The Most Important Benchmark: Headaches To Returns Ratio

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Joseph Gozlan of Eureka Business Group is a multifamily broker investor and operator Today he shares his insights on how to navigate the current market for success and protect yourself from interest rate risk He stresses the importance of having a good headaches to returns ratio when buying or selling real estate and explains why they are focusing on commercial and industrial assets He also talks about a new trend in the restaurant industry and the opportunities in the space to look out for 00 01 – 10 14 Owning and Operating Over 30MM in Real Estate Joseph talks about starting from single-family and realizing it s not sustainable Going to the big leagues and helping residential investors to transition as well How to find opportunities Stop looking for the unicorn deal Make your own deal Offsetting risk in the market Getting the right terms is important Commercial clients get better interest rates than residential clients 10 15 – 13 24 What is the Headaches to Returns Ratio Why Joseph and his team are investing in industrial retail and self-storage No more assets that people can sleep in When the headaches to returns ratio exceeds the acceptable ratio you sell 13 25 – 18 27 The Rise of Cloud Kitchens This is for people who want to run a restaurant but don t want the risk and the headache and the cost of the big retail side of a restaurant Leveraging online platforms and different delivery apps Young chefs entrepreneurs have the option to build a name first before opening a storefront 18 28 – 20 37 Closing Segment Words of advice from Joseph Reach out to Joseph Links Below Final Words Tweetable Quotes We learned that it s the residential investors that if we teach them and we work with them and we help them find good deals then they graduate into the commercial side – Joseph Gozlan Don t go and try to hunt for unicorns They just don t exist Instead of working really really hard to find a deal let s go make a deal Find a property that fits all your other criteria except the price – Joseph Gozlan The main resolution that we ve come to is no more things people can sleep in And that just comes from the most important benchmark an investor can have is that headaches to returns ratio – Joseph Gozlan —————————————————————————– Connect with Joseph at ebgtexas com and follow him on Facebook Twitter Instagram LinkedIn and TikTok Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Joseph Gozlan The thing that I tell my investors is to have a PFS right have a personal financial statement and fill it up And make sure you update it at least once a month And when you do that and you have residential properties you realize that your property grows 200 300 a month into the principal which adds on to your net worth 00 00 33 Sam Wilson Joseph Gozlan welcome to the show 00 00 35 Joseph Gozlan Thanks for having me man I appreciate it 00 00 37 Sam Wilson The pleasure is absolutely mine Joseph in 90 seconds or less can you tell me where did you start Where are you now And how did you get there 00 00 44 Joseph Gozlan Good great question We started back in 2005 invested in single-family grew to you know duplexes read the Rich Dad Poor Dad That s how we got started And then somewhere along 2015 kind of realized that it s not sustainable and I want to graduate to the big league So I started looking at the commercial assets Yeah And that s when we got our first multifamily property it was a 20-something unit And today we own and operate about 300 units close to 30 million in assets that we own with investors for the most part And we got licensed in Texas back in 2008 2009 and we ve been working with investors mainly since then on residential and commercial transactions 00 01 31 Sam Wilson Got it So you re a broker also an investor And you found a way to kind of silo a couple of different lines of business there the single-family residential investment side but also the commercial brokerage side 00 01 44 Joseph Gozlan Great We learned that it s the residential investors that if we teach them and we work with them and we help them find good deals then they grow into the commercial side They kind of graduate into the commercial side So we like to hold their hands throughout the entire process And not just you know a lot of commercial brokers will snub at the smaller investors We want to be there for the journey for them 00 02 08 Sam Wilson Right right Yeah absolutely Absolutely And I mean it s common I guess a common path for a lot of us It s the path I was on It s like okay I m a single-family investor I do fix and flip I own rental property blah blah blah And then eventually you re like okay maybe I need to find something bigger cause like you said it s just it s not scalable which is the title of this show which is yeah more more zeros in in the same amount of work Tell me this What are you guys really interested in right now personally in investing in 00 02 37 Joseph Gozlan So we re very bullish on industrial these days The whole COVID situation kind of impacted all real estate in different ways but what it really did one of the good things that came out of the whole COVID situation was econ got accelerated about a decade forward in two years period So all the econ that has developed and grew all the people outgrew the garage they need a 3000 square foot warehouse So these guys outgrew the 3000 square foot they need the 10 000 square foot all the way up to the million square foot warehouses of the Amazons right So industrial has been very hard in the market We also see an interesting shift of institutional money flowing from multifamily over to industrial So that s really where we are these days is we re focusing on the industrial side of things 00 03 28 Sam Wilson How are you finding opportunity in industrial I mean not that anything s not competitive but I feel like industrial s a pretty darn competitive space and cap rates there just keeps shrinking So what are you guys doing that says man here s how we re separating and finding value in this space 00 03 47 Joseph Gozlan So it s no secret that the market s been hot for the last few years right Whether it s multifamily industrial a lot of the real assets classes have been hot What I ve been telling all my clients is that look we don t go and out and try to hunt for unicorns They just don t exist right So instead of working really really hard to find a deal let s go make a deal Find a property that fits all your other criteria except the price And then let s go make a deal You know sometimes it works Sometimes it doesn t Sometimes we get creative with the financing or we get creative with the terms But we ve secured 6 7 8 even 11 cap rate deals just in the last six months so for our clients They re out there you just got to find them 00 04 31 Sam Wilson That s awesome I love that Find the property and make a deal Yeah Finding the unicorn can be particularly challenging Joseph here s a question for you when it comes to interest rates and buying industrial property A lot of these are sold on a triple-net lease right Or they re not sold but they re bought and they put a triple net lease in em that might it might not get renewed for five seven even ten years sometimes How are you guys protecting yourself with that interest rate risk I mean let s assume interest rates just keep climbing I mean and then you got and you got something that s maybe paying 4 or 5 on annual basis Like how how does how does that work out for you guys and how do you protect yourself 00 05 08 Joseph Gozlan So the way I look at real estate is rule number one in real estate everybody thinks it s location It s not Rule number one in real estate is you make your money when you buy Getting to the right deal put the right terms in place right Even if you know you re up for a refi in three years five years and the market is a disaster a bank will give you a loan You might not be happy about it You might not like it You might not make money for a year or two until things recover But you re not going to lose the asset if you bought right That s one thing I could counter-argue that the same risk that we take on the refi and interest rates in the market everybody else on residential and multifamily are taking that risk in property taxes But I don t know how it is in Tennessee but in Texas we ve been slaughtered in the last few years Probably taxes just going up and up and up and up 20 30 is like they have no mercy and that s a risk that residential and multifamily carry But when you have a triple net lease that entire risk is being transferred over to the tenant because the tenant pays the cams or the triple net and covers that risk for So we might have a risk there but we don t have a risk there And unfortunately the property taxes risk is guaranteed versus the interest rate which is an unknown right now 00 06 30 Sam Wilson Oh absolutely And as governments and even local governments continue to spend well beyond what it is that they re bringing in then they re just going to have to keep circling back to the only source of income they have which is you know largely property tax and taxes in general And those are just going to continue to climb So that s a really interesting point I ve never really thought about that Yeah On a triple net property you go you know they re assuming all this other risk Yeah We might have some we may have a fixed rate of return on this but but we ve also got some some downside that we re protecting against as well Would you say that same thing as it pertains to inflation When you look at inflation you go okay Inflation you know could be skyrocketing but even if we re not keeping pace it s okay cause we re offsetting risk Is that kind of the thinking there 00 07 15 Joseph Gozlan So in the last 10 years right we ve seen residential and multifamily really benefit from the fact that their leases are 12 months right So as rent go up and up and up every year when you renew the lease you could get 5 10 some percent some places 20 increases in rent year over year So when you have a market that goes like this having a retail or an industrial that have a fixed 3 5 10-year lease with 2 to 3 increase built in it s not very attractive right cause you you can t catch up to where the market is But when you have a shift in direction when the market is plateauing or maybe going down then having those guaranteed increases and guarantee corporate level tenant that reduces the risk and ironically or surprisingly whichever you want to look at it we ve seen our commercial clients get better interest rates than our residential clients So I have a residential client that is buying like a duplex or or a single family and they get 6 interest rate these days six and a quarter even while we just closed on a 3 7 million warehouse at a 4 99 interest rates So you see it s kinda like even the banks realize that the risk is a lot lower on these right now than it is on the residential side and they give preference and better interest rates 00 08 42 Sam Wilson Wow That s really shocking but you know obviously it just shows you where the I mean the lenders are where they see risk in the market And clearly it s on the single-family side of things What do you tell your investors who are investing in single-family I mean do you tell them that like Hey you re buying a riskier asset 00 09 00 Joseph Gozlan No because look we re still undersupplied data market right There s still a huge demand and not enough new construction going up It s not the same situation like we had with 2008 where we had ghost neighborhoods right that were completed and nobody was leaving in them We re not in the same world The thing that I tell my investors is have a PFS right have a personal financial statement and fill it up and make sure you update it at least once a month And when you do that and you have residential properties you realize that your property grows 200 300 a month into the principal which adds on to your net worth right But you graduate to the big boys right you graduate to a million dollar 2 million 5 million property all of a sudden it s a 10 000 mortgage or 15 000 mortgage And then every month there s an excess zero in the amount that s adding to your net worth So the principal piece it s not 200 it s 2000 or 20 000 right depends on the size of the mortgage So I help them see that you know if you really want to build your net worth the larger you go the bigger you go the more zeros are added to your net worth every single 00 10 14 Sam Wilson Right No I absolutely love that That s really really cool What are you personally so you guys run a brokerage you have lots of clients I m sure that you guys are bringing industrial properties to what is your buy box right now and why 00 10 29 Joseph Gozlan I m actually against putting things in boxes 00 10 33 Sam Wilson I like it Okay Let s hear it 00 10 35 Joseph Gozlan That s the thing So what I tell my clients is instead of looking at what I want to buy right tell me what you don t want to buy And then we look at everything else right So it s easier for me to say I don t want to do war zones I don t want to do student housing I don t want to do voucher housing And so on than to say I m looking for this because if I m looking for this I could have a great opportunity over here that I m not going to look at So for me specifically right in our personal investment portfolio right now the main resolution that we ve come to is no more things people can sleep in And that just comes from the most important benchmark an investor can have And unfortunately this is a benchmark you learn to appreciate more with age and experience is that headaches to returns ratio 00 11 27 Sam Wilson Okay 00 11 28 Joseph Gozlan It s that simple The headaches to returns ratio and that is the only exception to the rule of never sell real estate right except when the headaches to returns ratio exceed the acceptable ratio right And that s really what it is We manage over 250 apartment unit right now And the amount of headache it generates Because we also have the property management in-house is beyond what value and returns we get and the opportunity cost So for us the transition is to retail to industrial to those self storage all those other assets people can t sleep in in in a short way to say that We also kind of like retail but not any retail mostly the small service centers because Amazon still can t figure out how to do your nails cut your hair get you a cup of coffee in the morning right So we still strongly believe in those small retail strips neighborhood service centers We think those are great opportunity as well 00 12 32 Sam Wilson Oh neighborhood service centers man I think those are those those are here to stay I mean and the people that specialize in that it s it yeah there There s just like you said you re getting your hair done well I I m not getting my hair done but somebody s getting their hair getting their nails done they re getting I mean there s just things there s things that you just can t Amazon Prime to your door and yeah I see those having certainly a long useful life there That s really cool Joseph we ve talked a lot here about real estate We ve talked about you know brokerage we ve talked about you know think risk you re seeing in the market how you guys are shifting gears You ve moved into industrial I love your headaches to return ratio if you haven t trademarked that you should cause that s a pretty cool thing there And then what what was it there that that you you own you buy things that that no one can sleep in as long as as long as they can t sleep in it then then it s inside your buy box Are there things outside of real estate or other businesses that you guys look at you say Hey man I see I see opportunity here that that you re currently looking into 00 13 36 Joseph Gozlan Yeah absolutely So one of the things that kind of trains that we ve noticed in the market recently is What we call cloud kitchens So in the world of restaurants and food it s very expensive to get a like a restaurant like BJ s or Razzy s or a steakhouse or something like that Because it s prime real estate right And you pay a lot of dollars per square foot to have that location You pay hundreds of thousands of dollars to set up this thing and you don t know if it s going to work or not So it s a high risk unless you re a chain of restaurant it s a high-risk move for chefs for a small investors people that want to get into that business And the funny part is you pay the same price per square foot where you seat your clients and where the kitchen in is the back end stuff So it s very expensive And what we ve seen is the move to cloud kitchens If you watch shark tank they talk about that too as well It s basically people that want to run a restaurant but don t want the risk and the headache and the cost of the big retail side of restaurant So they get a place in an industrial area or industrial building and they built a kitchen in there and they reduced the cost of entry and they leverage DoorDash and Uber Eats and GrubHub and all those apps that came out and do the delivery for them to build their name to build their brand So when you go on DoorDash and you see a name of a restaurant there might not be a restaurant behind it It might be just a warehouse in the middle of somewhere where they cook the food and they send it out with delivery cause I don t know if you ve ever talked to a pizza place owner ever in the history one of their biggest headaches is the deliveries You got to have a driver you got to have the reliable car you got to do all that And the cost of gas impacts everything But today Uber DoorDash GrubHub You got rid of the headache All you have to do if you re a chef or if you re an entrepreneur in the space is focus on doing good food great pictures and promote it 00 15 41 Sam Wilson That s really cool Yes I have heard of this and this is something even at one point I saw em turning these into like underutilized parking garages They said okay we re going to put a quick service restaurant in there Are you guys in I guess this is a a perspective or prospective investment for you guys that you re looking at say man I might see opportunity there 00 16 01 Joseph Gozlan Well yeah absolutely cause again it all falls into industrial buildings right So if industrial is is where we re going to look at then it s definitely a tenant that we re happy to have 00 16 12 Sam Wilson Are they building these like unique brands where it s not just you know this is just Hey Sam west to open a restaurant and I m going to just put it in an industrial building and nobody knows about me yet and their doing it completely with digital marketing and DoorDash means that is that the way that s going down Is that what I understand 00 16 30 Joseph Gozlan Yeah pretty much This is an opportunity for a young chef or a young entrepreneur to build a name build a brand right until he is enough following enough income first he can decide that he never wants to open a storefront right This is basically the e-commerce of food I don t want to brick and mortar store for shoes cause Amazon is going to destroy me But if I have an e-com store for shoes I can compete with Amazon right Same thing with the food I don t want to storefront or retail place where I have to pay a lot of rent and I m depending on foot traffic That is gone the days of that are gone now So now I can use DoorDash and and everything And all I need is to compete on-screen space 00 17 12 Sam Wilson Right And you could dedicate an entire floor of a warehouse or of an industrial building or something to specifically being set up and even go with multiple kitchens potentially in the same exact space 00 17 23 Joseph Gozlan And that s the next level right So I haven t seen that done yet but that s the next level Somebody that buys a warehouse sets it up with even you know lack of better term kitchen suites right Like the WeWork of kitchens basically right It s definitely something that you know if I could as a young chef come in and get for let s say 2 000 a month or 1 500 a month I can get a whole kitchen set up for me Why not 00 17 51 Sam Wilson Yeah that d be hard to compete with you know as it comes to startup cost of an actual restaurant with walk-in traffic and seating and everything else I think it s fascinating to see how the whole delivery model is just changing It s changing everything and the unique ways we can add value to both the properties into even our tenants I was talking to somebody else today that they re charging their tenants 25 bucks for valet trash service So all they have to do is set their trash at their front door and I m like wait so now you have somebody walking around picking up all their trash and carrying it to the dumpster for 25 bucks I mean it s like okay that s brilliant I guess I mean but people are paying for it and I think it s just amazing the number of places we can go Joseph I certainly appreciate you coming on today This was a blast I learned a lot about what it is that you guys are seeing in the marketplace and how you guys are taking and finding opportunity I love of course again your headache to return ratio that you might get a show asset or something that goes along with that the headache to return ratio and your trademark on it but certainly appreciate that Are there any other closing thoughts you have here for our listeners before we sign off 00 18 50 Joseph Gozlan Yeah the market is shifting but we don t see a big dip or a big crash coming up I know a lot of people there s some YouTube videos that basically predict the end of the world as we know it It s not going to be like 2008 cause we don t live in the same world as 2008 The technology the gig economy you can you know drive Uber or DoorDash or stuff like that and still make income even if you lost a job or something like that So I think the crash is not going to be as hard as people are saying But I do say now it s a time to kind of look at the right opportunities and not be afraid to put offers that are not asking price or above asking price like we used to see recently It s time to get ready because when the blood is in the water that s where the sharks are going to have fun 00 19 36 Sam Wilson Absolutely Joseph thank you so much If our listeners want to get in touch with you learn more about you what is the best way to do that 00 19 42 Joseph Gozlan Our website is the easiest way to find us ebgtexas com And that takes you to our main website where we do the commercial real estate And I m on Facebook Twitter TikTok You can find me everywhere just reach out I m happy to discuss real estate anytime 00 19 57 Sam Wilson Awesome And can you give me that website one more time 00 20 00 Joseph Gozlan Absolutely It s ebgtexas com 00 20 04 Sam Wilson ebgtexas com Joseph thank you again for your time today I certainly appreciate it 00 20 10 Joseph Gozlan Absolutely Click here to visit this podcast episode