Brian Burke, based in Santa Rosa, California, is a real estate investor and the President and CEO of Praxis Capital, which is a vertically integrated private equity investment firm. He established this firm back in 2001. He began his career in 1989, buying his first rental property which led him into the world of multi-family then commercial investing.
Brian is a successful entrepreneur and syndicator – today he shares how he started his real estate career and giving back to his community after the wildfire in California. He also discusses his investing strategy, where he’s looking to invest, what to expect from an investment and his future plans.
Some Of The Highlights:
- His First Real Estate Investment and His Business Today
- His Work Strategy and Advice For a ‘Rainy Day’ In Business
- Brian’s Retirement Plan
- What is the preferred return?
Connect with Brian:
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Intro: Hey guys, this is Eden and today is a very special episode because we are going to host Brian Burke, who is one of the biggest investors on this show to date. Brian had completed half a billion in real estate purchases this year alone after a long and beautiful career that lasted for 30 years and still counting. When listening to this episode, I was personally amazed by how humble Brian is and the sheer perspectives and mindset real estate investors to have despite the fact that they never met before. Also, today we would like to ask you guys for a favor. If you love our content and feel like you’re learning from this podcast, please go on iTunes and give us a five-star review. This helps the podcast to rank higher and the best, part if you give us five-star review, shoot us an email at Hello@donandeden.com with the content of the review and your phone number, and you’ll get scheduled for 30 minutes phone call with me and Don where you can talk about real estate and get answers for the questions you always had. So, without further ado, let’s get started.
Lady: Welcome to the commercial real estate investing podcast with Don and Eden where we cover all aspects of real estate investing with special attention to off-market strategies.
Don: Hey Brian, welcome to the show.
Brian: Thanks for having me on Don.
Don: How’s the weather in Santa Rosa, California?
Brian: Oh, it’s a beautiful day today, almost 80 degrees this afternoon and in November, which is a little unusual, but I’ll take it.
Don: I like to skate. It’s like my hobby. So, I went to L.A., I went to Venice. I took a month off, just wanted to skate, took my skates with me and went there. Some people said it’s the best place for anything that has wheels. And so, when I got there, that was late May and it was raining. It was like rain in L.A. and people told me it’s very rare. That never happens. And it was kind of cold. And so, one of my friends that lives in California said that the weather over there was pretty unusual this year. Would you agree?
Brian: Yeah, it was unusual. A lot of rain this spring and a lot of heat this fall. So, it’s been a little bit unusual. But I would say the best weather in California is probably September and October. Those are usually some of the nicest months and people think that summer is probably the nicest, but it’s not always the case.
Don: Yeah not always the case. Is it still burning over there? I know you guys had the wildfires.
Brian: There’s a large fire. The largest fire in our country’s history just got fully contained yesterday. And that was about a couple miles up the road from our office. So, we were under mandatory evacuation last week. And this week, we’re back in action here in the office.
Don: As sad it is to say that, I’m sure that these wildfires pose some great opportunities for real estate investors. Am I right?
Brian: Well, once in a while they do and we had a fire in our city two years ago that wiped out 5000 homes in our city. We raised a fund last year to rebuild homes and our city and we raised about $8 million and we’ve been building single-family homes on burned-out home sites where the owners decided not to rebuild and elected instead to sell or move to a different area, put their lots up for sale and we’re putting spec homes on those lots and got a couple of dozen homes under construction right now. So certainly it does breed some opportunity.
Don: Not only opportunity, in this case, also give back to the community that is your city. Eventually, you want people to live in it and feel happy about it. Because that’s home for you. Right?
Brian: Yeah, people want the city to be put back the way it was. And we’re doing our part to help do that and at the same time provide much-needed housing. When you lose 5000 homes in a city of 250,000 people it makes a real impact on housing demand, and there’s a need for housing here. And we’re helping to provide that which is pretty exciting.
Don: That’s beautiful. So, I know your real estate career is a very long one. You’re one of the most successful entrepreneurs and syndicators on the show to date. I know you’ve amassed a portfolio of 250 to 300 million if my numbers are right and you’ve completed your half a billion in purchases of properties this year, am I right?
Brian: Yeah. 2019 is a banner year for us. We crossed the half a billion-dollar mark and real estate purchase, which is an incredible accomplishment for me to even say that it is weird. I never imagined that in my lifetime I would do something like that. But we managed to pull it off. Now we’ve got a portfolio consisting mostly of multifamily properties. Our business focuses primarily a hundred units and up multifamily all across the US and we’ve got about 3000 units that we’ve done. Our portfolio now is about 250-300 million of value. We still do some single-family here and there. Of course, our fund where we’re building homes in our city, so we’re kind of a multidisciplinary real estate firm that started in single-family migrated to multifamily, but once you have developed roots and single-family, it’s hard to lose those.
Don: Yes. I started single families too, and let’s be honest, it’s fun. Even when you’re doing commercial, it’s still fun to do some projects there as well. So, let’s talk about how it all started. When did you make your first steps in real estate? What was it back then? Because I know you’ve been doing real estate for 30 years, right?
Brian: Yeah, my first real estate investment was a little over 30 years ago. In 1989 was my first real estate investment.
Don: Just a side note. I was born in 1989.
Brian: You were born? Yes. So, when you were busy being born, I was busy trying to find a house to buy and I made my first real estate investment. I didn’t even own my own home but I bought a rental and fixed it up a little bit and a couple of years later sold that and I started doing some house flips, one house at a time and I was still working at the time and this enabled me to make a living on my job and then invest in real estate to build my future.
Don: What a smart decision! So, one thing led to another and now you are in control of over 500 million worth of property in multifamily which is amazing. So, tell us a little bit about the first deal in multifamily. When was the first time you decided to buy a commercial property?
Brian: My first multifamily was about 16 or 17 years ago. And it was here in California, it was a 16 unit apartment building. And what I was doing is I trying to figure out how to invest in commercial real estate, but I just didn’t understand it very well. I didn’t understand what the numbers meant or how to value it or how to evaluate it. Two rental houses that I accumulated through my house flipping business and flip one, keep one flip one, keep one. So, I had a couple of rentals I wanted to sell and I wanted to do a 1031 exchange and exchange up into an apartment building. It just seemed like it was an interesting way to grow the business and have more economies of scale and cash flow and all that.
So, I reached out to the real estate agent that was helping me sell my flips because he was a CCIM which is a certified commercial broker. And I said, “Hey, I don’t understand any of this and will you teach me?” and he did. He taught me how to read an income statement and what to look for and all kinds of different things. And then not long after that, he’s told me my first apartment building. I did a 1031 exchange and never looked back.
Don: How was the first investment? Was it a good investment, a bad investment?
Brian: Funny story is I just sold that property like two years ago. So, I kept it for a long time and I was able to do a 1031 exchange into an oceanfront condo in Hawaii where I rent that out and, maybe one day I’ll even be able to move into it. Who knows?
Don: We all have dreams. Being busy in real estate, you never stopped working. So, I know we talked a little bit before the show started. I asked you about the ways that you make money when you own such a massive portfolio, but most of it you syndicated. So, most of it, you had to raise money. And you had to structure a deal in which your investors are being paid first because I know you care about your investors. So how do you make money? How much money do you make on these types of deals that you’re acquiring? What are your goals for the future as far as your financials?
Brian: I started just entirely doing things with many of the resources that I could collect together. My first single-family investment was done with seller financing and then after that, I was like cash advance credit cards and getting signature lines of credit and all crazy kinds of things. I always tried to learn by putting my own money at risk. Then once I figured out how to do it right, I would go to investors and have investors invest. It took me about 12 years to start raising money from investors. And I did it for my single-family business.
First, I raised a blind pool fund and I split the profits 50-50 with my investors while we were flipping homes, and then when we move into multifamily, we’re seeing a lot of money from investors. If you’re going to buy half a billion dollars in real estate, it takes a lot of capital to do that. We were fortunate that a lot of investors were interested in partnering with us and putting up capital. So generally, the way we work it is the investors provide most of the capital for any multifamily acquisitions that we acquire. And in exchange, the investors get all of the profits until they’ve received a certain rate of return. Turn, once they’ve received that specific rate of return, then we start splitting in the profits and our splits usually start around 30% of the profits as the return goes up, then our split can get a little bit higher than that.
But generally, our investors always get the majority of the profits, and they always get paid first. So, this isn’t a big cash flow business for us. I know a lot of syndicators out there, who’ll just have a profit split day one where every dollar that comes in some goes to the investors and some go to the sponsor. Ours doesn’t work that way, the investors get a preferred return where they get all of the cash flow until they’ve received a threshold return and then we start to share. So, we keep the lights on here by doing house flips and having other multiple streams of income. For example, us building homes here in our community and the fire damage lots is another source of income and we have a lending company which is another source of income.
Occasionally we sell our multifamily properties and that’s when we get paid. We get a payday, not a paycheck. It’s not quite as lucrative as many people would think, but eventually, you get there and profit potential is enormous but you never realized that until you start performing for your investors.
Don: Okay, so let’s talk about the way that you structure your deals with your investors. So, they’re getting a preferred return. I guess it’s 8% right that’s the classic return that they get?
Brian: Yeah, ours is 8% general.
Don: 8% and then that’s going to be a preferred return which means they get that right away as they invested the funds or a little bit after right it could be two or three months after, right?
Brian: It doesn’t mean anything, they may never receive it. If the dealer loses money and never makes money from day one, they never see a dime. But the way of preferred return works is that the investors get 100% of the cash flow until they’ve reached that threshold return and that’s a cumulative return. So, if you invest today, in the first year, the deal throws off no cash flow, you get no cash flow. But if the second year it throws off 4% you get 4%. In the third year, throws off 8% you get 8%. In the fourth year it throws off 12%, you get all 12 because we still owe you 4% from year two and 8% from year one. So, if for two more years after that it still produces 12%, those two years, you’re still getting 12% that makes up the 8% from the first year. And then after that, dropped to 8%, we’d start splitting the difference of what goes over 8%.
So, a preferred return is often confused with a dividend and it’s they’re not the same. A preferred return just means that you’re first in line for all cash flow until you receive your hurdle rate. It doesn’t mean that you’re going to get distributions right away equal to the preferred return. It just depends on what the property is throwing off cash flow wise.
Don: Yes, thank you for clarifying that. Now, I know the investors are putting all the down payment and the capital expenses for repairing the properties and improving the properties. And so, they also get a share of the profits of the entire purchase. So, you’re offering your investor 70% 30%?
Brian: First, they get 100% until you reach that 8%. So, if they haven’t been distributed the full 8% through cash flow during the ownership period, then that’s where you catch it up. As you take your sales proceeds, you catch up on your preferred return first. After your preferred return is fully caught up, then any sales proceeds remaining after that are split according to whatever the waterfall is. And if it’s 70-30, 70% goes to the investor 30% goes to the sponsor. In our case, we have a couple of different hurdle thresholds where it’s 70-30, typically to a 12. And then after a 12% return, anything that goes above a 12% return is then split 60-40. And anything that goes above a 15% return if you actually can ever get above a 15% return, if we do then whatever a little amount goes over would be split 50-50. That’s the way at least three quarters to 80% of our deals are structured that way and of course, every once in a while there are slight variations on that theme.
Don: So, at the end of the entire purchase in the cycle of purchasing a property, renovating the property, stabilizing it, and then you refinancing the properties or you’re selling them?
Brian: If we’re going to hold over three years we like to refinance and return capital to investors. But if we can sell, we will. I always like to say that we’re a buy and watch investor, we don’t necessarily buy to flip and we don’t necessarily buy to hold. What we do is we buy the asset we watch, we improve the asset, and we watch the market for the most optimal exit point. And generally speaking, the most optimal time to exit is going to be right around year two and a half, two year three and a half, right around that point after you’ve fixed up units and fixed up the outside, you’ve increased the income, you’ve pumped the value.
That’s the inflection point where now the business plan would switch from things we physically do to just simply relying on the market for anything additional after that point. And when we reached that inflection point, that’s usually when we like to sell. But if the market isn’t cooperating and we don’t think it’s the right time to sell then we won’t sell. We can refinance, return some capital investors, sit on it for another year or two or three until the market is ripe for a sale, and then we could sell at that point.
Don: What would you say you’re typically improving the property like as far as the value goes? So, let’s say you purchase a property for 10 million. After all the renovations and after improving the property, what would you say, percentage-wise, is the new value that you guys can bring the property to?
Brian: On stabilization, we’re looking for at least a 20% lift that includes, over and above the renovation. So, if we bought a property for 10 million, and then we put 2 million into it, or 12, then you’d be looking for somewhere around a $2.4 million increase. So, you’d be like 14.5, maybe 15 million to exit. So, we’re looking for the kind of like that 20% or more lift within that stabilize period.
Don: Of course, we got 2.4 million in profit, 30% of that is going to go to the sponsor or is considered profit for the sponsor after the deal is completed, right?
Brian: First, you have to catch up with your 8% preferred return. So, let’s say you distributed no cash flow during that period. For example, let’s say it was a real deep value add and wasn’t throwing off any cash. Now the first thing you’d have to do is give 100% of it to your investors until they got an 8% return. If it was three years’ worth of time, then that’s 8% times three. That goes off first, and then after that, whatever cash is left is what goes into the split here.
Don: So, assuming you were cash flowing, and you managed to pay the preferred return during the entire process, and they always got the 8%, right? Hypothetically speaking, so you would be making 30%.
Brian: That’s right
Don: Of the amount that you generated, which is 2.4 million in case of buying a property for around 10 million.
Brian: And yeah, so you’re looking at maybe $750,000. Could be your potential payday for the value created. That’s right.
Don: Yeah. So, it’s just a matter of being able to get into a few deals like that every year, and then the profit as a sponsor, right as an indicator, the product It is down the line, a few years down the road.
Brian: Yeah, that’s exactly it. Like I said investors want to see their sponsor is getting a payday, not a paycheck. If you perform for them, then you do well. And if you don’t perform for them, then you don’t do so well. So certainly assuming you did your job right, the profit potential is pretty substantial.
Don: But, something Robert Kiyosaki changed my life twice. Once was when he wrote ‘Rich Dad, Poor Dad.’ We all did read this book and got influenced by it. And if you didn’t, then you should, because it’s like I would consider that the Bible for real estate investing and investing in general. The second time he changed my life was actually when he wrote his book ‘Fake,’ which he talks about how money is not real and how money is a depreciating asset and why you should never have it, why you should never hold any money. And that’s so true when you are trying to get wealthy and I think it’s something you understand once you’ve made some money in your life because you realize that it’s not real. But the things that money can buy, it just pays the bills. But if you try to get rich, then the only way to do that is to equity, which is what you’re doing right?
Brian: That’s exactly right.
Don: I think once this light bulb goes off and you get that principle, then you’re okay with putting all the work and assembling a deal and improving the deal and stabilizing these properties that you’re buying, just so you can get wealthier down the road. Because in theory, you are already wealthier because you have equity in the property. So, it doesn’t matter.
Brian: Yeah, you’ve got the equity and assuming that the market doesn’t turn against you and take the equity back from you, that’s happened before too. You saw what happened in 2005 through 2007. Equity is fleeting, so it’s 100% true, everything you just said. But there is something to be said for keeping some cash for a rainy day and always having reserves and kind of living a little bit of a low leverage lifestyle. The people with the most leverage were the ones that got hurt the most. And it’s funny when you live through an economic downturn like I have and managed to survive it, you see the risk that leverage ads and so you have to strike a good balance and you want equity and you want to use debt smartly to help improve your position.
But at the same time, you don’t want to over-leverage and you want to keep a safety net. You get it, you guys have built your business completely with equity without debt here so far and seeing what that’s enabled you to do. And now you can use debt smartly, to help grow your portfolio. And I think everybody needs to watch that as an example of how to do it the right way, and the safe way.
Don: Yeah, I think the main reason why we were able to pull this off was that we were making money in two streams, right. So, one stream was our business, our wholesale business, which created nice paychecks and nice paydays the way you call it before. And it’s an accurate way to call it because when you make paydays, then you’re able to buy properties and create wealth. And so that was the second way that we’ve created the portfolio that we own right now, through equity. The equity is the transactions that we made. We never live a lavish lifestyle. And it’s different than most people here, Miami because, I don’t know if you’ve been here but if you drive in the streets here, then you’re going to see a Ferrari or a Lambo everyday second turn. And that’s a lifestyle in Miami.
Being a successful investor here in South Florida, we were able to resist that temptation, to invest the money where it should be parked, which is, in my opinion, real estate and stocks and property and equity. There’s a beautiful saying that affected me tremendously, “Rich people are busy making money while poor people are busy showing off money that they don’t have.”
Brian: Right. Yeah, you could certainly see a lot of evidence of that around, that’s for sure.
Don: Definitely. And especially today with social media, everybody’s trying to show off, everybody’s trying to faking it till they’re making it. You’re not going to make it, you’re going to blow your first 10K on a Rolex. You should be blowing it on education. That’s not even blowing it, that’s investing and that’s the difference, right? So that’s what I think like an investor as I’m growing. Of course, I still have a lot to learn and I interview people like you, people that have made it bigger than me, the people that come to the show they have the same perspectives and the same lifestyle as well.
Brian: It’s just a matter of prioritizing and realizing that the first thing you’ve got to do is invest for your future. And it’s like I spent almost every dime I had investing in more real estate and more real estate. And so, it’s enabled me to accumulate a fairly large portfolio of rental homes just for my own, basically, my retirement plan. I don’t get any cash flow off of them because I had them all financed on 15-year loans. So that way, they’ll be completely paid off when I’m ready to step back and slow down. And it’s a sacrifice now because if the property needs to be repaired, I’m probably pulling that repair out of my pocket and kind of negative cash flow, but I look at it as like a deposit into that savings account, right? And then eventually I’m going to have 40 or some rental units that will be completely paid for and cash flowing for me with no debt and right at the time, I would need it the most. So, it’s sacrifice now, but it’s a payoff later.
Don: Definitely. So, let’s talk about the future that a bit since we’re already talking about it. What would your thoughts on the multi-family market right now and where it’s going because I know it’s a little bit overheated, a lot of people want to buy multifamily? And I know people buying properties for five and a half cap rate, which is pretty expensive in my opinion. What do you think about the market and where it’s going?
Brian: Yeah, you’re right, the cap rates are low. And we’re buying stuff at five and a half and six caps too. So, I get it, it’s where the market is right now. And certainly, real estate is desirable, but it’s desirable for a reason. And then, the reason is supported by fundamentals. And that’s why pricing is so high right now. And one of the most common questions I get is, what inning are we in and everybody wants me to say that we’re in the eighth or ninth inning and this is all going to change soon there’s going to be a big downturn, you’re going to be able to come in and scoop up properties at a big discount. I just don’t believe any of that’s about to happen, and doesn’t matter what anymore because anybody knows that a game can go into overtime and a game can be rained out early, and can’t just say that every game nine innings.
So, we’re not at the bottom of the cycle. And if we are at the top, what does the top look like? I think that a top when we reach one if we haven’t already, it just looks like a plateau in pricing where we take a pause and the economy catches up to where we are and valuations are still fully supported with incomes right now, even where they stand today. So, I don’t think there’s going to be a big downturn or a big buying opportunity anytime soon like some people are holding off for. When that does happen, maybe prices have gone up another 20% then they fall 10%. And if they would have got in today, they would have made 10%. But instead, they’re going to buy them and gain nothing. So, we’re still buying and I think one of my defense mechanisms is to buy in strong markets that have population growth, job growth, and income growth and that gives me a hedge against the downside. I think it’s important to do that. It’s tough out there. We have to look at about a thousand deals to buy one.
Don: It looks like a shiny market. Everything’s growing. The population is growing. The jobs are growing and so yeah, everybody would probably want to buy it there. But we’re already talking about that, what would you say that market is? Where are you looking right now for properties?
Brian: We’re looking in Phoenix, Arizona, Las Vegas, Nevada, Atlanta, Georgia, northern and central Florida, specifically Tampa, Orlando, North Carolina, such as the Research Triangle market, Charlotte, a little bit here and there of Texas. But I think Texas is way overbought. So, we’re kind of scaling back in Texas. We still own there, but we’re net sellers in Texas. I love to find something in Nashville, but there’s very little product coming out of that area. So primarily, I think, Arizona and Nevada, Georgia and Florida are primary markets.
Don: So, you’re looking at a lot of markets, and how do you analyze all the deals that are coming your way? I guess you got to have some help, right?
Brian: Yeah, we’ve got a fairly robust team here. I’ve got two other guys on the acquisition side and one analyst. So, we’ve, every time a new opportunity comes to us, my chief investment officer will do a quick prescreen. If it passes a certain series of tests, it goes to our analysts to build a financial model. And then it goes back to our chief investment officer or our CFO who is like a co-Chief Investment Officer. And then they review the deal and tour it and talk to the brokers and run the comps and tour the comps and do all those other tasks. Our businesses grown pretty substantially, we’re vertically integrated. So, we have our own management company and we manage our assets, which means we have employees on the ground, in all the areas where we operate.
So for example, we toured a couple of assets the other day, and it just turns out that we had our manager go with our acquisitions guy and manager knows the manager of one of the properties because they used to work together at one of our properties actually, and so, we have kind of a little bit of good rapport there and can learn more about the property because those relationships. So, we’ve well ingrained in the markets that we’re in, we have people on the ground and the markets that we’re in, and we have full control over the whole process. So I’m lucky that between me and my CIO, my CFO and the CEO of my property management company, between the four of us, we have 100,000 units of multifamily experience going back as long as 40 years and it gives us a good leg up on being able to stay on top of the markets in the assets.
Don: That’s not something you can easily find as an investor or a passive investor who’s looking to invest with a sponsor. I mean, your team sounds very professional and experienced and you guys are exploring many markets and have years of experience. So, if I was looking to invest as a limited partner, I would give you guys a call. And speaking of which, if anybody wants to connect with you and get to know a little bit more about what you’re doing and your projects and your future deals, what would be the best way to do that
Brian: Probably the best way to reach us is through our website. Which is PRAXCAP.COM or a company’s Praxis Capital and our website is P R A X C A P. C O M and on there, there are contact forms and you can fill out and our senior vice president and investor relations will set up phone calls. And we’ll get to know you and establish your relationship before we start talking about deals. That’s probably the best way. You can also find me on biggerpockets.com which is a real estate forum website where people ask questions and get answers about all kinds of real estate topics. I’m pretty active there and love to answer people’s questions on that website when they post in the forum. So those are probably the best two ways.
Don: All right, Brian, awesome. Thank you so much for that. And thank you so much for the insights that you gave us today. And of course, most importantly, time is the most valuable asset and therefore I want to thank you for investing the time to come to the show today. We appreciate it. I hope you’re going to have a great day.
Brian: Thanks, Don. I appreciate you having me on the show. I had a great time and humbled and appreciative to be a part of it. Thank you for having me on.
Don: You’re welcome. Thank you very much, Brian.
Brian: Sure thing.
Lady: Thanks for listening to the real estate investing podcast with Don and Eden. Stay tuned for more episodes. Till next time!