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Cash Flow Champs

Cash Flow Champs Real Estate Podcast

Tom Burns is an entrepreneur, retired orthopedic surgeon, and a physician for the United States Ski Team. He has over 25 years of real estate experience and has acquired or developed over $700 million of real estate locally and internationally. He is the co-founder and principal of Presario Ventures, a private real estate company focused on apartment development and private equity in Texas and the Sunbelt.

Dr. Burns is the author of Why Doctors Don’t Get Rich, a best-selling personal finance book for those who want to live life to the fullest. He is a sought-after speaker and mentor and has been financially independent for over a decade. He is the founder of the Rich Life Mastermind, created to help people create financial independence so they can control their future and travel to exotic places with him!

What You’re Going to Learn:

  • Exploring The Fascination Behind Apartment Development
  • Navigating Challenges and Adaptation: An Experienced Perspective
  • Multifamily Development and Transition to Operators
  • A Piece of Advice by Tom Burns
  • Dr. Burns’ Recommended Book for Aspiring Real Estate Enthusiasts

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Show Highlights

Exploring The Fascination Behind Apartment Development

Exploring The Fascination Behind Apartment Development

Paul Senior- Tell us a little bit more about yourself if we haven’t covered it here and so we can delve into today’s session. 

Tom Burns- Yeah. Grew up in Austin, Texas, got two healthy kids and a wife of 39 years, and started life actually thinking I was going to be an athlete, but found out quickly I wasn’t going to get paid for that. So that’s what spurred me to be a doctor. I was an orthopedic surgeon and a sports medicine guy. I knew athletes. And so I followed that path and I followed the path in medicine that is very specialized. There’s no accounting, no statistics, no economics. There’s nothing like that. There’s just, you know, how to be a doctor. Right? And so about halfway through my training as an orthopedic surgeon, which I think is fairly important, we’re trained by the apprenticeship model. We’re trained by the people that we’re supposed to be in 10, 20, 30 years. So it’s like a mirror into the future. I didn’t see that those men and women were as happy as I intended to be. They were complaining about their situation. They felt trapped here and there. They were sometimes on second and third marriages. And so because of that, I thought I probably ought to create something that’s not correlated with medicine. Didn’t really have the cash flow and the passive income verbiage yet. I just needed something coming in that wasn’t correlated with medicine. So that was where I started my training. And I started with no time, no money, no network, no experience, no education. I started with nothing. I knew how to fix a need, right? So I just read a bunch of stuff, learned what I could, and got out and became a physician. Paid off a few bills that I owed and I won’t go further, but I did. The only thing I knew at the time was I bought something so that I could start learning. And so that’s what started my real estate career early in my doctor’s life. And things just kind of grew organically from there. 

Paul Senior- It’s amazing. I’m pretty sure you probably did some research or something like that and looked like you ended up with your focus being an apartment development. What draw you there? What was the pull to go into that area of business? 

Tom Burns- Yeah, I wish I was as well put together that I did research and figured out that this is just the right asset class. Not true. I bought student condominiums first. I bought mobile

home stuff. I bought discounted notes. I bought cell towers. I didn’t care what I bought as long as it put money in the asset column that was creating passive income. However, over time, you buy units and you buy things in singles and then you get pretty good at so you buy them in bunches. Right. You buy little complexes and then people understand that you’ll close a deal, so they bring deals to you. Other people come and want to partner. I’ve had good and bad partners as I’ve now sifted them all out. I have good partners now. But you partner with folks and with partners you can buy bigger projects. So it just kind of happened organically. And then my partner Prosario, he’s got land development experience, retail, things like that. I’ve got office development and student property. We both had kind of diverse backgrounds and both had kind of done some multitenant stuff. And we just figured in, I don’t know, 2008 or so, a good time to do this. But in 2008, we felt that apartments would have a pretty good run. We thought over the next couple of decades, we would have gone and bought something, but we happened to own some land. So by default, we ended up in apartment development. And so that’s really kind of how it happened. Now we’ve done subsequent research to think we’re still in the right place on a long-term basis. It’s a little hiccup right now, but it won’t last forever. So that’s kind of how we got into multifamily. 

Paul Senior- That’s awesome. So is your development you go in full steam ahead with that right now given the conditions in the market? Or do you think you kind of pivot in just a little bit? Or are you kind of on the wait-and-pause for a little bit? What’s your status right now as it pertains to your business? 

Tom Burns- Yes, and sort of we are still moving with development. However, about 15 months ago, we thought we saw problems in the capital markets and so we had a very robust pipeline. And some of that development debt starts with some variable debt. Unless it’s a HUD project, which takes a long time to get. But you got fixed construction debt when you’re with HUD. We cut our pipeline back dramatically and started looking for things that would maybe do a little better during rising interest rate times. So, yes, we had some projects going. So we’re pulling the reins on those. And I’ll tell you, COVID and supply chain issues, they have really stretched out the development and building time as well as stretched out the lease-up time. So that costs money. And so those are all going to do fine, but we’ve had to really put some effort into them and put a little money in there to make sure it’s okay and that’s all going to be fine. So that took most of our work. When there is any kind of a slowdown, you don’t want to get out. You want to stay in the market. So you see, when things change, you know, when there’s a good buy or a good build, so to speak. And so we own a number of pieces of land. We have just slowed the process. We’re entitled and ready to go on one another. One. We’re entitled, but kind of letting it sit. And we are planning certain developments. We’re looking at certain acquisitions, maybe in the tax-advantaged arena, but that sort of depends on how things turn out in the Texas legislature. So we’re looking at those. We have pretty deep experience with public facility corporations from the past. And then the last one, he said, did you do a pivot? I didn’t do a real pivot. But if you think when you’re driving down the highway and you drift a little bit off into the other lane, we’re on the right road. We’re almost in our lane. But we went to something that we’ve studied for two years. It’s extended stay hotels. It’s a strange pivot. It’s a multi-tenant product, and it’s not where you go to have your vacation. It is a hybrid between the Marriott, where you take your kids to swim at the pool and a workforce housing. You put those two together, this is short-term, low risk to the tenant as far as they can stay for a day, a week, a month, or a year. And we looked at those. And a lot of people in my old world, my doctor world, we have visiting techs, visiting nurses, visiting surgeons that spend three months, six months, sometimes a year at a place they’ll tend to stay in an extended stay hotel. The numbers are basically at 40% of people who stay 30 days or more in those. So we looked at it for two years, and we’re now partnered up with a good, strong partner of ours that we work with before. And so we’re developing extended stay hotels over a couple of states, Alabama and Texas, a small portfolio of about five of them. So it’s been an education for our investors and for us. But we think it’s going to be a nice and all the numbers in the press have just gotten better since we started it. So that was our pivot to answer that question.

Navigating Challenges and Adaptation: An Experienced Perspective

Navigating Challenges and Adaptation: An Experienced Perspective

Prashant Kumar- That’s super awesome that you are pivoting into different asset classes and basically going into a hotel and kind of a hybrid between Marriott and the workforce housing. I want to take a step back. I know these projects take a long time to develop. A year, two years, and over the last couple of years, yes. You got into a project in 2020 and it is not live yet. And the markets have changed, dynamics have changed, lenders have become strict bridge loans, this and that. I want to understand from you, as an experienced person, how you navigate those challenges. I mean, you understand what I’m asking. I’m asking the deeper question while you are inside the project and things change. Yeah, you know, lending change, you know, cost of the construction change, inflation rose up, you know, Ukraine war. There are hundred different variables which you know, which we did not think about at the time of going into the deal and they show up. What happens then? 

Tom Burns- You bet. So I can go back in two phases. So we had the stuff that was going when things were good, right? Everything’s good. Then you should always use really conservative underwriting and still have a reasonable if you’re building something, if you’re building or buying something, you still need a reasonable contingency because stuff happens. Right, so that’s one thing. But the LTV ratios were pretty high back in the day because money was free. Right. So we had 83% on our HUD projects. That can be pretty standard. So that’s one thing. Well, actually, let me stay with those old projects. So most of our development projects have Gmax contracts where we negotiate with the contractor and if there’s for the majority of any overages, the contractor takes care of it. Unless it’s something that’s carved out that we decide on our own that we want to change. So that helps. Always contingency. And do we get it right all the time? No, of course not. If we started a project in 2020, life was great, things were good. And if the loan starts amortizing or your lease up is too slow or something happens, there’s some extra money’s got to go in there, it’s going to come back. But typically in my firm, we will typically put the money in. So we don’t like cash calls. We haven’t ever done one yet. So that’s how we’ve handled those projects that we’re going. If you do a HUD project, that rate is fixed. I mean, it’s fixed from the day you put the shovel in the ground. You get 20 months of fixed-rate interest only. Then you start amortizing after 20 months and then you get 40 years after that. So it’s nice. It’s a lot of brain damage to get a HUD loan. But once you get it we love them. We do a combination of HUD and commercial. Back in the day, you could buy a rate cap. Now you got to have a Tiffany diamond to be able to get a rate cap. It’s very expensive to get those. So going forward, what we’ve done, and something to note, apartment starts have declined by I’ve seen multiple things anywhere from 60% to 76%, so starts have declined. We think that’s a good thing. Anything that we have on the ground growing now is going to get birthed, so to speak, or be ready for lease-up and stabilization when there’s potentially a supply issue in apartments. So we think there’s going to be that. So, going forward, we do certainly lower the loan to value. We looked at doing one at 50% LTV, but we’re 60 and 65 LTV now. That lowers your risk. We get that debt fixed as much as we can when we’re speaking with the lender, at least we get a certain fixed amount or we can cap it. We can still cap things. It’s a price-risk-reward ratio. So you try to build in contingencies well, excuse me, we so we lower loan to value caps if you can, and a little extra contingency money, because if you don’t use it, we can give it back to the investors. But it’s nice to have it and not need to use it rather than need to use it and not have it. So we try to do all those things. Everybody says they underwrite conservatively. We hope we do. I can tell you, I had an under-30 director in our company who laid out what she thought was a conservative number once, and I said, go back 20 years and see what the actual rent increase was over the last 20 years, the average, and it was below what she thought was conservative. So we’re teaching them, we’re teaching ourselves. I’m making mistakes every day and learning from them. So we’re just trying to do the best we can. We try to do sensitivity tables. What if we’re at 80% occupancy or rents are flat for three years or that sort of thing, and interest rates rise to our cap? So, like, on our extended state portfolio, we’re capped at something like 8%, which is pretty high, but we’re capped there at least, and as it goes down, we get the benefit. So we underwrote at 8%.

Multifamily Development and Transition to Operators

Multifamily Development and Transition to Operators

Prashant Kumar- That’s awesome. Dr. Buns I know they are very good moments in life, but I want to start from the worst. What are the worst things that have happened and what have you learned from them? 

Tom Burns- And I’ll tell you, it usually comes. I always tell people I got pretty good at losing money. That’s how I learned my lessons. Never lost investor money yet, and that’s going to happen in the future, I suspect, but it usually comes down to people and you can do the numbers on a deal, get enough people to look at that, and you can make your best guess. None of us know what the future is going to be. So every pro forma is a lie, according to a friend of mine, because it’s talking about the future, even ours. So you try to underwrite the people, and I can tell you without getting too specific, deals that have gone bad have been because of people and smart people that have decided to go bad and could probably make money really well if they stayed honest. But that’s a pretty honest answer for you. It kind of feels like a violation and tries to do things right, and somebody decides that they want free money or free something. So those were the ones that affected me the most emotionally. 

Paul Senior- Dr. Burns I want to dig in a little bit more in terms of your business, kind of from the layman’s terms, in terms of what you do. So you do new development and construction for multifamily build-out. And so when you build those out, do you sell those at lease up to operators who want to come and operate the business and take over from there? Can you delve in a little bit more in terms of what you do for audiences to understand a little bit better? 

Tom Burns- Yeah, and we’ve really changed over time. That project in 2008, nine, it was us. We were the developers, we were the guys getting our boots muddy. We hired the contractor, we did all that stuff. And we had much less of a staff back then. We’d morphed into more of kind of a private equity company. So we will partner. Let’s say you’re a true apartment developer, Paul. We’ll bring the money, the asset management, the debt, that sort of stuff, the underwriting. So we’ll tend to combine with people now, and we will do that in apartment development. Apartment acquisition, obviously, extended stay development, that’s a new deal for us. We do build-to-rent projects. And so everything that I’ve mentioned is all development. And that’s just because I think that’s where our DNA is right now. And most of the people, the land people, know who we are. We source land. What we’ll do is we’ll buy the land. Then I might bring you in if you’re the developer, and say, I got this piece of land where we’re entitled to 330 units. Let’s put a plan together and let’s do it together. So that’s mostly what we do. We absolutely will acquire. But I’ll tell you, since about 2017 or 18, we didn’t like the numbers that we saw. Now, had we bought back then, we’d have done pretty well. But when do you stop? Had we bought a couple of years ago, maybe we might have gotten in trouble, I don’t know. But we understood the development more. So we’re in with the architects and we’re in with the designers and all that kind of stuff. So we’re an integral part of it, but we usually bring on a partner. Now. 

Paul Senior- That’s awesome. And in terms of what you see ahead for you and your company, say, over the next five years, is the focus going to continue to be the same? I know the landscaping is changing just a little bit in terms of just the real estate environment in general. Of course, we have rising interest rates and decompressing cap rates and everything else that goes on with that. What will be your focus and your companies going forward for the next couple of years? 

Tom Burns- Probably not much different than I described. We are a multifamily development private equity shop. So that’s our main lane. That’s what we’re going to stick with. And we still believe that we’re just short of 4 million multifamily units needed over the next, what, seven or eight years. So we know there’s a need. We know with these higher interest rates and inflation that it’s difficult for young people to buy houses. Well, that just shoves them right over into the rental pool for change at some point. So we try, you know, try not to overbuild. We stay out of the middle of the city. We do secondary market stuff. We’re outside of Austin, outside of San Antonio, but we’ll do the multifamily. Time will tell if we continue with the extended stay. We really love what’s going on right now, and the ground has been broken and projects are going up. We’ll see how that goes. If that’s the asset class that Warren Buffett and Goldman Sachs and Blackstone think it is, then BlackRock, I always mix the two up. But big hedge fund, put a lot of money, putting $6 billion into an extended stay. So if it turns out that that’s as good as it’s looking right now, we’ll continue to do a few more portfolios. Always looking for always looking for opportunities. And as you kind of heard, we pretty much stay in Texas. We’ve got enough projects going up and down Interstate 35, which splits the state, and that’s where all the population is except for Houston. So we stay up and down Interstate 35, and we go over to Houston. I think we got enough work for us. There’s always a deal out there somewhere. We don’t want to be the biggest. We just want to continue to do good, conservative projects and try to kind of do our best job for our investors. So we think there’s going to be a continued need for apartments. 

Prashant Kumar- So what is the investor sentiment over the last 18 months, and how are you tackling that in the current market situation? 

Tom Burns- Yeah, good question. And it usually finds that in the capital race and capital raising is simply just what you guys are doing right now. It’s education. It’s all we do is we have this thing here’s why we like it, and here’s all this stuff. If you’re interested, let us know. What else can I tell you about it? So you’re never selling anything. You’re just educating if people raise their hands. So we educate them on the apartment market, or at least what we know on it. We educated them on an extended stay. So our capital raises were pretty darn easy for a long time. And that’s because we’ve been at it for 20 years. We have a very deep investor base, but very much like in 2008 and in 2001, when there’s that wealth effect, if the stock market goes down, it’s going to be even worse. But when people see interest rates going up, they start kind of holding that money close a little more, picky on their investments. And we felt it. I think that our last raise was a little slower. It was a new asset class that took some education. But that’s an honest answer. I think things are a little slower. People are a little pickier. There have been some bad actors out there, so people are making sure they know who they’re investing with. Our folks know us, but you never know.

A Piece of Advice by Tom Burns

A Piece of Advice by Tom Burns

Prashant Kumar- How are you tackling them now? What is your approach? I know the time has 18 months gone by and right now, with the recent articles, there’s a lot of fear in the market. A lot of people we are raising for our deals all the time and we, you know, we are facing the challenges also. What are you doing? 

Tom Burns- Well, you know, if there are less if there are if there are less investors, there’s less investor money, we do less we do less projects, which is exactly what we’re doing now. We chose to do that, like I said 15 months ago. So what we’re doing, and I sort of mentioned it before, we have a twelve-acre piece of land that’s ready to go. We’re just delaying that right now. It’s not time. It’s in a fabulous location, but we want to make sure the numbers work. So we’re raising less equity, picking projects that require less equity, or making sure we have a long time frame. If it’s a large equity raise, we’ve never done this, but we discuss, do we bring in capital partners. We can do that. We have some institutions that invest with us. We’ve sort of broadened our capital base, broadened our minds to bringing other folks in or raising less. That’s supply and demand. So we’re not trying to do a Jillian project and we’re trying to do at least what we think is the best. So that’s one way we address it, so to speak. 

Paul Senior- Dr. Burns time has gone by so fast. This is so educational for our audience. We really appreciate you sharing all these good nuggets on the Cash Flow Champs Real Estate podcast. We’re going to touch just briefly here on a few questions, what we call the Lightning round. And one of the things I want to ask is what’s one piece of advice that impacts your life and how you think it may benefit others. 

Tom Burns- for people that are investing passively, know who you’re investing with. That is really important. And I say that just because that’s just something that’s current with me. Know who you’re investing with. There are ways to check. There are some background check companies. You want to know somebody that’s invested with them for a long time. You want to talk to other investors. You want to see a track record. Because if you could eliminate the human element market losses are what they are, but human losses are not fun. So that’s my new advice for today to know who you’re investing with and do everything you can to get comfortable. 

Paul Senior- Awesome. Great advice. Somebody said we first form habits, and then habits form us. For a successful man like yourself, let’s share with us some of the personal habits or just one or two of the personal habits that contribute to your success.

Tom Burns- I love habits. We are our habits, right? Brian Tracy says successful people are simply those that have successful habits. I was not the guy who tracked stuff a long time ago. And finally, at some point, I decided, you know what? They always say that 3% of people write down their goals, and 80% of those people reach their goals. So I was too cool for that. Until one day I thought, you know what? Get your ego out of the way and start doing that. So I started writing down goals. Goals are great, but you support them with habits. So I truly track my habits. I have a habit tracker, and I track whether I do 100 push-ups a day. And I’ve been slacking, all right? I’m saying it on live TV or whatever, but I’m slacking. I was really good for a number of years, but I track 100 push-ups a day, reading every day, taking a hike a certain amount of times, working out with a trainer, those sorts of things. There are some business habits I track, too. But as I look at my tracker, the first half of it’s all health, longevity, living a good life, telling my wife I love her, and things like that. So that little tracker is revealing. You can do that for a couple of months and you go back and look at it. And if there’s lots of X’s or check marks, you know that that’s something you’ve got going, right? If there are not so many check marks, then it’s either something that’s not important to you and you need a different habit, or it’s something you need to work on. So I just try to be a little bit better than I was yesterday in whatever area that is. If it’s my health or it’s my relationships or it’s my business or my reading, I just try to do something every day to move forward. Folks will be really surprised what compounding does when you do those little habits, little changes at a time over time, have massive effects. Compounding is real, so it’s very important to keep those. Peter Drucker says we overestimate what we can do in a year. We underestimate what we do in five years. And that’s what happens. You see that geometric growth at some time. So start small. Do something. Just put your shoes on and then maybe go out and try to run the next day. But just do something to get you going, and it’ll become a habit. So that was probably longer than you asked, but I’m a huge fan of habits.

Dr. Burns' Recommended Book for Aspiring Real Estate Enthusiasts

Dr. Burns' Recommended Book for Aspiring Real Estate Enthusiasts

Paul Senior- No, that’s great. That’s great. Thanks for sharing. I mean, that’s a beautiful thing. You talk about reading for a minute there, and most of the folks we have on this podcast, that’s always looked like a part of the habit that they do. Can you suggest if somebody wants to go down the path that you’re going down in terms of whether it be development or just real estate in general, is there a book you could recommend to those individuals who would like to emulate what you’re doing here? Dr. Burns with the success you’ve had? 

Tom Burns- Yeah. God, nobody wants to emulate me, so I’ll give you a couple if you want to learn, get kind of some of the basics of real estate. My friend Kenny McElroy wrote a book called The ABCs of Investing. He actually wrote several. The Advanced Guide to Real Estate Investing. Kenny’s been around this game for a long time. He started as a property manager. He owns 10,000 apartment units. A really good book on just good basic real estate and understanding. And that’s if you want to go buy something, whether it’s a single-family home or you want to buy a big apartment complex, the numbers and the thought process are pretty much the same if somebody wants to be a passive investor. So I’ve already talked about trying to understand who you’re investing with, but there is a book out there by Brian Burke called The Hands-Off Investor. Most people know it. I don’t even know Brian Burke, but I push his book all the time because it’s an encyclopedic volume of questions to ask things to do, and things to look for. And that’ll give you a lot of knowledge on kind of what to look for when you’re investing with somebody else. 

Prashant Kumar- Dr. Burns, this has been a great podcast. You have shared a lot of information about what good things you are doing personally. For me, information coming from you is verified and validated because of your experience, right? I mean, you have been in the industry for, whatever, 20 years. Give us solid advice, something that you believe in your true heart, something younger people like us probably can benefit from. 

Tom Burns-  Yeah, sure. And people are always so kind, saying all the nice things about me. But what you hear on the podcast or you see on a talk. A presentation is like a Facebook post, right? It’s all the good stuff. There are bad things that happen. And so you’ve got to realize that life is waves. Life itself is not going to give you anything. So there’s going to be up times and down times. Try to understand. And it really as I got older and got more gray hair, realized that when times are down or when there’s some sort of mistake or some sort of speed bump, something good always comes out of it. Now, if you quit and just complain about what happened to you, then you don’t get the lesson. So advice number one is to be persistent. Keep going. Time is the best real estate hack in the world. It’ll make a good deal look great, it’ll make a bad deal look good. Hang in there and don’t quit. You will eventually get the lesson from the mistake. Don’t fear them. If you want to learn best from some mistakes and it’s early, go in small to whatever you’re doing, because the lesson is going to have the same size. So go in small, you’ll lose small, but you’ll still get the full-size lesson, and that will work for you in the future. So don’t quit, stay persistent, develop some good habits, and you’ll get there. I tell people to be patient, but I like to call it active patience, meaning stay in the market, stay in whatever you’re doing, but realize that compounding in nature takes some time and it will reward you if you don’t quit. 

Prashant Kumar- Awesome. It’s a great nugget that has come out from your heart and I have taken it personally to my heart, obviously. Thank you so much for your time. Dr. Burns, how can our listeners reach out to you? How can they connect with you? 

Tom Burns- Yeah, I’ve got a website. It’s called richdoctor.com. Crazy name, but it’s easy to remember. I wrote a book called Why Doctors Don’t Get Rich. That’s on Amazon, and I don’t make money from it, but it’s got some pretty useful stuff. You always tell people, that won’t change my life, but it might change yours because I know I’ve had books that have changed the trajectory of my life. If anybody has read that book and it’s helped you or made a change in your life, send me an email, or tell me the story to hello@richdoctor.com. And the website’s got a few free things you can get if you want things that have helped me over the year. So just some tools and articles and items there. 

Paul Senior- Dr. Burns wanted to say thank you so much for being on the Cash Flow Champs Real Estate podcast. Thanks for taking time out of your day and best of luck in all that you do in the future. 

Tom Burns-  I appreciate it, guys. Thank you for having me on.