Tom Burns is a principal at a private equity real estate firm in Austin, TX, a physician for the US Ski Team, and author of the best-selling book, Why Doctors Don’t Get Rich. He has developed or acquired real estate locally and internationally for over 25 years. He’s a sought-after speaker and mentor and is frequently featured in nationally circulated print articles and popular real estate-oriented podcasts.
Tom has been financially independent for a decade. He is the founder of the Rich Life Mastermind, and his mission is to help people create financial independence so they can control their future and travel to exotic places with him! When not writing, speaking, or teaching, he spends most of his time exploring the world. Author | Speaker | Real Estate | Mentor | Physician | Orthopedic Surgeon
Episode Highlights Here:
Tom
Yeah, if the numbers don’t bear out our choices, drop the project or, or increase, you know, increase the equity. You know, a lot of times we’ll raise more equity to make sure we’ve got a bigger cushion. And of course we put, you know, we put builders contingency and overhead and things like that.
Pierce
What’s the number one secret to developing a successful apartment project?
Tom
Not good, probably conservative underwriting and fixing debt. Yeah, things change, nobody can predict the future. I have looked and looked at my crystal ball and it has never cleared up, it’s always cloudy. So it is being conservative. And, you know, hopefully, hopefully, that under promise yourself and your investors and hopefully, overproduced because it doesn’t always work out.
Pierce
What’s the number two secret to that conservative underwriting piece? Let’s dive into that a little bit. And what’s like one or two things that you make sure that you do on every single underwriting that that makes sure you’re having that conservative,
Tom
you know, will, will take will take whatever the market numbers are, right. I mean, cap rates are what they are, interest rates are what they are. And so we assume that, you know, at least 100, sometimes 150 basis point expansion, if we’re planning on selling, you know, sometimes we’ll build a project and you know, we’ll have sort of this projected sale in five years. And sometimes it’s a projected recap and refinance and you know, cash flow and down the road, we expect some expansion to cap rates. We, you know, we tried to use historical rent growth numbers. And I had, I actually had a young employee who had only been working since the GFC. And was telling me he was putting in was putting in rent numbers, you know, say it was really conservative on the rent numbers, and she put in a number that was for the time I gave her project told her to go back, I said, you go back and look at the last 20 years what the average rent growth was over the last 20 years. And it was, it was about half of what she was projecting as conservative. So point being, we try to try to not predict super grant row super rent growth. We try to fix our debt. And if it’s, we try to fix our debt period. And then the last thing we do is we run sensitivity tables, because, you know, you know what happens, right? So we run sensitivity tables for occupancy goes down to 80%, or rent growth stays flat or goes down, we want to see that we can make that service and see that we’ve still got a property that we can hold on to because if you can hold on to a property during bad times, it eventually hits that ramp that goes back up to the top of the hill. So we want to make sure we’re around when things go bad. Yeah,
Pierce
so it sounds like part of this conservative underwriting is historic rent growth, making sure your debt is fixed. So that that has no variable change in it whatsoever. Right. And, you can count on that, you know, being a fixed cost moving forward. Yep. And then making sure that you’re doing a stress test on what happens if we dropped to 70%? Can we still make it right? What happens if this happens and just trying to do some contingency plans throughout the pro forma to make sure that hey, does it still hold up? If something goes super south on us? Yeah, if
Tom
the numbers don’t bear out our choices, dropped the project or, or increased you know, increase the equity, you know, a lot of times we’ll raise more equity to make sure we’ve got a bigger cushion. And of course, we put you know, we put builders contingency and overhead and things like that. We try to have a lot of cushion in there because stuff just goes wrong. You can imagine what COVID did to the projects we had ongoing that stretched out a you know, a 20 month process to 34 months and so you know, loans start to amortize sooner that we’re Lonestar to amortize before you’ve got people in there, leasing units and and buildings are built slower because of supply lines and things like that. So it’s nice when you’ve got some extra contingency because costs do go up unexpectedly.
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About Tom Burns
Tom Burns is an entrepreneur, retired orthopedic surgeon, and a physician for the United States Ski Team.
In 2009, Tom co-founded RNB Capital Partners, a multifamily acquisition and development company. In 2017, he co-founded Presario Ventures, a private equity real estate-oriented company, formed to provide investors with institutional-class investments providing cash flow and capital appreciation. With $650 million in transactions, Presario Ventures oversees projects in Texas and the Sunbelt.
While managing a successful career as a physician, Tom executed over $750 million of real estate transactions domestically and internationally. He is the best-selling author of the book, Why Doctors Don’t Get Rich, a personal finance book for those seeking to live life to the fullest.
Though retired from medicine, he still volunteers his time caring for the United States Ski Team. He is a sought-after speaker, mentor, and educator who enjoys traveling the world and all it has to offer.
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