Building Wealth from the Ground Up with Brian Burke
Brett Swarts
Amazon best selling author of Building a Capital Gains Tax Exit Plan, Closed over ? Billion in Deferred Sales Trust + Real Estate, and Founder of Capital Gains Tax Solutions
A lot of people think that building wealth takes an insane amount of talent and amazing background. The President and CEO of Praxis Capital, Inc., Brian Burke, joins this episode to prove that wrong. He shares his origins along with the perception and mindset that he used in order to build his wealth and turn his life around. Learn about the tactical methods he uses in order to offset capital gains tax in great detail. Understand why it’s necessary to focus on your own niche while being flexible at the same time. Brian also emphasizes the importance of variety when you invest. He discusses easy and practical strategies for you to diversify your risk as a way to not only create but also preserve more wealth, both for yourself and your partners.
I’m excited about our next guest, Brian Burke. He’s with Praxis Capital. He has 30 years of experience, multifamily, single-family homes. He talks about real estate and how it’s like a river. If you want to be successful, you’ve got to go where the river leads. Sometimes the river is not straight. Sometimes it’s going to the left. Sometimes it’s going to the right and it’s flowing in certain ways depending on the market cycles and different locations and different product types.
He’s going to talk about how he has allowed the river of real estate, if you will, to lead him to more profitable opportunities, whether that be selling out of California, whether that be buying in other states, whether that be using single-family flips during the crash of ‘08 to going into multifamily. He has a unique story and a ton of wealth of knowledge. He also is going to tell you about, don’t let the tax tail wag the investment dog. In other words, don’t let tax be the reason you buy a particular property or deal. Make sure you’re buying it on the intrinsic value. I’m excited for you to read this. I look forward to your comments and sharing it with anyone else that you think might find some value here. Thank you so much.
This is another great opportunity to learn from somebody who has been in the business for years. He’s created a vertically integrated real estate private equity investment firm and has acquired over $500 million worth of real estate, including 3,000 multifamily units and more than 700 single-family homes with the assistance of proprietary software that he wrote himself. He also has subdivided lands, built homes, and constructed self-storage. He prefers to reposition existing multifamily properties. He’s also the author of The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications. He’s a frequent speaker at the real estate investment forums and conferences across the country. You can find him at PraxCap.com. Please welcome Brian Burke. Brian, how are you doing?
Great, Brett. Thanks for having me on.
Will you give our readers a little bit more about your story and also your current focus?
My story goes back quite away. I’ll summarize it. I started investing in real estate years ago. It all started with one single-family home purchase. I bought it as a rental. After that, I got into the fix and flip business where I was buying, fixing up, and reselling single-family homes. That business grew well. We had a massive real estate downturn. You might have heard about it.
The 2008 crash. You must be living under a rock if you didn’t hear about that one.
If you missed that, then something happened. We managed to survive that massive real estate downturn. In fact, it was probably the most intense catalyst for our growth. It allowed us to expand and grow our business because of the availability of distressed real estate which is what our platform was centered around ever since the beginning. We grew intensely after the real estate crash and continued to grow ever since. We started raising a lot of money to buy a lot of single-family homes after the foreclosure debacle or during the midst of the foreclosure debacle but realized that that was probably a short-lived opportunity. You scratch your head and you go, “What are we going to do when this party is over?” We turned our focus back to a business that I got into in 2002, which is multifamily real estate. Multifamily is scalable. You can maneuver around market cycles by investing in different areas because there’s multifamily in every market in the country. We knew that that was something that had a lot of runways left. It had a lot of room for us to grow and build a sizable portfolio. We’ve been focused solely on the multifamily space and have been building a portfolio there.
Before all your success, Brian, as a multifamily owner and also as a single-family fix and flip and also this proprietary structure, which I’m interested to learn a little more about, I’m curious, whom was Brian growing up? In particular, not just the hard work that got good grades, but what was the particular gift that you were given? We’re all given certain gifts. Some people call it a superpower. It’s God-given gifts. What was the one particular gift? In particular, how does that gift help how you help people? Connect those dots for us.
My biggest gift was I was a terrible student. I was a C average high school graduate that hated school. I also had a poor family. We had nothing. I knew that A, I would make a terrible employee, and B, I had to make my own way because I wasn’t going to inherit a dime. That meant that I had one option and one option only, and that was to be an entrepreneur. I had all the motivation in the world to make sure I did it right. While many people would consider those a handicap, I turned it to use it to my advantage because you’ve got to be motivated by something to succeed in anything. That was a real strong motivating force for me.
Seeing the silver lining or taking what’s in a typical situation where people who are maybe negative or maybe use it as a handicap, you turned it around and let it fill you into a positive, into growing, into reaching for new goals.
Building Wealth: Multifamily is scalable. You can maneuver around market cycles by investing in different areas because there’s multifamily in every market in the country.
If you’re going to be a one-trick pony, which is what I am, I know real estate, I know how to do this business and navigate it, maneuver it or I wouldn’t have survived it. Even though the worst adverse market, we’ve ever seen in at least my lifetime, if not maybe the generation before me and maybe even the generation before that, if I can navigate and survive that, that tells me I can do something right. If I’m going to be a one-trick pony, this is going to be it. I knew I was never going to be that Harvard grad that could come in and turn a company around and do all the kinds of things that those guys can do. I knew I had to build something and bootstrap it from nothing and that was the only way I could do it.
I’m curious, what do you think we are with this market cycle? You’re in Santa Rosa, California. I’m in Sacramento. Santa Rosa faced some major fires. California has a huge deficit in housing. Sacramento is year over year, the number one fastest-growing rental market in the nation for multifamily. It’s slowed down the last couple of years, but years before that, it was number one twice in a row. Where are we at with these multifamily opportunities to buy, to sell? How does that compare to what you saw before the run-up and the crash in ‘08?
The people that are in our own backyard are going to hate my answer because Sacramento may have led the country and regulatory constraints have come into play that’s going to impact Sacramento’s results. We have statewide rent control here in California, which is going to place some caps on rental growth and it may make that even less desirable. Personally, we’re selling everything we’ve ever had in California. If I never buy another parcel of real estate in California again, it will be too soon. We’re focused on buying in areas where we see future growth and future potential. We invest in places where people are moving to, not where they’re moving from.
If you look at migratory patterns, California is one of the biggest exporters of the population and New York. They’re going to places like Arizona, Texas, Georgia, Florida, Carolinas, Tennessee. They’re going to those markets and we’re trying to get ahead of that wave and own in places where that population is moving to. At the same time, we don’t have regulatory constraints that are capping our ability to succeed in this business. California is facing a lot of challenges. I could go on and on about all the reasons why. What’s most important is when you’re looking to profit from real estate, the real estate market is like a meandering stream in a meadow and it will go left, it will sway right, and it will sway left again. If you row in a straight line, you’re going to run aground. You have to be able to steer and steer around those obstacles. We steer around the obstacles by looking at where we’re investing.
When people ask, “What’s the real estate market doing?” I always have to chuckle because there’s no such thing as the real estate market. There’s a different market on every block. Where we’re at, they’ll say, “Are we in the sixth inning or the seventh inning?” Who knows? Games get rained out early and they also go into overtime. We’re in markets where you might call it 5th or 6th inning. California might be in the 8th or 9th, maybe even in the 10th. There are plenty of places across the US where you can still make money in real estate and continue to do so as long as you do it with safety as your number one priority.
Walk us through a deal that you’re selling in California and how your return on equity is. For those who don’t know about the statewide rent control in California, essentially, they capped rent by 5% plus the cost of inflation. For most places, that means 8%. You cannot push rents past that amount in a given year. Especially for people who were buying value-add opportunities, they were looking to buy where the rents were low, add a bunch of value, and raise rents by 10%, 15%, 20%. That puts a big hindrance on that opportunity and therefore there’s less incentive for them to buy. That being said, the same thing is true for even rents moving forward. You only can increase by, let’s say, 7%, 8% depending on what city you’re at. Walk us through your return on equity average. Let’s say an average $10 million deal. What are you seeing in your portfolio, Brian, in California versus, “If I sell this thing and go to Texas, Florida, these different states that are more favorable, what’s the difference in maybe the cash-on-cash return?”
I wish I could answer that because we don’t own any multifamily in California. We stopped looking at acquiring in California. We still have some single-family in California, but we won’t for long. We had 120 single-family homes in the San Francisco Bay area that we bought at the bottom of the market. We started selling those. We’ve almost rounded out the entire portfolio. We’ve got less than 5 or 6 houses left. We’re out completely from the California market. The only thing we’re going to have in California will be a few fixes and flip type of single-family properties that we’re still doing a little bit of because we already have the systems in place, might as well, if we can find the arbitrage. In terms of return on investment, return on investment left the California scene any time after 2013. If you could buy in 2009, 2010, 2011, you’d do well in California, but as prices started ramping up ‘13, ‘14, ‘15, it became way less desirable. When you’re buying at 2% or 3% cap rates and having to put down 50% to get cashflow, the prices have gone too far.
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