How to Vet Real Estate Operators Before Investing Passively

Allen Lomax (00:00)

Well, thank you for bringing that point up. It’s an excellent point. And it speaks really more to operators than it really does to markets. Like you had mentioned that period from 2015 to 2020-22 was, I guess a lot of people called it the golden year in multifamily. It seemed like you could do nothing wrong and you were going to make profits.

And then, 2000 and, uh, 22, 23, the last part of 22 and into 23 interest rates, uh, skyrocketed and you really separated, uh, the wheat from the shaft, uh, so to speak. Operators who knew what they were doing throughout, uh, that marvelous, uh, run up were underwriting, uh, like

All operators should in any cycle and that is they were underwriting to the to the bottom side of it.

Dylan Silver (02:40)

Hey folks, welcome back to the show. Today we’re joined by Dr. Allen Lomax, founder of Steed Talker Capital, where he helps physicians, attorneys, executives, and other high income professionals build passive wealth through alternative investments and high yield appreciating assets. A former psychology professor turned investor and educator, he specializes in helping professionals transition from earned income to long-term financial independence. Dr. Lomax, thanks for joining us today.

Allen Lomax (03:10)

Well, it’s a delight to be with you, Dylan. So grateful for the invitation to be with you and your audience today.

Dylan Silver (03:18)

Now, working with physicians, attorneys, executives, what’s maybe the biggest mistake you see them commonly make when trying to do this on their own?

Allen Lomax (03:31)

Well, the biggest gap that I see is that in almost every conversation I have is that we have a whole class of really smart, really credentialed people with really high incomes who get ⁓ phenomenally good at the work that they do, but they’re working for money and they just haven’t learned how to make their money work for them. And that’s really

two very different disciplines and they aren’t at all related. So working for money, you can do brilliantly wonderful things and you can do it for your whole entire career and still wake up one morning realizing you’ve never had a single dollar that didn’t require your attention to exist. And the cost of that is not financial. It is the cost of time. It’s the cost of lifestyle. It’s the cost really.

of making your most meaningful impact. So those three freedoms that money working for you is actually supposed to produce. that’s really the whole thesis. That’s everything else I do is really downstream from that.

Dylan Silver (04:49)

Now, folks who are attorneys, physicians, I’m imagining that in many cases, they’re looking for more conservative returns. They don’t want as much risk. Is that generally true?

Allen Lomax (05:51)

Well, they certainly do not want to put at risk ⁓ the capital that they do have. And most often they feel very safe in public markets because that’s where the professional advisors are telling them to put their money and they have it in ⁓ 401ks or they have it directly in stocks, bonds, mutual funds and certain things like that.

And there’s nothing wrong with those, that isn’t really, I mean, they call it diversified because they’re diversifying across that spectrum, but that’s really not what we consider to be diversified. That should be a portion of a portfolio. But the wealthy of wealthiest people are not putting the majority of their capital in those locations. And yet most professionals.

That’s where they have 90 to 95 % of their capital. But the wealthy of the wealthiest are putting their capital into private equities, private placements, such as ⁓ real estate, oil and gas, strategic metals, ⁓ and various other private ⁓ equities.

Dylan Silver (07:11)

Now, the idea of diversifying across multiple different industries and even segments within that space is now even more common, I would say, for real estate investors. I’ve seen people going from single family to multi-family and multi-family to land and RV parks, et cetera. Right now, as someone who is diversifying for not just yourself but for so many other people,

Do you have a favorite asset class within the real estate space that you may be particularly bullish on?

Allen Lomax (07:51)

Not particularly because even in that class, we diversify our funds across multifamily, ⁓ self-storage, medical office, high-flex ⁓ industrial, triple net lease. ⁓ So, I don’t really have a particular real estate class. I think that…

In all portfolios, you want to diversify across as many segments as you can because ⁓ the real estate markets don’t always ⁓ correlate with one another. Family, ⁓ medical offices, as opposed ⁓ to ⁓ retail, they’re two very different things and they’re going to go through two very different ⁓ cycles.

And when you’re diversified across that, you’re protecting yourself against those ⁓ market swings that are going to happen with each and every ⁓ segment. In terms of really stability though, ⁓ multifamily has always stood the test of times. It’s gone through ⁓ recessionary periods and even in 2008 real estate, comparatively speaking, ⁓ a loss about

2.5 to 5 % of its value through 2008 to 2010. Compare that to single-family homes that nationwide lost about 35 to 50 % of their value. Same is true of self-storage. Did very well through the recessionary periods. Retail took a big hit, not only through 2008, but also through

the COVID period, retail took a big hit. Office took a big hit in both of those. ⁓ But ⁓ with diversification, ⁓ you can weather those recessionary storms.

Dylan Silver (10:35)

Now I’ve seen simply from hosting this show that there has been a number of syndicators, quite a large number that seem to come into the multifamily space around maybe 2020, 2021, where they had seen the success over the previous six years where it almost seemed like you could buy a deal, maybe even overpaying for it and it would still work out maybe even in less than the predicted timeframe. But then when you had this perfect storm of events happening from

increased interest rates to increased vacancies to increase material costs and so forth, a lot of multifamily syndicators specifically in the Sun Belt got burnt. Do you think for folks who are syndicators or for thinking about becoming syndicators in a multifamily space, they should be underwriting their deals maybe more cautiously based off the last five or six years? ⁓ Or is it a simple matter of maybe

extending the time horizons from three to five years to maybe seven or 10.

Allen Lomax (11:38)

Well, thank you for bringing that point up. It’s an excellent point. And it speaks really more to operators than it really does to markets. Like you had mentioned that period from 2015 to 2020-22 was, I guess a lot of people called it the golden year in multifamily. It seemed like you could do nothing wrong and you were going to make profits.

And then, 2000 and, uh, 22, 23, the last part of 22 and into 23 interest rates, uh, skyrocketed and you really separated, uh, the wheat from the shaft, uh, so to speak. Operators who knew what they were doing throughout, uh, that marvelous, uh, run up were underwriting, uh, like

All operators should in any cycle and that is they were underwriting to the to the bottom side of it.

But all of those operators who are hurting now were underwriting to the upside expecting that growth to always continue. But the operators who are coming through that and the operators who are now in a position to go out there and purchase.

⁓ these, ⁓ distress properties were the, were the operators who underwrote, ⁓ for the downside rather than the upside. They didn’t hope for, ⁓ a continuation of, cap rate, ⁓ suppression. They, ⁓ they expected cap rates to stay high. They expected, ⁓ the free money to go away. They were.

underwriting for this downturn. That’s what you want to look for are operators that are experienced operators that know how to come through these downturn cycles because they’re always going to be there.

Dylan Silver (13:53)

Yeah, no question. And you mentioned underwriting for really the best case scenario and looking back, you know, it’s clear what happened when they were doing this. think they were looking back over the previous six years and thinking, well, that’s just going to continue. Are there any trends that you’re seeing right now, whether it’s in the multifamily space or another space where you think, well, this has been going actually fairly well over the last, you know, some odd years, we should be cautious before thinking that this would continue.

Allen Lomax (14:10)

you

Well, I would apply that to any ⁓ alternative investment is to just keep your principles in place and always underwrite for the worst scenario, not the best scenario. ⁓ And if you underwrite for the worst and things turn out for the best, ⁓ you’ve just prepared yourself for the good times ⁓ and can celebrate those good times. And if the bad times come,

you can ⁓ survive those and make it to live another day.

Dylan Silver (15:40)

Now, I’ve spoken with so many people who are focused on value add in so many segments of the real estate space. But one of the things that comes to mind, especially in multifamily, but in some other segments as well, is that you can value add beyond what the market warrants. And so if every apartment is a luxury, class A style apartment with a pool and two gyms, where’s the affordable housing? And so at what point

does it maybe become risky for people to be so focused on value add instead of maybe affordability?

Allen Lomax (16:20)

Well, that is the whole crux of what we’ve been talking about here. ⁓ Value add ⁓ is going to depend upon ⁓ market conditions. And if you haven’t underwritten for the downside, you’re going to be in trouble when that doesn’t come about. But we have seen over the last several years, there has been a lot of

It is interesting, ⁓ units that have been added through new construction have been the class A. there’s, I mean, there’s reasons for that. Economically, it just doesn’t pay a developer to develop for working class or B class properties, generally speaking. ⁓ The math just doesn’t work. And so there’s been ⁓

really an overdevelopment of class A properties and ⁓ that is going to have an effect upon the entire sector. It’s going to depress ⁓ rents across the sector because the A class properties are going to have to drop the rents. They’re going to have to make concessions and that is then going to have to go through the sector and the working class, the B class, the C class,

⁓ operators are also going to have to adjust their rents and ⁓ make ⁓ concessions. ⁓ That trend has ⁓ essentially, where we’re coming to the end of that trend, ⁓ new permits for ⁓ multifamily development have declined substantially over this year. And there’s very few ⁓ coming on.

⁓ within the next year here. So that is going to end. And by the way, we still have, even with the addition of the units that have been added over the last two to three ⁓ years, we still have a housing shortage. We still do not have ⁓ sufficient housing for the number of families that are coming online, for the number of individuals that are

going into the workplace, we still have a shortage there. But even with that, with the addition of the Class A additions at the top, that is going to be suppressing rental prices across the board.

Dylan Silver (19:00)

It’s a tough situation really, because as you mentioned, it’s very difficult to develop for truly affordable housing unless it’s government subsidized. And that’s going to be a separate niche entirely. And so the only way that people, as far as I can tell, are developing is if they’re developing these luxury units, these luxury projects. And so that’s creating

Allen Lomax (19:10)

Hmm.

Hmm.

Dylan Silver (19:25)

and the market that I’m in and the greater Austin area, you have an abundance of class A housing where there’s actually vacancies, but there’s still a general insufficient housing. There’s a housing shortage, especially in the affordable housing space. And so I don’t necessarily know what the path forward there is, but it does seem to be that that divide is getting steeper.

Allen Lomax (19:31)

Mm-mm.

night.

Yeah, absolutely. mean, that’s our whole financial economy is becoming more and more imbalanced. I don’t know where that’s going to go. It generally leads to revolution. So we’ll see. We’ll see where it ends up here.

Dylan Silver (20:07)

We will see. ⁓

We are coming up on time here, Dr. Lomax. Any new projects that you’re working on and then also anything that you’d like to mention directly to our audience.

Allen Lomax (20:19)

Well, the, mean, we have the ongoing project projects. have our investment side of the coin, which is our state talker capital. And that is where we are placing capital. We currently have placed just within the last six months, about two and a half million before the end of the year. We’re planning to place, we’re planning to 10 X that up to about 12 million.

⁓ We’re doing it in the sectors across the board. We’ve got really essentially four buckets. We’ve got the real estate, ⁓ oil and gas, strategic metals, and well-vetted private equities. We’re currently looking at a car wash ⁓ operation. And then the other side of the coin is our educational side and our podcast, Streams to Impact, and our coaching program.

which is around a 10 step framework where we work with high net worth, ⁓ W2’s and entrepreneurs like, ⁓ successful real estate investors who want to stop exchanging time for money and start putting their money to work. ⁓ we have, ⁓ the, we put those all together in, ⁓ investment options and an educational.

⁓ program. So they can find that at ⁓ @steedtalker.com and ⁓ there ⁓ they can ⁓ just schedule ⁓ and and a conversation with me a 15 minute conversation and we’ll see if what we have is a good fit and we base that upon their tax needs their investment needs and we base it upon

their personal values. a good portion of those initial conversations essentially ⁓ don’t work out ⁓ for them coming into our program, and that’s okay. We have referrals to other programs that are appropriate for other people. So it’s always good to connect. So if you’d like to connect, have a personal conversation with me.

That’s at our website, Steed Like the Horse and talker like I’m doing now dot com, steedtalker dot com.

Dylan Silver (22:53)

Dr. Lomax, thank you for joining us today. Thanks for your time.