Paul Shannon: Repositioning Your Assets to Generate High Income Returns

Are you a yield-seeking investor?

Paul Shannon, the proprietor of Redhawk Real Estate, discusses many tactics and experiences that helped him succeed in the real estate industry. This episode presents a chance for other investors to get involved, provides yield to those seeking income, and diversification investment beyond traditional assets.

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Paul Shannon: Repositioning Your Assets to Generate High Income Returns

Hey, everybody. Welcome back to another episode of The Real Estate Rundown today. I’ve got a guy whose name I really find it easy to pronounce, because we share something in common, but I honestly think this guy’s kind of got it in the wrong spot. But my guest today is Paul Shannon. Welcome to the show, Paul. Glad to have you with us.

Shannon, thank you so much. It’s great to be here. Thanks for having me. I shouldn’t…

It almost sounds like an echo chamber here at Shannon and Shannon and Paul. And you know, I pick up a lot of pizzas for Mr. Net, because my last name is Rob-nett. And people ask me, you know, What’s your last name? I gave him my last name. Rob. Net. They think I’m unqualified to answer the question. 

So I woke up and walked out with a pizza for Mr. Net, but I’m sure you’ve probably run into the same thing. But where are you in the world? And where is that as far as what you’re working on? And then you know, are you working in your hometown and those kinds of things? Let’s just get started with a brief bio on where you’re at and what you’re doing.

Sure, yeah, happy to provide that. So I spent the first 15 years of my career in medical device capital equipment sales, I was doing sales in the operating room for cataract surgeons. The equipment that’s used, the implants are used for cataract surgery served me well for quite a long time. 

I started investing in real estate back in 2016. I had done some single family flips, some buying holes using the burst strategy, and got into small multifamily kind of solid scalability. Towards the end of my corporate career, I was losing control of my time when I started to have kids as well. And I was traveling at nights a year. 

I was working 80 hours a week and my values weren’t quite aligning with what I was doing day to day anymore. So I was enjoying what I was doing with real estate. Again, so scalability with it. And then on top of that, I kind of saw some macro things going on in the market that led me to believe that real estate was a must in portfolios if I ever wanted to retire. 

So with that as additional fuel in the fire, I made the transition or jumped into real estate full time back in 2019 total. I have acquired 150 units and have just over 100 My portfolio today. And I’ve done that through kind of a mix of flipping homes, single family homes to create capital that I can use to then reinvest in the multifamily, which I’ve done a lot of what I call recycling capital, also known as the burst strategy, and kind of stacking units on top of one another and using that same capital over and over and over again to grow. 

I’ve also invested passively in real estate syndications. I like the mailbox money and not having to do a lot of the work as well. And it helps me diversify away from myself as an operator locally, which all my active portfolio today is currently pretty hyperlocal here in Indianapolis, Indiana, and it also allows me to diversify geographically with that, you know, participate in some of the markets that are having, you know, kind of this appreciation boom that are more driven by appreciation and cashflow, which is sort of the opposite of where I’m at in the Midwest.

Getting into markets like North Carolina, Florida, Texas, Arizona, and kind of riding on the coattails of strong operator. So a mix of a lot of different strategies and experiences in real estate. I’ve done property management, project management, you know, obviously, the sourcing and negotiation, raising capital, etc. So it’s been a fun journey so far.

So you know, it’s funny, because you really make the case for the average person to be involved in real estate. While a lot of people believe that you have to have some sort of, you know, special education. And then yet, we see a lot of I’m going to upset my realtor friends. 

Even though I’m a fourth generation realtor, you know, my son’s a fifth generation realtor, we see a lot of people that think real estate is really super easy, and then fail at it. What do you think of yours? What do you think your success was? Where others have failed? 

Because clearly, you know, your sales and marketing are great, but how did that translate to real estate to give you that successful edge to go from where you were at working? I mean, look, I don’t know how you look at your calendar. But if you’re really working 80 hours a week, you don’t have time for a side hustle. Right? So there had to be something given there. 

Because I mean, if you’re out of town, 80 days a week, working 80 hours a week, you probably have an 80% chance of getting a divorce, right? And that’s not what you’re looking for. So how did you fit that in and make that something that works? And with your skill set that really wasn’t focused on this at all?

Right? Great question. I’d start with what I didn’t do well, and that goes back to analysis paralysis, okay. I wanted to do this a decade ago, and I waited on the sidelines for way too long. I read way too many books. I didn’t take action soon enough. But when I decided that I needed to start down the path of actually tangibly doing something about it, I found others that were ahead of where I wanted to be. 

So I found mentors, I found people that I could go around to job sites with and watch them actively communicate with contractors and see what they were dealing with on a day to day basis when they were flipping homes, how they were evaluating underwriting multifamily properties, how the industry works from the inside out, essentially. 

I think a lot of people in today’s real estate market want to jump in, and they want to get started. And they want to skip a lot of the steps. For me, I was very methodical almost to a fault initially. But then, you know, as I was transitioning and saw that I wanted to get into this full time, I went ahead and I got my real estate license, I thought maybe I would sell and do some transacting for buyers and sellers and the retail side, ended up figuring out, I didn’t like doing that, and manage my own projects. 

So I had some headaches with contractors. While I was transitioning away from W to work, there were times when I thought gosh, I’m never around, my wife’s really not going to be happy. I’ve got to go over and work on this project. This contract was like falling apart. I literally get out paintbrushes and take care of it. 

You know, I started doing property management, I managed about eight homes and did leasing. I was at the property don’t open houses for prospective tenants. I was learning property management softwar. I was looking at applicant’s credit histories and criminal records and the whole nine yards from soup to nuts. 

So it really was very granular. And that’s not scalable. But what it did is it allowed me to kind of understand the business from the ground up and take the components of it and kind of outsource the stuff that I really didn’t like doing to take property management. 

For example, I’m not sure how anybody can manage a property manager if you’ve never done the job yourself, but just the limited experience that I had had and it gave me enough to really kind of understand their inputs and what they do in the business. So then I could feel confident that I can outsource that. Basically give them my investment to take care of and feel good about it. 

So you know, I will say that for anybody that doesn’t have a real estate background or construction background, it’s very doable. Just have a process. You know, find a mentor. Find people that you can get around that are doing things on a bigger scale than you are, circle as much as you can and then start taking one step at a time the journey of 1000 miles starts with one step.

You know, so Paul, let me just go out on a limb here and say you’re a little bit of a control freak. I mean, you know, quickly. Well, you know, but you know, and I’m, I’m with you on a lot of that. But I also agree that if you’re around mentors, you can learn what a good property manager does. 

So you don’t have to do that in order to be that right. So I saw where the simplicity could have happened in your world. And you could have advanced yourself further, faster, I think, had you been a little bit more plugged in with a mentor early on, you know, books are great, but how do books work out? 

You know, but working with real people? I kind of hear that. So. So I really, I mean, I feel yet and I talked to so many people that have that same issue, right? They, they, I mean, you don’t understand it’s a $300,000 purchase. It is, it really is. 

But a quick evaluation of the downside, which you’re much more likely to do now than you probably were 10 years ago. Quick evaluation of the downside, you could put in two or three things that would protect you that would give you the runway, i.e. a little bit of a savings account, to cover some rent payments. 

Maybe a property manager that you know, doesn’t mind showing you what’s going on. And you know, or a mentor earlier, you know, gosh, I don’t want to spend money on a mentor. This was my thing. I don’t want to spend money on a mentor, because that’s expensive. So we’re mistaken Dum Dum head, right, which is where I was at, right? I mean, I have a lump sum, I have $1 for every mistake I ever made. 

Because the second, third or fourth time, I figured out how to get it right. But if I just spent that money with a mentor, doing things quicker, where would I be right? So I hear you and I love the fact your journey is very similar to mine, everything that I do in my syndication business in the model that we do have already done, right. 

I mean, I’ve done everything from move a house to remodels to burst. I’ve done it all. There’s some things I like better than others. And I’m able to hone in on that and use my expertise that way. But at the same time, you know, I agree with you that you’ve got to just get started. So now that you’ve gotten started, you said that you’re hyper focused on executing your personal business plan in your local area. 

But you like working without a town, syndicators, other general partners on deals in other areas, other markets? How do you determine your capital, because your last name Shannon is not zoned? So I understand you do have some limited resources, right? But how do you determine when you invest in your local market, and when you invest with someone else in another market?

So I guess to answer that question, I have to go back to how much I’ve allocated towards real estate in general and why I decided to allocate that amount. So if you look at the 60/40 stock bond portfolio that’s often touted by financial advisors, the 40% that makes up the bond allocation has historically provided a few things for investors, capital preservation, a hedge against economic slowdown, income, and the opportunity to appreciate those are the four big ones right there. 

Sounds a lot like real estate bonds are not providing really any of those things, you can see that today. They’re getting absolutely crushed. And yeah, interest rates are inversely related to bond value. So as interest rates go up as they are today, the value of those bonds is going down. So back in the 90s, if you were getting six 8%, on the 10 year Treasury or whatever the corporate rates for bonds were back then that did offer a little bit of balance, especially in a declining industry environment in our environment. 

Today, you’re staying on the beach naked when the tide goes out. So I looked at that 40%, I looked at retirement, I thought, there’s no volatility protection here, there’s no income being paid. This is a bad story to tell. So real estate fits a lot of the bills that bonds do minus liquidity. In some cases, I just sort of felt like real estate was a necessary piece to my portfolio as I guess I got older. 

And it was a way to fill my time so if I was going to leave W to work, I needed something to do so I decided to make it a business. So I basically took 40% of my overall capital that I had, and I didn’t. I took half of that and I said okay, I’m gonna go into passive income investments. I’m gonna learn the syndication business that way. I’m gonna diversify markets amongst sponsors, and kind of get away from my active income. 

On the active side, obviously, I’ve got more control. You mentioned I’m a control freak, I love that piece of my portfolio to generally get better returns there. I feel as though I have more liquidity because I have control and want to execute my plan, how quickly I refinance it, what assets I purchase, and how I can control my velocity of money. Essentially I’m so happy to have 5050 active and passive. Does that answer your question?

Yeah, and thank you for going into the why? Because I think that’s very important. You know, a lot of people look at it go, Well, I just, you know, there was a deal in front of me. So I had to do a deal. Gosh, we have a lot of people that had to do a deal because they had money, not because they had a purpose and a plan. 

Right. One of the things that you mentioned was, you know, where we’re at with bonds and where we’re at with interest rates, as you’re recycling your capital, as you’re coming to conclusion on your business plan and or some of the other GPs are coming to conclusion. What are your thoughts as we move forward with rising interest rates, and the multifamily market?

It’s a perilous time right now, honestly, there’s sort of a disconnect, I feel in the marketplace where we stand today, the middle of May 2020. Between, you know, expectations from sellers who have enjoyed, you know, obviously a huge boon in pricing over the last 12 to 18 months call it and buyers who have been participating in that upswing, but now kind of are looking at and saying, “Okay, well, the cost of capital is going up, capital markets are changing almost daily, how do I even underwrite this thing”? 

You know, if my plan was to come in and rip and reposition the asset, and then refinance it in three years, where interest rates are going to be in three years? You know, what’s my take out loan rate going to be? How expensive is my interest rate cap gonna be? Am I gonna have to use those extensions? If I plan to sell before that and not refinance, what’s the terminal cap rate and have your cap rate is going to decompress in this rising interest rate environment, I don’t have a crystal ball. I don’t know any of those things. 

But what I do know is what I just told you. So when I look at OM’s, I try to point out where the holes are here, you know, who’s actually telling the whole story of this asset, who’s looking at it from protecting the downside, and I always start there. And if I feel like I can’t do that, then I’m usually out. 

But there’s got to be, you know, significant upside, typically, you know, for me to be interested on the value added side, and then Worst comes to worst on holding the asset. So I really don’t like to use variable floating rates, I like fixed rate debt. I like to lock in and just let it ride. That gives me a lot of flexibility in what I do with the asset and some of the smaller stuff that I don’t know.

I call it mid size, multifamily 4050 units. I finance those and credit unions or community banks have a little bit more flexibility, I don’t have to worry about yield maintenance that year, you know, four or five rates are going down. And I just thought I wanted to dump the property. I don’t have to worry about a takeout loan with a bridge lender that’s looking to take the property away from me if things don’t go perfectly. 

So I think it’s, it’s really just protecting the downside by being educated on what’s not in the offering memorandum, looking at, you know, rent growth with a fine tooth comb, how much realistically can you get, don’t underwrite, you know, darting off loss to lease in six months, and then achieving your pro forma rents in a year and then having ongoing six 7% rent growth for your whole dream. It’s just not realistic. You have to be more conservative.

So and that’s where, you know, there’s so much that you said there. Let’s unpack that a little bit. I mean, there’s so much that we see where people are underwriting that have gotten into syndication lately, right? We forgot that six months ago, we had about the lowest rates in the last 5000 years, right? 

Literally, if you check history, Corona brought us that one of the one of the tangible benefits we had was interest rates that were lowest they’ve been in 5000 years. That’s not normal. So when you’ve underwritten to that, when you’ve underwritten to 12%, rent growth, when you’ve underwritten, those kinds of things, those are and should be huge red flags, like you mentioned, Paul. 

Because when you see that you see a lack of experience, right, you see somebody that is not sitting there going, or you see a deal that’s so skinny, that in order to get to a return that somebody would pay attention to, they’ve got to do that, you know, I’ve started to see with some of the much more experienced syndicators, their realistic returns have dropped to 12 and 13%. Not because they are doom and gloom errs, but that’s where their middle of the fairway is. 

That’s where their risk challenge becomes their reality where they can say I can underwrite this way, and I’ve been doing it for a long time. And this is what I can, I can say with as much confidence as you can put together in om, right, that rates are typically in this area. Typically, we see cap rates follow rates by 2%. Right? 

We’ve seen that kind of go that’s compressed because of supply and demand. But there’s so many things that just because you put the numbers on paper, doesn’t mean they’re reality and there’s a lot of people out there that we’re going to find out we’re drinking their own Kool Aid, you know, kicking this number this way and if we adjust that one up, but this one down and this one over, we can get it to do what we want. 

Well, you know what, within a filter. Because I look really incredibly handsome, right? But you know, that’s the reality that you can make the spreadsheet say something, it’s just making sure that it conveys a doable truth, right? Something that makes sense, front to back. And so I really see where, you know, these kinds of informational things are helpful, and where you can get that experience. 

So when someone’s looking at that, and they’re underwriting, and when you’re underwriting, what are you looking at as we go into the next six months versus what you were underwriting in the previous six months? 

Sure. But I think, you know, to go along with what you’re talking about before, how does somebody that doesn’t have the experience get into this, I think you have to be a steward of financial markets. And that doesn’t just mean, what’s going on in your you know, your specific backyard as it relates to real estate or multifamily. 

It relates to personal finance, the economy, macro micro economics, and kind of understanding the flow of money and how liquidity affects different assets. Everything is sort of tied together. So when I look at, you know, the news today, it seems as if the Fed has really telegraphed that they’re going to be bumping up the federal funds rate by another 100 basis points or so during the next two FOMC meetings. 

So they just did 50 basis points last week, so rates are on the rise, whether that impacts cap rates, we don’t know, you know, it could be that rates rise by XML, and cap rates actually stay flat, they could be compressed slightly, they could continue to compress further, because there’s so much liquidity and demand out there. So we really don’t know what will happen to cap rates, but we do know that the cost of capital is going up.  

So when I look at that, I just take a conservative ones to it. And when I’m looking at what I’m looking at, okay, if I have, you know, a year 18 months to execute my operational plan on the value add side, what are rates today, I’m going to add 100 basis points to my take out loan. So I know that when I go to permanently finance that, that’s going to be about where I am, I feel comfortable that, you know, I can still make the deal work within those parameters. 

My plan is to sell it, I’m going to stretch that terminal cap rate. You know, if it’s a five cap market today, I’m gonna see what that pro forma looks like and what my sensitivity table looks like at a six or a six and a half. rent growth assumptions. I think a lot of people are winning deals based on how aggressive they are on their proforma with rent growth. You know, the New York Fed just released some data that shows that between 2020, February 2022, and February 2023, their expectation, consumers expectations are that rent will increase by 11.2%. 

I think it is, and then analyze that over the next five years. And the expectation is that it’ll grow at 5%. Well, that would be excellent, that would happen. But I’m not going to count on that because those are expectations, not reality. So I think it’s probably feasible depending on the market, you’re in that we have above the norm as far as rent growth through this year. And that’ll start to taper down. And then after a year, or two or three, I’m going back to two to 3% rent growth. In my ProFormance. 

Interesting to like, when you talk about underwriting and newer sponsors, I had an example of this a couple of weeks ago. I went to a joint venture partner behind that with a person on a deal that we were underwriting. We submitted an LOI and ultimately we lost and we were not awarded the opportunity. But as I was presenting it to him, it had about a 13 IRR and said, Paul, this is great. I like the location in the property looks good. 

Your plan seems strong, but I’m used to seeing 18 22% IRR. I said, Hold on just one second here, let me pull up my spreadsheet, let me share my screen with you. I changed just a few numbers, the terminal cap rate, I changed my rent growth assumptions. And then I changed my expense growth assumptions as well just lowered those downloads. 

You see, a lot of times people will predict there’ll be five or 6% rent growth, but 2% expense growth and a super inflationary environment where they won’t adjust for taxes or something like that. So I made just a few tweaks in the spreadsheet. So there you go, there’s your 19% IRR. Are you ready to invest?

This is exactly what you know, I look, everybody that’s been involved in real estate in the last 24 months has been lucky beyond belief, right? This is not a normal market. Does that mean that we can’t capture it? Absolutely. Does it mean we can predict it? Absolutely not. Right.

And more importantly than that, we can assume that it’s going to continue like this. Because what that does is that puts us and our investors at risk. And the worst thing that you can do in a syndicated world is to disappoint your investors to not hit your margin, right. I mean, look, I would rather be lucky than good any day in the sense that I would rather Eclipse my returns. 

You know, last year we were excited. We were shooting for 19 and we got to 39 right 39% IRR everybody loses their mind right now. But just as easily that could have gone from a 39 to a 19 in the next six months if we hadn’t paid attention, right, so the reality is, and this is the thing that even the flip side of that is educating our investors of why, why do we underwrite this way? Why is this all we’re assuming? Why don’t we see more? And why can’t you promise me this, right? 

And so those things, and I love what you’re saying, Paul, because we’re able to bring that down and go, Okay, guys, I can get you really comfortable, or really excited. But I can’t get you really comfortable and really excited at the same time, because those intersect through reality. 

And there’s that part of reality that we can’t predict the future, we can very comfortably say, we’re going to have inflation for the next 12 months, we can very comfortably say, we’re gonna have rent growth, but to say we’re gonna have 14% or 19% rent growth like we’ve had in my market for the next 12 months? I don’t know, right? 

At some point, there comes a place where reality supplies demand rates, all of this kind of collides. And then there’s the general public’s pocketbook. Right? How much more can the populace stand? I mean, as we know, Paul, inflation guts, the middle class, absolutely destroys the lower class, it doesn’t really affect the upper class, upper middle class survive just fine. 

But you know, when you’re talking about most people that are in the apartment world, especially seasoned DS, they’re getting destroyed by inflation, because they just simply don’t have another 50 bucks for 10% rent growth on $800. Right? Or that would be about a 7% rent growth, right? But you just simply can’t get there. And so you’re having that constraint. And you’re having to be there. So I really applaud you for taking that kind of a pragmatic approach that goes, Yeah, I get it. 

I’d love to excite you, and energize this thing. But we’ve got to deal with reality, because this also goes back to another very valid point with real estate, if you’re wrong, if you even if you’re 13% have overestimated it. I’m not saying you have “Disclaimer, disclaimer, disclaimer” right. But if you did, the beautiful thing about real estate is you just extend your runway, right? You don’t have to sell it. Unless you’re in a high leverage situation. 

You haven’t underwritten properly, you haven’t. So now you look at the other guy that said, Hey, man, I underwrote this and this and this and this, and man, we’re gonna make 30%. It’s going to be wonderful. They have the opportunity that maybe not only did they not even get close to that, they’re underperforming, they’re underwater, and the asset has to be has to be sold, and then the investors are losing money, right? 

So it’s always better to look at it and look at the history and in a lot of cases in your underwriting. Paul, wouldn’t you agree, take out the last 18 months, don’t consider the last 18 months in your underwriting, go to pre COVID. With your underwriting and what was normal, then? What did the environment smell like? Dan, we had great growth we had, you know, we still had a very positive environment. 

So as you’re looking forward, Paul, and you’re seeing how your investors are sensitive to that they’ve gotten trained, you’ve done a good job, other people have done a great job. Everybody’s done a great job of getting good returns. How do you see that you’re going to be protecting your underwriting and your investors and their minds, their expectations moving forward. In your deals as you continue to do that is it just going to be the same as what you’ve done. But the expectation out there is that these are realistic.

I think if you don’t change in this business, you die and I think if you always swing for the fences, you get crushed. It’s a singles and doubles game you want to survive and surviving entails not losing your investors principle. First and foremost, people can understand a story behind why, you know, a specific asset to perform the pro forma but at the end of the day, they’re not going to understand you losing their money because that’s just bad business. 

You need to be prepared for all scenarios. And I think that starts with conservative underwriting. I know it’s kind of taboo to say that but we are underwriting today to longer term holds lower leverage because that’s what the capital markets are telling us. That can be anywhere between 55 65% LTV 10 year fixed term debt. 

I think if you’re if you’re looking at bridge high leverage, you’re kind of playing with fire right now some of those players are gonna end up dropping out of the market liquidity is next I think to kind of take a hit we know interest rate risk has been there, but liquidity risk is also a potential down the road. So with those lower leverage and that longer From the whole period, you know, we’re anticipating lower returns for the short term. 

If we get better than that, then, you know, we’ll be happy but 12-13% IRR where else are you going to find that? And if we project that, and we can sell that, we actually surveyed the investors I have in my database and kind of laid out some questions that were multiple choice, will you Would you accept these returns, etc, etc. And we were pleasantly surprised that if we could tell a story behind the asset, and we have protected the downside, people were okay with that. Because you can’t find that kind of return anywhere else, another absence right.

Now, the other thing that you got to look at to fall is inflation is eating the dollar, right? Inflation is eating your fiat currency of just about any variety. So let’s not just isolate and single out the dollar. But you know if your money’s in the bank account, according to CPI, which I think is bogus, you’re losing 7.9% of your dollar every year, right? It’s impossible to lose 7.9% your dollar when your gas doubles, right?

However, if you’re losing 7.9%, or you’re investing in real estate, and making 12, the way I counted you back to 19%. Because you hedged against loss, and went to the other side where you actually got returned. And now, numbers are the same. It’s just about taking into account the whole perspective and seeing where you’re at and what’s going on. You know, so that’s I think another very viable way to look at it is okay, CPI says we’re going down, my real estate is protecting me and going up. 

That’s right, yeah, inflation is typically good for rents, and particularly with multifamily, that’s usually outpaced inflation. You know, if wages go up, if rents go up, the way you collect, your income goes up, it offsets the negative impact of inflation. So assets that tend to rise in value or a rise in the way that they pay you during inflationary times are good. And then inflation works in another way too, if you use fixed rate debt, because if those same wages in that same income goes up, five years from now, it’s higher than it was before your fixed rate, debt payment is the same. So the debt burden is actually Brad’s easier to service that has gotten cheaper. So that’s a great thing. So

Yeah, those kids, you know, that’s another thing that a lot of people don’t understand is that you’re paying, you’re making an agreement on debt, you’re making the agreement to pay yesterday’s debt with tomorrow’s dollars, right. And in the history of the United States, we have not seen a devaluation or deflation of the money. Probably. Right? We haven’t seen where tomorrow’s dollars are worth less, or there’s less of them. Because they’re worth less, which means you got to trade more of them. Right. 

But when you look at that, you’re making an agreement that for the next 30 years, I’m going to pay you this many dollars, and we’re going to do it this way. As your rents inflate, we call it cashflow. But it means you’re receiving more dollars, you know, to that same inflationary thing you look at in a matter of six months, we cured the minimum wage argument, right, we now no longer need to worry about 775 an hour, right? We’re now at 15 bucks an hour at McDonald’s, because supply and demand took care of the issue. No, because deflation or in sorry, inflation took care of the value. 

Now the people that are getting $15 an hour, one might argue, are worse off than they would have been had they not stayed at $7.35 And I remember this conversation with my dad and my son, who’s now 25. When he was 16, he just got his first job. He was, you know, making $7.75 at Pizza Hut. He was really excited about that. We were all very, very proud of him because he got a job. You know, this was during the ‘09 crisis. I mean, you know, 43 job applications at that time to get a job, right. That’s how bad the market was. And he got this job and my dad and he started having this conversation about $7.75. Oh, Papa, you know, when you were a kid, what did you get paid? And my dad goes, “Why I got $2.65”. Right? That $2.65. 

Then I said, Wait a minute, let’s have a conversation about what you could buy with $2.65. We started talking about a gallon of gas so you could get 10 gallons of gas. $7.75 gas was let’s call it, $1. You couldn’t get 25 gallons of gas right? You couldn’t use 10 gallons, you couldn’t even have the same Levi’s sneakers as a meal, nothing was the same and so inflation has continued to eat that and like you said, Paul, the more debt you can pull on now in a responsible manner. 

You’re going to parlay that into the future because you’re going to have the ability to pay back with tomorrow’s dollars that are there’s going to be a bigger stack of them and I would I would also make the final argument here that your home this is where most people go man My house has gone up in value 100 grand, I would challenge you. There’s your three bedroom two bath now. Has it sprouted an extra bedroom? 

Does it have a third Bay on the garage? What has changed? changed, because we’re so programmed with dollar denominated thinking that we don’t realize our house didn’t do anything our greenbacks did, right, again proving your point of getting the debt to pay back for tomorrow 100%. 

So now we know where you’re at, you’re conservative in your underwriting, you’re in this for the long haul, extending your whole period is better than trying to make the quick buck flipping out trying to deal with the new and improved interest rates, right? I don’t really mean to improve. But at the same time, we’re sitting here dealing with all these functions and all these things. What is what has changed with where you’re at today versus your investment strategy of eight months ago? 

Well, I would say, just generally speaking, there’s been more competition in the marketplace, there’s more new entrants into the space, you’ve got a lot of institutional interest, you’ve got a lot of new syndicators that are coming into the space that are green and are ready to go hard. So, you know, assets are trading at high valuations still, and, you know, we’ve been on property tours, and, you know, had 20, loi submitted and just decided, you know, we’re not going to feel really good if we win this deal. 

So I think for me, what’s changed is I’m sort of branching out geographically a little bit more on my active side of my business, I formed a kind of loose joint venture partnership with a guy down in Florida. So we started reaching out to brokers and got some key principles lined up and some other partners lined up if we find the right asset to execute on and Orlando, Tampa, Jacksonville. 

So kind of looking in different markets to follow the money, really, I mean, if you think about passive investors, and where they want to invest, they’ve heard the stories and all the demographic trends that are going on the positive benefits politically, and the business climate standpoint, in places like Texas, Florida, so there’s just a lot of transaction volume, a lot of money for those markets. And I think it makes sense to be involved at some level. 

So I expanded a little bit geographically and, you know, really looking to collaborate with more people. I’ve been pretty hyper, hyper local, and focused, like I mentioned, kind of being a one man band with a few joint venture partners here and there. At this point, you know, I’m looking to kind of scale and grow bigger, and I realized that this is a team sport, and you need more than just yourself, I think I bring a lot of skills to the table. So I’m looking to kind of collaborate with others. And, you know, just go from here, but I mean, if like I said, I’m in it for the long haul, and I’m extremely patient to probably an annoying degree. 

So I’m in no rush, what I do know is that I don’t want to go back to what I was doing before in my corporate career, and I know that I need to stay in the game. So if that means sitting on the sidelines for a while, or just kind of building up, you know, the processes and the systems and the connections to actually execute when things go south in the market, potentially, and be able to capitalize on that, then that’s what I’ll do.

You know, I heard you say a lot of things that make a lot of sense. I mean, we are, you know, my main focus primarily has been in Boise, Idaho, right. And we’ve been making a lot of headlines for the last 10 years. And now we’re making the headlines for all the wrong reasons, you know, the most highly appreciated market, most overpriced market, all those kinds of things. And we’ve done that same thing. 

We’re now from Washington to Florida, in different deal markets, because deals are still there to be had for various reasons. But we know, expanding your criteria, you’ve learned a skill, right? You’ve got it mastered. And you know, Indy, right, you’ve been there for eight years, you’ve driven the streets, you can touch it, you don’t really want to taste real estate, that’s probably pretty gross. But you know, you know what you’re doing. And now to move out from that you also in doing your gig, have learned what’s important to you. So now you can look at the next guy and go, “This is a good partnership”. He’s got some skill sets that I don’t. He’s in a market I’m not, he’s able to help me in ways that make sense so that I can do these things. Right. 

So there’s a lot there that you’re doing that I totally agree with. When you’re looking at this. The other thing I heard you say is patience. You know, I hear people man, we got you know, we got our fifth deal that we underwrote, I kind of go, Oh, how’s that working out for you? You know, because, you know, a lot of times you hear I love hearing don’t love it for their sake, but love hearing a guy that had to underwrite 100 deals, right? It means that he’s conservative, it means that he has taken a really broad glimpse of the market as to what could be good and what could be bad. So very excited for what you’ve got going there. Did you have something like that? 

No. I just, you know, I think that sometimes you see on social media or in other avenues, you know, you just see a lot of people celebrating a lot of wins and a lot of acquisitions. And, you know, there’s certain people that have better deal flow that have better economies of scale or better relationships with brokers, and that’s understandable, but there’s also I think, those that are stepping on the gas, sometimes a little bit too aggressively. 

You know, bit of a choppy water environment, we’re also looking at, you know, the other thing I would add to how we’re kind of shifting is we’re looking at development, I know you’ve got a background in development. You know, when you think about the cap rate compression between A, B and C class, it might be 100 basis points, it might be even less than some markets. So when I look at that, I see that people are paying too much for future rent rolls, the yield on cost of the project is too low, there’s not enough spread between the yield on cost and the market cap to get me excited. 

And then even if you do finish the asset and execute your value added plan, you’re left with a 1967 Nice product that’s maybe got 50 years left on it, it’s going to have ongoing maintenance issues. So if you can build something and have a 100 year runway on that asset that has no obsolescence, that has great floor plans, it’s going to have a lot of demand where there’s not enough supply, then, you know, why not take that route? So I’m not there yet. I’m learning the ropes. But I’m very excited about that potential. So and,

You know, just like you said, I mean, this is a 1973 model, right? I mean, it’s got some bumps and bruises, right? I mean, I’m not going to hit the eight foot ceiling, for sure. But at the same time, you’re, you’re looking at other ways to do it. And I loved what you said, because you’re not there yet. I love it. 

When people say that, because they understand their limitations, they understand where they need to continue to grow, they understand where strategic alliances will be a benefit to them. Right. That, to me, is the voice of prudence. Right? That to me is the voice of somebody going? I see it, I do. 

But you know, we can all look at what what happened with, you know, a certain unnamed online real estate company, I won’t say who it is, but they are now dealing with massive losses because of their, the way that they handled their portfolio, they had a bunch of people that knew what they knew what they knew, but they didn’t know what they didn’t know, right.

At the end of the day, they got into a situation… They got into an area where they couldn’t sustain what their model was telling them because they didn’t know really where the ceiling was, in their experience, got out way ahead of their cash flow. And at the end of the day, they were being destroyed. They still are, thank you, I’m glad about that. Because they didn’t understand the market, they didn’t really understand what was going on. And they didn’t know how to deal with it moving forward.

So you bring up some very valid points. And I commend you for knowing where your, where your limits are, and how but but I also know because of our interview, I know that you understand how to gain that knowledge, right how to go get what you’re needing to increase your portfolio, strategic alliances, watching people do it, you know, being with mentor groups, all of those kinds of things. 

But, Paul, this has been a really great interview, and I really appreciate your depth of knowledge in your area. I mean, you man, when you dive in, you really dive in. And that is something that that experience will buy you or books will teach you. But without discipline, you’ll never keep it and you’ll never be able to protect your investors if you’re not disciplined, because we’ve all heard the same thing. Right? 

None of this is new news. Right? It’s just about how you’re applying it to protect your investors, because you’re right, you are their custodian. And they are I mean, I you know, this for me, when people invest with me, it’s a humbling experience. And I’m sure you’re the same way, because people are giving you their blood, sweat and tears their 80 hours a week at nights on the road, they’re giving you that money, you better take care of it. And it sounds like you’re really doing a great job. And I really appreciate all of your insight on helping us understand that there is responsibility with that.

For sure, I would agree with everything you said there. It’s a fiduciary responsibility, and it shouldn’t be taken lightly. So I’d rather risk my own capital than others.

There’s a lot to be said for that. It’s sure a lot easier to sleep at night, knowing that you got a good you gotta deal going south. But nobody’s responsible for that. But you and nobody’s going to deal with it. I have to clean up after Yeah, definitely for sure. So Paul, let’s talk about as we close up, hear this episode. Where can people find you in the great world of the internet?

Two places are probably best, first my website. So I’m there and posting regular blogs and see my projects and everything going on there. The other is LinkedIn. I’m very active on LinkedIn so you can reach me there and that’s probably the best response.

Well, guys, as you know, we’re gonna post those two links in the show notes here. You’re gonna have those. And always guys like and subscribe to our podcast here. Give us a like on Facebook. Follow us on Facebook. You’re gonna see more incredible guests just like Paul and reach out to us at Shannon 

We’d love to give you a free info guide on how you too can be involved in syndications you can learn from people like Paul on how they’re doing it and why they’re doing it guys once again thank you for tuning in to the Real Estate Rundown. Paul, thanks for stopping by guys, we’ll talk to you next time.

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About Paul Shannon:

Since becoming an entrepreneur in 2019, Paul has been active in acquiring over 150 units, many of those deeply distressed properties. He has experience in people management, negotiation and acquisition, raising capital, project management, asset management, property management, and is also a licensed Indiana Realtor.

On a recent project, he repositioned a 40-unit distressed apartment, cashing out 100% of the initial equity contribution at refinance, to generate infinite cash-on-cash returns moving forward. These experiences have enabled him to create passive income, giving him and his family security, flexibility, and freedom. Additionally, he’s a limited partner in over 1,400 multifamily units across the country, as well as a number of other alternative assets.
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