Building Wealth from the Ground Up with Brian Burke

CGT 7 | Building Wealth

A lot of people think that building wealth takes an insane amount of talent and amazing background. The President and CEO of Praxis Capital, Inc., Brian Burke, joins this episode to prove that wrong. He shares his origins along with the perception and mindset that he used in order to build his wealth and turn his life around. Learn about the tactical methods he uses in order to offset capital gains tax in great detail. Understand why it’s necessary to focus on your own niche while being flexible at the same time. Brian also emphasizes the importance of variety when you invest. He discusses easy and practical strategies for you to diversify your risk as a way to not only create but also preserve more wealth, both for yourself and your partners.

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Building Wealth from the Ground Up with Brian Burke

I’m excited about our next guest, Brian Burke. He’s with Praxis Capital. He has 30 years of experience, multifamily, single-family homes. He talks about real estate and how it’s like a river. If you want to be successful, you’ve got to go where the river leads. Sometimes the river is not straight. Sometimes it’s going to the left. Sometimes it’s going to the right and it’s flowing in certain ways depending on the market cycles and different locations and different product types.

He’s going to talk about how he has allowed the river of real estate, if you will, to lead him to more profitable opportunities, whether that be selling out of California, whether that be buying in other states, whether that be using single-family flips during the crash of ‘08 to going into multifamily. He has a unique story and a ton of wealth of knowledge. He also is going to tell you about, don’t let the tax tail wag the investment dog. In other words, don’t let tax be the reason you buy a particular property or deal. Make sure you’re buying it on the intrinsic value. I’m excited for you to read this. I look forward to your comments and sharing it with anyone else that you think might find some value here. Thank you so much.

This is another great opportunity to learn from somebody who has been in the business for years. He’s created a vertically integrated real estate private equity investment firm and has acquired over $500 million worth of real estate, including 3,000 multifamily units and more than 700 single-family homes with the assistance of proprietary software that he wrote himself. He also has subdivided lands, built homes, and constructed self-storage. He prefers to reposition existing multifamily properties. He’s also the author of The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications. He’s a frequent speaker at the real estate investment forums and conferences across the country. You can find him at PraxCap.com. Please welcome Brian Burke. Brian, how are you doing?

Great, Brett. Thanks for having me on.

Will you give our readers a little bit more about your story and also your current focus?

My story goes back quite a way. I’ll summarize it. I started investing in real estate years ago. It all started with one single-family home purchase. I bought it as a rental. After that, I got into the fix and flip business where I was buying, fixing up, and reselling single-family homes. That business grew well. We had a massive real estate downturn. You might have heard about it.

The 2008 crash. You must be living under a rock if you didn’t hear about that one.

If you missed that, then something happened. We managed to survive that massive real estate downturn. In fact, it was probably the most intense catalyst for our growth. It allowed us to expand and grow our business because of the availability of distressed real estate which is what our platform was centered around ever since the beginning. We grew intensely after the real estate crash and continued to grow ever since. We started raising a lot of money to buy a lot of single-family homes after the foreclosure debacle or during the midst of the foreclosure debacle but realized that that was probably a short-lived opportunity. You scratch your head and you go, “What are we going to do when this party is over?” We turned our focus back to a business that I got into in 2002, which is multifamily real estate. Multifamily is scalable. You can maneuver around market cycles by investing in different areas because there’s multifamily in every market in the country. We knew that that was something that had a lot of runways left. It had a lot of room for us to grow and build a sizable portfolio. We’ve been focused solely on the multifamily space and have been building a portfolio there.

CGT 7 | Building Wealth

Building Wealth: Multifamily is scalable. You can maneuver around market cycles by investing in different areas because there’s multifamily in every market in the country.

 

Before all your success, Brian, as a multifamily owner and also as a single-family fix and flip and also this proprietary structure, which I’m interested to learn a little more about, I’m curious, who was Brian growing up? In particular, not just the hard work that got good grades, but what was the particular gift that you were given? We’re all given certain gifts. Some people call it a superpower. It’s God-given gifts. What was the one particular gift? In particular, how does that gift help how you help people? Connect those dots for us.

My biggest gift was I was a terrible student. I was a C average high school graduate that hated school. I also had a poor family. We had nothing. I knew that A, I would make a terrible employee, and B, I had to make my own way because I wasn’t going to inherit a dime. That meant that I had one option and one option only, and that was to be an entrepreneur. I had all the motivation in the world to make sure I did it right. While many people would consider those a handicap, I turned it to use it to my advantage because you’ve got to be motivated by something to succeed in anything. That was a real strong motivating force for me.

Seeing the silver lining or taking what’s in a typical situation where people who are maybe negative or maybe use it as a handicap, you turned it around and let it fill you into a positive, into growing, into reaching for new goals.

If you’re going to be a one-trick pony, which is what I am, I know real estate, I know how to do this business and navigate it, maneuver it or I wouldn’t have survived it. Even though the worst adverse market, we’ve ever seen in at least my lifetime, if not maybe the generation before me and maybe even the generation before that, if I can navigate and survive that, that tells me I can do something right. If I’m going to be a one-trick pony, this is going to be it. I knew I was never going to be that Harvard grad that could come in and turn a company around and do all the kinds of things that those guys can do. I knew I had to build something and bootstrap it from nothing and that was the only way I could do it.

I’m curious, what do you think we are with this market cycle? You’re in Santa Rosa, California. I’m in Sacramento. Santa Rosa faced some major fires. California has a huge deficit in housing. Sacramento is year over year, the number one fastest-growing rental market in the nation for multifamily. It’s slowed down the last couple of years, but years before that, it was number one twice in a row. Where are we at with these multifamily opportunities to buy, to sell? How does that compare to what you saw before the run-up and the crash in ‘08?

The people that are in our own backyard are going to hate my answer because Sacramento may have led the country and regulatory constraints have come into play that’s going to impact Sacramento’s results. We have statewide rent control here in California, which is going to place some caps on rental growth and it may make that even less desirable. Personally, we’re selling everything we’ve ever had in California. If I never buy another parcel of real estate in California again, it will be too soon. We’re focused on buying in areas where we see future growth and future potential. We invest in places where people are moving to, not where they’re moving from.

If you look at migratory patterns, California is one of the biggest exporters of the population and New York. They’re going to places like Arizona, Texas, Georgia, Florida, Carolinas, Tennessee. They’re going to those markets and we’re trying to get ahead of that wave and own in places where that population is moving to. At the same time, we don’t have regulatory constraints that are capping our ability to succeed in this business. California is facing a lot of challenges. I could go on and on about all the reasons why. What’s most important is when you’re looking to profit from real estate, the real estate market is like a meandering stream in a meadow and it will go left, it will sway right, and it will sway left again. If you row in a straight line, you’re going to run aground. You have to be able to steer and steer around those obstacles. We steer around the obstacles by looking at where we’re investing.

When people ask, “What’s the real estate market doing?” I always have to chuckle because there’s no such thing as the real estate market. There’s a different market on every block. Where we’re at, they’ll say, “Are we in the sixth inning or the seventh inning?” Who knows? Games get rained out early and they also go into overtime. We’re in markets where you might call it 5th or 6th inning. California might be in the 8th or 9th, maybe even in the 10th. There are plenty of places across the US where you can still make money in real estate and continue to do so as long as you do it with safety as your number one priority.

Walk us through a deal that you’re selling in California and how your return on equity is. For those who don’t know about the statewide rent control in California, essentially, they capped rent by 5% plus the cost of inflation. For most places, that means 8%. You cannot push rents past that amount in a given year. Especially for people who were buying value-add opportunities, they were looking to buy where the rents were low, add a bunch of value, and raise rents by 10%, 15%, 20%. That puts a big hindrance on that opportunity and therefore there’s less incentive for them to buy. That being said, the same thing is true for even rents moving forward. You only can increase by, let’s say, 7%, 8% depending on what city you’re at. Walk us through your return on equity average. Let’s say an average $10 million deal. What are you seeing in your portfolio, Brian, in California versus, “If I sell this thing and go to Texas, Florida, these different states that are more favorable, what’s the difference in maybe the cash-on-cash return?”

I wish I could answer that because we don’t own any multifamily in California. We stopped looking at acquiring in California. We still have some single-family in California, but we won’t for long. We had 120 single-family homes in the San Francisco Bay area that we bought at the bottom of the market. We started selling those. We’ve almost rounded out the entire portfolio. We’ve got less than 5 or 6 houses left. We’re out completely from the California market. The only thing we’re going to have in California will be a few fixes and flip type of single-family properties that we’re still doing a little bit of because we already have the systems in place, might as well, if we can find the arbitrage. In terms of return on investment, return on investment left the California scene any time after 2013. If you could buy in 2009, 2010, 2011, you’d do well in California, but as prices started ramping up ‘13, ‘14, ‘15, it became way less desirable. When you’re buying at 2% or 3% cap rates and having to put down 50% to get cashflow, the prices have gone too far.

CGT 7 | Building Wealth

Building Wealth: There’re plenty of places across the US where you can still make money in real estate and continue to do so as long as you do it with safety as your number one priority.

 

You sold at the right time. It sounds like a good time. You probably even bought at a good time on some of these other markets. Walk us through and what are the differences in returns if you had a chance to peg it?

We had some sales years ago where we were generating IRRs in the 40-ish percent range. We sold a couple of deals in the high twenties. We had one that was 43% internal rate of return, enormously high returns. We’ve never been one to forecast like that. Back then we were forecasting 17% or 18% IRRs. We were enormously outperforming that but that was what we were forecasting. We’ve been consistently lowering our return expectations.

We were forecasting returns in the 14% to 16% range, depending upon the length of the hold time with 14% being a ten-year hold, 16% being a three-year hold. We’re even compressing that even further. Our return expectations are about 12% to 13%, which is what we’re looking at. As soon as I get done saying that, we have a deal that we’re selling, offers are starting to come in. This is something we bought years ago. We’re going to end up delivering almost a 30% IRR. I wouldn’t have thought that possible on an asset acquired years ago, but it goes to show that when you can acquire the right asset in the right market, there are a lot of legs in it.

You must have found a 1031 buyer selling out of California who has some money burning in his pocket.

That has been a source of buyers for us. One question people always ask is, “Who’s going to buy this for that price when you go to sell?” The answer, often, is a 1031 buyer.

I sold a deal in Sacramento. A friend of mine bought it for $685,000 Downtown, Midtown Sacramento. A little seven-unit property, flat roofs, 1960s construction. It has 2 or 3 bedrooms. They sold for $1.9 million. It’s a $270,000 a unit. It’s a nice location. The average rents are somewhere between $1,300 and $1,450 and the guy paid $270,000 a unit. We’re going, “Who’s going to buy it?” I go, “It’s going to be a 1031 buyer and he’s going to be from the Bay Area.” Within two weeks, sure enough, all cash, 1031 buyer, Bay Area and he bought it. The money was burning in his pocket and he felt he had no other choice but to buy that property instead of paying the tax. It happens. It’s a part of where we’re at with a lot of these market cycles that I’m seeing.

You’re absolutely right, each market is specific and each street is specific. The key is following where the deals are at and not buying because you want a defer tax, but buying on the intrinsic value, on the value-add opportunity, on the force appreciation opportunity, not just to defer the tax. There is what I like to call a lot of dumb money where they’re going to buy it because that’s all they know and it’s not necessarily a profession. They don’t want to pay the tax. That being said, after doing all these deals for all these years, what’s the single best advice that you would give to high net worth individuals to defer capital gains tax or not overpaying. Walk us through a little bit of how you guys help mitigate, whether it be through cost seg, whether the 1031s. You mentioned a little bit maybe doing a TIC structure, you found out after a few years how to do that. Walk us through that strategy and how you help people with that.

One of the important things I tell people all the time is don’t let the tax tail wag the investment dog and so often people will do that. To your point about that property in Sacramento from your friend, here you have someone that’s overpaying for a piece of real estate just because they want to avoid writing Uncle Sam a check, and that can be a bad recipe. A friend of mine is a longtime investor. I thought I was a long time at 30 years, he’s 50 years. He told me he runs a family office and he said that some of the worst investments he’s ever made have been 1031 exchange deals because he’s buying with a gun to his head. You’re more focused on what you’re going to have to pay in tax than you are about what you might or might not make on the deal. It’s important to keep that perspective. Sometimes paying the tax, as awful as that may sound, maybe the right decision. That’s part of it.

In terms of what we can do to help mitigate, there are a few things. One thing that helps to mitigate is we use a cost segregation analysis study on the assets that we buy, which enables people to front-load a lot of depreciation. You can exit an investment without a 1031 exchange and reinvest that capital in another deal that uses two things. One is bonus depreciation and the other is cost segregation analysis and end up with so much first-year depreciation that you can offset some amount of the capital gain you would otherwise have been receiving in your property that you’re selling. The best part about it is you don’t have to make that investment decision in 45 days. You’ve got a longer time period to be able to take advantage of those opportunities. It’s not going to defer all of your tax in every case, but it might in some cases and it certainly might defer a lot of it in every case. That’s a couple of tools that we use.

You mentioned the 1031 exchange funds going into our syndicated offerings. For those readers who aren’t aware of the restrictions on doing a 1031 exchange to like-kind property, you can’t exchange out of a parcel of real estate and acquire partnership units in syndication because those partnership units are not like-kind of real estate, even though the partnership is buying real estate. You can’t 1031 exchange into a syndicated real estate offering, but you can partner with the sponsor and become a Tenant in Common with the sponsor and 1031 your money into a percentage of the deal and they can syndicate alongside you. That’s something that we’ve had in development for a number of years. It dogged me for about a decade trying to figure out how to make that work. We have gotten our arms around it and are able to look at those opportunities with some of our larger investors.

CGT 7 | Building Wealth

Building Wealth: Sometimes paying the taxes, God awful as that may sound, may be the right decision.

 

I’m curious, when does cost segregation not work? When does the TIC structure not work?

The TIC structure does not work for small investments. We’ve had people that have come to us and said, “I’ve got a rental house I’m selling. I’ve got $100,000 coming out. I want to do a 1031 exchange. Can I invest it with you guys?” The brain damage required to put together a structure like that is intense. It is costly. There are a lot of legal fees. It doesn’t make sense for a smaller investor. If we had somebody come in with $1 million, we had one group that came to us with $20 million, that made sense to do the brain damage for them. If you’re under $1 million, it doesn’t make a lot of sense.

We’ve run into the most challenge with cost seg. It’s worked fine for all of our properties. I’m not a tax expert but I do know that there are limitations on how much passive deduction people can take when they’re not actively involved in the business. There can be personal limitations that are unique to each investor on how much of those cost segregation deductions they’re able to utilize. The other way that we’ve run into difficulty with cost segregation is when we have foreign investors. We’ve done some deals with overseas institutions who have brought in the majority of the equity. They’ve given us a mandate to not do cost segregation on properties that we buy with them as a partner because taking the depreciation on a cost seg basis ends up hurting them on the overseas taxes, which I thought was interesting and something I hadn’t heard of before. It has been a bit of an obstacle to some of our offerings in the past.

I’m curious about the whole period. If you’re doing a cost seg, is there a 1, 2, 3, 4, or 5-year hold where you generally say, “We at least want to hold this asset for X amount of years to make sense of doing this?” What are your average hold times? Are you already holding for that long anyway so it’s not an issue? Walk us through the timing of your deals.

We’re generally holding for 3 to 5 years. We don’t get in and out of stuff in 1 to 2 years generally. We could and there have been cases. Our record is 21 months from acquisition to disposition, close of escrow to close of escrow, which was fast. We didn’t do cost segregation on that property. We certainly could have, especially if we intended to hold longer. Generally, we are doing cost segs on most of our assets but we’re also intending to hold most of our assets for 3 to 5 years. We may have an early exit. We don’t use the fact that we did a cost seg as an excuse to not early exit. If there’s a chance for us to put a run on the board in the wind column for our investors, make them a healthy profit and return their capital and take the chips off the table, we’re going to do that and not let that tax tail wag the investment dog.

You've got to be motivated by something to succeed in anything. Click To Tweet

Looking at the estate tax with ultra-high net worth readers that struggle with, “How do I get these funds outside my taxable estate?” Some of you are FLP, Family Limited Partnerships. They’re doing some gifting, small gifts along the way. They’re trying to buy with their kids in different ways, but they can’t seem to get it out fast enough. Meaning, they’re running out of these exemptions. Is there anything that you’ve used or you’ve seen that can help accelerate the ability to get large amounts outside of the taxable estate so they can save that 40% above their exemptions?

We haven’t run into that too much. Most of the guys that are ultra-high net, they have their own tax advisers that they turn to that help them structure how they want to be the most tax-efficient. We’ve certainly had some that use some of those vehicles you talked about, especially gifting. We’ve had some where they’ll have a limited liability company. They’ll form with other family members and then the other family members are stepping in and taking an active role and making the investment selections. It takes the patriarch or matriarch of the family that much more removed from what’s going on there. Those have been the major ones that we’ve seen. The 1031 exchange, of course, is another big one. LLCs and family limited partnerships have probably been the most common that we’ve run into.

To clarify, 1031 exchange maintains a step-up basis which is neat because, at the end, when you die, your heirs get a step-up basis of which that point they can sell and be tax-free as long as the value didn’t increase by the time they sold. However, the estate tax has nothing to do with that. It’s completely separate and they’ll look at your overall taxable estate. If you’re above certain exemptions, $22 million for married, $11 million if you’re single, they’re set to expire in 2025. Anything above and beyond that will be hit with a 40% debt tax. By the way, for foreign investors, if you have any foreign clients, the minimum is $60,000. They hate that their exemption is at $60,000, but anything above and beyond that is hit with a 40% estate tax. It’s something to keep in mind. I’m curious, what is the single best way to build wealth? Investment real estate, we know that’s your passion and that’s your way of doing things. Inside of buying investment real estate, what has been the thing that you say, “I’m glad I did X?”

I’m a one-trick pony. Real estate is the one thing I know. I’ve done some stock investing and mutual fund investing in the past. That’s never been a big focus of mine, certainly not something that built me a lot of wealth. Real estate has been the one thing that has always been there for me. When you think about equity investing and bond investing and those kinds of things, all of those same characteristics are available in alternative investing. Equity investing in stocks gives you upside potential. It can give you cashflow from dividends. Bond investing can give you a coupon that you can collect.

Of course, there are derivatives and all other things that you can invest in but real estate, to me, has many different facets where you could invest in a fix and flip opportunity where there’s an opportunity to get a big game. You can invest in a class A multifamily property that throws off a good cash-on-cash return. Maybe it doesn’t have a lot of rent growth or a lot of backside potential but it has a lot of cash-on-cash return like a bond. Some of your class triple-A, high-quality assets, trophy properties, that sort of thing, not a lot of cashflow but a lot of safety. It’s similar to your bond investing.

We’ve got some repositioning opportunities where we’ll buy multifamily property or rents for $300 below market. Bring them up to market rate increases, the income, which increases the value of the real estate more like stock investing where you’re getting that pop but you also get cashflow at the same time. We also have lending opportunities where you can have somewhat like a bond where you’re getting a coupon payment but you have security. There are many different ways to invest in and around real estate. It offers all of the different things that the various conventional investment opportunities offer but yet they’re unconventional and they’re alternative to the mainstream. The reason why I like that is it causes them to be non-correlated. You don’t have this scenario where the Dow dropped 400 points so that means everything went to crap. Your real estate can be steady as she goes as long as you’re in the right real estate with the right capital structure.

A good example of that is when you look back to the dot-com crash of 2000, 2001. Stocks took a plunge and real estate was essentially unaffected. Our rentals were occupied. Our rents were increasing. Our properties were selling. People ask me all the time, “What’s going to happen in the next recession?” Not every recession is going to look like in 2008. Some recessions look like 2001 and real estate does fine. It has a different risk and safety profile and allows people to diversify. Nobody should put all their wealth in real estate but it has a place for some of it.

CGT 7 | Building Wealth

Building Wealth: Keep in mind that the TIC structure does not work for small investments.

 

Real estate, especially investment real estate is the best risk-adjusted rate of return that you can achieve, especially its value-add, especially if it’s a great location. You’re right, it’s nice to be able to diversify. You can go with high risk, high value-add, single-family up to 100 units that are some risk. Multifamily or turnkey, 95% occupied, class A locations, you could pay lower prices for that but it’s going to be more consistent and probably not going to have as much deferred maintenance along the way because it’s a newer property. You can diversify commercial real estate. I’m curious, how have you been able to diversify within commercial real estate? Are you looking for that BS, that B location value-add? Is that your bread and butter? Are you starting to buy more class A? Are you even considering developing because a lot of those value-adds are hard to find and the values are highly pressed up? What’s your strategy to keep that diversification going for you?

Interesting question, especially as it relates to development. As far as development goes, I’ve been there, done that and got the t-shirt. I’m not interested in doing it again. When you talk about the risk spectrum, nothing is higher on the risk spectrum than real estate development. I used to hear a joke a long time ago that said that every real estate developer is either bankrupt or going to be. There’s a lot of truth to that. I used to think, “That’s ridiculous. If you do it right, you’re not going to get hurt.” I did my share in the development and thank God it didn’t bankrupt me but I’ll tell you when things don’t go according to plan, it hurts and it hurts bad. Having lived through that, I don’t want to do it again. Development for me is off the table. It’s outside of my risk profile.

I do think that there are ways to spread your risk and diversify your risk and we do that a number of ways. One is we invest in a variety of locations. We’re buying in Phoenix, Vegas, Texas, Georgia, Florida, North Carolina. Those are the markets where we’re shopping for real estate or where we own real estate. Having some geographical diversification can help us to weather any kind of storm, whether it’s a natural disaster type of storm or an economic disaster type of storm. The second thing is we have a variety of property types. We have some class A product. We have some class B products. We have some class C products. We’re spread among different asset rates and rankings in different markets as well. The other thing is we have different sizes. We have properties that are 95 units and we have one property that’s over 500. Having different property sizes is another way that we diversify.

When you can acquire the right asset in the right market, there's a lot of legs in it. Click To Tweet

Diversifying among asset classes is another. We’re not that good at that. We’re good at multifamily but you can diversify and own retail strip centers, office buildings, triple net leased commercial properties, self-storage, mobile home parks. There are all sorts of different asset classes within the real estate itself that you can use to diversify and then you can do those in different markets and you can mix and match all day long. You can buy mobile home parks in Arizona and multifamily in Georgia and commercial office properties in Texas and create all these different things. What you have is, instead of a real estate cycle, you have all these different cycles that are all out of phase with one another, where different things are going on at different points in time. That’s one of the things that real estate offers that is enormously beneficial.

That’s a good part to talk about the 1031 and one of the challenges is the lack of diversification in that. Typically, you’re trading one single asset and one single location for one other single asset and one other single location. Equal or greater value, you’re identifying 1, 2 or 3 for the rules and you’re only closing maybe one, maybe two of those. Too often, it’s that same product and it’s in that same cycle. The whole entity must move. By default, its singular, meaning, I can’t invest with all these other people or there are not a lot of opportunities for the TIC going in and it becomes, “I could sell high but I’ve got to buy higher,” and oftentimes, taking on even more debt, which is part of the ‘06, ‘07 run-up. I love to be a seller. I hate to be a buyer. I feel like I’m forced and the music stops and you’re not diversified. You’re in a single asset class. Maybe you’ve got some more units and you’re able to weather the storm but the key is not taking on too much debt. Would you walk us through a little bit? Not so much debt diversification, but it could be. It could be, “I’m going to a non-recourse deal but that’s not in my name.” More so, taking on smart debt when it makes sense versus over-leveraging to do equal or greater value for a real estate deal.

It’s interesting you bring that up. Look at the carnage and aftermath that resulted from the real estate decline that started in August of 2005. I can almost remember the day the light switch got turned off and real estate started falling in value in ‘05 and slid all the way until ‘09. With the worst of it being probably ‘07 and ‘08, it was probably the biggest declines during those two years. If you were to analyze the real estate that ended up in trouble, you’d find that in most cases, real estate was over-encumbered. A lot of times, they were negative cashflow, to begin with. In any event, when value started to slide, the owner had no exit. They couldn’t sell and pay off the loan. The value had fallen below the loan amount. The cashflow wasn’t enough to fulfill the debt service. Those are the risks that high debt loans can bring on. I see a lot of that in the passive real estate syndication space, where you’ll have newer sponsors that are trying to attract capital. The way they attract capital is by promising these high rates of return.

When you bake it down, what they’re doing is financing the property, primarily, with a higher interest rate, higher loan-to-value or loan-to-cost bridge debt. They’ll come in and they’ll borrow, let’s say, 80% of the entire cost of the property, which would include the purchase price, closing costs and the cost of renovation and that’s all debt. By doing that, you’re able to leverage the return of the equity partners who are bringing that equity in. The first time that it hits the fan, you’re in real trouble because there could not be enough cashflow to service that loan payment and you could have 100% loss of your investment if the lender forecloses.

The people who survived the downturn are the ones that had the lowest leverage when things went awry. That’s what we’re focused on. Not knowing exactly what the future holds, we’re trying to put the armor plating on and make sure that we live to see another day. I always say, “My first job is to not lose people’s money. My second job is to make them money.” One thing is for certain, I can’t make them any money at all if we lost all their money. Capital preservation is king. Capital preservation means don’t over-lever and get yourself in trouble. We’re buying stuff at 60%, 70%, 75% loan-to-value which results in 50%, 60%, 70% loan-to-cost. That gives us the ability to live to see another day, but we’ll never win the game of being the one that produces the highest rate of return. We’re more about the safer option than the hair on fire option.

CGT 7 | Building Wealth

Building Wealth: There are limitations on how much passive deduction you can take when you’re not actively involved in the business.

 

We call that smart debt, risky debt, and dumb debt. Dumb debt is one where you’re pressing your luck here and you’re hoping that the tides keep rising. Warren Buffett has a good saying, “When the tide comes back out, you’ll see who’s been skinny dipping.” That’s the part where you have to be cautious with the syndicators that you’re investing, the sponsors, the deals, the level of debt, and the level of risk that’s associated with each particular deal. That’s why I like Brian because he’s been through multiple cycles and he is seeing the good, the bad, the ugly and he brings lots of experience.

Of course, smart debt is taking on deals that make sense. When the market is down, depressed, it’s a buyers’ market. You can find that in any market. I’m not saying that you can’t find that but when you find it, take on some debt, but that deal, especially if it’s forced appreciation opportunity. To me, that’s smart debt because you can add that value by simply doing a rent survey study, looking at adding some countertops, washer dryers, maybe some flooring, some new lighting, some rebranding.

You know, I do this and this. It may take 3 to 6 months but when I do that, my rents are going to go up by $100, $200, $300. At that point, I’ve added the value versus hoping and praying that the values go up. That’s where risky debt comes into play. Once you’ve added that value, you’ve made that equity and you have a chance to exit and you’re holding on to that debt, you may not necessarily do a 1031 but you may refinance. Instead of paying down that debt, you may take on extra debt. You’ve got to be careful to navigate that. A whole other part of the risk-adjusted rate of return is navigating debt. That being said, let’s move into the lightning round. A favorite book you read?

I haven’t read any because I wrote a book. I finished writing one. That absolutely consumed every minute I have. I wish I had a book I could tell you.

Not every recession is going to look like 2008. Some recessions look like 2001 and real estate does just fine. Click To Tweet

I want you to plug your book. I want you to tell us the number one thing you learned while you were writing that book.

The number one thing that I learned is it’s hard to write a book. I had a feeling it was going to be a real process but I had no idea how much time it was going to take if you want to do it right. There are a lot of books that are written out there that are 150 pages and it skims over the topic and doesn’t give you the meat of what you need to know. If you want to write one that is comprehensive and gets down into the details, it is a ton of work. I learned that the hard way. The thing was, by the time I figured it out, I was past the point of no return. I couldn’t stop that. I had to finish it. That was probably the biggest thing I learned, be careful what you wish for.

For those who don’t know, it’s called The Hands-Off Investor. That is the book. Search for that at PraxCap.com, that’s where you can find that. Favorite podcasts you follow?

The BiggerPockets podcast is a big favorite of mine. I’ve been a guest on that show three times. It’s one of the most downloaded real estate podcasts in the country. I’m going to be on that again. The BiggerPockets is the publisher of my book. I’m going to be on the BiggerPockets podcast when the book launches. It’s a great show. It talks about all the different kinds of things in real estate and since I’m in love with real estate and the whole world that surrounds it, that’s my favorite podcast.

Best winery in Santa Rosa or Napa?

I’ve got a confession to make but you can’t tell anybody. I don’t drink. I live here in the wine country. This is the gateway to the wine country. All the most famous wineries in the world are here and I don’t drink. Don’t tell anybody that I live around here because they’ll kick me out of here if they figure out that I’m not consuming their number one agricultural product.

I’m with you. That’s like me with beer. All my buddies drink beer, I was like, “I don’t like beer. I don’t drink it.” I’ll have a glass of wine here and there. I hear you on that. For those who don’t know, Santa Rosa was hammered by fires. It’s bad, it’s tough in California. Brian, maybe give our readers a little bit of what happened. How is Santa Rosa doing?

Santa Rosa is on the recovery. The first fire was in 2017, it was the Tubbs Fire. That was October 8 of 2017. It started about 35 miles outside of town. I remember going to bed that night and hearing something on the news about there being a small fire in Calistoga. It’s 35 miles away and no big deal. I woke up at 4:00 AM to pounding on the door and going, “The whole city is on fire. You’ve got to get out of here.” That’s how long it took. In about three hours’ time, that fire made its way all the way down here.

Sadly, it leveled about 5,300 homes in our city. I was one of the lucky ones. It stopped a few streets from my house. Our house didn’t burn. What’s funny though, it probably stopped about two feet from our office. There’s a window behind me in the office. Outside that window, I used to overlook the historic Round Barn. It’s been there for 150 years. Now I overlook a field. That barn has gone. The hotel across the street is gone. The hotel down in the corner was gone. The mobile home park at the corner is gone. Our office somehow managed to still be standing. I remember driving through here when the fire was burning on the day it torched off. I drove through the parking lot. All of our landscaping was on fire. The dumpster was on fire right next to the gas meter. There wasn’t a soul around, no firefighters, no nothing and I thought, “This office isn’t going to make it,” but we’re still here.

CGT 7 | Building Wealth

The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications

It’s funny, everybody asked me after the fire, “What are you going to do? You’re in the real estate business. We lost 5,300 homes.” I’m like, “Not one thing. I am not a real estate developer. I’m not rebuilding homes. I don’t want anything to do with the city government and politics.” It took about a year to wear me down. Finally, we got approached by the largest homebuilder in our city. This is the group that built most of the homes here that burned when they were originally constructed. They came to us and said, “We want to do this program and start rebuilding homes in the community, not only for people that lost their homes but also for people who don’t want to rebuild, want to sell their lots. We can build spec homes there and provide housing for people. Would you be interested in raising capital for that purpose?” We did. We raised a fund. We’ve been building houses. That’s been a cool way to participate in the recovery.

That’s a great story, to give back and help them with such a big need in such a beautiful part of California, which is Santa Rosa. There was another fire too that hit. It was not as big but still intense. Tell us about that and the recovery since then.

That was the Kincade Fire. That was October 2019. It was probably larger than the Tubbs Fire in terms of acreage burned. Fortunately, it didn’t do as much structural damage. There were a number of homes lost but it was in the dozens or hundreds, not in the thousands. It managed to stop short of the Tubbs Fire scar. Fortunately, for us, we were a little bit worried about a few of the houses we were rebuilding, thinking they could burn a second time before we even get finished building it, but that didn’t happen. Hopefully, so much fuel has been consumed that we’re going to be okay for a while.

I’ll send some prayers for Santa Rosa because they’re still recovering. It leads us to our last question, Brian. This is probably my favorite question. It might be some of our readers’ favorite questions too. It has to do with how you stay centered in your values and how you stay encouraged charging forward to new heights. After accomplishing all that you’ve accomplished, the wealth you’ve helped create for you and your partners and even giving back to the community with Santa Rosa and all of these different things, being on BiggerPockets, writing these books, how do you stay centered in your values along this journey? Second, how do you stay encouraged to reach to new heights and reach new goals?

A lot of it is from our investors. We’ve got well over 1,000 investors that invest with us on a regular basis. I get feedback from them that keeps me motivated. We did our quarterly reports and I got an email from one of our investors saying, “This quarterly report is the most incredible report I’ve ever seen. I don’t have one single question that comes to mind that was left unanswered. Can I share this report with the other sponsors I’ve invested with to show them how this should be done?” They say plagiarism is the biggest form of flattery, but for me, that’s the thing that drives me, doing a good job for people and to be able to have people say that we’re doing the right things and producing a return for them. We’re exiting some properties. We’re going to have some great home runs. To me, that’s what I live for because if I wasn’t doing this, what else would I be doing? I don’t have anything else to contribute to society other than help people build their wealth and make money.

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You’re in your strong point and your sweet spot, helping people create and preserve more wealth through investment real estate. I want to remind everyone you can find Brian Burke at PraxCap.com. Check out his book, The Hands-Off Investor. Brian, any last words for our readers?

Thank you for having me be a part of this. I’ve had a great time being on it. I appreciate you thinking of us over here at Praxis.

Thanks, Brian. Thanks again for reading Capital Gains Tax Solutions. As always, we believe most high net worth individuals and those who helped them struggle with clarifying their capital gains tax deferral options. Not having a clear plan is the enemy and using a proven tax deferral strategy such as a 1031 exchange, cost segregation, TIC structures into syndication deals and of course, the deferred sales trust is the best way to grow your wealth. Until next time, take the information you’ve learned, the inspiration from Brian, and make some great things happen. Thanks so much.

What an amazing interview with Brian Burke of PraxCap.com, Praxis Capital, and a wealth of knowledge. I love the inspiration of growing up. It wasn’t always easy for him. He had a lot of reasons that may be why not make it but instead, he looked at it as a gift. It reminds me of the quote, “Consider it a privilege, not a sacrifice to pay the price for your dreams.” Whatever challenges you’ve been through in the past, whatever obstacles and adversity you faced, you can turn those things around and you can make a huge success, whether it’s real estate or whatever profession you’re in.

That’s encouraging to me because I have a similar background growing up. Our parents are divorced. One parent had a bunch of money and a wealthy entrepreneur, and the other one not so much. I live with my mom. We grew up with humble beginnings in that sense. At the same time, I got to see both sides and lots of positive things from both parents. I was able to turn a lot of that into inspiration to work hard and learn a lot from coaches and from people. That was inspirational for me. I appreciate Brian sharing that.

A little more tactical, we talked about a couple of things. Cost segregation, if you haven’t heard about that yet or haven’t looked at that, we have affiliates that we work with who are experts in this. You can reach out to us. We can connect you with a great cost seg team, which is a great way to offset capital gains tax and also income that’s coming off our properties as well as, of course, the deferred sales trust. If you can sell something, move it to the deferred sales trust, get a new depreciation schedule, and then use cost seg through what you purchased with the trust in the new deal. It’s the best of both worlds. We can also walk you through that scenario.

Don't let the tax tail wag the investment dog. Click To Tweet

The other one we touched on was the estate tax, although we didn’t get into it too much. As a reminder, the deferred sales trust, we can move the funds outside the taxable estate for the ultra-high net worth audience, all in one single deal. The other thing that Brian mentioned was focus. He has focused on his particular niche, which has been investment real estate. He said it’s like a river. There are times when he’s doing single-family home flips and there are times he’s doing multifamily. There are times he’s getting out of California and he’s going into other states. He’s not just going down one straight road, it’s more like a river, letting the market and the different opportunities and the numbers lead him down a path of creating and preserving more wealth for himself and his partners. He talked about variety, variety locations, product types and sizes and having different product types. There’s so much wealth of knowledge. Go back and read again and hopefully be inspired.

The last quote we’ll have is, “Don’t let the tax tail wag the investment dog.” In other words, don’t let the tax that you’re going to pay drive the investment you’re going to make. Buy the investment based upon the intrinsic value. With that, that’s all I have for this. I look forward to you guys reading the next one but more so than that, take some action on this. If you need help clarifying these capital gains tax deferral challenges, please reach out to us for a no-cost consultation. Go to CapitalGainsTaxSolutions.com and schedule a free one-on-one consultation where we can start your optimal timing tax-deferred wealth plan. Thanks so much.

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About Brian Burke

CGT 7 | Building WealthBrian Burke is President & CEO of Praxis Capital, Inc., a vertically integrated real estate private equity investment firm, which he founded in 2001. Brian is also a member of the Praxis Investment Committee. Praxis operates on multiple platforms, currently managing active syndications for the acquisition of single-family, multifamily, and opportunistic residential assets in US growth markets.

Over the course of a real estate investment career that began in 1989, the offerings Brian manages have acquired over 750 properties, including over 3,000 multifamily units, with the assistance of proprietary software that he wrote himself. Acquired asset classes include single-family homes, self-storage, mixed-use, and large apartment complexes in multiple states. Brian has arranged well over $500 million in debt and equity for Praxis acquisitions. Praxis’ current portfolio exceeds $200 million of real estate assets under management.

Brian is the author of The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications, and a frequent public speaker at real estate conferences and events nationwide.

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