DJE Texas (00:02.414)
Welcome to the DJ podcast where you will learn about real estate investing from real life examples. Here's your host, Devon Elder.

DJE Texas (00:16.526)
Hello, welcome to the show. Thanks for joining us today. My guest is Paul Danishrad. He's an author of the book, Money and Morons. You can see if you're watching the video, available on Audible, Amazon, Barnes and Noble, talking about an appending debt crisis for the United States. But he's also the CEO and founder of Starpoint Properties, their private equity real estate firm founded in 1990.

They've got about a billion dollars of assets under management right now in 10 states across multifamily, retail, industrial. So really cool for me to come in and pick Paul's brain on how they've built the company. We talk about that, how he got into it, how they've built it, what his role as CEO looks like today and how that's evolved over time, how they're partnering with investors. So they partner with, uh,

friends and family and high net worth individuals like a lot of firms do, but then they've also gone bigger and are partnering with Goldman Sachs and larger check writers. So we talk a little bit about that. And then we do talk a lot about his book and, um, and this debt crisis that he's seeing coming. So really fun stuff for, for, uh, us that like to geek out on econ stuff. I'm certainly one of them. And it was a pleasure and honor to have Paul on the show. Um, thankful for him, uh, spending some time with us. So.

I think you're going to enjoy it as well. We'll have a word from our sponsors and then get into the show here. Enjoy. This episode is brought to you by DJE Texas Management Group, a San Antonio, Texas based real estate investment firm with a track record of transacting on several hundred million dollars of multifamily land and industrial deals throughout Texas. EJ has been in business for over a decade and is approaching 100 team members in San Antonio.

To learn more about DJE, visit djetexas .com or the link in the show notes of this episode. This episode is also brought to you by apartmenteducators .com, a complete ecosystem for professionals to learn how to find, finance, and operate large multifamily properties for profit. You can get started with a free mini course and learn more at apartmenteducators .com or visit the link in the notes.

DJE Texas (02:32.974)
Well, welcome to the show. It's a pleasure to have you, sir. Thank you. How are you? I'm wonderful. Thanks, Devin. Appreciate you including me. It's great to be here. Yeah, I look forward to connecting and learning about all kinds of stuff as we talk shop on commercial real estate. As an introduction here, though, for folks that maybe aren't in your world already, we'd love to hear your background, how you got to real estate, into real estate, and then

I guess the, the summarized version of, of kind of building the company to where it is today. Sure. Yeah. I got into real estate, uh, you know, sort of, it was lucky. Um, I was in college, I needed a second job. I was about to be evicted from my apartment because, uh, couldn't make, um, I was waiting tables at California picture kitchen and we had a couple of weeks.

So tips were down, couldn't pay rent. So I went and got a second job with Glen Fed Develop, which was a track home builder. And where was this bank? I was going to ask where it was based. I think you're getting to it. Yeah. So this was out in San Fernando Valley. And they were building track homes, got a job with them as a gopher, a broker's assistant. So I'd get coffee, make brochures.

you know, greet people when they came through the door, run errands, got promoted with them after a couple of months and then got another promotion and then actually switched from, you know, the sales side and went and worked as an assistant foreman, moving around dirt and understanding how they built the projects and constructed. So both sides, from sales to construction, got some great experience with them. And that's how I got into real estate, that second job.

started the firm really small, right after school. And when I say really small, out of my sister's garage, set up an office, was buying a condo, fixing it, flipping it, buying a duplex, fixing it, flipping it, buying small apartments, improving them, adding value, selling them. And so, slowly built up the firm to what it is today. And just for...

DJE Texas (04:58.926)
perspective here, what does the firm look like today as we talk Q1 of 2024? Q1 of 2024, we've got about a billion dollars of assets under management, what they call AUL. We are a value -add asymmetrical. What does that mean? We look for value -add real estate that can deliver asymmetrical returns. To simplify that, we want to take lower risk.

higher returns by bringing, you know, a high level of expertise and execution to any type of real estate that needs attention. Perfect. Perfect. So quite a journey from a house out of college to a billion AUM. What were you doing for capital in those early days, those first couple of projects? Oh, yeah. First of all, projects, my sister and my credit cards.

which I don't recommend. Really stupid actually. You got you in the door. Yeah, yeah. 22 % interest on my credit cards. Man, that was dumb. That's tough. But if you can make that work. It was moronic. I'm going to look back on it. So yeah, my sister and credit cards in the early days. But after that, a lot of high net worth.

friends and family capital. And then today it's a combination of still that friends, family, high net worth following. And we have some institutional investors as well. Goldman Sachs is one of our investors. Mitsubishi has been an investor, KeyBank has been an investor. So we have an institutional following out there. Outstanding. Congratulations on making that transition.

What does the portfolio look like just kind of broad strokes here from asset class markets, et cetera? Yeah. So the portfolio is going to be a mix of all sort of everything from class C to class A and in three assets.

DJE Texas (07:14.99)
types, multi -family, retail, and industrial. Right. And this is all over the nation? Yeah. It's regionally across the United States. We're in 10 different states. Okay. Excellent. How do you guys like to ask operators that are that geographically dispersed, how you're handling property management? Is this something you're from the south to various third parties and see who wins and gets more of the business or how are you guys approaching that?

Yeah, so it's a bifurcated approach. If in a region we have enough scale and enough, if we have enough scale to support a management team there, we'll manage ourselves. If we don't have the scale, we'll farm it out to third party managers and that's a competitive process, both on the cost of their services, but also their skill set. Right, right. Yeah, it's kind of best of both worlds and...

And you build it how you want to, which is great. Well, let's talk about the last, I don't know, 18, 24 months here, right? 11 consecutive Fed hikes, very interesting global economy since COVID. How has that impacted you guys? How have you reacted? What have the last couple of years looked like for your firm?

Yeah, so we've been dormant. We've made a few acquisitions, but those have been very tactical and thematic, unique opportunities or special situations as people like to call them. They've been exactly that. And the reason we've been dormant, real estate prices have been coming down because this is just straight rise. And so we've been waiting for a bottom and we don't think it's there yet.

think we're going to see another 5 % to 10 % decrease in pricing. And we don't see a real inflection point or a catalyst until the Fed starts reducing rates. And as we all know, especially with the recent data, you know, when we look at sort of CPI or any of those metrics that the Fed looks at to gauge inflation, it's still a little too hot. And the job market is still really, really good.

DJE Texas (09:34.126)
And so there's not a lot of pressure on the Fed to reduce rates. And so we don't see that inflection or catalyst yet. So that's why we think we're going to see another 5 % 10 % reduction in rates. And so we're going to probably wait. We think a great buying opportunity in general in real estate is probably going to be about six months. Right. Right. Yeah. There was market pricing in more rate hikes earlier in the year and now it's pricing in less. So it's just kind of wait and see. If you were to have a perfect

by asset location, size, condition, what would that be for you guys?

Perfect buy today. You know, the only active part of the business today really is what we call our tenant -centric strategy. And that's a real risk -off strategy. And that's where we're a preferred developer for certain large -scale branded tenants, sort of like, you know,

As an example, it's like a Starbucks. We're building two or three Starbucks right now. Chick -fil we're building two Chick -fil -A's right now. So our Ten and Septic strategy, which is really risk off, means that for them, we go out and source a location, we find land and there's a place they want to expand. We purchase the land, we get it entitled, we build a building for them with a lease in hand.

before we even close on the land. That's where we call it risk off. So we're not really taking a lot of risks. And that's a sweet spot for us right now. So we're doing a lot of that. We've probably got about 15, 16 of those projects in various stages of development. So that is that that strategy I really like in this environment where we've got reduced pricing, because that's a really good hedge to

DJE Texas (11:38.67)
any type of deflationary pressures. So to answer your question directly, that's a sweet spot. That's a great one. Love having that lease in hand on a development project. It definitely takes a lot of risk off. Years ago, when we were more risk on versus today, we're a little bit more risk off. We would just buy the land and then go and try to find a tenant for it. We don't do that anymore.

We're a little smarter today than we were. Yeah. If the alternative is building with a lease in hand with somebody like a Starbucks or Chick -fil -A. Yeah, I can see why that's a sweet spot. What's the team look like today? Multiple asset classes, 10 states. Mentioned not a ton of acquisition activity the last two years, but plenty of operations and asset management activity. What's the team look like? So we got about 150 people in the organization.

that's spread through our home office down to the property level. At the home office, we've got about 40 people. We're fully vertical. So we have in -house legal, in -house construction, in -house entitlement, in -house IT, property management, accounting, acquisitions and dispositions. And so...

You know, HR. So we're pretty vertical for a smaller real estate firm. Sure. And the reason we do that is because we, we can execute at a higher level, just having everybody in house and, you know, building all of those sort of systems and infrastructure internally. Right. I couldn't agree more. We're, we're smaller, but the pieces that we have in house, it just, it's, it's quicker execution, shorter cycle time, um, less issues.

not fighting over being a smaller client for a vendor. So, uh, love all those things. Legal in -house sounds nice. That's one we haven't brought in still deal with. I like that. Yep. Well, we talked a little bit before Paul about a, about a debt crisis and you'd mentioned that you'd recently authored a book. So we'd love to pivot and dive into that. What are you seeing out there or, you know, the genesis of the book? Let's, let's talk through some of that.

DJE Texas (14:02.798)
It's I think pretty pertinent to what's going on in the world today. Sure. Yeah. So, you know, I've been watching this really closely for the last decade and it's been a concern and it went from a concern to a real, real worry.

going to have a debt crisis in this country. We're at 130 % debt to GDP, so we've passed the threshold where most leading thinkers on this believe we can recover from and the history and the debt has supported them. There's very good data on this. We're not going to solve it either. It's become a structural problem. What I mean by that is,

It's such a large problem now, there's no longer an easy fix, right? It's just not a simple cure. And everybody wants an easy fix and it no longer exists. So it's structural now. There's no politician on the planet that can get voted in or be elected by saying, I'm going to raise taxes and lower services and I'm going to lower entitlements. No one's going to elect them, right? Sure.

So we're gonna just keep adding on to the debt and the debt. Just listen to what Jerome Powell, the head of the Fed said two weeks ago. He said, this is a big enough problem that if we don't start having an adult conversation about this, it's gonna lead to crisis. Jamie Dimon, head of JP Morgan, one of the best bankers we have in the world. He came out and said, we're gonna have a debt crisis. We don't solve this debt.

Everyone's just ignoring it. So, yeah, I wrote a book called Money and Morons that talks about the debt and what I call the great conflux that's coming. And if people and families don't start protecting themselves, this debt crisis is going to really harm people. And the great good thing about it is, Devin, there's time. This debt crisis is not six months from now or two years from now.

DJE Texas (16:23.246)
I don't know when is exactly when it's going to come. No one does. But when it does come, people need to protect themselves. And real estate is a great way to protect themselves because everyone knows that real estate as an inflation hedge is one of the best asset classes to have because it's just organically or inherently a very good inflation hedge. So real estate is a good class to...

protect against the debt crisis. But even real estate then, right? You got to make sure when that debt crisis comes in, right? You got long -term debt, fixed rate. We've seen what inflation has done to interest rates in this environment, right? And those people who have variable debt, sure, you know, in our portfolio, we've got about 90 % fixed rate debt. But the 10 % of the portfolio that's not fixed rate,

It hurts. It doesn't feel good. That's right. That crisis is coming. Those that prepare are going to be really happy that they did so. Those that don't are going to wish that they did. I think all of us, it's really important at least at a minimum to just be educated, understand it.

And, you know, not sort of stick our heads in the sand and just hope it doesn't happen. Educate yourselves is the biggest thing I'd say to the audience. For sure. And that was the, that was the reason behind taking the time to write the book, I imagine. Yeah, absolutely. Yeah. How do you see that manifesting itself? We've been kicking the can down the road for decades. You're seeing this come to a head some point in the relatively near future. How does that manifest itself kind of out there?

the marketplace and in society. So, you know, there's a, it's really hard to forecast how the crisis is because there's three or four ways that, you know, a debt crisis can unfold. My best assumption today is that we're going to inflate our way out of this. We're going to keep on printing money and we're going to allow, you know, do

DJE Texas (18:50.666)
debasement of the monetary debasement and inflation to get us out of this, which is going to lead to, again, sort of a collapse of the bond market and much higher interest rates and really a very sort of heavy inflationary environment.

It's going to get to a point when the world looks at our debt and says, wow, it's just too much and I don't have confidence in it anymore. I'm not going to buy your bonds at 3 % or 4%, but I'll pay 9 % for them. Now imagine an environment where bonds are paying 9%, what's interest rates going to be? 12%.

You know, it's going to cause a really heavy recession, probably a little bit of a depression. So yeah, it's going to be an inflationary environment with the bond collapse, but that's a little speculative. So I want to make sure I'm clear on that. Yeah, sure. Sure. It's all forward looking here, but it can't always be quantitative easing to infinity, right? I mean, that's, we're just kicking the can. Yeah.

I mean, it's really crazy, right? I don't know how many people really spend the time to understand quantitative. What is quantitative? Where did that term even come from? There's a reason I titled my book Money and Morals. If you look at some of the moronic behavior that's going on in our country, it's just wild. And I wanted the book's title to be sort of a little controversial so that people could really understand that there's some really moronic behavior.

Quantitative easing? So what is that? We got one arm of the government selling bonds, another arm of the government buying those bonds. Why? Because they don't want a bond collapse. Right. Right. You know, what happened to a free market economy and capitalism? What happened? I thought it was the foundation of who we are. Right. Right. You want to sell something, you put it on the market and you let the market determine the price.

DJE Texas (21:10.158)
We couldn't do that because what would happen, bonds would just go up. We couldn't do that. We would have a bond collapse. We'd have a debt crisis. So they created this really interesting thing called quantitative easing. Fancy words. Yeah, you love the term, right? Sounds like they're smart. They must have it figured out. Oh, yeah. Well, they've got to figure it out now until people realize that those...

know, what we call financial engineering, you know, doesn't work. You can only buy your own bonds for so long. So yeah, QA to QE to infinity. And let's see what that leads us. What do you think is a little bit of a detail? What do you think about Russia getting kicked out of Swift and the impact there? They seem to be chugging along. Is there any, you got any thoughts on that?

Yeah, it's really interesting, right? Everyone thought when they got kicked out of SWIFT, that it was going to be really problematic, but they've been able to circumvent it really, really well and find other sort of vehicles to be able to continue their sort of monetary trading and transactions. So, I'm not a big fan of sort of Russian policy today.

But for sort of the nature of their problems, Swift wasn't one of them. Besides that, nothing. It was interesting. Interesting, for sure. So given that you studied this, you've written a book about it, you're obviously still bullish on real estate. How does that inform your strategy?

Or is it really as simple as, hey, we want to continue doing the type of deals we're doing, bringing in investor equity, lock in our debt long -term to be able to ride this thing out? Is there more to that? Or how do you operate a company with a billion AUM today given that you think this is kind of coming around in the relatively near future? Yeah. Good question. Right. So.

DJE Texas (23:29.07)
I love real estate and a few other asset classes as a protection to the debt crisis that's coming. Specifically for real estate, lower loan to values. So the standard 60 to 70 % I don't think is premium anymore. You got to be down to 40 to 50%. Wow. Yeah. And you layer in.

Let's say you do a 40 % LTV deal. That's low, right? I kind of think by anybody's measuring stick, are you bringing in different layers of Mez or Pref? Are you kind of bringing in one class of equity or how do you accommodate for such a low LTV on the first, on the senior debt? Yeah. So we'll have a capital stack. It depends on the asset and how quickly we can increase NOI and really add value.

So if we can do it really, really quickly, so if we can buy something with a million dollars of NOI, we think we can get that from a million to a million in the first two years, we'll bring on a little meds or that will pay off very quickly within 20 months. If it's going to take longer than that, we won't. We'll just stick to a very long LLTV, be disciplined, accept a little bit lower return in the front end for less risk, being more conservative, and for a higher back end return.

But yeah, we'll have a capital stack for the right project with the capital stack that might get us up to back to 65, 70, but we'll get right back down to 40 or 50 really quick. We won't keep it that high. And yeah, fixed rate debt.

90 -95 % of anything we buy moving forward will always have fixed rate debt and not for three years, more likely like 10. And we're going to be a little bit more risk off because of sort of, you know, we don't know when that crisis is going to hit and when it does, you know, the capital markets in general, both debt and equity are going to sort of just shut down.

DJE Texas (25:49.838)
And so there's not going to be an access to capital and it's going to get very expensive. And so for those reasons, you know, we're, we're, we, that's what we talked about asymmetrical returns, right? Really focusing on strategies that have lower risk and higher returns and being very selective and disciplined. And that probably means we're going to have less growth, right? We're not going to grow from a billion to 3 billion.

that won't happen with us because of the cancer, being more thoughtful, being more disciplined, select strategies, lower risk or risk off as I call it. So it's going to probably impede our growth over the next five to 10 years. Sure. Which is not inherently a bad thing. It's not growth at all. No. No, no, no. I sleep better at night. For sure. For sure.

I want to ask you a little bit about how your role as CEO has evolved. I mean, obviously starting with One House and to where you are now is quite a journey, but how has your role running the organization evolved and what does a week look like for you today? Yes, it's definitely evolved, changed a lot. So I'd say I spend now 50 % of my time problem solving.

So one of the departments has got an issue and it's worked its way up to me because the issues become big enough. So I'm solving a problem from a project that's got variable debt, even though it's only 10 % of the portfolio, but a project that's got variable debt and the debt's doubled. So cash flow has dropped a lot and we've had to sort of now manage through that.

whether that's cutting expenses or raising more capital for the project. That's just sort of one example. Another good example is the IT department came in my office last week and got hacked. Ransom deal or what was it? We don't know yet. They haven't told us yet. Something's coming. There's going to be an app. We don't know what it is.

DJE Texas (28:12.622)
in the middle of data return solving. So 50 % problem solving, about 25 % managing people and motivating and making sure we're watching our KPIs and we're meeting those key performance indicators and people are sort of on time, on budget. So typical, you know,

My performance management is with high psychology. Another 10 % is what we call focusing on CPI, constant process improvement, not the inflation metric, but the internal term for, you know, we're constantly making sure that we're improving our systems. And that takes some of my focus. And then the other 20 % is all sort of

investor relations and talking to capital and continuing to maintain our network. Right. I appreciate the overview. How has the experience been with the kind of organic high net worth investor, maybe family and friends, maybe it's outgrown that versus the Goldman Sachs of the world? You're obviously working with both, so there's some merit, but

How does have those two experiences been for you guys? Yeah. So it's sort of just, it's the yin and yang of life, as I say. There's always sort of benefits and downsides. The high net worth, friends and family following that we've had now for 30 years. It's a great investor base and

very easy to sort of manage, less demanding. We have much more control. But really hard to scale a business. That capital gets limited. And if you really want to scale and go to something larger, then you have to go to the institutional market, as we call it, right? That is the sort of the most sex in the world. And they're great too. Great large buckets of capital.

DJE Texas (30:36.302)
big appetites, very growth oriented, can write large checks. So our high net worth individuals are probably average check size is 200 ,000, where institutional, their check size is 21. But with the institutions comes a lot of responsibility. They have more control. You gotta have high levels of reporting and systems to make sure.

you're running a really sophisticated firm, that's going to be one of their demands. And also, you know, they would cry a different level of management and sophistication. So there's a cost burden to a firm, those systems, more that level of professionals. Yeah, certainly. And then certainly some benefits there that go along with that.

Well, the book is Money and Morons. Paul, can they find it on Amazon? Find it anywhere? Yeah. Yeah. So it's a little, you know, self -promotion here. It just hit a bestseller on Amazon, so it's easy to find. Congratulations. Thanks. And Barnes & Noble has it too. And so anyone with those. But there's an audio book too, so it's an easy move. Perfect. Yeah. Good call putting the audio out there.

If somebody listening wants to just connect, learn more about your firm in general, where do we send them? Go to StarPointProperties .com, our website. You'll also find me on LinkedIn or X under my name, Paul Donnishred. And also we've got an Instagram account, so you can find StarPoint there as well. Okay. Well, we'll link to that in the show notes. If you're listening, you can scroll through to the description there and connect.

With the team, Paul, thank you very much. This is wonderful. I really enjoyed getting to chat with you. Thanks for your time. Devin, thanks for having me on. It's a pleasure meeting you. Likewise. All right. We'll see you. All right. Peace.

DJE Texas (32:41.742)
Thank you for listening to the DJE Podcast. For more information, please go to djetexas .com.