Stony Stonebreaker, CCIM and Co-Founder of Passivo, joins us to discuss his background in technology, getting started in real estate, investing in multifamily real estate in multiple markets, and much more.
Connect with Stony at https://passivorei.com/.
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Devin Elder:
Stony, welcome to the podcast. Thank you, for jumping on. How are you doing?
Stony Stonebreaker:
Doing great. Devin, thank you for inviting me and I’m really glad to be here.
Devin Elder:
Good deal. Well, I look forward to diving in and talking shop on some real estate and in investing like we do on the show here. Before we kind of dive into that, I’d love to learn a little bit more about your background. And when and how did you get to the real estate bug? What did that look like for you?
Stony Stonebreaker:
Well, I guess my story is a long drawn out story but I’ll make it brief, of course. I went to college for engineering. I was an electrical engineer and it got into my work. And I read a book early in my career because I wanted to… I was curious about real estate because commercial real estate and income producing real estate kind of peak my curiosity and I wanted to do some investing. So I read a book by William Nickerson titled, How I turned $1,000 into Three Million in Real Estate in My Spare Time.
Devin Elder:
Great title.
Stony Stonebreaker:
Yes.
Devin Elder:
Top to bottom, great title.
Stony Stonebreaker:
I guess he had different versions because the first version came out in 1959. The second one came out in 1969 and I understand there’s a third version that came out just a few years ago. But I read that book and really was fascinated by the advantages of income producing real estate as he called it, the apartment investing. And he invested in smaller multi-families, duplexes, quads and then built up from there. And I thought this is really cool.
Stony Stonebreaker:
So I started to invest, but I didn’t take all of the lessons in mind. I bought a vacation condo on the beach in Florida here and then I bought another vacation condo up in the mountains in North Carolina. But I was all wrapped up in my technology career, I was involved in telecommunications. I had some entrepreneurial opportunities which is what I really enjoyed doing. So my WQ job allowed me to do some of those. And so I was really involved in that. I didn’t do too much because my time didn’t allow, and so forth.
Stony Stonebreaker:
But then in 2002, I actually retired and I did that to spend more time with my son who was growing up the time. He was 11 years old at the time and I wanted to spend some summers with him. And so we did that driving around the country and doing some traveling around in different countries as well.
Devin Elder:
Oh, that’s excellent.
Stony Stonebreaker:
So I got involved with that and then later on after he went off to college, I had time on my hands and I wanted to do something, so I rediscovered real estate. I actually, had a little side job there in between because I advised small startups and early stage companies for a while in technology.
Stony Stonebreaker:
But then I got into the real estate. And so my real estate really didn’t get started in commercial real estate, in multi-family like I do now until about 2016 because I was involved in all the other advisory capacities, and so forth. So when I first thought about it, I started to read and do like so many people, listening to podcasts like yours and doing all of that, and getting all the education. I had a pretty good finance background from managing some telecommunications groups and doing some business plans in the past and so forth, but then really got into it.
Stony Stonebreaker:
And I had interviewed several friends who were in commercial real estate. They talked to me about different aspects of it. And one suggested I get my license to be a sales agent basically. So I did that, which I didn’t really like the sales part but he did suggest that I also get my CCIM designation, which I got started on at that time. And so I did that ultimately, as well which was very advantageous. And so I got out of the sales part and I’ve been a dedicated full-time investor in real estate for the last five years or so.
Devin Elder:
Excellent. Tell me a little bit more about the CCIM designation. I’m obviously aware of what it is, but haven’t gone through that myself. What was the process like and what value do you think that brought to you as an investor?
Stony Stonebreaker:
Right. Well, I think, it’s tremendously valuable to me. First of all, and to anybody who wants to get a better financial background and strength and understanding of different aspects of commercial real estate, I think it’s very valuable.
Stony Stonebreaker:
We have four core courses there that are multi-day courses from three or four or five day courses that are very valuable, that are your required courses. And then they have some electives that are required. And it also has a component that requires you to materially participate in transactions so that you have a certain volume of business that you’ve been involved in to also get the actual hands on experience of transactions.
Devin Elder:
And they’re substantial, you know?
Stony Stonebreaker:
Yes, yes. You got some transactions like the one I qualify for, was you have to have at least three transactions totalling $30 million. But you can have smaller transactions maybe 10 transactions up to $10 million. So you tend to have different levels, and then there’s some other ways as well. But the whole combined package usually takes two or three, four years, some people a lot longer to go through the process.
Stony Stonebreaker:
But the four core courses teach financial fundamentals, basically. They teach investing from the perspective of an end user, somebody that’s leasing space in properties, also from an owner and an investors so that you understand also the different four basic sectors of commercial real estate, which the CCIM primarily puts everything into, which is retail, industrial, commercial, office and multi-family. So you get each of those and you understand the nuances.
Stony Stonebreaker:
The second course is particularly valuable. I think to multi-family people because it goes into market analysis and it focuses strictly on market analysis. And there’s some unique, they’re not unique, I guess they’re metrics that are taught in there that I’ve never seen any regular multi-family investor use in their market analysis. And so there’s a few characteristics there that can help you forecast the future that’s not really done.
Stony Stonebreaker:
Most multi-family investments that you look at and the webinars and their performance are put together, are showing what the history of that particular submarket has reflected in the last few years. But CCIM has a way of projecting using some other metrics to help project future changes for the next, at least two or three years. And so that’s helpful as well, some other metrics. And so that’s been very, very helpful for me.
Devin Elder:
Excellent. That’s good to hear. It’s clearly time investment and I’ve never really delved too far into it other than to interact with brokers, and so forth that had the designation. But that’s good to understand and something for people to explore if they’re going to make a career out of this.
Stony Stonebreaker:
And yeah, one thing I guess I should add too, is that the CCIM has a really good online database of metrics and demographics and so forth that are very helpful in property analysis and in market analysis. And some of that is not generally used either in multi-family properties that you see that are presented to the market. You get into not only the demographic but you get into psychographics of the local population and you get into other aspects as well. And so I really like the benefits of it on that side.
Devin Elder:
Excellent, excellent. Well, I’m glad that’s been valuable for you. What does your company look like today? What type of projects are you pursuing, working on, enjoying, that type of thing?
Stony Stonebreaker:
When I first got into real estate, I was looking to… I wasn’t sure how to get into multi-family real estate. And so what I did, was I invested on my own, I was trying to find people to invest with. It turned out at a CCIM lunch, I did meet a young investor who also was just starting out in multi-family investing. He was raising capital for one of the coaches, that’s National Coaches, that’s been in the business for a few years. And so I invested with him and also invested in a couple other projects.
Stony Stonebreaker:
And then later on we liked the way we operated properties. We evaluated things with our own way of working with each other. And so we formed the company that actually was brand new as of early this year, where we announced it anyway. And so my company is Passivo. And what have done, is we typically will partner with other operating partners who will find a deal in a market that we like, that we’ve analyzed the market.
Stony Stonebreaker:
We’ve also developed these relationships with these operating partners who we have gotten to know over the years and trusted. And we’ve done background checks, we’ve vetted them fully and we’ve done referrals and so forth. And so we have invest our money with them and then we’ve also raised capital as part of the deals for those operating partners. We’ve become part of the general partnership for an operating entity for that. And so we’ll join up that way.
Stony Stonebreaker:
And so we bring our investors along and so we’ve raised capital. I haven’t been raising capital that long, my partner has been when we formed this company Passivo. And so I’ve been doing more of that lately, but what I do sometimes is I’ll be a KP on a deal as well and sign on the loan or do other aspects.
Stony Stonebreaker:
And we also add value to the operating partner if it makes sense for both parties to do some asset management with them, do part of the due diligence upfront, handle our investor relations and so forth. So what we do is we’ve invested in so far in the past, in properties in Texas and in Florida for the most part.
Devin Elder:
Great markets, yeah.
Stony Stonebreaker:
Yep, I tell you what, there’s no competition at all in those markets.
Devin Elder:
Yeah, that’s right. Deals you just go pick it off a tree, right.
Stony Stonebreaker:
That’s it, right.
Devin Elder:
Yeah.
Stony Stonebreaker:
But it’s really challenging market is right now, of course. But still, we also like other submarkets. We like some other smaller, secondary even tertiary markets. We haven’t invested in those yet. And we have a variety of investors that we’re attracting. And so we’re also carefully, we’re not focused on the smaller properties yet, but we’re looking at some of those possibility of smaller properties.
Stony Stonebreaker:
What we’ve typically done is invested in a 100 units in our properties. But some of our investors want to be the solo investor in a smaller property, it might be more with in deep line with their wishes. And so we’ll go under a 100 units probably for those.
Devin Elder:
Right. And that’s the same markets that you’ve been looking in or you exploring different avenues there for the smaller properties?
Stony Stonebreaker:
Well, we’ll consider other markets as well. First of all, we like the Southeast, which with the growing MSAs and then the growing submarkets within those MSAs. But we also will consider other ones outside of that if we have a good strong partner who has experience in that market, who is a player in that market, they have multiple properties, and they’re respected, and they’re doing a good job already in that market and we do the background check on them.
Stony Stonebreaker:
So but what to do though, is if they bring us a property or if we think we want to do a deal with them, we’ll go ahead of time before we have a deal in front of us. And we’ll analyze that market with our metrics that we have, our process that we follow and make sure that we feel comfortable in that market as well, besides just the operator themselves.
Devin Elder:
Yeah, of course. So many variables there but you can’t replace an operator that’s gone full cycle and been operating in one market and has a track record, like there’s just no substitute for that.
Stony Stonebreaker:
Right. Yes, right.
Devin Elder:
No matter how good something looks in the model, rubber meets a road with operator doing the day-to-day and even down with the staff on, the leasing agent on site has such an impact on the performance of these things.
Stony Stonebreaker:
Exactly, exactly. And we like to make sure that the underwriting is… Everybody says, they do conservative underwriting. We like to do accurate underwriting. And if there are numbers where you’re not quite sure if we do a little bit more conservative on those, that’s great. And make sure that the reserves are set aside or that the term, the loan and the financing is longer than the business plan. And make sure that our money is protected and our investors’ money is protected as best as possible.
Devin Elder:
Of course, of course. And I’m sure it’s comforting to your investors if you’re placing your own capital in the deal and/or being a key principle on the deal. Clearly, that represents your belief in that project and you’re taking some additional risk doing that.
Stony Stonebreaker:
Yes, that certainly helps and we believe in it. And we won’t be inviting people in to do something that we wouldn’t do ourselves. I mean, that’s fundamental. Yes.
Devin Elder:
Yep. That’s right. Talking about underwriting here, current hot topic is inflation and what you’re looking at on one hand, maybe rent growth higher than we’ve seen historically. And then of course, salary and your payroll line item and materials higher than we’ve seen historically too. How are you guys looking at inflated rents on your income side and inflated expenses across the board as you look at these properties? Are you changing it significantly from what you might have done two years ago? Or what’s the thinking around that these days?
Stony Stonebreaker:
Right. We like the old classic, under promise and over deliver. And so we might push up the rent to bump a little bit more than we might otherwise. And like you said in a couple of years ago, but we’re not going to go up much above three and a half on our rent or maybe four, in the pro forma.
Stony Stonebreaker:
I mean, to get a deal these days, you almost have to push somewhere on your deal and be a little bit out of your comfort zone. If you think you have the right property, it’s got the right story behind it. And maybe you have a little different take on the value upside of the property than the other people that are bidding on that property because as otherwise, you’re not going to get that.
Stony Stonebreaker:
But we really depend a lot too on the initial screen for the operating partners as I mentioned before, that we partner with. And that we understand, how they’ve underwritten properties in the past and where they like it. And we talk to them pretty thoroughly about any deals they bring us so that we can understand what that story is. And it might be a unique location that’s turning over. We have a way we think of helping to, or looking at certain markets and determining whether they’re emerging. We’re trying to use some statistical techniques to do that and to look at that, so that will help us in determining that.
Stony Stonebreaker:
But those are the good subjective questions and decisions that have to be made on each property. And that’s a good point because we still like to keep it as conservative as we can. But make sure that we have the most accurate numbers and we’ll push it where we think we can.
Devin Elder:
Right. Yeah, it’s interesting. It’s a constantly changing landscape with… We’re in Texas and property taxes have always been the biggest line item and we’ve seen big increases there. We’ve seen big increases on insurance, payroll too, big increases on rents. And it’d be very comforting just to say, “Hey, we’re going to grow expenses 3% and rents 3% and just move on down the road.”
Devin Elder:
But I like what you said earlier, you want to be accurate in your underwriting and sometimes the market just changes. You’re going to see periods of higher rent growth and lower rent growth and it’s tricky to forecast that stuff out too far into the future. But we make the best assumptions that we can and move forward. In terms of operators, you guys clearly have a process for vetting operators, what are some characteristics of operators that you’ve seen are some common threads among successful operators?
Stony Stonebreaker:
We like operators who have a concern, first of all, for the investors’ money that they invest in their properties. And that’s even a priority over their own money, frankly. We think that the people who put aside appropriate reserves, who allocate CapEx to improve a property we like, value add properties.
Stony Stonebreaker:
We like to moderate value equity like we are taking a distressed property invest to ourselves. Although, we do have a couple of operating partners who we are considering investing but with a group of investors who would be comfortable with that, and who have the experience with more distressed properties.
Stony Stonebreaker:
We like the underwriting. We like the fact that we talk with brokers and with contractors in local area and ask about the background of some of these operating partners that we talk to. And we feel like that brokers who are dealing with most of the investors in that market will give us some pretty good feedback on some of these operating partners, and who will give us pretty frank feedback on who they would consider good partners to be with and who not to. And we’ve done the same thing with property management groups. And as I said, the contractors and lenders who lend in that market.
Stony Stonebreaker:
So we depend on the referrals who give us people who have been dependable, they’ve closed on deals, they haven’t tried to re-trade at the last minute and other characteristics like that. So it’s a pretty thorough background check that we do on them.
Stony Stonebreaker:
It’s not just what kind of deal can they give us and how they write us into the deal? But we also want to be part of the team that’s actually following that. They want us to be part of the asset management calls and to be involved in the property. We don’t want somebody who is an operating partner who just wants to do everything and themselves.
Devin Elder:
Right. And that’s a value add for them too, right? If you’re helping coming on and assisting with some of the asset management components. These are big deals, there’s a lot of work to be done and that lends itself well to splitting up the responsibilities and also some of the equity and reward pieces of it.
Stony Stonebreaker:
Exactly.
Devin Elder:
So we’re coming out of COVID and a crazy year, last year, finishing up 2021 as of this call and this year has flown by. We talked a little bit about inflation, what are you seeing going into next year in terms of markets you like and are you going to stay with similar product type and asset class or try to venture out beyond that? What do you guys have in mind for the firm?
Stony Stonebreaker:
We certainly are going to focus on value add multi-family for the next year or so. We want to build up our investor base a bit more so that we are a bigger supporter of other investors and other operating partners go to their deals.
Stony Stonebreaker:
But we do have some other potential directions that we can go on a limited basis. We don’t want to branch out yet but we think that there’s a couple of areas we can do. And I really probably don’t want to talk about that, but we’ve had some in the back of our mind that yes, if you will, that will help us.
Stony Stonebreaker:
Because one of the things that we really like is, we really like to help our investors become more financially literate and become better investors themselves. And one thing in my background, I’m a little older than some of you or some a lot of other people that are investing maybe, but I came up in a traditional home which lots of people of us did. Where you go to college, you get a job, spend your whole career, basically with one or two companies and invest, put your money away and then, save it. And I’ve pretty much followed that with a few investments.
Stony Stonebreaker:
But I think that getting into investing in commercial real estate, a lot earlier in my career, I wish I had done that, wish I’d learned more about it and actually taken the action to do that. And so we’re trying to encourage our investors to do the same thing. If they won’t want to invest with us, that’s fine. If they want to invest with somebody else, that’s fine too. But we want them to understand that there’s some other tools as well out there and that there should be a diverse set of tools to invest with.
Stony Stonebreaker:
We want them to understand the cost of investing in mutual funds, for instance. It can be a lot more than they understand the value of compounding real interest and growth of the investments over time and make sense, and that they should be starting very early. That they should have a diverse portfolio of real estate, stocks and bonds, and maybe some mutual funds, index funds probably. But there’s a whole range of things like that and other tools that make sense for a fully financially literate person.
Stony Stonebreaker:
And to part of that also goes to… My partner, Lennon and I were just about to start a little educational venue on Saturdays at our local Big Brothers and Big Sisters, where we would take the Robert Kiyosaki, Cashflow Game For Kids.
Devin Elder:
Oh yeah, good game.
Stony Stonebreaker:
And go there, take that and show the kids that way and use that as a springboard to teach them about some financial literacy and teach some younger kids, who may not get it from their homes as well. Because I didn’t get a whole lot of financial literacy or an education from my family and I didn’t in school. I was an electrical engineer, I didn’t get anything there.
Devin Elder:
It’s a huge gap and some would say by design, it’s a huge gap.
Stony Stonebreaker:
Exactly. So I want other people to know about those things, about the cashability of whole life insurance, real and things like that used to be only the Big Brother, not the Big Brothers, but the good old boys network only knew about those things. And the billionaires would invest in these tools but they really weren’t available to people. When I grew up, of course, there wasn’t all this technology. I put in one of the first video teleconferencing units in the country in 1985 or so.
Devin Elder:
Oh, wow.
Stony Stonebreaker:
And so going video like this-
Devin Elder:
But thing cost a fortune?
Stony Stonebreaker:
It’s so true, it did. It sure did. But we just had our encyclopedia at home in the newspaper that came and you didn’t know who was a member. We weren’t country club people. So we didn’t know, I didn’t know who the country club people were and who had the deals going, and so forth. So with the internet going on, there’s no excuse not to be able to find this information because it’s all over the internet. And so we encourage our people to be active there.
Stony Stonebreaker:
We also try to provide tools on our website that will help them find resources that will help them, and be part of a meetup, that we have a live meetup that we have here in Miami, that we had before the COVID, we’re restarting that shortly. And so we have a lot of different things like that we believe our investors will benefit them, their families and their legacies with their family.
Devin Elder:
Absolutely, I completely resonate with that education component. Part of what I do is really driven by being on a mission to expose other people to this because it was such an epiphany for me.
Devin Elder:
I’m 43. I got into real estate investing in my early 30s. So I had already had college, career, married, family, gone through all of that and not been exposed to this. And I almost felt cheated in a way when I discovered this.
Devin Elder:
It was like, “Why didn’t anybody show me this before? This is a game changer in a lot of ways.” And I’ve had countless number of our investors tell us the same thing. People that have been investing for decades and then they get exposed to this concept. Not that it’s a panacea or it’s a cure for all ills, and every investment has risks, whatever the case is.
Devin Elder:
But I feel like I’m on a mission too, to at least expose people to the idea whether they do project with us or don’t do a project for five years, maybe we can at least plant the seed. Because it has been around for long time. This is how the wealthy have been doing it for a long time.
Devin Elder:
But now that the democratization of the formation of capital really just in the last few years, is really an exciting thing to see and exciting thing to be a part of. The world’s waking up to this possibility. And as even as busy as you and I are doing these projects and talking to people we’re still addressing just a tiny fraction of people in America that could be investing in these type of deals.
Stony Stonebreaker:
Absolutely. Yeah, I agree wholeheartedly and it just makes a lot of sense to at least to be, like you’ve said, to be exposed to it, let be people know about it, understand. And if they have their own curiosity about it there’s no reason why they can’t just go explore it in much more in depth through with all the available resources we have nowadays.
Devin Elder:
Right, right. Yeah, it’s absolutely incredible the resources and then the connections too. At some point you’ve got to make some real life connections with some people, whether it’s via conference or meetups or mentorship groups or whatever the case is. But all that can be facilitated by the internet and podcasts and meetups. And that stuff’s just really neat to see because it’s all relatively new in the scheme of things.
Stony Stonebreaker:
Oh, absolutely. And just us meeting up here on video, we would never have met up in, when the days I was growing up like this and understanding, finding people who have common interests with you. And the technology change is just unbelievable. We were talking earlier about some earlier technology that I was involved in and the primitive technology that we used in our space program back in the days when I was working years ago on it is unbelievably, how different than what we have now.
Devin Elder:
Right, right.
Stony Stonebreaker:
Right.
Devin Elder:
Right, yeah. It’s absolutely incredible. Well, Stony, thanks for jumping on today. It is great to connect, those in the audience listening that want to connect with you and learn more about your firm. What’s a good way for them to do that?
Stony Stonebreaker:
My email is [email protected], that’s with S-T-I-N-Y, and our website is passivorei.com. And welcome to join us there and schedule a call or download, we have a free ebook, like most people do and explains our investing philosophy. But yeah, be glad to talk to anybody about any questions they might have on investing in real estate. I’m just enjoying this immensely.
Devin Elder:
Oh, outstanding. Well, we’ll link to that in the show notes. If you’re listening to this episode on whatever platform, go to the show notes and we’ll link to the website there and you can connect with Stony and the team. But I enjoyed it. It was great chatting with you, getting to know you and wish you guys continued success here over the next year and beyond. Thank you, Stony.
Stony Stonebreaker:
Thank you, Devin. Good to meet you and talk to you and really, a pleasure.
Devin Elder:
All righty, take care.
Stony Stonebreaker:
Thank you.