Podcast Episode 172 Transcript

Episode 172: Redefining Real Estate Strategies: Ground Up vs Value Add w/ Shannon Robnett

folks this week on the prereal podcast we're joined by Shannon Robnett if you're interested in learning uh about the real estate market how to Syndicate how to build a a a company that is really by volume just absolutely exploded Shannon has got a a wealth of knowledge Down to Earth real genuine guy it was a wonderful conversation uh he gave some some really amazing nuggets throughout the conversation some things that from an investment perspective or things you want to keep an eye out for Shannon Robnett this week on the prereal podcast don't miss it guys this was a really good one are you ready to bring your real estate game to the next level my name is James Prendamano I'm the CEO and founder of preReal and over the past 25 years I've closed over a billion dollars in transactional real estate each week I'm meeting with outstanding investors High performing individuals and Visionaries operating in the real estate space these are the people that are actually out there there in the real estate game right now getting it done this podcast aims at bringing anyone's game to the next level this is the pre-real podcast welcome everyone to the pre-re podcast we're joined today by Shannon Robnett Shannon's the CEO of Robnett Industries uh has built a a really amazing portfolio uh over $250 million in construction projects everything from Flex space and multifamilies through municipal buildings and storage uh Shannon has a background in real estate I think it's four four generations is in in realtor and two generations as as Builder developer is that correct yeah there's actually five my sons followed me into the business so there's really five generations of real estate uh we we go clear back to the Great Depression even though we didn't cause it I love it so uh how old is your son my son's 26 now yeah so um um that lands for me my my son is still in high school he's he's 15 years old um and we we've got a portfolio we've been building out in New Mexico and he just took a a trip with me last week and he's got the bug man like he he is all in he wants to learn the lands side of things and he's fascinated well you know James I came out of high school wanting nothing to do with my real estate background in fact I did uh I went to college and I'm sitting there taking you know all of your core classes accounting econ you know speech all those things that I didn't like and my brother was building houses and that you know n 18 years old he was making 45 Grand a year in 1994 and you know I'm working at a coffee shop to make it up to cover my car insurance so I could live with my parents and go to college and I quickly quickly learned that that I'd been taught a lot at the kitchen table growing up and I just didn't realize it and so I very humbly put my per verbial hat in my hand and went back to my dad and said hey you know what I'd like to start building some houses and and uh he started me on that Journey on in building my own company and uh it's been it's been an amazing one and then my son kind of similar story he didn't really want to have a whole lot to do with the business growing up and then you know he saw the kind of money that he had the opportunity to make at a call center or going to college or whatever and very quickly changed his tune as well it's um it's a beautiful business if if you love it yeah if you got the passion for it it really I wouldn't trade what I do for for anything so you you're in you you go to college you you come out you make the shift now your portfolio is almost entirely centered in the Boise Market correct well that's uh that used to be the case but you know Boise's become become a very appreciation Centric market and so we've Diversified out we're in Florida Texas Washington uh and we're getting ready to do a deal in Tennessee uh so you know we've uh We've really focused on markets that are you know like boisey I mean Boise's made everybody's list for the last decade as far as you know best places to do whatever but you know James as you know you you would much rather have a mediocre deal in a great Market than a great deal in a mediocre market so you know we primarily look at Market first and then once we've identified our market and and and this is one we want to pursue then only at that point do we even bother to consider deals in that area the political climate to me is number one on the swad analysis when we're determining if we're going to jump in or not how much does that play into your decisioning you know 100% I mean look it you wouldn't go buy a car de a car at a dealership where they they were known to take advantage of people why would you go into a market that is known to take advantage of landlords uh and be overly friendly to tenants I mean why put yourself at an unfair Advantage when you're the one that's betting millions of dollars bringing in investor Capital uh to make that a reality I mean it just absolutely doesn't make sense so the first thing we look at is that you know are we in a state that that prefer landlords are we in a state that's development friendly that wants to see growth you know there's clearly states out there like California and obviously New York that are not interested in development and they've done that by putting up red tape they've done that I mean James I just got a project entitled it's a it's currently a warehouse in an opportunity Zone uh I got it entitled for 200 units of multifam uh two blocks from the mall half mile from the main bus terminal and boisey uh got that completely entitled in four months right nothing says we want growth like that kind of an opportunity right and so when you can do that I mean especially at our age why go beat your head against the wall just to prove you can do it you know you and I are not the Donald Trumps of the world we're not looking for the fight you know I just want to make some money I want to make some my investors some money uh I want to provide housing to the communities and I want to do it in a responsible way in a community that appreciates me you've built you've built some big operations here um in volume I'm curious in Personnel what does the company look like Personnel wise you know we are actually uh I'm downsizing my Construction Company we're doing a lot more outside of boisey and I'm not the kind of guy that wants to be managing my own Personnel in Tennessee uh or you know Florida so we're downsizing that but there's currently uh I think there's we're down to about nine of us uh in our in our complete operations so we've got uh you know three full-time employees in the construction side of things um and then um we've got six of us in in the capital raise and and the you know um investor relations portion and and underwriting um you know on that side so we're really kind of Shifting that Focus because for the same amount of energy I mean the reality is I've got to oversee all of this so if I'm trying to manage a construction portion even though I've got you know great personnel and I've got project managers and I've got great superintendents I can't manage them to the degree that I need to um and have the level of success that I expect and so you know I've got projects uh you know all the way across the nation now and doing that to me the best way is to step into a local market I prefer the interview process because I've been doing this long enough I've been in you know my own companies for 30 years in construction um I prefer the interview process and when I find an owner that is geared like me wired like me understands the project success is really firmly in their hands they understand that speed is is it they understand that you know great connections with Lo local subcontractors is core to their success um then I find that's my guide right then we look at making sure that uh that we line up on where we're at I always involve subcontractors and and general contractors in the development of the plans um because you know I obviously don't know everything and when I can employ them and I can I can get them to help me build out what's best for the whole operation it really really works well uh really tones down the change orders really tones down uh the delays it speeds up the communication Because by the time we're breaking ground everybody's familiar with the plans what advice would you give to folks that are in that position that have access to deals but they haven't thought about or figured out the capital raise piece well I mean look uh James you've been in this game a long time and if you've done it like I've done it and I got a pretty sneaking suspicion that you have uh you went and found those that knew what you didn't and you found out how to make them teammates right I mean there's no sense somebody's got a great deal there's no sense giving it away right there's no sense walking it away yeah uh but I know for a fact if I if I found a deal uh and I couldn't raise the capital and I came to you and I said hey James listen I have this great deal I need the knowledge I need the information if I bring you this deal can I have a small piece of it and will you show me how to do this deal I know the answer would be absolutely yes right if it checked the boxes if it worked through with what you're doing um I would and I do that all the time with people right they bring me a deal you know what this is a great deal uh and you just go open kimono you just show them what you know and they either decide that they want to be all things to all people which is rare right I happen to be one of those uh unicorns that I I can raise capital I can I can V and you know build deals I can manage deals um you know I I our team does all of it but a lot of people don't they focus on what they're good at which is really smart you know you'd never call your plumber and have him pave your parking lot you know uh and so why would you think that you've got to raise all the capital and and find the deals if you're great at finding deals find strategic Partners like yourself or myself that you can take these deals to gain a piece of The Upside learn from there and you know move on and Advance your strategies become better at what you do without having to be uh you know know a fish out of water because the last thing you want to do is figure out how to pull the capital together okay so now you did step one you found the deal step two you pulled the capital together step three you got to go execute on that model well those are three very different hats to wear I mean that that only took me 30 years to figure out what I'm doing and you know why would you want to think that you could do all of that or had to do all of that uh what are you seeing on the ground and and how are you seeing next steps in the market well I mean it's just like you know every bit of news we're getting nowadays it's it's completely biased one-sided and usually full of garbage yeah uh I mean I'm I'm closing on an industrial deal I just closed on one two months ago in in the Houston Market with uh 4% debt uh I'm getting ready to close on another one with five and E debt fixed for 10 years with a 10year option um you know debt is still out there debt is still plentiful capital is still out there what's changed is the dscr that nobody was paying attention to the debt service coverage ratio that tells you that you can't go get 90% loan to value on a value ad uh because you've got Debt Service now I mean 3% Debt Service come on James we've never seen that in our life we probably won't see it again and so to think that we're going to be able to make that model now be able to make those numbers work um it just doesn't it doesn't pencil like that most banks want to see 125% coverage on their debt so if you've got a $10,000 mortgage they want to see you have you know 125 in in noi um and a lot of people look at it and go well the purchase price is you know $40 million I should be able to bring in you know 8 million and make this deal work well that's not what's happening anymore and so a lot of people built their model based on you know we're going to do this $40 million deal we're going to put Bridge debt in place uh at the end of our our time period there we're going to flip that bridge to perm we're going to cash out refi we're going to created value but cap rates have changed right cap rates have crep back up cap rates this is the first time in my life James after doing this for 30 years that I've ever seen cap rates be inverted to debt right I mean you've got cap op rates that are still in the you know fives and you've got debt that's at at the high fives you know low sixes Y and so that's an inversion I've never seen yep so you've got that that's happened so your your property is you know even though you you've executed perfectly on your game plan you came in you rehabbed uh you raised the rents you improved the product you you've solved the bacancy problem you've done all that you still have an asset that may in some cases be worth less on paper you may have a stronger noi but then when you go and apply that noi to the debt service coverage ratio you're not able to get the capital out and so people are either not getting their return to their investors or worst case scenario they're having to do a cash in refinance which leaves them in the predicament do I sell now for a loss or do I go back to my investors and and raise more Capital to come into the same deal they're already in uh low ing the expectation lowering the returns because they didn't play Real Estate as the long game yep you know I mean you know a lot of people are playing uh you know real estate is a One-Shot deal it's a 12 to 24 month deal and it's not man it's 18 holes of golf it is you know bunkers and trees and all kinds of coid and and you know shortages on materials and I mean we've got all kinds of stuff that have happened and that's not unusual so we've just got to play it that way and when you play it that way uh probably like you have definitely like I have you know you're not surprised and your investors are looking at something that's you know underwritten properly it's scored properly and when you're doing that what's going on in the news absolutely has no bearing and no effect what's going on in the in the in the capital markets has no bearing and no effect on any of my projects it the the long game it that that's it that's where it starts and stops with we saw for years especially in the multif Family Market proforma after proforma come in where they were chasing you know their loss to lease and they were going to increase rents by 30% they were going to cut management by 20% in the market they had no experience in when inflation was at probably 11 or 12% in spite of what was reported exactly and in spite of their still being favorable long-term fixed debt they were opting just to make the Prof forers work for that shorter term debt and banking on these refi and it it was like guys if you I I call it getting to the other side of the rainbow if you can't get to the other side of the rainbow in real estate you are dead right you know the excuses and that's what they are that we hear today about coid and supply chain issues these are the names have changed but the circumstances have not right this is than it was 10 years ago and 10 years before that there are anomalies in the market that are always going to be there and if you're responsible with the debt and you're giving yourself time to stabilize the deal and get to the other side that's the magic sauce for us at least has been staying power and making sure that we're not overleveraged and we're smart with our debt well you know I mean look you can pencil whip a spreadsheet to tell it whatever you want want right I mean uh especially if you add a nice uh nice cocktail or you know uh a beer to it while you're doing your calculations you could make it say you're G to you're going to make a million dollars a month on this but you know anytime like you anytime I see a performance performa that has less than a fiveyear duration on it I'm immediately suspect right because you're timing the market it it's no different to me than the guy that's now crying about the price of Tesla uh because he got in you know one week before the peak it's no different than the investor that got into the last real estate cycle in ' 08 uh in December of 07 you know there there's there's a lot of that that's happening and it and it will continue to happen it's human nature right everybody wants to do it but this goes back to seasoned investors they may not know the best deals but they know how to vet the sponsors they really know how to understand look I'm a doctor I'm a lawyer I'm you know High W2 wage earner in Silicon Valley what I need to know is does James know what he's talking about and does James have the track record did James go through the 08 recession did James go through the dot bubble burst I mean how many how what this one will be what my fourth recession third fourth recession right so it's not like I like recessions but I've made a lot of money in them because I've learned from the last one and I just like you said the name has changed right uh we're going to change it to something else I mean you know we had we had the.com Bubble Burst we had Y2K remember that one right somebody reminded me we went through Y2K right uh when all the computers were supposed to die and you know all this different stuff but it's about that longevity it's about understanding your Horizon and knowing where you're going and knowing that your underwriting is there that we can make it you know if you're underwriting that you've got to get anything more than a 3% uh rent increase over a 5-year window you know 3% a year so maybe 15% uh if you're looking at that you're you're teasing yourself you're being delusional and a lot of people forget that they're dealing with other people's hard earned money you know somebody else went out and and and made that money paid those greedy bastards in Washington to give it to you yep and uh you owe them uh the responsibility and the fiduciary duty to know what you're doing when you take it Shannon what type of of deal are you looking for today is are are you slanting toward residential commercial mixed use you know uh we look at I we do a lot of multifamily we do a lot of industrial uh we've done a couple of office deals um office is obviously uh kind of treacherous right now nobody knows if they're coming back to the office or not um but you know my background is industrial I did my first industrial investment for myself in 2001 I've got two of the original tenants still in the building you know 22 years later um and they've grown their business but they don't want to change their address you know um and so we look at that we look at obviously like we talked we look at politics we look at Market we want to drill down into the right markets do the right deals but we're definitely not in a hurry we are not somebody that's sitting there going we got a pipeline we got to fill we got a you know we got we got to make deal flow happen because we got to make some fees and we got to do this we got to do that uh because we like to make sure that what we're doing has the right tone to it it's got the right longevity um you know we've got the right mix of investors in it we've got the right tax credits we we've kind of placed all this together so that we're making sense of it for ourselves and our investors because doing a deal for deal sake is I mean that's like that's like running across a freeway just to see if you can make it yeah are you looking to Cluster deals if you if you're You' mentioned Florida Texas Tennessee once you start to enter those markets do you typically look to build around those deals yeah always you know when we entered the Houston Market I recognized very early that the Houston Market is a strong industrial Market but it's not great uh for multif family and you know my deduction on that was based on you know how wage growth is has been kind of slow compared to the rest of Texas um and it's mainly a blue collar town uh you've got a lot of things going on with the port you know everything that that that is Houston there uh but that means it's going to be strong for industrial right and so when we go into that market yeah we're looking for two and three and four deals just because you know you fly down there to check on your asset to meet with your management team to do those kinds of things you don't want to just check on one deal you know check on two or three uh moving into the Flor Florida Market same way Tennessee same way so we look to do that but you've got to go get your foothold and You' got to get something that's substantial that's sustainable uh and that's going to do really well um you know kind of I look at it that if you can get one deal that's kind of a flagship you know so that you're moving into the market you're moving in strong uh because if you're going to Cluster deals and you've got you know your first deal is mediocre that's not going to breed a lot of strength for people watching you do that into that market for sure uh so in in in that approach what does it look like from an Investor's uh perspective are you securing deals and then sourcing Capital are you locking the deals up what does that look like for you yeah so we do a combination of both uh you know if we're doing a development deal uh all of my development deals I will never purchase a piece of property before I have full entitlements uh and that means that I pass on some pieces that I'd like to have but the reality is you know just like you described earlier in the show James you've got four years into this deal um if you had to buy the land first to put those four years in you've got interest Carry On Your Land you've got opportunity cost with what you've done you've got expenses for all of your you know consultants and everything like that I'm okay to spend the money on the Consultants but I want to make sure that you know if and usually when I go into a market on a on a land deal I don't argue too much on price if it works it works but I also make it conditional that hey you know I'll buy your piece of land for5 million do if I get it approved for 300 units right and so you get your price but in in order to do that you've got to give me the terms right you know this game James it's price or terms right I'll give you the price you give me the terms we'll get it entitled as soon as we get it entitled that's when we start bringing in the investor Capital so then we come in we have a couple of standard plans that we really like as far as how things are built we modify per the area usually a couple months after we've secured the ground and gotten through our entitlements we usually give ourselves 60 days to close on the land after entitlements close on the land we're ready to submit for building permits we're off and running and uh making a mess in the ground you know usually within four months of entitlements uh and then in that four month period of time we're bringing in the capital we've got some great relationships with some lenders uh that are you know they're they're very versatile they're very mobile they're very agile so we can move into a market very quickly um and secure the debt and go vertical uh if we're buying something that's existing you know there's a little bit less leeway you've got a little bit tighter timeline but all of the things that you need to prove are there right so you do your due diligence you secure your debt at the time you've got that tied up uh you know and we go into every single one of our deals for five 5% of the equity stack uh 5% of the the debt or the sorry yeah the equity and so I'm I'm always the one that writes dness might check right I'm I I'm always the one that pays for the due diligence and that comes back to me uh in what I put into the deal and so you know that takes that takes some money uh but it also keeps my investors from facing any of that risk yeah but you know the other side of that James if I've got to bring investors in on that front side I've got to give up some of that front side when we put our land in our deals we never mark it up right I mean we get paid for our entitlements we get paid for that work but if we were able to secure the contract on the land at $5 million for 300 units that's what it goes into the deal at right wellow and so they have the trust and the faith that everything we do is transparent because I I've never done a deal James that went perfect I'm waiting for my first one right that everything goes like clockwork there's there's always something right and we've watched people for the last three years underwrite to Perfection I applaud you for putting your your land deals in uh at par because that is is becoming rare I'm seeing more and more and more that the there's a huge Delta between that initial number and what they're actually putting it in the proforma for um so that's that's pretty neat to hear but you know James the thing that we do is we also do a true waterfall right so I mean we're on par with our investors at 5% Equity uh if until they get their you know preferred return and up to a 12% return and then from there we step up if we're getting you a 23% return we're getting a very large slice of that over the top right so I can afford to put it in the deal bet on myself just like you're doing with your money right because if I can perform like I think I can and I I don't like I don't like EX excise right so I'm not doing this for the fun of it but when I can perform like I think I can I can make the money I should have made on the land right but I'm betting on the end product I'm not putting myself in there I've got enough other businesses I've got enough other things going that this is not where I'm making my money on the entitlement process right I'm making my money on my exits I'm making my money on my cash flow and when you align yourself with people like yourself people like myself that have done this often enough and know where they're supposed to be paid not where they need to be paid right I need to get paid because I got to survive to the next deal I need to do this to get this done I need I need to be paid James when my people win when that project is successful and we're exiting that deal that's when I need to be paid that's when it's most tax efficient for me and that's when my investors deserve to reward me for my hard work not before I love it um if if you had to give some advice or or resource perhaps is there any books podcasts things that you would reference for investors that are looking to uh step up their game and and take things to the next level perhaps start raising capital and getting involved in syndications any resources that have been super helpful for you you know honestly James the best resource you can find I think is networking with other syndicators figure out how you can be important to important people identify people that you want to Mentor you and don't do what everybody else does and say hey do you have a mentoring program where I can throw money at you and you can tell me what you think you want that I want to know but when you can come in I just recently brought a guy on that uh is going to be full-time here in the next little bit that he came to me and said what do you have that I can do and I threw in one of my deals I said analyze this and scrutinize this and he sent me back three pages of notes all typed up real nice he went through everything from the punctuation to you know this seems a little bit different than your last deals comparing to this comparing to that it was just a complete uh data nut on this thing and I saw he had a skill set and I'm like you know would you like a job here because this is something that we're lacking and you know he will become full-time very soon and it's what he wants right it's what he he always envisioned and so I I always tell people you know you can learn more work in the field if you want to be a developer go find a job at a development company go answer the phone start there you know work with other people that are doing what you're wanting to do uh because you can read a lot of books I read a lot of books I gain nuggets that I could add to what I'm already doing but the reality is man and James you know this you get in the trenches you see two days before closing this the buyer calls up and goes time for that haircut James and you know what's happening and until you've done that and until You' worked through that until you've watched somebody negotiate and navigate uh and walked away from that battle you're not really going to understand it so I would tell people go where they are hang out find out what you can do to be useful under promise and overd deliver on everything that you do with them and you will become somebody that they learn to rely on I mean I've got people in Tennessee now that I call because they made themselves available and when I want to know about the market I can have data in 24 hours from I can have pictures from the street right and and now they're become a a reliable part of my team and at that point I open up everything I have to them my resources are your resources my information is your information and they're getting an inside look 30 years of business that they can tap into because they have become somebody that I can also rely on so don't underestimate the power of just networking with with people that are doing what you're doing taking a job with people that are doing what you're doing and learning it from the ground up and know that just like the investment itself the exit is a long way down the road so spending three years in a development office or five years in a development office answering phones working your way up becoming somebody that's important uh in that organization to learn from the ground up is I think one of the best educations you could ever get and usually you can get paid to do it um Shannon where can people learn most about your operation where should we point folks you know the easiest way is just to go to ShannonRobnett.com uh you can get links to my podcast you'll be able to get a link to this episode if if you want to watch it again on a different platform my book list my calendar's available if you've got uh if you've got questions you want to you want to chat we could definitely uh schedule a call uh but just Channon robob net.com you can get a hold of me right there all my socials are there as well well I really appreciate you taking the time to join us today I know you're traveling this was super valuable and uh best of luck man we'll be in touch James I really appreciate what you're doing for the community with bringing information and and bringing this kind of knowledge that you have making it accessible to people because as you and I know that's what builds the community and that's the only thing that's going to keep us safe as an investment Community because there's still there's still a lot of Village idiots out there man Amen brother Shannon Robnett appreciate you baby enjoy the trip as always everyone please stay [Music] safe