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Cash Flow Champs

Cash Flow Champs Real Estate Podcast

Brad’s first investment EVER was in 2002. He started with a 32-unit apartment complex and by 2005 he retired from his six-figure income job. Over the years, Brad has owned over 57 apartment buildings totaling over 10,000 doors and just over $1 Billion in asset volume. He and his wife Jen earn 7 figures annually from their investments and have eliminated their US federal taxes due to the preferential tax benefits of owning apartments.

What You’re Going to Learn:

  • How Brad Got Into This Asset Class
  • The Ability to Overcome Challenges in Real Estate
  • Communication Strategies and Alternatives for Investors
  • Predictions on the Real Estate Market
  • Navigating Investor Sentiment Challenges

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Show Highlights

How Brad Got Into This Asset Class

How Brad Got Into This Asset Class

Paul Senior- So, we were just discussing syndication and I’m glad you clarified it, Brad. Some people assume syndicators are just wealthy individuals with 10,000 units by themselves, but we syndicate and involve other partners in these deals. What inspired you to get into this asset class?

Brad Sumrok- Honestly, I never thought I’d be here. I grew up with very little money. My parents didn’t go to college, and I was taught to study hard, get good grades, and get a degree. I did all of that, but corporate America wasn’t for me. I was told that I didn’t work hard enough, didn’t come in early enough, didn’t stay late enough, took all my lunches, and took all my vacations. I know, and several times, I was told that I didn’t have what it takes. So I changed jobs every three to five years, looking for something that fits me better, made me happy, and where I could do well. I got fired once and laid off once, so in my early thirties, I found myself floundering like many people, wondering about the meaning of life, why I’m here, and what I’m meant to do. That’s when I started studying for my third degree, the LSAT, and at the same time, Rich Dad, and Poor Dad came out. The book, and its sequel The Cash Flow Quadrant, inspired me to take action. But it wasn’t the book that changed my life, it was the action I took after reading the book. Kiyosaki says that specialized education could earn you a fortune, while formal education, which is what I had with two degrees and was planning to get a third, could only get you a job. So I sought out real estate education, seminars, conferences, and mentorship, and that’s how I got started. That was 22 years ago.

Paul Senior- Wow, that’s beautiful. And now, 22 years later, you’ve accomplished so much, as Prashant just mentioned. What inspired you to keep going after all these years?

Brad Sumrok- It’s funny because I feel like I’m just getting started. I take care of myself physically and emotionally and do my best to take care of myself spiritually. But I have a lot of energy and energy matters. If you don’t have the energy to fulfill your life’s purpose, how could you do it? I feel like my purpose is to make an impact on as many people as I can. I look up to people like Tony Robbins and Grant Cardone. They’re both in their early to mid-sixties and have done more in the last decade than in the previous two decades. I’m in my mid-fifties, and some people might wonder why I’m pushing myself, but it meets a lot of my human needs, as Tony Robbins talks about. I’m a big Tony Robbins fan, and he talks about the need for certainty, connection, variety, love, growth, and contribution. Doing deals puts money in my bank account, but getting into the education business puts deposits into my spiritual account. I like doing both, and while we make money from the education business, it’s never been about the money.

The Ability to Overcome Challenges in Real Estate

The Ability to Overcome Challenges in Real Estate

Prashant Kumar- Brad, it seems like you have a very spiritual perspective. You mentioned earlier that the decade from 50 to 60 is a time when people experience significant growth. I feel like you are in that growth pattern right now.

Brad Sumrok- Absolutely, Prashant. While others might be slowing down, I am in the prime of my life, and I have my foot on the gas. I wake up every day excited to buy a deal, exit a deal, host an event, or run my mastermind. Of course, there are things I have to do that I don’t enjoy, but that’s part of being a wise and successful business person. As we grow and scale, we can hire or outsource people to do the things we don’t like and focus on what we love and are good at.

Prashant Kumar- It sounds like you have an amazing quality to uplift yourselves, pardon my language. Shit always hits the fan in this business and it’s so amazing to see you come out of that. How do you come out of that? I want to learn that piece of it. I’m pretty sure shit hits the fan all the time.

Brad Sumrok- There is a significant challenge happening right now. I have recently been involved in two deals that required capital calls. Capital calls are generally not popular among investors. This may come as a surprise to some of you, as for the past ten years we have experienced unprecedented tailwinds where an average investor could still perform well. However, what happened last year was a significant rise in interest rates, which affected just about everyone, including those who purchased anything in the last two years with a variable-rate loan. Additionally, uncontrollable factors such as soaring insurance costs, taxes, prices, and labor have gone up way more than anyone could have budgeted for. As a result, this is presenting a challenge for many syndication groups. I believe that those who are strong in experience, track record, confidence, and liquidity, and can communicate well with their investors regarding the good, the bad, and the ugly will succeed.

We were fortunate to fund most of our capital calls with our investors because we were able to show them our plan and communicate with them effectively. Unfortunately, not everyone is as lucky as us. Some are making terrible decisions and failing to communicate with their investors. As you may have seen in the news, there is a large deal that went into foreclosure, and there will be many more to come. A friend of mine who is a partial owner of a management company just bought a note on a deal, and he is going to foreclose on it. As Grant Cardone says, there will be blood in the streets.

However, there is some good news. If you can get through this period as a syndicator, Tony Robbins talks about winter, and economic winter is always followed by spring. This will not last forever. My message to those who are in deals that are being challenged is that you must get through it. What is happening now is temporary. I have been through this before in 2008, 2009, and 2010. Although it was not the same circumstances, I have seen this last downturn, and nobody I know wishes they would have bought less real estate in those years. Nobody will look back five years from now and say, “I wish I would have bought less real estate in 2023 and 2024.” The deals are currently on sale, and there has been a pricing reset in the market. We can buy deals now for 15% to 30% cheaper than last year. The downside is that the cost of debt is still higher, but it is stabilizing. As of today’s date, it is easier to get debt today in the middle of April than it was in the middle of March. So things are calming down a little bit, but we are not out of the woods yet. However, I am seeing great buying opportunities.

I just got retraded by $800,000 on a deal I am selling, and I accepted it. They countered with $1.2 million, and we were able to meet somewhere in the middle. Although I do not like being retraded, I did not have many other viable options. This shows that there is more power for buyer groups now. A year ago, if you retraded a deal, you were dead to the broker, to the seller, and to the industry. Now, we are seeing more buyer-friendly terms, better pricing, and deals that are in progress that could be renegotiated because the market has changed, and the pricing has shifted. Cap rates have gone up 50 to 100 dips.

I am excited about the opportunities, but also, I think the more comfortable you are being uncomfortable, the better. This is why some of my mentors, like Tony Robbins and Jesse Hitzler, have you do uncomfortable things like cold plunging. I hate cold plunging, but I do it because it puts me in an uncomfortable situation. And the first time I did it, I know I thought I was going to die, and I didn’t die. And then I did it again, and now I’ve done it again, and now it’s like it still sucks. But I know I’m not going to die And I know how to breathe and talk my way through it, if that makes sense.

Communication Strategies and Alternatives for Investors

Communication Strategies and Alternatives for Investors

Paul Senior- It certainly does make sense, and you’re emphasizing the importance of resilience and mindset in getting through tough times. It’s truly inspiring to hear. You mentioned Tony Robbins, and I’ve read nearly everything from his mentor, Jim Rohn. I know a lot of valuable insights have been passed down from Jim to Tony, so that’s a great point.

For those who may not know, a capital call is when you need to go back to your investors to raise capital that you weren’t originally planning on to keep the deal viable. Brad, you talk about the importance of communication and reaching out to your investors, but how are your investors responding to that? In cases where raising capital directly from the investors isn’t possible due to liquidity constraints, what other options are available to make the deal work?

Brad Sumrok- Yes, I can provide an example. In one of our deals, we have a rate cap. For those unfamiliar with the term, in 2021, we obtained a variable-rate loan for a deal and purchased insurance to ensure the rate wouldn’t exceed a certain percentage. However, the rate has risen beyond our cap, and our two-year cap has now expired. We must purchase a new cap, which is similar to buying insurance when there are many claims, and the cost has increased significantly. When we initially purchased the deal, our cap was $100,000, but it has now increased to $2.5 million. Budgeting for this is almost impossible. Although we always raise additional funds, no one raises an extra $2.5 million to purchase a cap that may not even be required. Furthermore, there is no historical reference point for this kind of extreme rate increase. Hence, the capital call was necessary not due to poor operations or decisions but unforeseen circumstances. We informed our investors about the situation and explained that although our NOI has increased by 46%, selling or refinancing the property is not viable because debt proceeds won’t be available. We must acquire extra funds to buy the rate cap so that we can continue with our business model and hold the property through the downturn. Selling during the downturn is the worst decision one can make. Although the value of the property might have decreased, it will eventually pass, and we can meet and achieve our business plan. I know this because I have done it before. I purchased deals in 2007 and early 2008 before the market crashed and held them until 2014 or 2015. Investors not only received their capital back, but they also made a profit. If we had sold during the downturn, there would have been a loss of investment. Thus, the GP team needs to have the wisdom, maturity, insight, confidence, and business plan to communicate why we’re doing a capital call, how important it is to do a capital call, and the consequences of not doing so. I’m not referring to individual consequences, but if investors know and feel confident that we have a plan and are in this together, they will understand. Three years ago, when we tripled everyone’s money and projected a 2X return, we didn’t keep any of the upsides. Everyone was elated with the bonus depreciation and not having to pay taxes. No one said, “Brad, you did an excellent job. We believe you should receive a higher fee or get more of the upside.” But when things go wrong, people forget about the risks, the details in the PPM, and that they decided to invest. Some start pointing fingers and blaming others. However, there is a distinction between poor business decisions and poor execution, which, in my opinion, occurred in the Houston scenario. I’m not part of the deal, and I’m unaware of the nuances, but I’ve heard several poor decisions were made. However, we must all comprehend that we will all be affected by rate increases, rate caps, insurance, taxes, labor, and supplies.

Predictions on the Real Estate Market

Predictions on the Real Estate Market

Prashant Kumar- Brad, as a mentor with access to a lot of information and insights, we understand that nobody can predict the future with certainty. However, given your experience and expertise, where do you think the real estate market is heading in the next six to twelve months and possibly in the next 24 months?

Brad Sumrok- Well, first of all, you are right that nobody has a crystal ball. However, I do believe that the Federal Reserve was quite clear on March 22nd when they were supposed to raise rates by 50 basis points. But due to the unintended consequences of several bank crashes, they decided to evaluate whether to continue raising rates or not, instead of just going ahead with it. This was a significant pivot in their comments, indicating a more wait-and-see approach. Therefore, I think there may be one or two mild increases in interest rates, but ultimately, things will start to flatten out. By the end of 2023, we may even see a decrease in rates.

I understand that some people might think that it’s best to wait until the market stabilizes. However, I think that waiting too long could result in missed opportunities. In 2009 and 2010, I was told that I was “catching a falling knife” and that things would get worse, but I knew that there were good deals to be had, and I took advantage of them. You never know when things will turn around, so it’s essential to be able to recognize a good deal and evaluate the market and the team behind it.

In my opinion, there are three critical skill sets for success: evaluating the deal, evaluating the market, and evaluating the team. Out of these three, the team is the most critical. I disagree with Grant Cardone on this point because he believes that it’s all about the deal. While the deal is important, if you’re working with a team, it’s crucial to have confidence in them. If you’re teaching someone else to do their deals, you need to emphasize the importance of having a strong GP team, even more than the deal or the location.

Paul Senior- I agree. In my opinion, the General Partner is critical. You have to bet on the jockey in that situation. Brad, I couldn’t agree with you more. Now, when it comes to agents and debt and such, you’re probably looking at around 60-65% LTV on these types of funding these days. Therefore, you need to raise more equity for these deals. However, in your situation, you’re making capital calls and such. So, I’m just curious, how are you sourcing the equity portion of it? Are you going back to your original database from whom you did deals before, or are you finding other sources for the equity?

Brad Sumrok- Well, come back to me in a month because we just acquired a 230-unit property in Jacksonville, and we’ll need to raise capital. You’re right; we’re getting about a 65% loan at mid-5% rates. It’s a good loan, with a fixed rate for five years and no prepayment penalties after that. I prefer it to a ten-year loan with a hefty prepayment penalty from a life insurance company that we received a quote from.

Many people are saying that it’s harder to raise equity now because the average investor has been bombarded with negative media coverage about foreclosures and economic uncertainty. Therefore, you always need to be communicating with your database. My database is pretty big, and I have a 506 C and 506 B database, including not only past investors but also people who have attended my training events. I’ve been doing this for 22 years, so I think we’ll be able to raise the money.

However, everyone is saying that it’s a little harder to raise money right now, especially if I go to the same investor group that I just asked for additional capital. They might say they don’t have any additional capital. In that case, I’ll thank them for their previous investment and encourage them to join my program to learn how to do deals and raise money themselves.

People tend to look in the rearview mirror to make future decisions. However, as Warren Buffet said, you have to be greedy when everyone else is fearful and be fearful when everyone else is greedy. The government printed money and paid people to stay home, which created an unprecedented situation. Now, they’re trying to create a recession to undo what they did.

Paul Senior- Brad, you are spot on. Your knowledge and expertise are invaluable, and we truly appreciate the information you are sharing with us.

Navigating Investor Sentiment Challenges

Navigating Investor Sentiment Challenges

Prashant Kumar- My next question is related to the current investor sentiment. It seems that there is a decrease in investor confidence, with only a few willing to invest compared to before. This poses a challenge, especially if you need to raise capital for deals. Even if you go back to your previous investors, there’s a possibility that they may not have additional funds to invest. This leads us to consider prefex equity groups. Have you ever dealt with such groups for your deals? For instance, you recently had a capital call, and if you were to ask for more funds from your database, you might encounter the same issue. Considering your latest deal, a 230-unit property in Jacksonville, which I estimate to cost around $35 million, what are your thoughts on utilizing prefex equity groups?

Brad Sumrok- Well, I would rather not use preferred equity because it introduces an additional layer of risk. The preferred equity investors will want to be paid first, depending on how much they contribute. It’s not terrible, but depending on the amount they put in, they may want some control. There are different types of equity, including syndicated equity. With preferred equity, they may want control or to be paid first, as that’s the definition of preferred equity. However, there is also a term called anchor equity, which is like an LP. In one deal I did, one company wrote a check for $50 million, and we raised $6 million from other investors. The company that put in $50 million didn’t get paid first, but they had more say and control over how things were run. It’s a double-edged sword. I’ve never used preferred equity on my own, but I’ve been in deals as a GP where we’ve used it. I’ve partnered up with some people who are more sophisticated than me and have a Wall Street background. I don’t have that background, and they can talk the talk and walk the walk. I don’t want to tell people to know their limits because we don’t have limits, but using preferred or anchor equity with strings attached is an advanced strategy that advanced beginners need to stay away from. It’s my opinion, but what happened in Houston was that the guy was an advanced beginner and got over his skis. Debt and preferred equity were easy to get, and he had built up a track record, but in a short amount of time. Looking back, he probably made a lot of bad decisions, so it introduces another layer of risk. Don’t use preferred equity unless you understand how it works and not only the potential upside but also the potential downside.

Prashant Kumar- So, Brad, I know we are talking a lot about the future. I want to see what do you have in store for yourself. I know we were talking earlier, you have a few events coming up, and other things like that. Do you want to share the information with the audience? 

Brad Sumrok- Well, the first thing I want to say, and as I’ve already mentioned, is that we need to be buyers right now. I’m not just saying this because JPMorgan Chase, the largest financial institution in the United States, released a commercial real estate report in March with five bullet points, the last one being that you need to be a multifamily buyer in 2023. So, why is this the case? Let me list a few reasons:

Firstly, there is a housing shortage, particularly for B and C-class housing, and nobody is building it. This means that families making between 50,000 to 70,000 dollars a year do not have enough housing units available to them. They cannot simply go out and obtain a stated no-income loan for 0% down as they could in 2008. Instead, they need to put 20% down and have a 660 credit score. Moreover, the median price of a single-family home in the US has skyrocketed to $450,000, creating a significant affordability gap between renting and owning. On average, it is $1,100 cheaper to rent than to own a medium-priced apartment compared to a medium-priced home. Therefore, the demographics favor those of us who own apartment buildings. There is a ton of pent-up demand as millennials who moved back in with their parents during the pandemic are now ready to get their place. However, they are not going to buy a house right away; instead, they will rent an apartment, creating a significant supply-demand imbalance.

Secondly, the fundamentals are still strong, particularly in landlord and business-friendly markets with high job growth and high population growth. Rent growth is still positive, and jobs are still being created, with positive population growth. There is a limited window on the bonus depreciation next year, which will decrease from 80% to 60%. Therefore, if you want to pay fewer taxes, this year is better than next year.

Thirdly, real estate is for sale, with pricing as low as it was in 2017 or 2018, and with buyer-friendly terms that have not been seen since that time. However, this will not last for long. I cannot predict if it will be in 2024 or 2025, but we have a window of opportunity that will close in the next six, twelve, or eighteen months. That is why now is an excellent time to invest in real estate.

Moving on, in my world, we are organizing an event in August – our 6th annual Apartment Investor National Conference, which is a multi-speaker event. In the past, we have had several celebrities, such as Jesse Itzler, Grant Cardone, Robert Kiyosaki, Ed Milette, Damon John, and industry insiders too. This year, given everything that is going on, everyone should attend. It will take place on August 25, 26, and 27 in Dallas, Texas. I would love to give you a QR code to share with your network. However, for those listening, the event’s website is aimnatcon.com, and there should be a landing page up for that.

Paul Senior- Great! Brad, thank you very much for sharing your insights with us today. We’re now moving on to our lightning round. This is where we wrap up the conversation with a few quick questions. Before we do, we just wanted to express our gratitude for the valuable information you’ve provided our listeners. You’ve certainly given us a lot to think about.

Share a piece of advice that has had a significant impact on their lives, and how they believe it might benefit others. Would you be able to share such a piece of advice with us?

Brad Sumrok- Well, the first thing that comes to mind is mentorship. In addition, proximity is power. That’s a saying by Tony Robbins. I’m not sure if he coined it, or if it’s a Jim Rohn saying, but the gist of it is that you become like the people you spend time with. So if you want to make progress in your life, you need to be in the right room, at the right conference, and around the right people. For those listening, success is a team sport. When I started in this business, I attended a seminar, hired a mentor, and went back to work on Monday. My coworkers made fun of me, saying that I spent too much money and missed out on fun activities. However, three years later, I quit my job, and 20 years later, my net worth has increased 100 times over. Meanwhile, my coworkers are still working at Chevron Texaco, likely earning a decent income, but nowhere near my level of success. This is an example of the power of proximity and mentorship.

Mentorship is the best way to shorten the time frame for success and turn decades into days. While it’s possible to do everything on your own, why not plug into someone who has already gone down the path before you? As Robert Kiyosaki writes in The Cash Flow Quadrant, most people believe that the “S” stands for self-employed, but it also stands for “do it yourself.” Those who insist on doing everything themselves will remain small. That’s why I appreciate Grant Cardone’s philosophy that collaboration is the new currency. By having proximity, mentorship, and a willingness to collaborate, you can achieve success much faster than if you try to do everything yourself. These are my tips.

Paul Senior. Well, thank you so much for joining us today. We appreciate all the valuable information you shared with us. Your insights have been incredibly helpful and we’re sure our audience will find them equally valuable. We would love to stay connected with you and hear more about your future acquisitions and ventures. Best of luck for the rest of the year and beyond.

Prashant Kumar- How can folks reach out to you? 

Brad Sumrok- My website is bradsumrok.com, you can also find me on social media. Although I’ve discovered that some fake accounts on Instagram have more followers than my real account, which is puzzling. You can connect with me on LinkedIn, Facebook, and Instagram using the handle @bradsumrok. No punctuation, no underscore, no other symbols. I have a social media management company that helps me with posting, but I respond to many of the direct messages myself.

Prashant Kumar- Great. Thank you, Brad, for your time and valuable insights today. We truly appreciate your presence on the Cash Flow Champs Real Estate Podcast. It was an honor to have you. Best of luck with your future acquisitions and endeavors. We look forward to staying connected with you and seeing you at the Dallas event in August. Thank you again and take care.