Almost everybody in real estate has been talking about “pivoting” and adapting to the radical changes in the market as we navigate the COVID-19 crisis. For Boardwalk Wealth, however, nothing much has changed. Operating under a conservative approach even before the pandemic, this Dallas-based private equity firm puts emphasis on maintaining a strong balance sheet and being well-capitalized. Speaking with Lisa Hylton is Omar Khan, the partner who is responsible for capital raising, strategic planning and investor relations. Brining in his strong background in asset management, Omar is leading the firm in becoming a resilient player in the midst of crisis. Listen in as he shares a wealth of knowledge and tons of good information on the large multifamily syndication niche.
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The Ups and Downs of Investing in the Time of Covid with Omar Khan
I have yet another amazing episode to bring to you. Before we jump into the show, I want to invite you to get over to my website, which is LisaHylton.com to check out more information about my passive real estate investing guide on how to confidently invest in your next real estate deal. Without further ado, on the show is Omar Khan. Welcome to the show, Omar.
Lisa, thank you for having me. I’m glad to be here.
You’re welcome. It’s a pleasure to have you. Omar is responsible for capital raising, strategic planning, and investor relations. He has over ten years of global investment experience. He has participated in capital financing and M&A transactions valued at $3.7 billion. He is a CFA chartered holder and graduated with honors from the University of Toronto with a Bachelor’s in Finance. He moved from Canada and lives in the US with his family. To get started, how did you get started investing in real estate?
My professional background is I was structuring a lot of deals on the institutional side, so equity, debt, and all that kind of stuff. That part, I had down. My family has been involved in real estate for a little while for a couple of generations, so I had that part down as well. When we moved to the US, specifically when we moved to Texas, my wife and I were thinking, especially me, “I’m in a new country. What should I do?” We were doing back the envelope and I was like, “I’m not sure if that works.” It’s a nice problem to have. We were comfortable paying six figures in taxes. Unlike in Canada, I have no social services here. There are positives and negatives. There’s no perfect thing. “Why am I paying so much taxes?” I thought taxes would be way lower in the US then. This is more of my ignorance than anything else. They weren’t and I was like, “I need to lower my taxes legally.”
While at the same time, a buddy of mine from Toronto has a family office. They were doing some estate planning. They were in a lot of commercial office buildings and a couple of retail buildings in Houston. As they wanted to pass money on to the next generation, they wanted to restructure their Houston portfolio. He’s an old buddy of mine. The guy was like, “I’m in Dallas, it’s only a three-hour drive. Why don’t you come down and help us out? We’ll get to meet each other,” and all that jazz. I got down and started helping them restructure their entire portfolio. It’s a big portfolio, and then went from there. I wish I had some grand plan of like, “I’ll do this, and then I’ll do this.” It was just doing one thing after the other. People are open, at least for me. I’m grateful that a lot of people who didn’t even know me have opened many doors. They’ve been generous with their time, efforts and money. You keep putting one foot ahead of the other. That’s how it happened.
As you look back at your journey of investing in the earlier part of structuring those deals, were there particular things that stood out to you that made you think, “Maybe this is where I want to dive further into. Maybe operating of multifamily properties?”
Yes and no. There wasn’t any one epiphany. For instance, I’ve talked to a lot of people and I realized a lot of people are like, “I bought houses. I wholesale. I turnkey, and then I went to multifamily.” People have a journey. I had none of that, to be honest with you. Some of that is because of my professional experiences because I was already dealing with a high dollar volume type of work, to begin with. The other is my personal experiences through my family. Now I’ve realized it’s weird. My family didn’t own a lot of commercial assets. They didn’t necessarily buy houses and any of that stuff. I don’t know why that is. My grandfather started doing that. I never had that transition from buying houses to this, to that.
Thirdly, unlike a lot of people who want to be in real estate or have always wanted to be a physician or a lawyer or an actor, I never had that. I had a lot of good training. I was lucky to have extremely good training in good firms. I had a good professional and personal network, both investors or people I can rely on for expertise. It was a whole bunch of experiences at the right place at the right time. Those people are generous with their time and if they’re not generous with their time, a lot of these other things don’t work out. There was no career arc. You sit down five years ago and you have a goal, and then you decide, “I want to do this.” A lot of this was putting one foot after the other. Knowing that I had a tax problem I had to fix, then things started falling in place.
Can you walk us through how you play in real estate these days?
What I do is I run a company, so we’re owner-operators. We’re not just raising capital. We have our own projects and we raise money only for our own projects, not for anybody else’s. We operate our own properties. We have lots of investors and we’ve got partners that do various things, but we are the operators. What I tell people is, “If you ever feel pissed off about anything, I am the guy you’ve got to come to and shout at.” What I do is what we’ve always done. I know a lot of people say they’re playing defense in COVID and my thought about that has been, “Aren’t you always supposed to play defense even during good times? What kind of dumb team are you running words, which is only playing offense? How are you going to win any championship if you only play offense?”Keep putting one foot ahead of the other. Click To Tweet
It’s the exact same thing and exact same business model that we were doing earlier. We cater to middle class, but that’s mostly making around $60,000 to $80,000 a year, give or take. Have we gone down? Yeah, we’ve gone down where the median incomes have been around $45,000 but we’re not playing the C minus, that space. I’m not saying I’ll never do that. I’m just saying we never wanted to do that. I didn’t want to deal with that level of hassle.
To be clear, can you talk about the markets that you focus on investing and the type of asset class that you focus on?
Texas, Florida, and Georgia, the reason for these is these are growing markets, but these are also landlord-friendly markets. Having lived in Toronto and having lots of friends on the West Coast, if you’re a landlord, you know this thing called Cash for Keys where somebody can choose to not pay you rent, and then you have to beg them to leave. I never want to be in that situation. These are landlord-friendly states and they’re also growing states economically and all of that stuff. Our stuff is typically on the multifamily and B, B-plus value-add. Typical median incomes are about $60,000-ish to $80,000 depending. The typical deal size is about $20 million, $25 million, $30 million, in that range. We’ve gone up. We’ve done 1 or 2 deals low, but $25,000 million to $30 million is our sweet spot. Within Texas, it’s San Antonio and Austin. Within Florida, it’s Jacksonville and Georgia, it’s Atlanta.
When investors invest in your deals, is there an average return that they can anticipate to receive yearly when the deal sells?
Our targeted returns are having the same makings IRR, 8% to 10% cash on cash during the course level, and then we have an 8% pref. If I don’t pay you that pref, I will get paid the dime and a 70/30 split on top.
Are all of your deals set up with a pref?
Yeah. In fact, what I tell people is, “If you want to lose your money quickly, invest in deals that are not set up with the pref.”
Going back to what you were saying in the beginning, you were talking about the impact COVID has had on your business and the fact that you haven’t necessarily changed the way you’ve done your business because you’ve always approached it from a conservative approach.
We invest our own money. I did not know this was happening until I got into this industry. We always invest a substantial amount of our own money into deals. Frankly, it’s always been the same. We always have a lot of liquidity in our books because the lack of liquidity is the biggest killer in private equity. My personal experiences and my team’s experiences are institutional so we’ve done a lot of that work. Also, on a personal level, I have seen three generations worth of transactions happening, where I’m the third in my family. Good times or bad times, it always happens to everyone but you always need to have a strong balance sheet and you always need to be well-capitalized.
A lot of this stuff isn’t rocket science. I’m not like Elon Musk or I’m not trying to send a guy to Mars. This is just simple blocking and tackling. People get into trouble when they try to become too cute, when they’re not well-capitalized. Maybe they can’t or they don’t want to because they want to show the numbers on paper look better. A lot of these are self-inflicted wounds. As long as you’re conservative and as long as you’re not too cute, you’re going to be okay. When you try to cut corners, then everything is cutting corners. These days, everything is marketing and nobody’s doing the operations. Things will work out long-term, but you always have to be focused on the end result.
With that, a couple of items to branch off on that. One is reserves. You touched a little bit about reserves. When passive investors are looking at deals to invest in, what would you say are the amount of reserves that they should anticipate to have?
There’s no clear answer to that. It sounds like a cop-out but it isn’t. The reason is that it’s all dependent on the type of asset you’re buying, where you’re buying that asset, what is the condition of that asset, and the sponsor’s experience. The reason why I’m saying that is because you can have the same asset and something is super-efficient. They’re going to spend 80% of the money. Some guys can’t even fight their way out of a paper bag and they’re going to spend double the amount of money. None of this is complex stuff but a lot of times, people want a formula and there’s no formula.
This is what I tell people. A lot of this work, contrary to what everybody thinks, is still relationship-driven. For instance, you could come up with $50 million cash and you will still not be able to do a deal more often than not because if you don’t know the right brokers and owners don’t trust you, this stuff doesn’t happen. A lot of people think you can fake it. You can’t because within five seconds of a broker getting on a call, they will be able to sniff out whether you’re the real deal or not. Whether you’re just reading some pre-prepared script from some joke of a mentor who’s giving classes at the airport chair on the weekend. None of this stuff works.
You have to realize big brokers in every market and in every business in the world, they’re busy individuals. The same as you are a busy person. If you will waste your time with some tire kicker, why would somebody who’s selling $500 million to $800 million a product a year waste time with you? People don’t have time to mentor you and hold your hand. A lot of this marketing that you see around, “Take my coaching program in XYZ,” it’s nice. I’m not saying that. Like Mike Tyson says, “Everybody’s got a plan until you get punched in the face.” When you immediately start talking to brokers and you can talk that language and you can talk to owners on an operational level and financial level, none of this is a mindset coaching and all these other things you hear about these days. Nobody cares. Nobody’s got time.
Branching off from that, as someone who’s reading or thinking, “They would love to get into this space.” Starting off with perhaps investing, maybe similar to how your family invests because you said they are into commercial real estate.
No, they are.
What advice would you give to that person who wants to get started investing actively in real estate?
What I tell people is there are a couple of things you have to realize. A lot of people focus on returns but from a risk perspective, you have to be comfortable with the liability you will take on. If you sign off on the loan, a lot of folks say, “It’s a non-recourse loan.” A $10 billion bank is not a complete moron. They’ve got a lot of carve-outs and those carve-outs are onerous. I’m not saying it’s hard. You just have to be comfortable with it because a lot of people focus on the upside, not the downside. Number one, understand liability. If you’re comfortable with it, it’s fine. If you’re not, don’t worry about it. Number two, you’ve got to realize if you’re starting off, you’ve got to do a lot of things at the same time. You’ve got to be the marketer, the guy finding the deal, and the guy running the deal. You have to realize what your strengths are.
Let’s say you’re an introvert but you’re a great operator, those are your strengths. What you focus on is that you can get a partner who is more of an extrovert, but don’t just get any extrovert. It should be somebody who is professional. Let’s say you’re more of an extrovert. You’re super easy in developing relationships like that. When I get into the operating side of the business, there are many small things that I’m not going to do. Get a partner who does that. Don’t try to do everything yourself because if you try to do everything yourself, you won’t be able to do it and you’ll screw up everything. It’s not because things are hard. It’s just that there are five million easy things. In isolation, all of these things are easy to do. In combination, when you’ve got 50 deliverables in one day, you run out of time. You always have to have a good team. Try developing a team around you and understanding their own personality, and then going from there.
That’s the best thing I can tell you if you want to become active. A lot of this stuff, you can’t do behind a computer. You have to physically do it. Trust me, it feels weird. Even in this day and age, you have to physically go and meet people. I would have said shake hands but shake elbows now in the COVID world. You have to physically shake elbows and you’ve got to do property tours. At the end of the day, you’ve got to submit offers. That doesn’t mean you hit the broker’s price because if you think the broker’s price is stupid, don’t pay. You’ve got to start submitting offers because that’s when the rubber meets the road. A lot of guys come in and they’re like, “I need to find the perfect asset.”You’re supposed to play defense even during good times. Click To Tweet
That then leads me to my next question, which is for those who are interested in investing passively. As an operator, you are someone who’s putting together deals. What insights can you give to people who are interested in going into a deal passively?
I would suggest you thoroughly vet anybody. By the way, not just passively investing in life. Any substantial relationship, monetary or otherwise, you thoroughly vet that person. A lot of people can sound like a big deal or they can talk a big game on the internet especially. Everybody’s got a fancy website, newsletter, and all that stuff, but you have to drill down and ask them specific questions. A lot of times, if people can’t give you a specific answer, that’s for a reason. A specific answer also is, “I don’t know that answer right now. How about I get back to you?”
That is the hallmark of somebody who’s honest because they’re saying, “I’m not going to blow smoke up your ass but let me get back to you on this one.” If somebody says, “I don’t know as I have not done that before,” that person is a lot better to deal with in my opinion than somebody who just uses all these buzzwords about positive thinking and relationships. Thoroughly vet somebody. I have a great article on my website. You can refer to that out. A lot of times, you have to, regardless of what the marketing says, rely on the person’s track record.
A lot of times, these days, one of the dead giveaways is if somebody says, “We control 2,000 assets,” that is a fancy way of saying they’re not an operator because this means that they’re either a limited partner, which is equivalent to me saying, “I own the stock in Facebook.” “I own a $500 billion company.” I only own $20 worth of it. A lot of this is gut. Please remember, the deal of the century comes by every two weeks. Don’t be in a rush to invest. Take your time, learn about the person, check the references, check them again, and then go from there.
You said you don’t necessarily do anything differently with the COVID environment based on your previous investing strategy, but nonetheless, as you look at the landscape of the marketplace, real estate is continuing to develop in the uncertainty of this marketplace. What are your thoughts when it comes to investing in deals other than vetting the deal and then using your gut? Give advice for people who are thinking about getting into the market in this cycle situation.
It depends. Number one, you have to be a little bit more conservative, even more than usual. Have more reserves, have five more on price, and all of that. At least in the area that we’re in, about $25 million to $30 million asset size, in the B space specifically for multifamily. I don’t know about the future. Everybody’s a little uncertain about it. If I went to sleep in the middle of March and I got up today, I would have saved myself a lot of heartaches. Our collections are 98% plus. I am not the only person with that collection. I know tons of other operators. We’re all in this weird la-la land and we were all stressed, and then nothing happened.
Collections are still strong. Will they stay strong? That is the million-dollar question nobody knows about. This is where, a lot of times, are those years of developing relationships, not just with brokers, but with lenders, owners and investors. That’s where it comes in because you need to be a market expert. As an example, you need to understand, even within Atlanta, there are certain pockets where you can’t even build a new apartment. The school rating hasn’t even fared well. The township or municipality that fared well hates apartments. They do not want them made. Their school rating is 9 or 10 out of 10, so everybody wants to move there. Understand that that’s not going to change because people still want to send their kids to a good school. You’ve got to realize these small, little nuances. Become an expert. Be a mile deep and an inch wide.
Connected to that is something that I’d like to touch on is the assumptions. Rent increases and expense decreases, but more specifically on rental income increases. What are your thoughts on that as people look at deals?
This is market-specific as an example. That’s a cop-out, I know. The few deals that I’m looking at, I haven’t projected any rent growth in the first year to see where the numbers end up but that’s what I’m doing. I know some people are in certain pockets of markets, where there’s more demand than ever. I’m not going to do that. It depends where you are. This is why I said you have to know what markets you are investing in because for the federal property in the suburb of Atlanta, we have a line outside the door. What’s going to happen is the school here starts on August 1st. People want to move in because they want to register their kids in that school district.
It is weird that you would think nobody would want to move and we have so much foot traffic. You would think like nothing’s happened but there are other properties we have. Our foot traffic has gone down significantly. Newer leases are not happening, but a renewal rate has shot through the roof because nobody wants to move. This is why it’s important to understand each and every market. Every market has its own specificities. I know it sounds like a cop-out, but I know people want to put a number and be done with it. That’s why these things don’t work like that.
This one might have a cop-out to it as well. This is regarding the business plan, value-add. I’ve had a lot of conversations with different operators and different people. They’re noting that as they go further down into the uncertainty of this market, they’re concerned as to whether they want to continue to execute that aggressive value-add structure and strategy.
I’ve heard a lot of guys and I know everybody has their opinion. I don’t agree with that at all. This is just my opinion. I’m not saying everybody else is wrong, but I am saying that’s wrong. In our particular case, what we realized is the only time you would be stopping renovations is either you run out of money or you feel a major recession is coming because something negative is happening. In our particular case, first of all, we’re in supply-constrained markets. People in the municipalities are not going to let you build something there.
Our line of thinking is we are well-capitalized. We already have the money on the books so we don’t have to look for money, number one. Number two, if a recession does happen, I want my property to be the nicest property on the block. Even if rent growth doesn’t happen, my occupancy goes up because, at the end of the day, you have to realize everybody thinks their apartment building is some unique thing. I’ve searched for an apartment before and I’m assuming you search for an apartment before. They’re all the same. Eventually, at that $800 to $1,000 level or $1,200 level, a lot of times, it comes down to price. It’s mostly price and some gimmicks.
In a recession, you already have a more price-conscious consumer. They will gravitate to a nicer product or a nicer value, number one. Number two, the problem is a lot of these folks who are not renovating, this has a spillover effect 2, 3, 4 years down the line. Let’s assume nothing happens, we go through a little bit of a hiccup. Hopefully, that’s the case, and six months out of work is fine. The problem is next year, how are you going to get an increase on top of an increase that can get projected? Because if you had projected, you were going to get a $100 increase this year and a $50 increase next year for a total of $150.
This year, you get $100, and next year, you get $150. Nobody’s going to give you $150 because people aren’t dumb because they’re options. The point is you’re caught between a rock and a hard place. If you do it, things fall off a cliff. That’s one thing. If you don’t do it, you make the climb for yourself steeper. It’s asset-specific, market-specific, and operator-specific. Everybody has their own line of thinking but a lot of times, people aren’t well-capitalized. They don’t have money. If you don’t have money, the decision is made for you already.
This leads me to my last question. One of the things that I saw on your website is the PPM. It was the first time I had ran across an operator’s website where someone took the time to go through that for investors. Could you talk about the reason why you decided to do that?
The reasons why I decided to do that were simple. For the life of me, I do not understand why this happens. Most of the people I meet, and I’m talking sponsors, I’m not talking about investors, try to hide behind smokes and mirrors, “I’ll do this,” but at the back, they’re doing something else. It’s like, “I’ll do something here,” but they’re not trying to do something here. We’re in a day and age where people aren’t dumb. Just because you aren’t exposed to something, if you find out about something, it’s easy to look it up. If you don’t know something, you look it up on the internet. There’s enough information out there.
Information is not our problem. That whole not being transparent thing used to work maybe in the ‘70s and ‘80s when people could not be informed. It does not work anymore. It’s not just my deals but I have lots of investors who invest in other people’s deals. They’ll be like, “What do you think about this? Should I be doing this?” A lot of times, the language was intentionally misleading. You’ve got to realize these people, some of this is legal boilerplate and boring but a lot of times, people put words for reasons and they’re wanting you to not look at that word. Once they take your money, what are you going to do about it?
The whole idea there was I would like to think I don’t have stupid investors. Even accredited have exhibited, more often than not, an ability to think critically. Why hide behind smokes and mirrors? What kind of relationship are you trying to hide things from people? If somebody likes it, great. If somebody doesn’t like it and think they can get a better deal somewhere, I highly encourage that person to get a better deal somewhere. I invest my own money and I won’t want to give it to somebody who’s giving me a bad deal. How can I tell you to do that? It’s simple. You break things down and if somebody likes it, they like it and if they don’t, they don’t. It’s not the end of the world.
With that, we’ll move on to my level of questions. I ask these questions to all my guests. The first one is what are you grateful for in your life?
I complain a lot. I’m grateful for my family. I’m grateful for the fact that compared to a lot of unfortunate things happening in the world, I haven’t ever had to face any of that. You don’t realize it day-to-day but I’m grateful for all of that. I don’t say I’m grateful enough, but I am.Lack of liquidity is the biggest killer in private equity. Click To Tweet
I helped you to get some grateful aspirations in there.
I’m already feeling more calm and centered.
What has attributed to your success and continuous growth?
It’s a lot of things. The usual, my parents. The fact that I had a lot of social capital built up because of the people my parents interact with and with their environment I grew up with. The fact that by nature, I have a somewhat stubborn personality that if I want to do something, I’ll try my best to do it. It’s a combination of factors but a lot of this is I’m a product of my environment. I was privileged and lucky enough to be put in a good environment, which helped me to get to where I am now.
What do you now know that you wish you knew at the beginning of your journey?
I should have moved to the US many years ago.
Can you expand on that?
The US is a combination of a couple of things. Number one, it is the only country with a sizable enough population. I’m talking about more than $150 million that has both a sizable enough population and original population because countries typically have a huge population and they’re dirt poor or they have a small population, which is extremely rich, but it’s still a small population. This has a combination of a big market and a rich market. Number two, I don’t know what it is, but I like it. Americans as a whole generally are hustlers. I love that.
People want to nest and people want to do business, whatever that thing is. I lived in a few countries and that thing is not necessarily as common across the board as it is over here, which is an interesting dichotomy. There are all these high achievers in every country on the whole number. We’re talking averages. I love the fact that Americans are hustlers and everybody’s trying to make money. Everybody’s trying to do an entrepreneurial mindset and that sort of thing. That’s not always found everywhere. I’ve lived in a few countries so I can guarantee that.
What an awesome episode. Thank you for dropping all these nuggets. I love it. If my audience wants to learn more about you, find out more about your offerings, where can they go to learn more?
You can go to our website, BoardwalkWealth.com. Right on the front page, you can enter your name, email address, and how you found out about us. Click on whatever the button is at the bottom. Verify your email and you will be added to our mailing list. You can also email me at Omar@BoardwalkWealth.com.
Before we leave, anything else that you want to share with my audience before you head out?
No, you did a good job. I was just answering questions.
Thank you, Omar. I appreciate you for coming on.
Thank you for inviting me.
Thank you, Omar, for coming on the show. I appreciate it. Here are my key takeaways from this episode. Number one, when you forego executing your business plan, you have the ability that causes you to be in a situation where you could potentially be foregoing rental growth. It will be hard to catch that up in future years because you can’t just pull up. If you’re planning on doing a $100 increase this year or $50 increase this year, and then a $50 increase the following year and you forego this year’s increase, the next year would be potentially needing to do a $100 increase. Maybe your tenants are going to be like, “No, I can go somewhere else and rent something else.”
You could potentially lose tenants that way. It sounds like there’s a fine line between understanding when you can increase rents and when you can’t. It’s something that you do need to think about and perhaps tread the water to try and see if you can do it because that’s impacting your business plan and your returns for your investors. The next two points, one was for active investors. People who are actively looking to invest in multifamily. He talks about being comfortable with the liability of taking on this responsibility, the loans, etc. Even though they’re non-recourse, they are bad boy carve-outs and stuff like that.
Those kinds of acts of negligence etc. can result in you being held on the hook for whatever has happened. Recognizing your strengths, so this point was into understanding that you can’t do everything yourself. You need to be introspective and think about, “What am I good at? What are my superpowers? What do I bring to the table?” Working with and attracting people who bring the other pieces to the puzzle to then build a business together. Lastly on this point was knowing that if you’re wanting to play actively, you’re physically going to need to get out there and meet people. That is property tours and submitting offers.
Going through the process of understanding how to do that stuff and being able to get that done. For passive investors, he noted thoroughly vetting the sponsor, so understanding who they are, whether you like and trust them, their track record, and the whole nine yards. Take the time to do that. Also, knowing that there’s always a good deal. There are always more good deals coming. Not to feel rushed and pushed to see, “I have to invest in this deal.” Take the time that you need to make sure that you understand the deal that you’re investing in and that this is what you want to do and this is how you want your money to work for you.
It’s a great episode. I enjoyed having Omar on. He’s a wealth of knowledge and tons of good information. He noted if you want to learn more about him and how to find him, his information will also be on my website, which is LisaHylton.com. You can go there, grab his information, and also explore all the resources that are on there for passive investors to learn more about passively investing in real estate confidently. Until next time. Keep leveling up. Take care.
About Omar Khan
Omar is responsible for capital raising, strategic planning and investor relations. He has over 10 years of global investment experience.
He has participated in capital financing and M&A transactions valued at $3.7 billion. He is a CFA Charterholder and graduated with honors from the University of Toronto with a B.Com in Finance.
Omar moved from Canada and lives in Texas with his wife and newborn son.
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