Welcome to our latest episode! Today, we’re thrilled to have Charles Carillo, founder and managing partner of Harborside Partners, on the podcast. Charles has been actively investing in multifamily and commercial real estate since 2006, with over $200 million in transactions. Known for his expertise in renovating and repositioning properties, Charles has developed a reputation as a knowledgeable and experienced investor in the field.
In this episode, Charles discusses his real estate journey, the challenges and opportunities in the current market, and his approach to multifamily investing. He shares valuable insights into navigating the complexities of property management, financing, and working through market corrections. From dealing with interest rate hikes to handling insurance spikes in Florida, Charles provides practical advice for investors looking to succeed in today’s real estate environment.
If you’re looking to understand the ins and outs of multifamily and commercial real estate investing and hear firsthand strategies from an expert in the field, tune in now to learn from Charles Carillo’s expertise.
HIGHLIGHTS OF THE EPISODE
00:24 – Guest intro: Charles Carillo
01:00 – Charles’ background: Growing up in real estate and early investments
05:10 – The challenges of managing properties in different markets
06:50 – Florida insurance spikes and other market-specific issues
08:10 – The impact of financing and interest rates on multifamily investments
15:00 – How to handle rising interest rates and refinance decisions
21:00 – Opportunities in the current market and finding value in today’s environment
28:30 – Working with investors and managing investor expectations
40:20 – Lessons learned from past investments and adjusting strategies
43:30 – Final thoughts and how to connect with Charles
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
CONNECTING WITH THE GUEST
Website: https://harborsidepartners.com/
Linkedin: https://www.linkedin.com/in/charleskcarillo/
Instagram: https://www.instagram.com/harborsidepartners/
Facebook: https://www.facebook.com/CharlesKennethCarillo/
Full Transcript:
Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome Charles Carillo. Hi Charles.
Charles Carillo: Hi, Mike. Thank you so much for having me on the show.
Mike Zlotnik: Thank you for coming on the podcast. I appreciate the opportunity to be on your show. And let me introduce you. You’re a managing partner of Harborside Partners, a real estate syndication firm.
You have been actively investing in multifamily and commercial real estate since 2006, investing over 200 million. And you run a podcast called Global Investors Podcast, where you interview industry leaders. Talking about U. S. real estate, so welcome once again.
Charles Carillo: Thank you so much.
Mike Zlotnik: Before we dive into business, a little bit about you. Where do you live, family, kids, cats, pets, whatever works for you.
Charles Carillo: So I’m originally from Connecticut. I moved down to Florida where I am now in South Florida in Palm Beach County area in 2012. And I grew up in the real estate business. So as you mentioned, I’ve been a multifamily investor since 2006, but my father kind of gave me the got me into it.
I guess you would say he bought his first multifamily property a few months after I was born and it was a six family property. And he, you know, that was kind of my second education of him building up this portfolio. And it was, They were pretty tough properties, right? Like a lot of D properties, C minus properties.
And I wasn’t really interested in any of this. So I was like, no, this is nothing I’d want to do. And as he transitioned, I guess, into better properties kind of as he understood, which is the normal, I mean, route of most investors that are active, where they start with Lower class properties, let’s just say, and they’re getting into more ideal properties, newer properties, less management intensive properties.
And when I started investing, my first property was a three family property and from a small city in Connecticut. And I house hacked that one back then before they really called it house hacking and really just bought, you know, Realize that real estate, super, super local and buying properties, even a couple blocks from each other completely could be a very different outcome investing.
So it takes investor really has to know the market and the neighborhood. And that was one thing that as my dad was buying better properties, it was something that you know, I started buying better properties and you know, since. Really 2022 we sold out all of our C class properties. I sold out a portfolio I had in Connecticut as well and really just focusing on B class and above properties.
You know, you’re getting better tenants and it’s less management intensive. So that’s kind of my, what I’ve been doing and really my whole kind of career in real estate.
Mike Zlotnik: Yeah, I got you. I appreciate that. And yeah, we’re just in Connecticut. Connecticut one of my daughters figure skates and they train in Stanford, Connecticut, Chelsea, Pierce.
Charles Carillo: Nice. Nice. Nice.
Mike Zlotnik: In any case, you absolutely right. All real estate is local. I live in New York city and you can go two blocks or one block in one direction. Things change. So sometimes it’s neighborhoods. Let’s transition from one to another super fast. So I absolutely agree, especially in big cities. So now let’s shift to the investing and I think you mentioned in the past, at least through other conversations, you invest sort of in Florida Dallas, Fort Worth area, Atlanta.
Let’s talk a little bit about those markets. How are your investments doing today, given the fact that we’ve seen market correction, higher for longer interest rates, insurance premiums skyrocketing a number of other factors that have been challenging for multifamily operators. Let’s just talk about that and then we’ll shift to the opportunities ahead.
Charles Carillo: Yeah, I think you know, each of those markets has had distinctive issues, I guess, or setbacks and I was talking to an investor yesterday and, you know, even with all the new product and inventory that’s come on the market in a lot of these markets. I mean, a lot of these markets are very resilient.
I mean, I know like Austin, some other markets have really getting hit with nearly 10 percent decreases in rents, but and a lot of your I would say your really core markets. I mean, like Dallas is a very core market. You got, you have 50 fortune 500 companies there. I mean, it’s a even with the supply they put in there, I mean, it’s still, you know, we still keep our occupancies in in, you know, mid nineties there without a problem as doing, you know a value add strategy.
So we had property taxes in Florida or in Texas where have been killer over the last couple of years. Obviously interest rates is everywhere. And then you know, with Atlanta, we, the big thing we’ve had that’s really plagued a lot of people in, inside of Atlanta we’re, one of our properties that we have there is kind of in the suburbs, but it’s been that a lot of skips and then we’ve also had issues with evictions there.
And that’s what people have had. We’ve been lucky there. We’ve property there. They just check numbers is 96. 2%. Rented there occupied. So we, we doing well there. And our collections are very high, but a lot of people have had issues with Lanta and then Florida, obviously it’s the insurance. I mean, that’s just one of the things that’s really come back to You know, hurt down here in Florida as one of the things as you know, because you have these insurance premiums and a lot of things that kind of lag, you know, we see inflation go up, but we don’t really see it.
And then we see it like the tailwind of it, right? Coming back months later, year later. As you start seeing these premiums redone, I mean, and it’s not just in, you know, I saw a double digit returns, a double digit increases in insurance in Connecticut, you know what I mean? Before I sold portfolios there.
So that was already you know, those were renewing the beginning of 2022 and you already start seeing like the hits of this coming through and then it really just went 2022 end of it. 2023. And so it’s one thing for people that are on the sidelines now going back in you know, hopefully, you know, you’re gonna see a lot of those increases have already happened.
And for people owning the properties, holding properties, I mean, it’s tough now because you’re not really able to raise rents to really recoup that and then put insurance rates on top of that. If depending on how you finance capitalize the property, I mean, you could be in a very tight spot.
Mike Zlotnik: Yeah, I appreciate that, and I really appreciate clarification, depending on the market.
So, Florida, it’s, they get hurricanes, so it’s a hurricane. Hurricane of insurance increases, right? So, essentially insurance skyrocketed. And you said Central Florida, which is different from the coastal. Coastal is even worse. And the, there was a tidal wave that hit the entire country. I mean, we see, we saw increases here in New York.
30 percent year over year. This was insane. You think about this. I guess insurance companies took massive losses. But certain markets worse than others. And then interestingly enough, new supply, right? That, that whole problem was from the time when the industries were low. New construction starts were easy, and the volume or the starts was huge.
And now they’re being delivered, and they’re creating inventory glut, or creating competition. But what’s really interesting, two years from now, in 26, we’re expecting that there will be Very limited new deliveries or much reduced new deliveries. So as a result, if you can persevere all the way to that point of view, of course, you will have better pricing power for ant increases.
Right. Yeah. And Atlanta. Yeah. I’ve heard that from many people that that whole statement, if you’re in the wrong part of Atlanta, you’re dealing with the socialist Republic of Atlanta, right? Where I live in New York, it’s the same thing here. Go evict somebody. Good luck. It’s the worst process in the whole country.
You could be evicting somebody for one and a half years, even two years if they put up a good fight. Right. It’s kind of insane. They can, they can live in an apartment without paying your rent and just. Come in front of a judge with a crying baby or, or saying I’m disabled and I don’t have the money and the judge is not going to kick you out, not going to kick them out.
So from that perspective, as a landlord, of course you are sympathetic to their situation, but at the same time, you have to pay your mortgage, you have to pay insurance, right?
Charles Carillo: Yeah. People don’t understand. I think when they see them paying this large chunk of their income to This greedy landlord, and then they find out if you actually work down the numbers for most landlords, we’re talking like less than a 10 percent profit margin, you know what I mean?
So it’s like, this is not a high margin business per se, when you have everything put together with financing and everything that goes with it. Now you have some landlords that have paid off properties or have, you know, bought many years back and they have a big spread, but like, that’s how the whole, that’s how it all works.
You know, that’s how real estate works where you’re supposed to. Buy it and hold for long periods of time. And when you do that, you start having that spread, you know, increase, increase. But the one thing with financing too, is that even makes it more difficult is if you’re in one of these areas where evictions are difficult.
And if you have some sort of government insured mortgage and Fannie and Freddie just came out with new requirements for this as well, where you now have to really follow what they’re doing. And the first taste of this, I really got was It was like in COVID 2021 in in Connecticut with some properties had there and the only way I was able to cause I had bank loans from local banks.
And that was the only way I sort of came down to, as my attorney was telling me afterwards, they said, you know, provide all this documentation showing it’s not government insured. And that was the only way I was able to get tenants out of, you know, they hadn’t paid in like 10 or 12 months. You know what I mean?
But even had canceled their electricity. So they weren’t even living there. I was paying electricity as well. So it’s like, this is how. Like when you start you have to really, it’s not just the area where you’re in now. Now it’s also the type of financing you’re getting, which something really wasn’t a problem prior to COVID.
You know what I mean? This is something where they started kind of flexing. You’re using money from us. Now you have to follow our rules. And this is something when I tell investors, it’s like, you know, They’re not always, you know, look at all your different financing issues because now you have someone else that you have to, you have to bring in as a partner, really, you know what I mean?
That’s making decisions and it’s never in your favor. It’s like, you know, it’s like bringing the IRS in, you know what I mean? They’re always that silent partner and it’s, you know, they’re always there and it’s something you have to understand. So maybe it’s better getting instead of this this, this type of financing where they always say, well, it’s you know, my personal assets aren’t at risk.
Well, True, maybe, but it’s also one of the things too is that if you’re buying a property and you’re, I mean, you’re not going to do any more deals with the agency anyway, if your property goes down. So, you know what I mean? So you’re going to be blacklisted there anyway. So if you sign on it, now you have full control and the bank’s not going to be bothering you.
They just want to make sure they’re paid mortgage. They’re not going to be there sending out inspectors there like the government financed government sponsored entities do. So it’s one more thing just to, just to go on a little tangent there about financing in general.
Mike Zlotnik: Yeah, I appreciate the clarification. Kind of interesting. You can get in bed with the devil, in essence, if you’re getting, if you’re getting government dollars, you have to follow the requirements, but let’s kind of move forward now. So all these things we just described, the sort of challenges for multifamily operators, owners, syndicators.
From the checks written in the past and especially when you want 22, those investments were bought at the peak of the market and valuations have corrected. So just how much valuation corrections have you seen again? I don’t know if it’s anecdotal or systematic. But these so called sunbelt regions, we’re talking about Florida obviously Texas Atlanta.
I’ve heard different numbers, but some folks have talked about 20 to 30 percent range, which is about right. But I’m just curious, your point of view. And then, you know, switching, well, that’s what happened in the past. Is that The time to go in now from the point of view, if you can get something to some of these situations where the owner is struggling, you can buy it at the right price, then the forward outlook is very different.
So let’s just talk about first, what’s been your experience on the existing assets and valuation corrections.
Charles Carillo: What we’ve seen is been a little less of a decrease than 20 or 30%. I would say it was more around 15%. And and I, it hasn’t, you know, cap rates haven’t really expanded that much that you would think with what’s happened with interest rates over the last 24, 30 months.
And And I think that’s, I mean, that’s an interesting point there because you would always think that, oh, this was going to go away. This is going to be going down. We’re going to have all these deals. It’s the thing we’ve been hearing for years and years, you know, all these deals available, everything coming on.
And maybe you’re seeing those big price swings or decreases on lower quality properties, let’s say. You know what I mean? Properties that might be 50, 60 years old. Yes, I could probably see that. But on the, you know, the more ideal properties, your B class, B plus properties, you know, built after 1985, after 1995 type properties.
Well, these don’t have that big a swing that we’ve seen. You know what I mean? And it’s, you know, I think right now it’s just one of those points, like with one of our properties. We have we had a rate cap that expired earlier this year. We bought in 2022, no problems with that property. We put another rate cap on for six months.
And so we have like another month or two on that. But now it’s one of those things where do we refinance, you know, do we shave off like 2 percent or two and a half percent on our interest rate? But now we have that big prepayment penalty, or is it something in the sense of, do we just kind of hold on to what we have now with with bridge and just like see. As we, you know, take those decreases as they come, you know what I mean? So it’s on the topic
Mike Zlotnik: a little more, but that’s a very relevant problem today, but that’s as fundamental as it gets. So if you have existing loan and you have an inspiring rate cap, I’ve seen two scenarios, the banks requiring either a new rate cap, if you’re maintaining the same bridge, or you have to set aside some kind of interest reserves to cover the gap.
Essentially equivalent of a rate cap except for you it may work better as interest rates fall And you’re on a floating rate mortgage. You’re not basically pre paying at a high interest rate So i’ve seen those two scenarios, but your trade off is exactly what you mentioned refi At the current high interest rates and then lock in pre payment penalties yield curve maintenance And we know the rate’s gonna fall, so it’s one of these things where it’s a tough choice whether you hold the bridge for longer and just wait, wait it out until better times, or you bite the bullet by the security, but then you’re locked in for multiple years.
Again, what are your thoughts? What are you, what are you, what are you thinking to do?
Charles Carillo: I know I, I have been having a call with an investor in three hours and this is what I’m, this is the same conversation I’m going to have with him. And it’s it’s one of those things because it’s it’s like, as we’re saying, we’re going to, we know inventory is slowing down next year.
Right. We have record deliveries. We know it’s going to slow down next year and even 2026. It’s going to slow down even more. So as you’re having these deliveries slow down, it’s not just deliveries coming on, is you have these concessions that come along with it. So you really need, after they come online, you’ve got to wait out like a year for them to really, for those, Lost a lease to little burn off, you know what I mean?
And that’s where you’re back to really a level playing field with my 1988 built property and your property built in 2023. And so where now there’s this discrepancy of 600 months, 600 or 700 a month in rent. And that’s where we’re able to rent without an issue compared to, well, you’re giving away 2 months and all of this kind of stuff that goes with it.
And now it’s becomes more difficult for luring new people in and they’re not like checking your income and all this kind of stuff to get. Yeah. It all filled up so that they can get some permanent financing on the property. And the thing though is that what we’ve, what we found going forward now with what you have is that if you, the problem is that it’s twofold because if the, like you said, interest rates that’s what we’re saying going down.
And then if you have yield maintenance on that, not only am I paying a prepayment penalty, but the more that rate goes down. Now there’s more that I have to pick up when I’m paying off in the prepayment penalty because I agreed to a certain yield, you know what I mean, to that lender. So now it’s something that it gets even more expensive.
As that rate goes down, it’s different if you’re selling rates go up and I’m selling some of the prepayment penalty prepayment penalties, usually not as bad in certain situations because they can now put that money back out in the street into other properties and they’re getting a higher interest rate.
But now we have this issue. So you’re like, It, do I go down, you know, do I, do we cut off two, two and a half percent and go to like five, whatever it is, five and a half, we’d get on a mortgage now, maybe five. And then the problem is that had this massive, massive seven figure prepayment penalty when we sell the property and who knows, you know, at this situation, you might do that and paid these before.
And it’s like, there might be a slowdown. You might, you might have a lot of this new inventory might be slowing coming on the market whatever it is, new starts and you find a buyer next year. And now you had one year, whereas you could have just rode that out. And so it just, it really depends on, it really depends on what your team does and exactly like if they’re really interested in selling it, you know what I mean?
Or what it is. I mean I’ve seen, you know, stuff that comes on the market now. You know, we had a lot of distress stuff that’s come on and it’s still going through the paces, but I think as we get into 2025, that’s going to start slowing down because you’re gonna have a lot of people that already did workouts with their lenders.
Because most people, when they got these bridge debt, they had two year caps on their interest rates. So, these are burning up as we speak, you know what I mean? Over this next four months. So, I think 2025 is going to be a little different story with these properties coming on. And then I also think banks are more likely with better properties to keep them, you know, to keep, to work them out.
Compared to if you have a really, if you have a, you know, A property that’s a lot of deferred maintenance wasn’t able to be done. They might let that one go. And that’s what a lot of buyers in the syndication space don’t really focus on. So I don’t know how those are going to be picked up on that. And it’s definitely for us, it’s probably not going to be something that we’re looking at.
But so it’s really that balancing act between what do you do and how long are you going to keep it? If you’re keeping the property for two, three years, and that’s where your goal is, at least, you know, maybe you go with the fixed debt. And then work it out knowing that what we’re saving every month, we’re going to be paying back a little bit in the prepayment penalty or, you know, a portion of that maybe sizable portion.
Mike Zlotnik: Yeah. I appreciate that. That that’s a, that’s a great analysis. And I can, I can tell you this, that on the deals we’ve been involved optionality is worth. Paying extra costs. So optionality, meaning that just extend the bridge, even though it’s painful. But the question is, where do you raise the capital to extend the bridge?
So we’ve done some of the mass mass debt on, on some of these deals where we come in with this, let’s call it recovery capital and gives them time, especially if the property all hold it enough. Equity rich, cash poor. So optionality could be very, very valuable because the drop in the interest rates could be significantly more valuable than being stocked for five years at a higher interest rates from that perspective.
It’s, it’s a significant, it’s almost like this, the. It’s clear rates are going to, they’re going down and just a speed of, of, of, of how fast they’re going to go down. But one way or the other, a year from now cost of financing could be a hundred basis points lower, just plus minus, right? We don’t know that.
It could be 75. But that, that’s a very significant savings in essence on the interest costs and having the optionality to sell versus sort of a holding onto the property for five years. So basically everything you discussed makes a lot of sense and it’s individual depending on the, on the circumstances.
But let’s now move forward. New opportunities. Are you seeing interesting deals? Now is what kind of deals and granted that you’re no longer looking for tough property You’re looking for the better easier assets And I think majority of the people have gone through let’s call them CC minus properties some point You just kind of conclude I do I want to want to battle that it’s so tough.
You’re dealing with very very difficult execution. And one of the other points that most people don’t realize they perform on these deals wonderfully, but they can’t get to a target NOI because you can’t get to, to the, to the collections. You can’t get through the rent increases. You can’t get through the math.
So you wind up with lower NOI. And then even the cap rates didn’t necessarily expand as badly as, as, as we thought, but the NOI is just not supporting the valuation. So it’s at a perfect execution. You could, you could do perfectly it’s called NOI math and the cap rate. So what I’m, what I’m pointing out to execution is harder than it looks.
And we’ve seen this again and again, where people just project, I don’t call it perfection, but pretty, pretty good execution. And if you get hit with. Any difficult events, insurance spikes, or a hurricane comes through, or collection issues, or, you know, during the inflation day, cost of construction went up, a lot of these projects struggle.
Now they’re reversed. Now we find ourselves. September 24. You are looking to deploy new capital. How are you looking at things? What kind of opportunities you’re seeing? What kind of projects? What markets? Just, just curious, what are you seeing today and what do you expect? Let’s call it in the next six months.
Charles Carillo: So like what we’re seeing now for deals coming through is And this is deals that are on the market. And then also looking at I’m on a lot of different email lists for people, syndicators raising money. And what I’ve seen on a lot of deals coming through from syndicators that are raising capital for the deals I’ve seen really, what I’ve seen is really simple business plans that are really.
Don’t have much value out there, very light value ad, or they’re really just taking away the lost lease. And they’re not like true value at plays. And obviously this is a much safer investment, but a lot of people are going for that, so they don’t have to put out as much capital. They don’t have to have their vacancy drop as much. I mean, it’s all, it’s all safer all around, you know what I mean? But are they getting
Mike Zlotnik: the right price? That’s, that’s the big issue because these safer looking deals. With good with high occupancy, they’re not getting big enough discount, they make it look like a safer deal, but in reality, you’re not getting a lot of value at, you’re already substantially fully occupied, you’re thinking it’s a lower risk deal, but is it? It’s only lower risk deal if you’re getting the right price. If you’re not getting the right Then what are you getting?
Charles Carillo: Yeah, it’s, I think you have some of these value add operators that kind of got really caught in 2022, 2023. And I think they’re going to simpler problem, but it’s really, I think the mistake that’s being made with a lot of this is they are a yield kind of plays that they’re trying to make into value add plays.
So these are not deals. These are long term, you know, if you bought the property and held it for 10 years and you’d be fine, you know what I mean? And you’re cleaning up a little bit of things here and there, but to get the returns, I just don’t see it. And that’s what I mean, like, you know, because for any kind of deal really to be able to raise money and to really pencil out for most investors and syndicators, it really needs to be a 15 percent IRR plus, you know what I mean?
So I just don’t see how you’re able to achieve that without doing much work. So a lot of deals that we’ve seen that’s come across our, our desk you know, on market or from brokers there’s not that much of a, like a a discount to make it and kind of a deal that we’ve got
Mike Zlotnik: a couple of years ago. Because what you did is, what you did is describe today, which is the second you just described, as they’re marketing these deals. Sort of the brokers at a value. That’s that’s not a steep discount to the past relations and The forward money if you can’t come up with 15 percent IRR on equity today This is this is a garbage and this is this is no deal.
We’re looking at deals If you, if you want to write an equity check, I want to see a deal with 25 percent IRR, okay? We can, we can look at, you know, let’s call it 20 to 25 percent on equity. Okay, you could justify the case depending on various variables and risk factors. 15, what the hell is 15? I mean, I’m sorry, I’m just, yeah, I mean this.
It’s like, okay, 15, I can make 15 lending money in a first lien position, 14 percent of hard money loans, we’re still doing them today. So 15 percent return on equity doesn’t, like, you’re not getting a deal, you, I don’t know what you’re getting.
Charles Carillo: Right.
Mike Zlotnik: So it has to be better deals, and that’s the question in theory. If you’re getting historically depressed pricing or historically discounted pricing, these deals better be good. I mean, they better be much better target IRR with conservative assumptions. Otherwise, you’re not you know, it’s something that you don’t want to transact. It’s, it’s kind of like, You didn’t find anything interesting, and I don’t know how you can raise money for it.
I don’t know how you can do anything. It’s more like, okay, that’s, that’s somebody want, it’s a sell, like holding their price and it’s good for them. It’s not good for you today. Today, if it’s not a really good deal with 20, 25% IRR, why, why, why? It’s not even worth the time. Even if it’s looks like a. Core, core plus deal.
It needs to have those numbers as crazy as it sounds. People are saying, well core, core plus, low value at 15 percent plus, not today, not if you’re buying today, because the market conditions are such the rates are high. So you better be getting a good deal. Otherwise something is off, right?
Charles Carillo: Yeah, I totally see. I’ve just seen that usually for this whole process to work for is you really have to have a path of how you’re going to raise rents on a property 20 to 25%. I mean, that’s really what it comes down to. And when you start seeing people that are saying, well, we’re going to, you know, there’s a there’s 10 percent or 12.
It just doesn’t. It’s not going to pan because you’re not going to get returns out to investors. So they’re buying properties that are really easy. Yeah. Yield place, they’re just properties that are buying that are single digit return type properties and by them trying to raise rents or whatever, you know, trying to get rid of lost lease, you’re going to try to reach this return you know, with a.
High, you know, teen kind of return, whatever it is. And I just don’t see the way of doing that. It’s completely risky. It’s a different thing. If you’re going in and you start seeing this differential factor of 25 or 30 percent versus other properties that are there in the market and like nearby in their neighborhood, that’s a whole different conversation, but I just don’t see that.
So I just haven’t seen the discounts and kind of what we’ve been doing in house is We’ve been focusing on doing small JV deals with just a couple of our partners on properties that we’re finding and that where you’re able to kind of work out some creative financing with with investors and work with local banks, you know?
So that’s really the route we’ve been doing. We haven’t done really that many syndication deals. The last syndication deal we closed was at the end of 2022. So it’s something that we have a very small firm. And I, I think that’s one of the other things too, is when you see deals like this, and when you look back at the firm, you’re, sometimes it’s always in my mind is that if this is like a acquisition fee type, you know, to keep the firm kind of going type thing, there’s too many people and stuff like this.
So that’s always a worry I would have when I see deals like this. You know what I mean? Because a lot of smaller operators that I’ve worked with that I have some past investment deals with, I’m not getting any deals from. Yeah. You know what I mean? And when I speak to them on the phone, they’re like, Oh, we haven’t underwrote, you know, we underwrote this deal and this deal, but like, we’re not doing anywhere near as what we used to do. Cause it still hasn’t like come to our level. Like you were saying, Mike.
Mike Zlotnik: Yeah. Charles, transaction volume is still incredibly low, but that’s one thing that’s I, I guess it’s, it’s a combination of multiple factors. Price difference, availability of financing, very difficult times raising equity capital.
So all those factors together make it very difficult for for the deals to, to take place. Although the theory is this production line starts picking up maybe. More price recovery will happen. So this is the whole conversation. It won’t the price recovery happen to what degree? And the, the, the volume, yeah, it’s, it’s been, it’s been low for everyone.
Cause investors are sort of, and I don’t know if have you, have you talked to investors? I’m just, I’m just curious, sort of your investor sentiment. They’re still very cautious, especially people who have invested in the past few years, they experience is Massive recency bias. They’re nervous about what’s going to happen with the capital they’ve invested.
Even some bad deals already come through, so there’s losses. So that whole crowd is just one unhappy crowd. They’re wonderful folks, but the experience is tough. And what do you do? Are you, are you seeing new investors going to the place, into the marketplace, fresh capital? Otherwise, Funding a deal becomes very tough unless you have an institutional partner who will give you a large amount of capital.
But then, you’ve got to prove to them that this is a phenomenal deal. Institutional investors are even tougher than high net worth individuals. Just curious, what are you seeing?
Charles Carillo: Oh, I mean, we’re still doing calls with new investors and potential new investors and you know, building out our list for investors, but it’s when I, you know, when I follow up and speak to investors by email during the week.
And I mean, a lot of them that haven’t invested with us, just to throw on our, you know, on our list that I follow up with a lot of really negative experiences like you were saying. And I mean, there’s people that have been just like a lot of people. I don’t see coming back in that have invested with other operators and lost money, or they don’t hear back from the people.
Tons of horror stories from people that are in mentorship groups. There’s probably four or five off the top of my head that I’ve heard in the last two weeks of people losing their money, being part of some sort of fraud within it. So it’s, you know, It’s, it’s difficult. I mean, when the deals like when you’re not able to add value and you’re not able to sell the property for twice what it was, what you bought it for four years ago.
I mean, the whole thing starts melting down and that’s not really how this whole industry is supposed to be. It’s supposed to be it’s supposed to be buying property, good properties for long periods of time or for, and when I say long periods of time, like at least five years. And that’s typically how it used to run.
And you’re building wealth over that part. You know, it’s not supposed to be where I go into something. Raise rents 50 percent and then, you know, sell it in a year and a half. And I think that type of mentality is what was happening, which people got, you know, sucked up and because you talk to people and they’re like multiple deals from operators done, operators not responding to them.
I’m keeping my money in you know, in, in bonds or, you know, treasuries and stuff and, all this stuff, you know, so this is what you’re hearing. And yeah, it’s difficult to raise money. And then you also can tell you know, we both have podcasts. I imagine you’re get people reaching out to you people I’ve had large operators reach out to me and with the ultimate goal of coming on the show and raising money for a deal.
And so that’s not something that normally happens. And it’s something that I’ve just seen really this year come around where they’re having problem running raising money to, especially if you have capital calls, you know what I mean? And with a lot of investors don’t know if they’re, you know, capital calls haven’t made their way through.
So there’s still loan workouts. I mean, you still have deals from 2022 that aren’t, you know, that are, You’re in that part right now where your interest rate caps are coming up. You know what I mean? So it’s they might not be there yet. You know, you have loan workouts, they’re doing all this stuff and that’s not, hasn’t come out yet.
So if you’re a past investor, you might not know the damage of your property until, you know, end of this year that you’re in the clear, depending on how everything goes. And you know, it’s just you know, a lot of deals I looked at, I remember one deal I saw We are going to partner on. We were looking at one deal and we just, we just reviewed it and we turned it down.
Ultimately, two years later, I saw it come up as being foreclosed. So, you know, a lot of deals, a lot of operators that you’re, you know, you work with, you really have to double check them and you have to do all your own due diligence on the operator. And then also on the deal itself and on the market and verify a lot of those assumptions, because when I look back at the deal, it’s actually, I use that deal as a case study with some students that I teach.
And if you go back through it and you just have like, it’s a laundry list. Every time you look at it just gets longer and longer of stuff that’s wrong with it. And main thing was that they’re buying a value at property, trying to value out it again. And that just doesn’t work. You know what I mean? If that group had bought it, put 10 year debt on it.
You know, they’d be in a whole different situation now, right? And they’re knowing that we’re going to give you single digit returns on this and hopefully sell it in the future for this. That’s a different business plan, but it’s difficult when you’re trying to mend strategies together to try to get to these high returns that I really just don’t see a way of them achieving.
Mike Zlotnik: Well, everything you said is, is, is back to the recency bias is past. It’s almost at a point where there needs to be a reset and there was a reset and it’s very difficult to convince existing investors, not even convinced. I mean, at this point, they will, whether they like it or not, just like you said, they’re realizing it through hard experiences.
There was a massive reset. Assumptions were, let’s call them aggressive. Well, why? Because the market was aggressive. A lot of things were aggressive. Rent growth was aggressive. A lot of assumptions on value added projects bridged that, that we would be able to refi after the work. What’s done in two years insurance higher number of other challenges, obviously collections.
So the market is essentially. Went through a significant reset and the thought process today. We are, I wish there’s a way to press a button, complete reset and get everybody’s mindset. This is now sort of time to be greedy, not time to be fearful. It’s the reverse from that perspective. The fear is dominating and concerns are dominating from the last couple of years.
And you’re absolutely right. There’s a Wild West out there. I’ve heard these horror stories to them degree folks invested with complete shysters. Ponzi schemes, disappearing people, or maybe legit people, but troubled market conditions, right? So market conditions higher for longer interest rates.
Very few people expected this to happen. And, and the debt service is basically Pressuring a lot of deals from liquidity perspective. So maybe if you, if you live until 26, you’ll be fine, but you got to live until 26. Meanwhile, you need to pay the bank, either buy a fresh rate cap, like you said, the whole conversation started, or you, you need to put interest reserves where that money is going to come from.
It’s not a trivial conversation and capital calls are tough. Most investors are in a Some of them are just not in a position to even fund it, right? So I’ll leave that alone and I want to kind of move, move forward for for a little bit. Just sort of your outlook for the next 6 12 months and then how would folks reach out, just sort of turning to positivity.
Because I think it’s actually a phenomenal time now to write fresh checks. You, you could find, we, We, we have a deal, we, we wrote a check this week, which is a deep buy from a, it’s a mixed use over 300 apartments, anchored by a, by a super Walmart. On that deal, the cap rate basically increased from, call it the 4th to the 6th, right?
That kind of a change. based on the market conditions. That’s a deep buy. Its IRR is conservatively targeted in the 20s. Like, when we see deals like this, then immediately you know this is, this is likely a phenomenal deal. So, I’m very cautiously optimistic about fresh money going out, but how do you get to people the message across that if you’re a new investor, if you’re a stock market investor, you have not done real estate, now may be a phenomenal opportunity to actually Participate.
Diversify from the appreciated stocks into what’s trading cheap now. Multifamily real estate, not a commercial real estate, excluding office, office aside. It’s trading at a steep discount. So have you, have you, you know, I’m just curious your thoughts, because I feel it’s a great opportunity. And you may not see every deal look like this, but there are deals that are strong deals.
Another point that I heard is you’re not looking for perfection. Right. If you’re looking for perfection, you’re never going to find, but if you’re a ballpark, something used to trade, let’s call it 20 million. And now it’s trading 25 percent less than 15 million. Just again, throwing a number on a table, whether you’re getting it for 15 or 16 is less relevant today because the discount is already there.
And as rates fall, cap rates will, will, will fall and your valuation will improve. And then if you do the right capital structure today with more conservative Leverage you’ll be totally fine on a forward basis. It’s kind of one of these things. It’s the reverse now It’s almost you can’t go wrong now if you buy right versus You couldn’t go right if you bought two years ago, like very, very few things that you bought two years ago are doing really well now, unless you get fixed rate debts, some kind of stabilized asset that is you know, got long term commercial lease tenants and high credit quality tenants.
That’s a different experience, but if you bought a value add deal, that’s a couple of years of floating rate debt, 95 percent of them are in some kind of trouble.
Charles Carillo: Yeah, no, it’s true. It’s, it’s definitely true. I mean, if you’re, if you’re getting deals that have. Like you said, a deep by a discount like that.
But what I was saying earlier is I just I don’t see those. I don’t see people putting out deals like that. I don’t see business plans. You know, I just don’t see it. I don’t see how people are making these numbers work as they did before, unless at the end of the day, they’re saying that interest rates are going to drop so much and that’s how they’re penciling out these performance.
But I think for investors, that got burnt in real estate one way or another over the last couple of years, or that are coming in for the first time. I think, you know, use these experiences and put together like your investment philosophy as an investor and you know, put together your rules and of how you’re going to invest differently now than you did years before and different type of deals you’re going to do different due diligence.
You’re going to do on operators Different due diligence. You’re going to do on deals and markets. Different debt that you might look at or require different parts of the deal. You’re coming in as you’re talking, Mike, you’re coming in with a lot of like mezz debt, stuff like this. People have to understand the difference between that and where they may be in common equity.
And that might be not yeah. Not the type of equity class they want to be in. Maybe they want to be a little closer up front if something goes wrong. And these are the decisions that people have to make. And I think putting it together and it’s not just retail investors that get put in these situations.
I mean, it’s one of those things with banks. Banks are notorious for lending when it gets crazy and opening up the lending standards. And then when after everything kind of comes to a stop, they stop lending where it should be. Opposite, right? But it never works like that. And we’ve seen that cycle after cycle after cycle, especially with what happened in 08 and stuff like that.
And what we’re seeing kind of now with certain lenders. So I think it’s a time for investors, like you said, to reset their mindset and to, I mean, looking to real estate, figure out how you want to get involved with it and kind of what your actual investment goals are where, you know, and then allocate capital accordingly.
You know, don’t put so much money. Yeah. into certain deals with certain operators, don’t invest with certain operators so many times per year. These are simple things that you can do without even knowing anything about the deal to really limit your downside. And I think when I speak to investors with other operators, these people, like they went against all of them, you know, three different deals with the same operator in one year or saying, you know, all these, all these things.
Things, all these red flags that they did. And when they look back on it and they’re being honest with me it’s something that now I can edit my own underwriting and my own like investment philosophy as a passive investor. And it also has an active investor. So I think that’s what we can take away from what’s just happened here over the last couple of years.
Mike Zlotnik: Harold, great lessons. I concur. Lessons learned, right? Sometimes you win, sometimes you learn. That’s, that’s the book. So at least exactly what you said. Update your investment standards, investment philosophy. It’s a great advice because if you don’t you will make probably the same mistake again.
But I do want to comment just to one quick comment. So a lot of people learn from school mistakes or difficult experiences. And the pendulum swings all the way the other way. So instead of realizing now is the market condition to be a little bit more opportunistic they, they turn ultra conservative and they don’t want to make the same mistake again.
But it’s almost the wrong thing to do. Now, maybe psychologically, it’s easier, you know, if you have 10 million bucks invested and you lost. Six million of that. Your remaining four million feels like, oh my god, I want to preserve that money, right? I already lost six. So that preservation of capital mentality kicks in and there’s nothing wrong with that.
But the interesting thing is, is, is that yes, you should still improve your underwriting, you should still look through better assumptions or at least scrutinize assumptions to get more conservative. But look at this this way, would you touch the one more point, then we’ll wrap up. Folks look at the interest rates, and they In order for the returns to pencil, you have to assume better interest rates.
And folks say, well, we don’t know that. The interest rates are going to be at the high level. We just don’t know what’s going to happen. So something really interesting happens. They essentially turn to ultra conservative underwriting, too conservative underwriting. Then you can’t transact, you can’t act, you can’t take advantage of the opportunities, simply because you are now the pendulum swung all the way to the other side.
And unless you see perfection it becomes inaction. So, I’m just kind of commenting on this, because I do agree with the whole update to underwriting, update to diversification, update to your thinking, what kind of investments you want to look at. Before, people didn’t even understand what they were really doing.
What was the right suitability for their goals? They were just writing checks left and right, looking at the bright and shiny objects. Today, it’s more, more of a, oh, I need income. Why am I writing a check into growth? And what’s a risk profile? That’s common equity. Can they be the man’s debt or preferred equity?
The, the, the crazy thing, I’ve said this more than, more than once, but today, if you’re not comfortable with common equity, if you feel too nervous about this because you lost a bunch of money, man’s debt today generates equity like returns without equity like risk. Now it’s still a risk, but it’s a very different experience versus the deals that were a couple of years ago.
We’ve actually even seen some trouble deals from last few years where we provided some mass debt and we got paid in full, but the equity got beat not completely. So if you’re in a better position on a capital stack, you, you, you, you, you have to really know the difference. And if you don’t understand the difference same deal, everything else is the same.
If you are on a primary debt, you’re safe, you’re a mass debt, you’re safe. Common equity, you destroy, right? And maybe there’s a borderline between, okay, maybe common equity makes 20 percent back. Can mass debt be recovered? Can preferred equity be recovered? These are the fundamental questions that folks really need to understand and hopefully gravitate to a level of comfort on the future deals.
So that’s kind of my, my, my parting thoughts. Any good book to recommend or and or how would folks reach out?
Charles Carillo: I think my favorite book that I always tell people about is the 80, 20 principle pre else principle. I think that’s something that people can utilize in every facet of their life.
And you’ll be amazed at how I mean, how it fits with with your life and with just common, everything that happens and how that kind of works into that ratio. So it’s very interesting. And if you’re interested in learning more about what we’re doing, my company’s harborsidepartners. com. And if you go to harborsidepartners. com, We have a lot of information there, a podcast. Mike was just on it. We have a YouTube channel you know, past investing guides, some other information, learn more about what we’re up to and you know, get on a call with us if you’re interested in investing. And when we do have deals, we don’t do that many, but when we do them you know, we will let you know right away.
Mike Zlotnik: Thank you, Charles. I appreciate you coming on a podcast. Thank you for sharing and your wisdom and great lessons. So I greatly appreciate it.
Charles Carillo: Thanks, Mike.
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