The Most Important Benchmark: Headaches to Returns Ratio

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

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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.