Why No Real Estate Deal Is Better Than a Bad Deal | Multifamily Investing Discipline

Naeem Farokhnia (00:00)
Yep. So yeah, the interest rate has gone up and then some say that they’re going to go down. We don’t know. We are just assuming that they are up in our underwriting and then we assume that they are not going to go down. We assume that they may go up a little bit even. And then we put that in underwriting. That’s how we reject a lot of deals because they don’t pencil out. And then we don’t care. I mean, for the past year,

If I didn’t have any deal, I don’t care. Not having a deal is better than having a bad deal.

Scott Bursey (02:09)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host, Scott Bursey And today we are absolutely firing on all cylinders with a guest who is injecting serious fuel into the real estate investment world. Our pro today is Naeem Farokhnia from Redwood Crest. Naeem has mastered the art of scaling complex value add projects and navigating shifting capital markets, bringing that high octane expertise we all crave.

Get ready pros because you’re about ready to get fueled up. Naeem, thanks for joining us today.

Naeem Farokhnia (02:46)
You are welcome. Thanks for having me. It’s a great opportunity to be with you and with your guests and hopefully I can bring a lot of value for your guests so it’s worth their time. That’s the goal.

Scott Bursey (02:59)
And to kick things off for listeners who may not be familiar with your journey, please tell us how did your cure begin and what is your main focus now?

Naeem Farokhnia (03:09)
Yeah, right now I invest in really large apartment buildings, residential apartment buildings. ⁓ I didn’t start as real estate investor. I started in tech. Believe it or not, I got my PhD in electrical engineering, two PhDs in electrical engineering and worked at Apple. I was born in Iran and then lived there for 27 years.

came here to the US 15 years ago. So the transitioning from engineering to real estate and then sales was very interesting. So there are a lot of movies that can made off of my journey. then, but yeah, I’m, I’m glad that I did. I exposed myself to a lot of different experience and different skills along the way that I think

in a peaceful manner. I didn’t have to, but I chose to. And then, also it matches my personality. And then I learned a lot along the way and I’m happy to share them with everyone and also help anyone who thinks that where they are right now is not a fit, is not a good fit for their personality, right? So we have different personality. Some people are happy.

where they are, which is great. Some people are not happy where they are, but in order to get where they are naturally happy, there is a transition. At the beginning, they are going to lose. They’re going to lose money. They’re going to lose their friends. They’re going to lose relationships. It’s hard and it’s scary, but I think it’s worth it. your personality doesn’t match where you are working, taking those initial risks, I think for the most people it’s worth it.

Scott Bursey (05:50)
Thank you for that insight and that’s a fantastic journey Naeem What really caught my attention about you was the way that you’ve been able to execute complex, large-scale value-add strategies in competitive markets, turning challenges into incredible growth opportunities.

Naeem Farokhnia (06:12)
Yeah. So what basically you need to do in any market, any new field, any new career, you need to really connect with really good people in terms of both skills and ethics. So when you get connected, you can either work with them or hire them as your mentor. Then you don’t have to reinvent a lot of wheels. So they have already done that. You can bypass a lot of things. You can learn quickly. can…

learn in a really good way instead of getting injured and doing trial and error, doing everything by yourself. So you should have a mentor. Anything you want to do that helps a lot. And then you just keep putting time. The only variable that you have is your time. mean, what the market does, it’s out of your control and you don’t want to control that. But you have to be prepared for anything that markets

⁓ send your way. For example, if you are in Seattle, if you live in Seattle, you are prepared. I mean, if it’s going to rain, you have a plan. You are going to take your umbrella or take your car or whatever. You are not going to be upset that it’s raining. You have a plan for it. If it’s sunny, again, you have a plan. You are not going to be upset or anything. Same thing with the market. Market is going to go up and it’s going to go

down. are two options. is nothing else. If you have a plan for both options, you are good, you are protected, and you don’t want to control the market, but you should have a plan for whatever the market sends your way.

Scott Bursey (07:58)
control what you can control and have a mentor or a group of people that can assist you along the way is what I’m hearing from you, Naeem.

Naeem Farokhnia (08:09)
Exactly, yeah. The only variable that you have is your time. I mean, you can also be very careful who you work with, who you surrounded yourself with, and then everything else should take care of itself. ⁓ Yeah, you can’t control how tenants behave. You can’t control when the roofing is going to collapse. You can’t control how the insurance is going to respond.

But you do have control over your time, what you learn, who you hang out with, what you put in your brain. ⁓ So you should focus on things that you can control.

Scott Bursey (08:50)
Naeem, let’s dive into the rapid fire session designed to get some high level strategic takeaways for our listeners. What is your single biggest competitive edge in deal sourcing currently?

Naeem Farokhnia (09:07)
So I’m capital raiser. My partners are deal sources. So in general, if someone closes the deal left and right and they have been into the market for long enough, then brokers trust them. Brokers love them. Brokers wants to work with them first. Because the last thing brokers wants to do is

working with someone new who doesn’t know how to close or hasn’t closed yet or doesn’t have enough capital to close. So it’s going to be a waste of time on their side and their seller side. So they want to work with someone who is experienced, who worked with them before, closed before. So they are looking to close. They are looking to sell the property, get their commission. So…

When you make it easy for them to do that, they’re going to love you, they’re going to continue working with you, and even better, they’re going to send you off-market deals. That’s what you are looking for as a deal sourcer. You are looking for off-market deals, deals that are not exposed to the market or online website, so you can really get a really good discount and then really good deal. Yeah.

Scott Bursey (11:03)
Relationships are everything in this business. And people do business with folks that they know, they like, and they trust.

Naeem Farokhnia (11:17)
Exactly. Exactly. Yeah.

Scott Bursey (11:18)
What is the most common operational

bottleneck your firm faces today?

Naeem Farokhnia (11:26)
So the operation really is like, we try to avoid variable interest rate or bridge loan because they are not fixed rate. For one year, they have a rate and then for the second year, we don’t know what’s going to happen. If the rate jumps higher, then it’s going to be very hard to make the deal happen. Usually the deal goes to foreclosers. So we want to kind of have a fixed rate.

at the beginning for five, seven years. That’s the things that you’re very cautious about. And we on the right conservatively, meaning that we assume usually the rent gross is very lower than what the projections are. The occupancy rate is way lower than what the projections are. And then we assume that something goes wrong with the

I guess renovation, we assume that it’s going to cost more than what we projected. Then we underwrite and then we come up with the purchase price and then we ask seller to sell with that price. If they disagree, we just walk away. don’t, we don’t compromise our underwriting or assumptions. And then we are, we are disciplined in that way. And then I think everyone should be like that. ⁓ And then yeah.

closed

Scott Bursey (12:53)
It’s always about execution. Systems and standardized processes are the bedrock of scaling. And if I’m hearing you correctly, if you missed that step, everything slows way down.

Naeem Farokhnia (13:09)
Yeah, for execution, it’s all about the people. You can have a really good deal, give it to bad operators, they are not going to make it happen. The deal is going to fail and you can have a bad deal, give it to a good operator, they’re going to make it happen. for really, ideally you want to have a good deal with good operators. So you have enough margin.

like a lot of things even go wrong, still you make that deal happen. That’s our goal, to have a good deal with good operators so we have enough margin of error which will happen. So that’s the goal.

Scott Bursey (13:53)
getting that deal in the right hands is so critical.

Naeem Farokhnia (14:00)
Yeah, exactly. Yeah. Yeah. Again, it’s like a feedback loop. Yeah. Good deal attract good operators, good operators attract good deal. That’s how ⁓ good operators kind of scale and grow. Yeah.

Scott Bursey (14:03)
No doubt, Naeem.

Absolutely. In your view, where is the most overlooked market or asset class for the next 12 months?

Naeem Farokhnia (15:05)
So there are a lot of markets that are kind of saturated, like for example, Austin, they are experiencing your Dallas, or most markets actually in the US right now, they are experiencing negative rent growth, they are offering concessions. So as an investor or operator, you have to keep that in your underwriting. You should not ⁓ assume that rent…

is going to grow or rent ⁓ even is going to stay flat. Assuming that rent is going to go down and concessions going to be offered, then you have to on the right and make sure that the deal still pencils out. But yeah, there are, mean, you don’t want to compete with institutions. You, I mean, what is wrong with going with tertiary markets, secondary markets, some small towns.

markets. All you need is a delta. When you buy it and when you sell it, if you have rent growth, if you can sell it higher than what you purchased in a really good market that is experiencing population growth, then you should be fine. Yeah, who cares if it’s in Austin, if it’s in New York. mean, New York has another challenge, which is like a tenant friendly and then all the rent control laws. ⁓

or it’s a small town in Texas. As long as you can deliver what you promise to your investors, it should work. Yeah.

Scott Bursey (16:40)
Naeem, how is the underwriting moving the needle for your operation?

Naeem Farokhnia (16:46)
Yeah, it’s very important. So in underwriting, you should assume all the variables that play a big role in your basically purchasing a really good deal. in your underwriting, you assume what the rent is going to be five years from now, four years from now, three years from now. And then if you…

If you don’t put the right number, then you’re going to come up with the wrong purchasing price. You’re going to purchase higher than what you should. I mean, the seller is going to be very happy and then they are going to sell it to you. But now you bought the wrong property at the wrong price. Now it’s going to be very hard to deliver. Now it’s going to be very hard to

⁓ operate and then now you are stuck with the deal for five years of your life which is very painful, which is going to be very risky. That’s how ⁓ operators fight, partners fight with each other in these deals. So yeah, you have to do everything right from the beginning.

Scott Bursey (18:03)
That’s some game changing advice for our listeners right there in the…

Naeem Farokhnia (18:09)
Thank you. Yeah, I hope it was helpful.

Scott Bursey (18:10)
Let’s shift gears here a little bit.

What macro shift or regulatory hurdle are you most focused on now?

Naeem Farokhnia (18:20)
So regulations are constantly changing, but not at the highest speed. They are slow. So you have to keep up with the regulation and kind of comply with them. You don’t need to fight with them. Some regulations, most of them are good to protect consumers and operators. Some of them are not as much as good, but it’s just going to take time for everyone to realize that and then they’re going to get fixed.

Yeah, you just need to know about them, follow them because getting fined, ⁓ either filing your taxes or violating some law is going to cost a lot of money to the operation team, to the partners and eventually to the investors. Yeah. I mean, usually experienced operators, they know the laws and they’re going to follow that.

Scott Bursey (19:15)
Let’s go underneath the hood now. What’s your immediate strategy for managing rising capital costs?

Naeem Farokhnia (19:21)
Yep. So yeah, the interest rate has gone up and then some say that they’re going to go down. We don’t know. We are just assuming that they are up in our underwriting and then we assume that they are not going to go down. We assume that they may go up a little bit even. And then we put that in underwriting. That’s how we reject a lot of deals because they don’t pencil out. And then we don’t care. I mean, for the past year,

If I didn’t have any deal, I don’t care. Not having a deal is better than having a bad deal.

A vacant unit is better than a bad tenant, having a bad tenant. I guess being single also is better than being in a bad relationship, bad marriage. So we don’t care if we don’t have a deal. ⁓ But yeah, as long as…

If a deal pencils out, it meets our requirements, you like the deal, you’re going to go after it and you’re going to buy it.

Scott Bursey (20:29)
once again, it has to be the right deal is the message I’m getting from you.

Naeem Farokhnia (20:36)
Yeah, it’s very important. So you want to get the right deal first. Second, you want to have the right team to manage it and exit it. So two factors, very important. Yeah.

Scott Bursey (20:48)
I know you’re playing the long game. Please outline a little bit of your long game strategy.

Naeem Farokhnia (20:55)
So for example, when we work with our investors, we are not looking for any specific deal. We are looking for like 30 years relationships. That makes a win-win strategy. Like for us, we want to do a really good job in our first or second deal so investors not only stay with us, but also spread the word to their…

networks and group of friends. So they are like, ⁓ we work with these operators. They are great. You should work with them too. So they win by getting really good return and results. And we also win by having these investors around, by having their networks and family around. And then that’s the goal. That’s how we look at the relationship we have with

our investors in long term. It’s a win-win situation. Same thing with our operators or partners. If we do a good job with them, they are going to keep us around. If they do a good job, we are going to keep them around. So as they always say, rich going to get richer, poor going to get poorer. This is a positive loop. It’s a positive feedback. So good operator is going to grow, good investors going to grow. And that’s how we should.

Yeah.

Scott Bursey (22:14)
Now I am curious, are you involved in any investment groups, peer groups, networking groups, anything of that variety?

Naeem Farokhnia (22:23)
Yeah, starting five years ago, I’ve been a member of at least one or two masterminds a year. This year I’m part of an exit strategy. It’s a private equity mastermind that I’m part of. I’m actively reading books. I’m actively networking with really good operators. I’m going to really good events, good clubs. And then that’s what I’m trying to do. Like going there.

Good people are.

Scott Bursey (22:55)
It sounds like you put a lot of value into these groups.

Naeem Farokhnia (23:00)
Yeah, yeah, I did. Yeah. I also listened to podcasts. There is this app, it’s called, let me see, ⁓ Libby, something like that. So this app basically connects your local library with you. So you can borrow your local library’s book in your phone.

And most of them have audiobooks. So you can listen to those books for free on your phone, which means that you can listen to them while on your car or you’re walking or working out. That actually helped me a lot with my thing. I’m reading a lot of books. I’ve read a lot of books in the past few months and it changed drastically and I love it. So I just wanted to share it with your audience. ⁓

So hopefully they can benefit. They can also listen to podcasts. There are a lot of good podcasts out there.

Scott Bursey (24:05)
And Naeem, given the current climate, what is the most non-obvious piece of advice you have for pros looking to successfully transition from small-scale investing to institutional-level deals?

Naeem Farokhnia (24:21)
Be patient. Keep your expectation low and work harder. That’s all. If your expectation is high and even you work hard, you are going to get disappointed. But keep your expectation low, meaning that you don’t deserve anything. Working harder doesn’t mean that you’re going to get any results. So keep working. Keep working. It’s going to come. It’s going to eventually come. But when it’s going to come, we don’t know.

It’s not going to be tomorrow or next week. There is no guarantee. Your job is to just keep working. It may come five years from now. That’s great. It may come next week. That’s great. You don’t know, but you just keep doing your part. Yeah.

Scott Bursey (25:05)
Naeem, if I’m hearing you correctly, stop chasing the perfect deal and start mastering the perfect process.

Naeem Farokhnia (25:14)
Yeah, that’s a very good way to put it. Yeah. Yeah. You don’t know when a good deal is going to come, how it’s going to come, where it’s going to come, but you have to be disciplined. You have to have your, I guess, rules and regulation in place. So if a deal meets your requirements, great. If it doesn’t, you just walk away. Yeah. You should not, you should not depend on it. You should, you should be financially free or secure enough.

That if you don’t have a deal for two years, you should be fine. You should be actually happy that you didn’t have deal for two years because none of them penciled out. Not because that you didn’t get a good deal, but you did your part. You worked a lot. You underwrote a lot of deals, but none of them penciled out, which is you should be happy for that. Again, not having a…

deal is much better than having a bad deal.

Scott Bursey (26:15)
Institutional success is built on repeatable, disciplined action, not luck.

Naeem Farokhnia (26:24)
Exactly, yeah, Like Warren Buffett said, right? Put your part and then the result is going to come. We don’t know what’s going to happen to the stock market today or tomorrow, but you buy a piece of good business at a really good price and hold it for long term and it’s going to work.

Scott Bursey (26:26)
Naeem,

What sort of advice or additional golden nuggets can you leave with our listeners here today?

Naeem Farokhnia (26:55)
I think you are doing great, everyone. you might have an ideal here that you’re looking at, and you are here. So you may feel that you didn’t do enough, or you don’t deserve, or you might blame yourself.

But the reality is you shouldn’t look at the ideal all the time. You should look at what you were yesterday or one month ago, one year ago, two years ago, and look at how much progress you made in the past two, three years. When you focus on the progress, you will see that you actually made a lot of progress. You learned a lot.

And that’s how you should think about every day in the morning. Look at the progress that you made. You made a lot of progress and naturally you should be happy about that.

Scott Bursey (27:57)
Now, this has been an incredible conversation. Thank you for your insights.

Naeem Farokhnia (28:04)
Thank you for having me. It was a pleasure being here.

Scott Bursey (28:07)
For those of our listeners who wanna follow your journey or collaborate with you, what is the best way that they can reach you?

Naeem Farokhnia (28:15)
They can go to redwoodcrest.com and fill out the form so I can get in touch with them. They can also connect with me on LinkedIn. They can find my name, Naeem Farokhnia They can Google it, find my LinkedIn profile, send me a connection request, and then send me a message. I would love to get in touch with you.

Scott Bursey (28:43)
Naeem, this has been just an incredible conversation. Once again, thank you so much for joining us today.

Naeem Farokhnia (28:53)
You are welcome. It was great being you. Thank you for having me, inviting me, and it was a pleasure talking to your audience.

Scott Bursey (29:01)
And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Naeem, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.