WS385: Insights into Financial Analysis with Peter Knobloch

In today’s episode, we are joined by Peter Knobloch to talk about his current work. Peter has always been in real estate in some way or another and shares his passion for the business with us. His particular passion lies in doing the financials on investments, which has continued to drive and motivate him.

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[INTRODUCTION]

[00:00:00] ANNOUNCER: Welcome to The Real Estate Syndication Show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication.

And now your host, Whitney Sewell.

[INTERVIEW]

[00:00:24] WS: This is your daily Real Estate Syndication Show. I’m your host, Whitney Sewell. Today, our guest is Peter Knobloch. Thanks for being on the show, Peter.

[00:00:32] PK: Thanks for having me, Whitney. I really appreciate it.

[00:00:35] WS: Yeah. I appreciate your time as well, Peter, and being on the show and offering your expertise and experience to the listeners as well. And so, before we get into Peter, I want to remind the listeners to go to the Facebook group, the Real Estate Syndication Show where you can ask questions of experts like Peter. And you can leave questions for me to ask on the show, and you can also just network and meet other people that are going through their syndication journey as well and growing their businesses and other people that are hopefully more experienced that can answer questions and maybe you can throw a rope down to help other people that are behind you as well. Also, go to Life Bridge Capital where you and I can connect personally.

Then back to Peter Knobloch, Peter is in real estate investment. Expertise includes investment identification, underwriting analysis, negotiations, acquisitions, development, equity funding, debt financing, asset management, and valuations up to 300 million. Fields and specialties include CFO, COO, CEO, operational management and consulting, private equity and capital, business strategy plans, business valuations, business restructuring, and financial analysis.

Now, 10 years ago, he and his wife flipped a three-bedroom condo purchased from a bank out of foreclosure for $50,000. It was a mess. They renovated the entire condo for about $20,000, carpet, drapes, bathroom, kitchen, painting, lighting, etc. 18 months later, sold for 150,000. They did all the work, except for the kitchen.

So, Peter, thank you again for your time. I’d love for you to give the listeners a little more about what you’re currently doing in real estate, and let’s dive in.

[00:02:11] PK: Well, thank you. Again, I appreciate being on your show. Well, back in early May, I decided after 10 years in the family business that I had purchased and now we’re in the process of selling it to get back into real estate. Early in my career, I worked for an investment firm, and it was my responsibility to do the syndication for our captive full of investors.

And the principal tasking with doing everything basically from the cradle to the grave, finding the apartment buildings, negotiating the purchase, acquiring the debt, and working with our attorneys to write up the private placement memorandum. I also did the financial analysis, which I love.

I’ve been doing spreadsheets now for well over 30 years. That’s one aspect that I really, really enjoy is getting in and doing the numbers crunching. It really is very, very enjoyable. I formed a real estate syndication holding company. It’s an LLC, and I spent the last 60 to 70 days putting all the systems in place and making contacts, cultivating some very good relationship across the country. I’m based here in California, and I made the decision that I’m not going to be buying any properties in California for a number of reasons. The number one being that it’s just overpriced, and it just doesn’t make economic sense.

So, I’m looking for properties and I am looking for properties in the Midwest and the Southwest regions and a few states on the East Coast. I’ve looked at a lot of great properties, and I’ve made some offers on a few. But I’m being very, very picky, because I want to buy smart and buy right. Of course, the other task is finding passive investors, which I’m working on as well. But that’s an ongoing process, as you know.

[00:03:49] WS: All right. So, you’re active. You’re out there looking. You’re trying to find that deal like all of us are. So, I’d like to know though what you’re doing right now to increase your deal flow. How are you looking at more properties? We’ll get into some other things you mentioned.

[00:04:03] PK: Now, that’s a great question, and I know that’s something that your listeners can empathize with. When you’re trying to get started and then you’re trying to get a deal flow going where you’re getting people sending you deals, I looked at a lot of sources, both online and actually first-person contact with individuals.

I’m doing everything that I can to find sources for properties. I have subscribed to a number of multifamily apartment brokerage sites, I’ve identified these target cities and the areas that I want to invest in, and I’ve made phone calls looking for commercial real estate brokers. I’m more particular about that. I prefer to work with the brokers that have an investment – Commercial real estate investment background or they have some investment experience. That way, they can understand and get up to speed rather quickly.

Then I developed an investment criteria to one page. It talks about the property type, the characteristics in terms of age, roof, utilities, minimum occupancy, geographic locations, the size, the deal size, and of course the demographics. And what I do is I go in first and I qualify the market first. I’d looked at some fantastic investment opportunities for properties, but the market just doesn’t support it. So, I passed on them.

So, the bottom line is you got to look at every possible source available, both online and cultivating those personal relationships with those individuals. Property managers are an absolute wealth of knowledge and experience, as well as real estate attorneys.

[00:05:42] WS: So, numerous things that you’ve mentioned. I want us to dive into a little bit. So, you said you’ve identified markets you want to invest in, but then there’s other markets that you’re passing on. I’d love to know some of those reasons why – About the markets that you want to invest in and the other markets why you’ve passed.

[00:05:59] PK: Well, at the end of the day, the market has got to support the property, because as I said you can find a fantastic property. It pencils out. It offers a fantastic return. All those things line up in terms of the numbers. But if the market is not there to support it in the up and down swings of a economic cycle, then there’s really no point to it.

As an example, job diversity. When I look at a market, I want to make sure that no single industry employs more than 25% of the population base. I’m looking for low unemployment, stabilized median household income, 50,000 or more. There’s a very strong supply and demand, population base of 175,000 within a five-mile metropolitan area. Five-year population trends shows that there’s an uptick of people moving into the area and that there’s some major employers that are moving in or have had an established business profile there for some time.

So, all told together, these tell me that, look, it’s a vibrant, stable economy with a strong population base. Those are in my opinion the ingredients that you need for your renters.

[00:07:16] WS: Yes. Some great points there and the things you’re looking for when you are identifying a market. So, anything specifically that you’ve recently seen in a market that you said, “Okay. I’m not investing in that market.”

[00:07:31] PK: Yes. For example, I was looking at the Las Vegas market. I had put Las Vegas and then Nevada area as one of my areas that I’m interested in, probably due to selfishness because of proximity. But unfortunately, the Las Vegas market, the demographics, they have such extreme swings up and down. I’m just very, very concerned about that.

Another market that I really wanted to invest in is Arizona, but the pricing is now starting to get up to where it equals California, because there’s so many people moving in there. You can find a good deal, and I just want to make a comment about that. When I was starting in the real estate business, I heard that you can find a good deal about every week. But now, you can basically find a good deal about every other day.

And the way that I look at the real estate market is kind of like a multistory parking garage at a mall. Sometimes of the year, it’s going to be very, very busy like during the holidays and summer period. And when you get there, it’s just filled with people and cars, and you don’t think you’re going to get a parking space. Other times of the year, it’s going to be slow, and there’s not going to be a lot of people there.

But the bottom line is that if you’re patient and you’re persistent, there’s always people coming in, and there’s always people exiting. There’s always people coming in and out of the market for whatever reason. You just have to be persistent and patient and diligent in looking for that right deal.

[00:08:55] WS: Nice. I’d like to hear more about your number crunching that you talked about you love so much and just the financial analysis. Maybe we can talk about that for a little bit since you love that part of it. I can’t say that like the numbers part is my favorite part of this process or business, but thankfully, I’ve partnered with somebody that that is their favorite part. But I would love to hear about how you’re analyzing deals and maybe some things you’ve seen in different markets and what you’re doing maybe different than other people.

[00:09:23] PK: No, I really thoroughly enjoy it, because I’ve been doing it for such a long time. About a year and a half after I got married, a friend of mine contacted me from Texas and says, “Hey! Let’s start up a business, and import/export business.” So, I said, “Sure.” So I bought the first compact portable computer with Lotus 1-2-3. From that day on, I’ve been loving it.

At the investment from where I worked, I did the analysis and I put together all the statements. Then I did three years in commercial real estate development where we did these multiuse development projects up to 300 million. What I mean by multiuse is that we bought a [inaudible 00:10:01] property, and we put a hotel, a restaurant, retail and sporting clubs on this property. And I was responsible for doing all the analysis and the number crunching, putting together the business plan, doing the investment analysis, cash flow projections, and so on. And I thoroughly enjoyed it and loved it, and I’ve been doing that ever since.

And when I formed this company, I put – I spend the time, and I built my own spreadsheet. I know there’s a lot of great ones out there, and there really are. My advice about it is if you don’t have one, find someone that you can mentor with to learn how to use it, because finding someone and getting someone else’s spreadsheet is kind of like walking into a movie halfway. You understand the context, but you really don’t understand what’s going on, and it takes well. But I built a spreadsheet that really does a fantastic job of covering all the bases, as far as the econometrics go and looking at a property.

One feature that I built in that I really enjoy is the two key critical documents are the trailing 12 months P&L for the property and the rent roll, the current existing rent roll. And I built into my spreadsheet the way to dropping the rent rolls with the dates that the lease expires. I built a formula such that it captures the rent roll and it shows you the rent going up to the time that that lease expires that you can either renovate and get in there and renovate or adjust the rent upwards as needed.

Because a lot of people I’ve seen over the years, they look at the rent roll and they go, “Well, these rents are kind of under market.” They go, “Yeah. We can jump these up.” And they put together this pro forma showing a static jump, saying, “Well. In this year, we’re going to raise the rents X percent, and then this year they’re going to go up.” But that’s not realistic, because every lease is on a different timeline. So, what it does is it offers a more accurate and takes in the consideration of timing and the magnitude of the rents.

[00:12:00] WS: So, in yours, you can do it by the month instead of by the year?

[00:12:03] PK: Exactly. It takes the rent roll, and it lays it out over the five-year period and in the formula captures when each of those rent leases come up and they roll over.

[00:12:13] WS: I really like that. So, in some models that we’ve been trying to use and trying to figure out which one we are building our own and all the stuff and using different ones. I’m glad you brought that up, because one thing I really disliked was it’s all like annual. So, in a property that we were looking at was a massive rehab, and we would be pulling three buildings. I think there’s 32 buildings. We’d be pulling three buildings at a time off the market to remodel those and then going three at a time. We were allowing sometimes for even up to 50% vacancy if we had to just through that remodel. But it wouldn’t be for a whole year.

[00:12:51] PK: Exactly.

[00:12:53] WS: So, I love that you thought through that, because that’s something we were also doing. I want to be able to put it in for the first month, the specific vacancy if I want to and the second month and third month and maybe changes in the fourth month or the sixth month where it gets more. It’s higher or less or – Actually be able to model that out a little more accurately than just all year this is what it is.

[00:13:15] PK:  Exactly. A lot of people I’ve seen do annual projections. What I’ve done is I’ve done a five-year by month, and then the totals reached, they roll into an annual, so we can get the annual statements and see that.

The other thing I built was an executive summary. Some people call it a dashboard, but it’s a single spreadsheet that captures all of the assumptions and all of the key information. I mean, it’s quite compact, but you can look at it from an investment perspective, a banking lender financing perspective, payback, capital structure. I can play with the asking price and then automatically adjust everything. It works extremely well. I’m very, very pleased with it.

The thing you have to remember, no spreadsheet is ever done. You’re always doing these final tweaks on, because things change, markets change, conditions change. But it’s always a work in progress.

[00:14:10] WS: I think that’s an excellent point is that that spreadsheet is never complete. There’s always ways to improve it. And are there any other ways that maybe you’ve improved your sheet that maybe the ones that most people are buying right now wouldn’t have or they wouldn’t know that they should have in there? Anything that you’ve added?

[00:14:29] PK: One thing that kind of like a little bit of a minefield is dealing with the investment analysis, the IRR, the returns. It requires a certain level of sophistication to understand how that’s put together. And if it’s not done it exactly right and correct, it can throw off your investment return quite a bit. So that’s something that I would counsel and make a suggestion — be very, very careful with that. You got to make sure that you’re deadly accurate with that investment return.

The other thing is that I’ve built my spreadsheet in such a way that when I’m putting together a pitch deck or a slide deck for investors, all of that information goes into another spreadsheet that is professional-looking. It’s for the investor. It provides a nice summary. The investment analysis, the sources and uses, how the capitals are going to used, the timeline, description of the property. All those things that are needed and necessary for an investor to be informed about the potential investment.

[00:15:28] WS: I think that’s a great point there too. It’s like what information should we bring out a here to put in an investor deck or an offering. But then how do we make it so it’s easily understandable to a potential investor? Some are very sophisticated, but not all want to see everything. So how do you handle that? I know you mentioned you’re putting some of those things in there, but what does that look like?

[00:15:51] PK: Well, what I’ve learned and this is kind of a general observation is that what I’ve noticed when people are first starting out, they’re putting too much information and it gets a little overwhelming. They figure, “Oh! I got to make sure I got everything in. I’d rather give them too much than too little,” which may or may not be true. But the point being is that if you can take a moment to step in the role as an investor, what would you want to know?

Of course, you want to know who are the syndicators? Do they have the experience? Can you trust them? Does this investment fit within my investment criteria as an investor, because there is substantial risk in it? There’s no guarantees of the returns or when you’re executing the business plan. Have they done this before? Do the returns look reasonable? Are the assumptions that are underlying the five-year business plan, do they look reasonable given the market and given the property?

You can get a property that needs a little bit what I call cosmetic curbside appeal makeup, and then you have other properties that you got to go in and upgrade the electrical, and there’s some exterior work. The roofing and all the things that really add up a lot. So, the point being is that you really have got to think as an investor and determine what would it look like, what would I want to know as an investor.

The other thing too is look – Talk to investors. Find out what their investment criteria is. What are they looking for in an investment? Look for seasoned investors. Of course, this falls into looking for a good team and perhaps a mentor that can help you.

[00:17:27] WS: So, what is your buying criteria right now, Peter?

[00:17:30] PK: I’m looking for, obviously, multifamily class B and C, value-add. That’s the properties that when I was in the investment firm, that’s the properties that we went after. As my father used to say, because he was in real estate and his parents were in real estate, so, I’ve been around it all my life. So, you want to buy the ugly duckling on the block, so to speak, where you can go in and actually do some value-add to the property.

And what I’m looking for is an opportunity go in and cosmetically improve the property. Yes, rents are under market. The operational management need some upkeep, of course. Anything I can do to add value.

I’m looking for a cash-on-cash of 10% or greater, as it sits. I look at a property as it sits today. Does it get me close to that? As far as a lever property would get 15% IRR, cap rates depend upon that the market, and of course, price to rent ratio is 1% or greater. I would prefer 1980s or earlier, pitched roof that has some life left on it and then ideally individually metered water and utility, electrical. But that’s not always the case. But that’s okay.

[00:18:41] WS: Peter, what’s been the hardest part of this syndication journey for you?

[00:18:45] PK: I have to say the passive investors, because I have all the skill sets that I need for everything else that I’ve been doing. It’s just cultivating those relationships with the passive investors. Fortunately, I’ve been making – I’ve been going out, I’ve been meeting with individuals, and I’ve got a list of 50 to 60 people. Basically, I sat down and said, “Okay. Who are my friends and family?” and I put the list together. One by one, I’m letting them know what I’m doing. I’m starting to get some very, very good positive feedback.

The key here is to put a list together and have a discussion. Have the courage to go out and have that conversation, and you’ll be pleasantly surprised. The more you do it, the better you’re going to get at it.

[00:19:31] WS: No doubt about it. You got to step out there. Even if the first few are really bad, you’re going to learn a lot from it. You’re going to be further ahead because of it. Eventually, you have to have that conversation though with those investors, and everybody’s terrified of that first one or two or three. But if you don’t start, you’ll never going to get past that first two or three or four or five, whatever.

[00:19:50] PK: What I’ve learned is just be extremely honest, open, and transparent. If you don’t have the experience, then partner with someone who does. Create a vision. What does it look like for you? And if it’s realistic and it’s reasonable, then just commit and do it. Once you commit, amazing things happen, doors open that you could never possibly imagine, and people will be brought into your life, and you’ll meet people.

I can’t tell you how many times that I met someone and they’re wonderful, but it didn’t turn out to be anything. But they knew someone who knew someone. The thing to remember is just to keep trying and keep going, and wonderful things will happen. You’ll have your ups and downs, your struggles. But those struggles are telling you that these are kind of the weak points that you need to focus on, and they can become strengths.

[00:20:39] WS: So, Peter, how are you preparing for another downturn or how do you prepare for another downturn?

[00:20:44] PK: Well, that’s a great question, and I know that there’s a lot of chatter going around about a pending recession. I’m a big believer in business cycles and economic cycles, and we’ve had – We’re going on 10+ years of this expansion. It’s been fantastic. But I’m not really concerned about it, because I’m going to be buying properties and structuring them in such a way as to write out these dips in the economy. So that’s really what I’m focused on. You got to buy smart. You got to not overleveraged yourself too much. Cash is king. Make sure you have substantial operating reserves and just be very smart, watching your money and taking care of your renters.

[00:21:31] WS: So, Peter, what’s a way that you’ve recently improved your business that we can apply to ours?

[00:21:35] PK: Take your time to sit down and write out a plan, a strategy if you will. You’ve got – I’ve been a CFO for 15+ years, and I’ve done turnarounds and startups. One of the things I do when I meet with them is, I say, “You need to verbalize what your vision is for your company in some timeframe, 3, 5, 10 years, whatever it is.”

I deal with four things, strategy, structure, people, and processes. Those four key things. You’ve got to have a strategy for your vision. You’ve got to build a structure around that strategy that will support it. You got to get with the right people who share your vision, your passion. Then you got to put the systems in place.

If you do those four things and they do overlap, you will have in my opinion the best ingredients for success. You can’t focus too much on the strategy and neglect the systems or get too involved with people and neglect the structure. You’ve got to balance all four of those as you move forward with your real estate investment. Again, I’m coming from a place of building a company, a syndication company, buying multifamily apartments. I know there’s wholesalers out there. There’s flippers, all types of real estate investment. But there’s some basic fundamentals that cross all lines of business.

[00:22:59] WS: So, what’s your best advice for taking care of investors, so they want to come back?

[00:23:04] PK: Communication, transparency, and honesty. Communicate, communicate, communicate both good news, not so good news. But you’ve got to stay in communication with your investors. Let them know that you’re doing your very best, being completely transparent, and letting them know that you understand what their investment tolerances are and that you are doing your absolute very best to meet those. If you do those things, it’ll help you tremendously.

[00:23:33] WS: What’s the number one thing that’s contributed to your success?

[00:23:36] PK: Consistency and diligence. I mean, I’m not unique or special in any way in the sense of business. We all go through times where we doubt or question what we’re doing, fears. But what I’ve learned is that if you push through those fears and those doubts and do your best, great things will happen. Like I said, I really enjoy – I love real estate. It’s just so much fun. It suits my personality extremely well, and I love the number crunching. It’s just a lot of fun.

[00:24:11] WS: So how do you like to give back, Peter?

[00:24:13] PK: If I can be of help or service, I’ve gotten emails, I’ve made contacts, I’ve gone into a lot of networking groups, and I’ve had people contact me through email and ask questions. I’m more than happy to help in that regard, based on my experience both business and real estate.

[00:24:27] WS: I appreciate that a lot, Peter. I appreciate how you’ve told us about how you look at a market and things you’ve added to your spreadsheet that’s helped you to be more successful in analyzing deals. Tell the listeners how they get in touch with you.

[00:24:38] PK: Well, I’ve got a website. The name of my company is Argo Capital Group, and it’s www.argocapgroup.com. You can go to my website, and you can reach out to me. I have a phone number and email and the little bit of information and my track record and what I’m focusing on.

[END OF INTERVIEW]

[00:24:57] WS: Don’t go yet. Thank you for listening to today’s episode. I would love it if you would go to iTunes right now and leave a rating and written review. I want to hear your feedback. It makes a big difference in getting the podcast out there. You can also go to the Real Estate Syndication Show on Facebook, so you can connect with me and we can also receive feedback and your questions there that you want me to answer on the show. Subscribe too, so you can get the latest episodes. Lastly, I want to keep you updated. So head over to lifebridgecapital.com and sign up for the newsletter. If you’re interested in partnering with me, sign up on the contact us page, so you can talk to me directly. Have a blessed day, and I will talk to you tomorrow.

[OUTRO]

[00:25:37] ANNOUNCER: Thank you for listening to The Real Estate Syndication Show, brought to you by Life Bridge Capital. Life Bridge Capital works with investors nationwide to invest in real estate while also donating 50% of its profits to assist parents who are committing to adoption. Life Bridge Capital, making a difference one investor and one child at a time. Connect online at www.LifeBridgeCapital.com for free material and videos to further your success.

[END]