Cash Flow Champs Real Estate Podcast

Gary Lipsky, President and Founder of Break of Day Capital, has been a lifelong entrepreneur. His company has done 1/4 Billion in real estate transactions. Break of Day Capital focuses on value-add multifamily properties typically in Arizona.
Gary is the author of the Amazon best-selling book Best In Class, the host of the Real Estate Asset Management Podcast, and co-founder of the Asset Management Summit.

What You’re Going to Learn:

Gary’s philosophy and methodology for Asset Management
The market direction and financial uncertainty
Gary’s thoughts on exploring new markets outside of Phoenix and Tucson.
The one factor that has kept investors coming back repeatedly to the operator.
The best piece of advice from Gary Lipsky

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Show Highlights

What is your philosophy and methodology for Asset Management?

Prashant Kumar- Take us deeper into your asset management practices. What is your philosophy? How do you manage your teams? You are sitting in La. Your properties are in Arizona. How do you do that?

Gary Lipsky- We hold a weekly call every week, regardless of the performance of the property. This call is conducted over Zoom, allowing us to see each other. During the call, we review the properties and go through the reports submitted by the team. The reports are presented in a specific format, a single-page Google Sheet, which allows us to track trends and important KPIs over time. We also have a project list that we review, with details on who is responsible, notes, and due dates. This helps keep our team accountable, and anyone can access the information at any time.

We focus on a few select cities, and I frequently visit the properties to keep an eye on things and look for new opportunities. I also have two employees based in Phoenix who can quickly address any issues that arise. I believe that by visiting the properties often and praising my team for doing good work, I can build better relationships and inspire them to go the extra mile. I want my team to feel that their input and decisions matter, and that they have a sense of ownership in their work.

Prashant Kumar- What are the challenges you faced in the early stages of your real estate investing journey and how you overcame them? Could you also provide insights into the solutions you have implemented to address these challenges? Are you still utilizing third-party property managers or have you established in-house property management? Tell us a little bit more about that.

Gary Lipsky- At the start of your real estate investing journey, confidence is a major factor. It’s natural to doubt your ability to execute a deal, but as you complete a few successful deals in a particular area, your confidence in your underwriting will grow. While it may be tempting to go from zero to ten quickly, it’s important to take things slow and build your systems. This will ensure sustainable growth. When we first started, we didn’t have any systems in place, but we figured out how to improve and refine them over time. Raising capital was another challenge we faced, but as I gained experience and became more comfortable, I was able to provide education to investors, convincing them to join me on my second, fourth, or even sixth deal. With time, they bring their friends and the growth continues. It’s important to remember that real estate is a long-term game, and being patient and doing the work is crucial to success. Great entrepreneurs talk about loving the process, not the result. If you love what you do, it will pay off. This is a long game and success can come to those who put in the work, even when others don’t want to.

Paul Senior- Are you guys vertically integrated right now in terms of operations?

Gary Lipsky- We are not vertically integrated in terms of operations. This is a frequently asked question. We utilize a third-party property management company based in Tucson. This company specializes only in Tucson and has over 30 years of experience. Their expertise in the market is a valuable asset to us. The property management company manages 45 properties, which gives us access to information that we would not have access to if we were self-managing. It is more advantageous for us to remain nimble and not take on the HR challenges of hiring a large team for property management. We believe that relying on the third-party company allows us to be more efficient and focused on what we do best, maximizing the returns from our assets.

Paul Senior- As an asset manager, you play a crucial role in overseeing the operations of your assets. This includes monitoring the performance of the property management company and ensuring that they are meeting your expectations. By having a close eye on their reports and activities, you have a significant impact on the direction and success of your assets. Have you found this level of involvement to be effective in achieving your desired results?

Gary Lipsky- Absolutely, our approach is to collaborate closely with our property management company. Before we go under contract, we develop a business plan and ensure that both parties are on the same page. This includes verifying their local expertise and receiving their feedback and recommendations. It’s important to have their input, even if it means pushing back on our projections or offering alternative solutions. We seek a partner who will challenge us and provide honest assessments, not just blindly agree with our plans.

Paul Senior- Awesome

Share your thoughts on the market direction and financial uncertainty

Prashant Kumar- Given the current market conditions, we’d like to gain insights from experienced individuals like yourself. Can you share your thoughts on the market direction and the financial uncertainty? We’re particularly interested in hearing about your underwriting approach for deals. Kindly share your perspectives with us.

Gary Lipsky- I am currently optimistic about the market. Strong operators will be able to navigate the challenges posed by rising floating debt. Past investors need to choose partners who have the financial reserves and resilience to withstand economic downturns. We had initially planned to sell assets at the end of this year, but have decided to wait for the right opportunity. We believe the market will pick up steam towards the end of 2024 and want to be in the best position to sell by maximizing ROI through renovations and increasing occupancy, rents, and other income sources. The renovations will be funded through the bank, not our cash reserves, as we want to continue executing our business plan. The focus is on achieving long-term financial stability and maximum return on investment.

Prashant Kumar- How do you see new acquisitions with the debt, the financing that is happening? Rates are continuing to rise, even though we saw some emails from CBRE a couple of days ago, the Fed raised the rate, but CBRE decreased their Fred SBL rates because the volume is so low. Everybody is sitting on the sideline. What are your thoughts on this?

Gary Lipsky- Debt is cheaper now than it was a few months ago, even with the Fed raising the rates. So now you’re looking at maybe five and a half percent for the fixed-rate debt. So you just underwrite and build it into your model. You must be conservative. You have a higher cap rate than you did six months ago, a year ago, because when you sell it, there will probably be cap rate compression, and I’m pretty confident of that, but from where we are now. But just because you’re confident, you want to protect your investors and whatnot rather be safe. We’ve had deals where we had an exit cap at 5.7 and sold it for like, 3.7, and those are the deals that you love. So just protect yourself, and protect your investors. You’re only as good as your last investments, your last deal. So we’re always under. Quality is much more important than quantity. You’ll do very well if you just focus on good deals and any deal that you’re starting to stretch, it’s just not worth it. Make sure you have plenty of reserves and plenty of buffers in there. Even if you’re only doing a couple of deals a year, you’ll be fine. So don’t push your luck and play the long game.

Paul Senior- Are you currently actively searching for investment opportunities or are you taking a more passive approach given the current market conditions, including the interest rates? With the agency debt from Fannie Mae and Freddie Mac, leverage may not be as favorable. Could you provide an update on your current investment strategy?

Gary Lipsky- We are currently on the lookout for investment opportunities. Although there is limited availability, we have been evaluating potential deals. The higher cap rate at present offers some advantages in negotiations, and we expect more lending options to become available as the year progresses. At the recent National Multi-Housing Council conference in Las Vegas, brokers were optimistic but cautious. We maintain our stance on the price we are willing to pay and are willing to wait until a suitable opportunity presents itself. The past year has taught us to be patient, and we are confident in our approach.

Have you considered expanding into markets beyond Phoenix and Tucson, or are you focusing solely on these two?

Prashant Kumar- Most of your deals are in the Phoenix or Tucson market. Have you considered expanding into other markets, or are you focusing solely on these two?

Gary Lipsky- We have been exploring potential markets in Las Vegas and Avocado for the past year, gathering data points. Our goal is to become experts in whichever market we choose. We cannot achieve expertise in every market and still maintain quality. Building relationships and having a deep understanding of the market, including data points, is crucial. For example, if a 30 million dollar deal with 150 units arises, we want to have all the necessary information to make an informed decision on whether it is a good or bad deal. We will thoroughly underwrite and stress tests it, but proximity is also important. While we may like markets such as Florida, they are too far away for us to be present consistently. Our focus will be on markets that we can easily access and truly know well.

Paul Senior- We’ve heard from some operators that they are facing some difficulties in raising common equity recently. Can you share your experience with this? Are your investors still showing interest and oversubscribing for your deals, or have you noticed any changes in terms of raising equity?

Gary Lipsky- Yes, we have experienced some challenges in raising capital. We completed four deals last year and around spring, we hit a wall with raising equity. Previously, our webinars would fill up quickly, but now it takes longer. Despite doing 132 million in transactions last year, we must be patient. We know we can still get there, and we have a backstop to cover our deals. Currently, investors are nervous due to the news and stock market losses, so they are hesitant to invest. The key is to be patient, not overreach, and have a strong team to support you. During these uncertain times, it’s better to aim for smaller deals and secure supportive partners rather than stress about raising capital. When sentiment improves, you can pursue larger deals and take on more risk.

Paul Senior- Do you invest across different asset classes? For example, do you focus on value-add opportunities in C-class properties or concentrate on A-class assets? And if so, which one do you find easier to raise capital for in the current market?

Gary Lipsky- We invest in both B and C class properties. Our investors seem to prefer big value-add opportunities, but we also look for good returns. We recently purchased a B+ property that took a bit longer to raise capital for, but it’s now performing well with a projected IRR of 15%. However, some investors prefer older vintage properties with higher projected IRRs. While we have explored properties from the 60s and 70s, we generally prefer newer properties. We aim to find undervalued properties where we can increase the rent by making small improvements such as painting. We are value-focused buyers and always look for the best opportunities to add value.

What is the one factor that has kept investors coming back repeatedly to the operator?

Paul Senior- As an operator, our goal is to secure repeat investors. If you could identify one factor that has kept investors coming back to you repeatedly, what would it be?

Gary Lipsky- Our goal as an operator is to attract repeat investors. To achieve this, two important factors are crucial: finding attractive deals and maintaining open communication with investors. We provide transparent updates on our performance, both actual and pro forma, and share any challenges we face and the steps we take to overcome them. We understand that there will be ups and downs in the business, but by keeping investors informed and responding promptly to their inquiries, they feel confident that their funds are in good hands. Effective communication is essential in building trust and ensuring that investors feel informed and secure.

Prashant Kumar- Share the best moments in your journey so far and the worst moment, if you like.

Gary Lipsky- Sometimes a single deal can present a number of challenges. For instance, one deal involved using prep debt for the first time, but the documents were not signed until the day before closing, causing stress. Additionally, the site faced issues with drug and gun activity, as well as staff turnover. Despite these difficulties, the operator made the decision to pivot the business plan and prepare the site for sale. Despite various problems that arose during the escrow process, such as a finicky buyer, the sale was eventually completed and resulted in a much higher return for investors than originally projected, achieved in just 20 months instead of the projected five years. Good asset management can turn a bad deal into a good one and make a good deal even better, especially with favorable conditions. Real estate investments tend to pay off over the long run, as long as one continues to work hard and find solutions to problems.

Prashant Kumar- That’s awesome. Let’s jump into the lightning round and ask you a few questions. Can you share one personal habit that you believe has contributed to your success and could benefit busy professionals?

Gary Lipsky- Maintaining good health is crucial for success. If you prioritize your health, all other aspects of your life will fall into place. On the other hand, if your health is not in good condition, it can hinder your ability to work effectively and think clearly. To ensure a long-lasting impact, it is essential to engage in regular exercise and adopt a healthy diet.

The best piece of advice from Gary Lipsky

Paul Senior- You have likely received guidance and mentorship throughout your career. From all the advice you’ve received, what is the best piece of advice that you’ve received from someone and how do you think it could benefit others who are pursuing a similar path as you?

Gary Lipsky- Well, I agree with what you said. Having mentors and being part of a group can provide invaluable support and advice. You can share experiences, both good and bad, and hear about what others are facing in the industry. This can give you new ideas and insights that can help you in your work. Having mentors and being part of real estate groups can also help to keep you motivated, especially when you’re working from home and feeling isolated. This support can be incredibly powerful.

Paul Senior- Are you familiar with any good books for those who wish to learn about syndication and real estate investment? Ideally, a book will set them on the right path.

Gary Lipsky- If you’re a complete beginner in the field of syndication, I highly recommend Joe Fairless’s “Best Ever Book.” It covers a wide range of topics and is an excellent starting point. Furthermore, reading and being an avid reader can greatly benefit you in this field. There’s a wealth of free information available, such as podcasts, that can help you learn without having to spend a lot of money.

Prashant Kumar- How can our listeners connect with you?

Gary Lipsky- Our website, breakofdaycapital.com, is the best way to get in touch with us. On our contact page, you can find our “Real Estate Investing Made Easy” eBook and access to all of our other resources. Do visit us on the website. Additionally, you can find us on social media platforms such as Facebook, Instagram, and LinkedIn, and we would be happy to connect with you there.

Prashant Kumar- Thank you so much.