TLP35:Useful Tips for Aspiring Limited Partners with Mark Kenney

The Limited Partner shares in the potentially outsized returns of a well-planned and executed investment, but as a passive investor and has the maximum leverage on their most precious asset, their time. And that is why we're here together. 90% of the millionaires out there built their net worth with real estate. However, 0% of the billionaires are hands-on managing the real estate asset because there simply isn't enough time. My name is Jake Wiley and for the past 16 years, I've been investing in real estate and I've learned a thing or two, but the most important lesson is how to leverage the expertise and time of others to maximize your investment potential. Welcome to the Limited Partner Podcast. All right. Welcome partners. Again, this is your host, Jake Wiley. This week we've got another exciting episode. I'm joined by Mark Kenny. Mark, welcome to the show.

Hey, Jake, how you doing?

I am doing great. Thank you for being here. So Mark is the co-founder of Think Multifamily. So, I imagine we'll be getting into a multifamily discussion here, but Mark I'll kick it over to you. Why don't you give us a little bit of background on, on who you are and how you got to think multi?

Yeah, sure. I appreciate you having me on today, Jake. I grew up in Michigan in Dallas now. One of seven kids have an identical twin brother and growing up, both my brother and I were like, Hey, we wanna do something different than we're seeing everyone else doing because nobody in our family or extended family were entrepreneurs or anything. We went to Michigan state and we both went for accounting and we started looking at doing real estate when we were seniors in college, we bought our first property when we were 22 in our hometown and started buying smaller properties, but we both also had corporate jobs. We're both CPAs. Did IT consulting, had IT business. And my IT business was doing pretty well, least. I thought it was from a financial standpoint, but horrible from a life balance. I would work minimum 90 hours a week, sleep like three hours a night, and phone would go off 24 hours a day, caused a lot of issues just because I wasn't able to spend time with my wife and things like that. So, my wife and I were buying smaller properties in 2013. She's like, yeah, we need to start looking at doing something different. And I'm like, okay, in my spare time, I'm sure how I'm gonna do that. But anyways we joined up together. So co-founder because my wife Tamil is not just someone that supports me, but the business wouldn't be anywhere near where it is without her and her skillset. And we started first as a passive investor, actually in 2013 in a syndication with a friend. And then we started doing our own, we've done value wise about over a billion dollars of transactions over 90 deals. And we're in 12 states. And invest, you know, as a lead, if you wanna say syndicator, but also invest passively in real estate and some other investments as well.

So I really, I love this story 'cause I'm also an accountant by trade.

Oh you are? Okay.

Yeah. That's where it, this all started. I'm super jealous though, that you started investing right out of school. Like if I, you know the advice, if you could go back in time and tell yourself something, I would've probably said buy a house while you're in college, run it out to your friends. Sell it when you leave and then like, let that be the seed for everything. But, Jake I guess the question for you is how did you get started in real estate, especially love to hear Mark You know, I always kind of wonder, I always have these discussions with people in my mind as well, like nature versus, you know, nurture and why do I like certain things and not like other things. For whatever reason, both my brother and I, and fortunately my wife Tamil really liked real estate.

I don't know why. And we were like, everyone needs a place to live. It seems to make sense. We really didn't know anyone doing it at all. And I don't know how we gravitated to it to be frank, other than we're like, everyone needs a place to live. We were both like, like you probably very analytical because we're both CPAs and things like that, but we could touch it. We could feel it go buy it and look at it versus stocks. It's a roller coaster. There's no logic in my opinion, whatsoever. And events that happen impact things that shouldn't impact, but real estate, we thought, Hey, you know what? We think we could probably start buying some small properties. And eventually we were like, Hey, we will end up buying these properties and retire, like when we're 40, right? And frankly, I don't wanna, I'm pass 40 obviously, but I don't wanna actually retire. If you wanna say. But we also kind of concluded that, you know what, we have to buy a lot of properties, in order to on our own, in order to replace income, 'cause we were both, you know, doing pretty decent income wise doing it and things like that. But, it wasn't like we saw commercial or someone in our family was doing it. It was one of those things we just thought, Hey, we can touch it, feel it, makes sense. We can get a loan for it, which I'm not sure how we got a loan, but we did. I don't know, you know, how they gave us a loan, but they did. And we're like, we can actually put a little bit down and leverage the rest and it just made sense to us. I think that's such a cool story, right? Because if you can get in early, especially before things get out of control. I mean, this is like what I want for my kids more than anything else is, get in early before you like run your, you know, your salary because I mean, everybody know, like, most people probably know this, you feel your salary, right? Whatever you make, you start to like live into that lifestyle. Oh yeah.

So it was like, man, like I, I think about when I was in college, I lived off of $700 a month and that had to pay for like my housing. I was like, man, if I could have started like that,

Oh, yeah.

And replace 700 bucks. I could have done it no problem. But you know, like as you get more into your career and like you, as a CPA I was working, you know, for somebody else. Now, like in retrospect, like, oh, could have done so much better if I had started early. So, I'm super jealous.

You get nervous, like you get nervous because my IT business, I was making, you know, pretty good money. I was like, I don't think I'm gonna replace my income. And for, you know, I didn't really have to replace a hundred percent in order to have a pretty good, you know, lifestyle and things like that. But your points well taken about the seller because I have a nephew who's super smart, loves real estate and eager and all those things and kind of wanted to start doing real estate. He's a police officer. And literally just got promoted like two weeks ago to a detective, sergeant or whatever. And now he's like, oh, it's good and bad. You know, because now he's kinda making more money and more control and it's harder to get out of it.

It is, it is so hard, especially the further on you get, right? And then you have,

Oh yeah.

Family and kids and like it all stacks up. But let's talk about the transition to multifamily. Probably similar to maybe a stress point. And I'm inferring here based on your story. You know, my wife and I very similar invested in real estate and we grew a portfolio and we had properties in multiple states and like we were growing and I mean, it, one got to the point, like with residential. So, we had like singles and doubles that it was just like, we couldn't take anymore. Like physically, emotionally, like we, we couldn't take anymore 'cause it was just gonna be too much, right? Like financial pressure, like you name it, like when you start having all these singles and doubles. And I didn't learn that lesson until later, right? That there's probably a better way, but I'd love to hear your transition into multifamily.

Exact same story. We were buying mostly two to four units. And doing everything ourselves, plus working tons of hours, doing evictions and trying to be handyman when we weren't that handy. And it became, I'm surprised actually we continued through it because it was not a very good experience. My biggest thing, other than the time, which was important was I also just got tapped out financially. So my wife and I, every two or three years could buy another. At the time we got married pretty young too. And then I'm like, okay, so I'm gonna have to wait till what I'm like 150 to have enough properties to do it. And we got burned out on that. And then when our friend was doing a syndication and kind of, you know, picked it, we picked it up pretty quickly, 'cause we were already in the financial aspect of it and kind of things like that. I'm like this kind of makes a lot of sense because he's using a third party management company that does all the day-to-day for him. Other people he's getting money from other people to buy bigger deals. And that's how, you know, our kind of light bulb went off in our head. And my wife, you know, fortunately really pushed me because I'm like, I don't have time for this. But we ended up, you know, making the time somehow. And we almost gave up after a year because it took us a year to get our first deal, but we didn't, we kept through it and were persistent and patient and things like that. But I can tell you, it was not a very good experience. Cause I lived in Michigan at the time, my brother and I would work till 10, 11 o'clock at night, come home, shovel snow, you name it. And again, I'm not sure how we continued to do it because it wasn't great, but I'm like once we learned going larger and really less headaches with the larger properties. It became, you know, really a blessing to us.

Yeah. I can vividly recount, you know, one o'clock in the morning putting down baseboards and trying to lay tile and trying and get, cause we did some flips too, and trying to get all of those things done around a full-time job. And you know, this is part of the message that I want to get out there for the Limited Partners or aspiring Limited Partners. Is that yes, you can go out and do onesie twosies and you can make decent money. And especially when the market was rising, like flipping was great. It's been great for a while. Right. But it's not gonna persist forever, but like, you do get to a point where like the bank looks at you and be like, I'm, we're not giving you any more money, right? Like, we're just not gonna do it. Like you've just become too risky and you feel it and it's stressful. And I was doing this full time, you know, probably I left my job. I was doing it full time and we hit that point where the bank was like that's it like, you've maxed out the number of government loans that they'll give you. So, like you're done. So I had to go out and start raising private money and it was just like, yeah, we're doing like one or two deals a year because it was like every single one of 'em was a slog. So I—

Plus our recourse, you know, when we were buying smaller properties, I'm sure with you, we're going the bank. We had recourse debt, which means you do have personal liability. Something happens now we have, you know, half a billion dollars in loans or whatever, and it's all nonrecourse. So, we don't have personal liability. Doesn't mean you can't go off and do whatever you want. You can't be stealing and unethical in lying, things like that, then you're gonna have recourse, but it's nonrecourse loan. So, if something happened to that particular property, for whatever reason, we own like 60, then if the bank looks at that one property, they can't come after me personally. They can't come after my other property. So, that's a major difference, especially when I was, I started out when I was 22. I was kind of freaked out about having that personal liability because something happened. We miss rents, you know, people paying us, which happened more often they should. My brother and I didn't have a lot extra money. We're just starting out to be able to cover that. So that was a big issue for me.

Yeah. And then, I mean, the fear is real. It could snowball very fast. It's like, if this one goes empty, Or they're late. And then it's like, we gotta, you start putting all the pieces together. Like, oh man, this is I've lived it. So, if you're out there and I have, we haven't convinced you yet that maybe you should consider maybe just skipping doing the onesy twosies and jump right into, you know, a Limited Partnership. Hopefully that's why you're here. But I guess let's talk about that because I think too, it's. It is not super simple, right? Like you can't just jump in blindfolded and get into a Limited Partnership and hope for the best. What are some things that you've seen that aspiring Limited Partners or people that or even experienced Limited Partners should be thinking about, especially now in this point in time where, you know, the market's really unpredictable?

Right. Yeah. I mean, I think for one just to your point, if you're a Limited Partner, there are different ways a syndicator lead where you wanna refer to 'em as can, constructure a deal. You can't just get into every deal and some deals, you have to be accredited investor in other deals you might not, but that just is a starting point. The other thing I would say. How long has the person been doing it? Are they doing it full time? And if you're gonna invest in anything, it really doesn't matter what it is. You wanna at least have some base knowledge. About some rules of thumb, you know, just because something doesn't fit a rule of thumb doesn't mean it's wrong, but you want some really good rules of thumb as a Limited Partner. You can actually somewhat look at and say, okay, Jake has a deal, but you know, I see the income growth is 10% year-over-year. Is that realistic? Oh, probably not. Or Jake has a deal and he has a, the cap rate he's assuming then he go down over time, which, you know, for all practical purposes we don't think is gonna happen, could but it's not conservative enough. So, I just think you could look at it and say, Looked at multifamily, understand it. I don't wanna invest in it. That's actually a good thing to realize as well. But if you're gonna invest in it, you need to get educated, at least somewhat enough to understand where you're making a good decision or not. I also wouldn't be forced into a deal if you're working with somebody and they're pressuring you to invest and you just get that high pressure sales type thing. I personally don't deal with people like that, drives me crazy. If they're like this is the, you know, the best deal ever you're missing out. I'd pass. You know, listen to your gut. And I don't know why, but for reason, as a general statement, women seem to have a little bit better intuition about people than guys. It just, I don't know, just seems to be the case. You know, have your wife speak to somebody, if you're married or you have, you know, a woman that can speak to the lead or whoever it might be and just get a gut check. Because I can tell you, people are like, they're trying to invest with somebody and it's a pretty small world and they ask me, do you know anything about this particular person? And I know a lot about different people and it's like, okay you know, you don't wanna just jump in blindly with somebody unless you know, some background about them, what they've done. Have they had any issues? Have you ever had problems on a property? If they're like, no, I've never had a problem on any property then I probably would not invest with them, frankly.

There's some really great points in there. I mean, I love the fact that I think as an entrepreneur, let's take a step back, right? As an entrepreneur, somebody's trying to grow up business. There is a, there's a tendency to want to know that, like you got it, right? And that's the, what you wanna project to everybody. And you know, like VC guys and all these guys, they see it all the time. They've got the experience and they know that like a real investor knows that there's issues. As a matter of fact, like. As an investor, you wanna look at somebody and be like, how did you deal with the issues? Right?

Right.

Because they come up and if there's no good like story, it's like, maybe you just haven't been in business long enough. Or like, you're not telling me something.

No, it's true because it's, you know, you don't even realize sometimes what you learn as you go through the process, right? And you look back and, you know, we've done. I mentioned, you know, over 90 deals, if you know, review tons of contract and I can see, could we have a mentoring program too, but you know, that aside I can see people that are new, that would get stuck. and they wouldn't even know that they can't foresee what's gonna happen in the future. I'm not saying I can predict what's gonna happen, but I can tell you what will happen the way some of these contracts are written initially. If you're not smart enough to be able to pick up on some of these business terms about, okay, it's gonna go back. If you get in some sort of litigation, everything goes back to the contract. So, don't be like, oh, the broker told me we could get more time if we needed it, even though it's not in the contract. No, that doesn't work. So, I just can't tell you how many things we run across on the buy side, the sales side, that I can see people, you know, getting caught or even, you know, without getting all the details. I mean you're an accountant too, but just accrual based accounting versus cash based accounting. And you're not talking like, you know, tens of thousands of dollars difference. You're talking hundreds of thousands in some cases, several million dollar difference in value. Just the way the actual owner provides the financials to you. And if you're not smart enough to ask for the right financials or do your due diligence to validate, you know, bank statements and things like that, we get push back all the time. That's a non-negotiable for us. We will not move forward on any deal if we can't, you know, prove out the revenue. But a lot of people do. They'll move forward anyways, and they're gonna get— Yeah. That's being an accountant. I mean, you're really kind of hitting some interesting points to accrual based. There's all kinds of revenue rules out there that start to make the financial statements completely different from what's actually happening. Right.

And like, somewhere out there, the regulators are like trying to say, Hey, we're trying to make, put everything on the same playing field. Because there's all these different games you can play with accounting. And therefore, like what happens is you can actually look at financial statements that look amazing, but there's no cash, right? There's no, no way to pay the bills. There's gonna be, they're gonna be in default on all their covenants. You know, I'm not trying to scare you here, right? As you listen to this, like there are some just basic blocking and tackling things that you need to be thinking about. Mark you're bringing up some really great points and then this road has been trod, right? There are some great players out there that do this over and over again. There's no reason to jump into something that doesn't feel right.

That's right. And just to put in perspective, you know, not to belabor the point about, you know, the accounting aspect, but a $25,000 difference doesn't sound that much to somebody that doesn't understand. But if you're dealing with cap rates, which we don't have to, you know, anything, five, you know, five units and above, but let's just say at a five cap, which is very conservative, a $25,000 misstatement on their financials is $500,000 zero and we're paying for that. Which that's the way it works. It's not made up. That's what you're over paying for the property you buy $500,000 for a $25,000 mistake.

Yeah. That's real right. And I think—

That's real. And we see it all the time. You know, we unfortunately people don't wanna share things or they're not, you know, I went through stuff initially and wish I would've learned these, you know, these things about transactions. I'm like, why wouldn't anyone teach us this stuff? And we share things we've had issues with. And that's how you learn is actually, you know, like you mentioned, as far as how do you prevent those things from happening? We wanna be able to find, you know, prevent mistakes, obviously, but if we have a mistake, find it quickly and fix it quicker than we ever could before, because we've seen a lot of different things. And I look back, you know, years ago, I'm like, man, we could have really got in trouble. You know, if we didn't, you know, based on what you know now I'm like, I'm glad we didn't, but we could have gotten in trouble.

Yeah. I mean, let's put that in perspective. Right? You know, at a 10 cap, everything is multiplied by 10 that just happens to work out that way. So, at five cap everything's multiplied by 20, right? That's the way it works. You're actually dividing which has this like massive multiplication. The deals that we're looking at in today's market are somewhere between two and three. So, there these things can be significant out there and these like small changes, and those are the things that you really need to be thinking about when you're looking at a deal, 'cause your point was, are you expecting the cap rate to go down? Are you expecting the cap rate to go, you know, at least to stay the same, like where it historically low cap rates, which means everything is so sensitive, right? Everything has like a 30 multiple on it. Everything that you're doing right now is a 30 multiple on it. So if the cap rate go to four, they go to five, all of a sudden it's a big value change. And those, you know, like just having a little education and that's why we're having this conversation is gonna help so much. When you're looking at a deal, because like, it's those little nuances right there, then you'd be like, oh cool. Like cap rate, boom, move right on past it. Like, what are the rents? What are all these things? If somebody makes a small, you know, error on the cap rate, favorably to the investment, like it's gonna look terrible down the road as the market changes. And we're at a point where the cap rates are historically low. Yeah, nothing surprises me anymore. Could they keep going down? Like, I guess, right. But like that can't be the expectation, right?

Yeah. Now the benefit is, you know, if you've owned properties we've sold and selling, you know, probably sell about a dozen properties this year. And the benefit is, you know, that same multiple works on the reverse side. So, if you have your net operating come going up by dollar it's, you know, 20 plus dollars of value. And that's how you frankly can make some pretty significant life-changing money. You can, even as a Limited Partner in getting returns you know, a refinance or a supplement loan or a sale. We're not saying we're gonna try to time the market, but we, you know, we sold about probably 10 deals last year, about 24. We'll probably sell another 10 deals this year. We're already at over 20 deals this year. I'm not sure how, but we are, but you know, it's kind of a crazy thing. It's not because, you know, can't sit here and say, oh, we're all geniuses. We're so smart. And you know, we have to get some credit to the market, but it all comes on and taking action though, too. Could you be leaving a little bit of money on the table? I don't know some of these deals we've owned for a year and you're doubling your money in a year. Does it make sense to sell? I think so. I think you have a disproportionate amount of equity capture you're gonna have in, you know, 12 to 24 months, and you might keep another three years and get another 25%. I'm making that number up. But if you can do that hit your 5 to 6 year projection and you know, 18, 24 months, you probably owe it to the investor to sell it.

Yeah. I mean, I agree. Like, it's funny because like, when you think about cap rates, you think about a long term hold, it makes you nervous.

Right.

But if you think about the value that you can create with a super low cap rate, so let's just say you buy a property, we'll do five, right? 'cause that's an easy number to work with. Like every dollar in income that you net operating income that you increase on that property. It's going up by 20, right? Like, yeah. You can do some magic, right?

Oh yeah.

With property that maybe has just been, you know, it's a little, just needs a little bit of love. Rents could go up, you could add some revenue here and there. Like you can do some real good things with low cap rates. But if you know, the investment thesis is a five to seven year hold, like. I would hope to see somebody saying we expect them to go from three to maybe four, right?

No. And for sure, that's right. I mean, the other benefit too, just is the, you know, the tax benefits that we've seen and, you know, that's different for everybody, but you know, for us, it's been significant with, you know, the depreciation with bonus appreciation and cost segregation and those type of things. The end of the day doesn't matter term-wise, it just the Limited Partners, at least when we do deals will be allocated. A prorata share of their depreciation. Now whether they take it or not, or can it doesn't go away. So, if they can't take it for whatever reason, and they do a sale later on, they can offset the sale with that depreciation. And the whole goal is on paper, not to make any money. That's reality. And the whole goal is not to pay any federal income taxes.

Yeah. So, I guess as we kind of wind down here. What excites you about multi-family

For me, it's, you know, I originally started it more for personal reasons, you know, just because of family issues and not having time with family. And now it's also, you know, turned into like, you know, pretty significant financial, you know, benefit, frankly, which has allowed us to. Get back, you know, frankly, I didn't, you know, when I was early on in my, my, you know, young and things like that, I never knew whether I'd wanna give money away or anything frankly, because, you know, we didn't grow up with much. So, I'm like, I don't know. My wife always wanted to, I'm like how are you saying that we don't have any money to give away. And so for me, you know, we're going to charity event tonight and things like that. We're able to support some people in the missionary field that we know very closely nephews and some really good friends. So, that has allowed me when people say money's not important, they've never been without it. And it takes money to make things happen. So, that's been a great thing for me. The other thing is just seeing other people in our group. Have been able to, you know, quit their two jobs or their spouse or both them and their spouse being able to quit their two jobs in a relatively short period of time. I don't know why I love it. You don't have to be, you don't have to love it to be an investor in it, especially if you're Limited Partner. I think if you're gonna syndicate things like that, you're gonna, you're gonna really wanna like it a lot. But as a Limited Partner, I think it's proved that it's, you know, from an inflation standpoint, it's been very resistant. It did phenomenal during COVID cap rates went down between pricing went up pretty much, everybody was wrong on that. What was gonna happen? And it's continued to perform, you know, kind of over and over again. So yeah, we're in a cycle, like you said, you know, nobody knows people guess all day long, they're wrong more times than the right, but it's been, if you can be patient enough, You don't have to sell 3, 4, 5 years. You don't have to, nothing forces to do that cycles don't last, you know, we haven't had a cycle where the cycle is down for five years, you know, it doesn't exist. So, just hold in there, be patient as an investor, get educated as an investor. And, you know, you can be an investor, that's a pain in the butt too, frankly. And as strange as it sounds, people don't want you as an investor. I'd rather not take money and a pain in the butt doesn't mean you're asking questions. That's totally fine. But if you don't understand concepts or you're like, you know, this is all guaranteed, you know, never can lose money, never do this. And you need to understand it's an investment. You need to go into it without that aspect of it. And again, get educated to ask some smart questions and you'll be, you know, you'll be attractive to a syndicator doing deals pointing 'em together.

Mark, thank you. I usually end the show with gratitude, but you beat me to it. So thank you for sharing, but this has been a fantastic conversation. I love it. I love your background 'cause it parallels so nicely with mine. Sure. But thank you for being on the show.

Thank you, Jake. I appreciate it. I hope you've enjoyed today's episode and I'd actually love for you to contribute to a future episode. If you have a question you'd like answered or a topic or a guest to bring on the show, please email me at jake@thelimitedpartner.com. Now I realize there is a lot of lingo. That's thrown around on these shows. So, I've created a cheat sheet for you with the top 26 terms that come up most often, head on over to thelimitedpartner.com/lingo for the list. Enjoy. And we'll see you next time.