go out and buy a $10 million or even a $1 million property with an agency loan the first time without having experience. They want somebody that’s experienced even for smaller properties. The way you do that is you partner with somebody on, “I will be a key principal for you or a KP on the loan.” That means Randy Langenderfer signs on Lisa’s loan that I will be a key principal. That helps you get the requirements for the loan in terms of net worth. That also means that now I get to leverage Lisa’s experience in that as a key principal. If I have the desire to be a general partner in the future, I have now earned my Fannie Mae or Freddie Mac card. They would look at me differently if I came to them wanting to borrow money.
You just can’t walk into a Fannie Mae or a Freddie Mac office and say, “I want to borrow $1 million for this asset.” The key principal is needed for that. When I started, I did several LPs, and then I had desired to be a GP at one point in time but I didn’t have my Fannie Mae or agency card. I signed as a key principal on 120 units in Columbus, Ohio. To do that, though, the mindset you and I have is like, “Why would anybody do that?” I would say I mitigated my risk. That’s why I signed on with two people who I know had net worth probably five times what I did. There’s a risk mitigation factor. The property was stellar. The people with who I was a key principal had a lot more money than I did. In the rare event, the worst were to happen, the agency is going to come after those two guys before they get to me.
I’m so glad that you shared that story because people can see how much of a team sport this business is and how people can get into the business as a result of it. I’m sure you can relate to this. A lot of people generally in the finance and accounting space, due to the conservative nature, might suffer from that analysis paralysis. Can you share with my readers some of the tips you would give to move through that? Especially as a coach, I‘m sure you have seen that through your students as well.
Sooner or later, you need to pull the trigger. You have to take action. Share on XI was talking to a student. I had a call with him. He’s a finance–accounting guy. He has some assets and wealth. He was asking a ton of questions. I stayed on the line and answered all of them. His name was Randy as well. I said, “Randy, sooner or later, you’ve got to pull the trigger. You have to take action.” As finance–accounting people, we can talk ourselves out of any deal. I can, too. In the best of deals, I could talk myself out of because, “What if?” That’s what we are trained to do in our day jobs, to mitigate risk for the corporations we work for and do that. All those things we talked about, education, knowing the risk and developing your personal strategy and risk tolerance help you mitigate the risk. When I wrote my first $50,000 check, my hand was shaking but I never regretted it. I know very few people who have ever regretted it. You are mitigating your risk immensely by being an LP versus the GP. In the words of my mentor, Rod Khleif, “Take massive action.“
This then brings me to my last three questions here for the level-up questions that I ask all my guests. The first one is, what are you grateful for in your life now?
I am most grateful for a God who loves me, a wife who loves me and four children who love me.
What do you attribute your continued success and growth to?
I don’t think I have arrived yet, but thank you for that compliment. I would continue to want to learn. My father told me, “If you find something you enjoy, you never have to work a day in your life.” I have found that one day, I will retire from the corporate world and do this full-time. I truly enjoy it. Find something you enjoy. If real estate is it, then dig in, go ahead and go all in. Consistency, slow and steady wins the race. It’s the old hare and the tortoise. You don’t need to hit home runs. You just need to be in the game. Move and do it.
Lastly, what do you now know that you wish you knew at the beginning of your journey?
Multifamily real estate, I wish I had known a lot earlier in my life. I mean that very generally. It’s a great asset class. I am convinced I will continue to invest in multifamily as an LP and a GP for as long as I can because of the elements we talked about.
As you talked about that, I was curious. Have you experimented with any other asset classes?
I have. I wanted to get into self–storage. I thought I wanted to be an operator. I started to look at being an operator in a self–storage unit because the numbers are beautiful. If my finance and accounting friends are out there, if in the history of downturns, what’s the best performing asset class of real estate? It’s mobile home parks, self-storage and then multifamily. Multifamily, in ’08 and ’09 correction, it only went down about 3%. Self–storage and mobile homes went down even less. It’s recession–resistant. I invested in a fund that focuses on self–storage and mobile home parks. I have been very pleasantly surprised and will continue. My wife thinks that I’m a little strange. ATMs, there’s a giant group, Dave Zook, out of Pennsylvania that has done this for many years. Back to the sponsorship and knowing the sponsor, I know Dave Zook from afar. I have listened to many of his podcasts. I have heard him speak. I have mitigated my risk by trusting him. He has got a great track record and a whole infrastructure of the team behind him. I don’t know ATMs well but I know that he has been very successful in ATMs over the years. I have invested there.
I love all the personal stories that you have added. It adds so much to the show. One more thing that I want to cover here is the self-directed IRAs, which is something that you spoke about at the very beginning of the show. I‘m sure that people are reading who are thinking, “He talked about that self-directed IRA. I do have self-directed IRAs.” They have IRAs hanging around. They probably don’t know the power that is in those IRAs. Can you talk about how you have put yours to work?
I‘m happy to do that. First of all, my brother-in-law told me to use my IRA. That’s a golden rule of the traditional financial counselor. Don’t put your IRA money in something “he perceives as risky.” He perceives it’s risky because he doesn’t understand it. To him, it is risky.
Before you go further, you spoke to your financial advisor and your financial advisor told you not to do it.
I’ve got to tell you, yes. I hope your audience doesn’t think too bad of me. Back to the Warren Buffett illustration, it was risky to him because he didn’t think about it at all. It wasn’t on his radar. He understood stocks, bonds, P/E ratios and beta. I was over here educating myself in multifamily real estate. The self-directed IRA is, if you have money, which many people have money, whether you are 25 or 55, in corporate accounts, you can’t take a Fidelity Mutual Fund, Vanguard, T Rowe or any of the big houses and use it to invest in this because they have fiduciary responsibilities and they won’t let you. It’s legal. There are companies out there, self-directed IRAs or SDIRAs, that allow you to invest in other alternative assets like ATM funds, mobile home parks and Bitcoin.
I will put a plug–in for Quest Trust Company here in Houston, Texas. It’s the one I use. They are a huge one in America all across the country. It doesn’t matter where you live. You simply move money from your traditional IRA like I had changed employers. I had money sitting in the old account. I moved money from my Vanguard account to Quest. Once you get into Quest, you have an alternative investment option, real estate being one of them. You can invest in multifamily real estate via your self-directed IRA. There’s paperwork there because that’s called self for a reason. The company has a fiduciary responsibility too to make sure you are compliant with all the regulations. There’s a self–regulate. I can’t buy my own home that I live in via my self–directed IRA. That’s called self-dealing. I can’t buy a house for my son or daughter to live in. They are called self-fulfilling requirements. You’ve got to stay clear of those.
You can invest in alternative investments, such as multifamily syndications. That was where I dipped my toes in the water, $50,000. My counting head was, “I don’t want to risk $50,000.” I formed a trust within the SDIRA myself and another individual. They both put in $25,000 for a total of $50,000 and then invested in multifamily syndication. This is a way to get around the $50,000 minimum threshold for your audience to dip their toes in the water as I said or you can form an LLC within that Quest account. If you’ve got three people there, then you form an LLC. There are ways to get around it.
There is paperwork involved. Also, the other thing for your audience is, just because it is in a self-directed IRA does not mean that it’s tax-free. When I use the term UBIT for this audience, everybody will know that’s Unrelated Business Taxable Income, it is subject to UDFI, Unrelated Debt–Financed Income. To the extent that there’s leverage on the asset, that portion of your investment becomes taxable at capital gains only, not ordinary income. It’s just capital gains. The other self–part of it is it’s a separate legal entity. It’s different than Lisa’s personal return. It’s Quest Lisa. You have to file a 990–T Tax Return.
The point of this was that I hope that someone has taken away that it’s possible. There are so many different ways as well as there is a service provider that can help them to bridge the gap and provide even more possibilities based on whatever situation they want to create.
By the nature of it being in an IRA, you don’t think you are going to use it anytime soon. Why not invest it in something like this? To your great takeaway or summary, there are a ton. You may not think you have money but you do. You have money in an IRA. You can part partner together with others to hit the minimums.
Passive And Active Investing: You can’t just go out and buy a $10 million or even a $1 million property with an agency loan the first time without having experience, even for smaller properties.
Thank you so much, Randy, for coming to the show. I appreciate it. If my readers want to learn more about you, where’s the best place they can go to find out more?
Lisa, I want to thank you for the time. It has been a pleasure. The easiest way to get ahold of me is to go to the website, Invest-Ark.com. There’s a contact page on there that you can arrange a call or send me an email. I would love to answer any of the questions. I truly enjoy being a coach for Rod’s organization and giving back. However, I can help your audience, just reach out.
There are so much value here and lots of good information. Thank you for sharing your story and adding value to people’s lives. I appreciate it.
Thanks again, Lisa.
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About Randy Langenderfer
Randy is President of InvestArk Properties, LLC focusing on creating investor value and passive income returns for the busy professional. He has been in multi-family real estate since 2014 as both a general partner/key principal in 250 doors and a limited partner in over 4,000 doors. InvestArk offers the busy professional, who wants to include multi-family in their portfolio, an opportunity to partner with experts who are aligned with their investment goals.
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