Want to know the secrets to wealth building through real estate investing? Today’s guest is Sujata Shyam, Managing Principal and Founder of Luxe Capital and the host of Passive Income Unlocked podcast. Sujata’s personal mission is to bring the real estate wealth-building model to hardworking, busy people who aspire for financial independence. In this episode, she shares valuable investing tips to help you on your way to financial freedom. Join Sam Wilson as he chats with her about AirBnB entrepreneurship, multifamily investing, private placement, investors, and more!
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Unlocking Wealth-Building Strategies In Real Estate Investing With Sujata Shyam
Sujata Shyam is an accomplished professional multifamily underwriter. She’s passionate to bring real estate wealth, building models, to hardworking busy people. She’s also the Founder of Luxe Capital, which helps people invest in high-quality, recession-resistant and pre-vetted commercial real estate opportunities. She’s passionate about closing the gap and helping people decouple their time from their income. She’s also an Airbnb entrepreneur, which is how she got started in real estate and how she initially found her way into financial independence.
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Suja, welcome to the show.
Sam, it’s great to be here. Thanks so much for having me.
The pleasure is mine. The same three questions I ask everybody who comes on this show. Can you very quickly tell us where did you start, where you are now and how did you get there?
I started out as a graduate student. At that time, I had only worked in lower-paying jobs. I was a social worker and I was doing a fellowship. This was after going to undergrad at Northwestern. I wasn’t making much money. I went to graduate school and I knew I needed to start figuring it out. I had known that I didn’t want finances to be a limiting factor in my life. I had pursued this like social worker path. I was in business school and I decided, “I need to figure out what my first move is going to be.” Long story short, I used my student loans to make my first real estate investment. I had no money. I only had loans and that was how I got into my first deal.
Fast forward, we flipped that house. I held it for five years and I also done house hacked on steroids. That was another huge part of shoring up my financial independence game then I became an Airbnb host. In the middle of that, I took an eighteen-month trip around the world and realized that I didn’t want to be in Corporate America and needed to find a path where I could control my own time and schedule and be in control of my own destiny, etc. That all led to me wanting to level up in real estate and help people learn about how to invest intelligently and how to decouple their time from their income. I opened this private equity firm that connects people to real estate syndications and teaches people about how to do that and how to achieve financial independence.
That’s a lot all at once. I’m excited for you to jump in. Let’s rewind the tape a little bit and go to the house hack on steroids. Can you define that?
When I bought my first house, I had got a new job and qualified for a very expensive house but my dad was a real estate investor growing up. Although he didn’t necessarily go big with it, he did have three single-family home rentals, which when he bought them back in the late ‘80s, early ‘90s were negative cashflowing. They’re in San Jose, California so they’re doing great now. There was obviously a ton of appreciation that happened in that market. When my sister and I were kids, 4 to 7, 8 or 9, they were still lean years and that was one of the reasons.
A house is a liability before it’s an asset.
What he always told me is that a house is a liability before it’s an asset. That is not the typical mindset that most people think when they’re thinking about buying their first home to live in. I decided for sure that I wasn’t going to buy a house where mortgages were going to cost me more than renting. That was something that I went into it with. I decided, “If I’m going to do this, it needs to make sense financially and not going to count on market appreciation, etc.”
The way that I accomplished that was I bought a house that had five bedrooms in it. I didn’t know the term house hacking at that time but I rented those rooms to friends. I had a cashflowing asset from day one. I bought the cheapest house in the nice neighborhood and was able to find something that was not flying off the shelf. There wasn’t a bidding war or anything because it’s an odd house and it worked well for what I was doing. That was how I started that journey. I eventually developed it into an Airbnb adventure where I didn’t have to share the whole house with everyone. We can go into that but that’s how it started.
That’s interesting. Five bedrooms that leaves you four rooms you can rent out to your friends. That’s brilliant. Airbnb is on fire now. Why did you not stick with Airbnb then grow your PE firm?
I took my single-family house and I turned it into a BNB where I separated out different parts. I had three Airbnb’s and my single-family houses. I purchased a fourplex and transitioned it to a hotel use so that I could legally do Airbnb with it, even with a changing regulatory environment. The reason that I got into private equity was that it was 2018 when I bought my fourplex, which I transitioned to a hotel. At that time, people were talking about, “It’s been a bull market for many years. There’s going to be a correction sometime. We don’t know when.” I definitely knew that I didn’t want to be caught with my pants down and Airbnb was not a recession-resilient asset class.
It was probably going to be more resilient than hotels in a downturn but it’s still hospitality, travel and leisure. There are lots of ways that you can protect yourself because you can have travel nurses and military families, etc. There are all these different people that need Airbnb’s. I will tell you, now that games are back and people are coming to conferences again, that demand is starting to tick back up because I’m in an urban environment so that does change it. I got into private equity because I’m like, “I need to diversify outside of hospitality.” Almost all of my income was coming from Airbnb, which was hospitality but I didn’t want to be fully in hospitality.
That makes a lot of sense. Walk us through the transition to PE, what you are investing in and how you’ve structured it. Give us a breakdown of what it is you’re doing now.
First of all, when I was an underwriter professionally, I was working in syndications. I had a background underwriting large multifamily transactions from $2 to $60 million and had underwritten those or analyzed them and prepared them for institutions to be ready to invest in that. I had quite a bit of experience. When I jumped into the private placement world, which is a different world than the institutional world entirely, it feels more like the Wild Wild West but at the same time, it’s a place where individuals can act rather than huge banks, pension funds and life insurance companies, etc.
It was exciting to me that I could apply this business model that I learned from the institutional side to me as an individual. I’m like, “All these insurance companies are here making money on affordable housing. Why can’t individuals do that?” The private placement world allows individuals like you and me, regular everyday people who are hardworking and have started saving and have assets that they can access to invest.
I was very excited about this. It took me a while to figure out because you start listening to BiggerPockets and this and that and people are house hacking, flipping or wholesaling and buying duplexes. I knew that I wanted to operate at a higher level. It felt like I was past that. I didn’t want to start wholesaling or flipping. It was also not that easy to flip back in the day because the margins were thin and were hot.
It took a couple of years to figure out where it was that I wanted to land in the private placement space. That meant listening to podcasts and figuring out whose investment philosophy I could align with. I ended up finding people who mentor, who are very focused on recession resilience and downside protection, not necessarily getting caught up in the hype of multifamily. That’s where I feel like my niche is.
Does not getting caught up in the hype of multifamily mean you’re not a multifamily investor?
Any type of new investment takes time and energy to learn about.
I should clarify. I definitely will invest in multifamily. I consider multifamily to be a recession-resilient asset class. However, within the multifamily community, there’s pricing. It’s very high, very competitive and you have to be careful about what you buy. That’s not only true in multifamily. That’s true in any asset class. You have to be careful what you buy but for multifamily, the pricing keeps going up even more so than other spaces.
You have to have a balanced approach when you’re looking at deals. You have to make sure that it’s conservatively underwritten and that you’re going to be able to deliver on the business plan. You also have to make sure that it’s aggressive enough that you can win deals. Balancing those two is definitely, in my opinion, an art. At the same time, you have to put a package in front of investors that they’re going to be attracted to and excited by it. You also have to educate investors and train them to think long-term or not think about a quick turnaround. Although I know that having a two-year timeframe is attractive to some people who are at different phases in life if they’re older, etc.
Let’s rewind a little bit and talk more about the underwriting side of things. How much time do you spend underwriting now or vetting other people’s underwriting?
It’s a big part of what I do. I take a close look, at least one deal a week. I’m going through the underwriting file, going back and forth with sponsors and making sure that I’m understanding the nuts and bolts of how they’re underwriting. To be honest, I’m not going to fully underwrite every single deal because that is a pretty big task. I can’t do that every single week now but I do look at least one deal and I would say like a medium level.
What are some of the things you look for when I’m assuming you get the underwriting file from the sponsor?
For people who aren’t necessarily familiar with underwriting models. There are a few key assumptions that you need to look at and make sure that you’re understanding them. The thing is you got to get a holistic picture because, in terms of underwriting standards, it can vary across markets and depending on certain times. You have to be able to look at a holistic picture, which takes a little bit of time to figure out how to do but some of the things you want to look at, for example. Are, number one, the reversion cap rates? What cap rate are you buying at? Within that, understanding, what is going into the cap rate is extremely important because even the cap rate number can be manipulated depending on what you do and don’t include. That’s a whole conversation. We could go into it but I’ll leave it at that for now.
Make sure you understand what goes into the cap rate, what’s going in cap rate is, what the reversion cap rate is and make sure that you understand both those numbers very thoroughly. I would also look at rent growth. That’s a key assumption to look at. Oftentimes, people will have different ways of doing that. I would say that if you’re going to try to be aggressive in the underwriting, it makes more sense to do that earlier rather than later.
For example, even if you’re making a slightly aggressive prediction for a stabilized rent, that’s probably more justifiable than justifying like for example, 4% rent growth every single year going out 4, 5, 6, 7 or 8 years into the future. It would be more justifiable to say like, “I think I could get a 10% rent bump within 10 or 12 months based on the fact that rent growth has been 26% or whatever it’s been.” Ten percent is probably a lot for year one but in any case, a shorter-term prediction is one way that you can potentially justify a slightly more aggressive assumption.
Rent growth, you got to be very careful about that. Everyone has to understand the market. How well do you understand what types of units are going for what? That’s something that you got to have a property manager who knows their stuff. The expense ratio, that’s a very important one. Expenses on the one hand are what they are. You can try to economize on them over time. However, I would say that the expenses are going to be minor. You can incrementally drop them up until a point.
I feel like people always want to underestimate operating expenses but there are all these fees that if you’re not aware of. For example, a lease renewal fee. That’s a tiny fee that happens only once a year but it happens once a year on every single unit or if that unit has a turnover then it is potentially 50% of that lease. You got to be aware of all the little expenses that add up. Turnover, what is that going to cost? People don’t necessarily budget these once in a while expenses into their operating expenses. Those are a few key things that I would look for.
What are some once in a while expenses that you feel are commonly missed?
As I said, the turnover fee. When you have to turn over a unit then oftentimes, there’s paint, repairs or things that need to be done to get the unit ready to rent at a higher rent level. That can be pretty substantial. It can be $700 or $800. Another one is the lease renewal fee and the lease-up fee. If you have to pay a couple of hundred dollars on every lease, that’s a new lease. Even if you raise the rent by $50 a month, they have to pay a $200 lease-up fee. That’s four months of the next year where you’re paying for that increased lease. Those are two that come to mind. I would also say, make sure that you’re budgeting enough for property taxes.
That’s a key one you hear a lot about but that’s because it’s important. You got to know what your property taxes are and how they’re going to increase. You have to be in conversation with the various bodies that are in charge of that and make sure it’s not the property taxes that the seller is putting in front of you but what you’re going to be using for property taxes. I think most people know that now but it’s something that you want to make sure that they’re doing.
Achievement is important, but fulfillment is more important. You can always achieve more, but you also need to give time to your relationship and hobbies and do creative endeavors for your spirit.
To fully clarify what you were talking about on the lease renewal fee, you were suggesting that it would be something maybe that a property manager would be charging you as the landlord or you as the sponsorship lease on the apartment or whatever it is for the $200 fee to you. That’s an expense.
That’s an expense that we have to pay to the property management company.
Whereas, if you said lease renewal fee, I would have thought that’s an income item but it’s not. I see the way you’re putting that. That’s helpful to give some people some interesting things to look out for on the underwriting side of things. Is there an expense ratio that is a typical red flag where you say, “Dig in deeper if that number is too low”?
I would say anything under 50%, I’m going to take a very close look at, which is most things. Most performances are under 50% but if it’s at 35%, that’s a huge red flag and needs to be very closely looked at and probably bumped up at, for me, to get comfortable with the deal. At least, in my projections, I’m going to need to bump it up. I would say the rule of thumb of 50% I think is a good starting point and anything less than that deserves scrutiny.
Talk to us about your investment style. Are you going out as a direct sponsor? Are you doing fund to funds? Talk to us about that side of your business.
I’m an investor before anything else. I was looking for ways to diversify my own assets outside of hospitality. I didn’t want to have all of my assets invested in hospitality. I was looking for ways to place capital, for example, the profits that come off of my hospitality business. I want to put them into recession-resistant asset classes, not necessarily more Airbnb units. Although there is a case for that but any case. I’m an investor first so I was looking for deals that I could put my money into and I realized that I needed to do a lot of work to feel comfortable investing.
I was meeting all these great sponsors. I was meeting all these great people who were doing deals and they had a need for capital. I’m like, “I did all this work to make sure that I’m comfortable investing in you.” By a lot of work, I mean relationship building and calls. These relationships sometimes get built over multiple years. It takes a while for me to get comfortable with the person, their firm and how they’re underwriting. It takes a lot of time so I decided to say, “I’m doing all this work vetting these deals. I will start by creating recession-resilient funds.”
We’re doing deal by deal for the most part that I look at self-storage, multifamily, senior housing, ATM funds, mobile home parks and industrial. Those are the asset classes that I’m focused on and looking at closely in order to present a diversity of offerings to my investors across asset classes, geographies and sponsors. If I want to create a diversified portfolio of my own investments for myself and I’m able to offer that to other people. Whereas if I was a sponsor, I would more be saying, “Would you like to invest in my deal?” I wouldn’t necessarily be able to offer that diversity.
Those are relationships that take, oftentimes, as you said, years to develop to get that. The three pillars of knowing a good sponsor are that you know them, you like them and you trust them. A lot of them don’t have the time, quite honestly, to sit down and get to know all of those sponsors or want to get to know all of those sponsors. I think that’s a brilliant model. Once you select those sponsors, are you coming in as a code GP? Are you doing fund to funds? Is every deal different? What does that look like?
I have almost entirely been doing fund to funds. We create a special purpose vehicle, which investors fund into and we, as an LLC, fund into the deal. We’re not part of the GP for the most part. That could change at some point depending on the sponsors and the relationship but I decided to focus on the SPV model because it seemed the cleanest to me from a legal perspective. I didn’t want to be operating in a gray area. Although, that can be difficult because sometimes that’s all there is to operate in. I want it to be as clear about it as possible. That was part of what took me a long time to figure out was, how do I do this in a way that I feel is well protected from a legal standpoint?
The SPV does have administrative costs and legal costs. It does cost some money so you have to make sure but depending on the size of the deal. There are all these things you can do over time. You can negotiate with sponsors. What we’re doing is we negotiate for a higher split or something like that so that we’re able to take both our compensation and pay for the cost of the fund so that investors are usually getting the same deal or approximately the same deal that they would get if they went directly to the sponsor. That’s also the benefit of investing as a group. You can command a higher equity split or something like that.
Part of that is getting sponsors on board with the idea of offering different class shares saying, “Will you offer someone who invests $500,000 a different set of returns, preferred return or equity split than you would a normal $50,000, $100,000 investor or maybe $1 million and sometimes it’s $2 million?” When we write a bigger check, we can command higher returns and that’s one of the ways we pay ourselves and our investors still get the same deal.
I think one of the things to point out there is that going back to the time it takes to develop those relationships with those sponsors, those are pre-negotiated arrangements. You don’t do that out of the gate. Once docks are drawn, when stuff is inked and once investors are putting money in, it’s too late to go back and say, “We want a special class remembering $5 million to the deal. We want a special share class.” That ship has sailed at that point.
You’ve given us a lot of things to think about. We’ve talked about SPVs some unique things on the underwriting side to look at and asset diversification. We’ve talked about what your feelings are on Airbnb, maybe isn’t a recession-resistant asset class, why you’re looking at other things and why you even formed a private equity firm. All of these have been unique stories of how you have gone through your real estate journey. There’s one last and final question. Are you real estate full-time now? Is there still a W-2?
I’ve been in full-time real estate since 2018. Since 2018, I am no longer going to be working at any W-2 job. That was something that I did start in 2013. I went on this trip around the world, etc. I did end up going back to work for a short period of time because I wanted to grow my real estate portfolio faster. It is easier to do that when you have a W-2. I did go back to work for a time but I’ve cut the cord since 2018. I love so much what I do. I am passionate about closing the investing gap and helping people learn about how to do this type of investing.
Any type of new investment takes time and energy to learn about. You got to get comfortable with it and all of that takes a lot. Getting people to that point where they feel comfortable investing and when they feel like their money is in good hands and that it’s a smart thing to do with this portion of their portfolio. That’s a big task and I’m passionate about that. I like helping people get across that hurdle. It’s also nice to invest with accredited investors who are used to these types of deals. I like to do both.
Suja, we’ve learned so much. One last question for you before we wrap up. Can you define success for us? For you personally, what does success mean and how will you know when you have been successful?
That is a very deep question and it’s something that I would say that I ruminate on, at least weekly, if not daily. For me, success is on the one hand is all about feeling good on a day-to-day basis. Feeling happy, fulfilled, and positive about the future. Feeling like I’m making an impact on other people’s lives then there are ways to achieve that. There are areas of focus that I have, like my relationships, my physical health and my finances. My business is separate from my finances because what I’m able to accomplish in my business is not a financial thing. It’s also how many people am I working with, who have I helped and what have I made possible for other people? That’s a huge part of my business success as well.
I’m sure I haven’t touched on all the important areas of life but success is something that you have to look at holistically to say, “Is this what I want my life to look like day-to-day? Am I fulfilled? Is this how I want my days to be?” It’s a constant reflection process where I’m constantly trying to tweak it and figure out like, “Now that I’ve reached this goal, do I want to shift here?” Those are the principles that I think about is fulfillment and achievement. Achievement is important but fulfillment is more important. Balancing those two because sometimes achievement can come at the cost of fulfillment because you can always achieve more but then, you also need to give time to your relationships, hobbies, creative endeavors and your spirit, etc. It’s a bit of a moving target, I would say but that’s how I think about it.
Thanks so much for coming on. I’ve certainly enjoyed this. If our audience wants to get in touch with you, what is the best way to do that?
I have a podcast called Passive Income Unlocked. That’s also a daily podcast and I’d love for the audience to tune into that. You can call me anytime you want or send me a text message. My phone number is (650) 804-8043. I would love to talk to anybody about what they’re thinking about regards real estate, investing or anything else related to those general topics. Please feel free to reach out. I’d be happy to talk to anyone.
Suja, thank you so much. Have a great rest of your day.
Thanks. You too, Sam.
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About Sujata Shyam
I didn’t know that much about investing growing up – by the time I was in High School, I knew enough to know that I needed to be investing intelligently, but I didn’t understand how to do it well.
One advantage I did have was watching my Dad manage a few single-family rental properties -which taught me about the benefits of real estate investing.
The only problem was, Dad was often gone in the afternoons attending to his rental portfolio. It was like a second job for him.
Still, his example led me to purchase my first fix and flip home with a friend when I was getting my MBA. I had no money at the time, but believe it or not, I was able to purchase this house using my student living loans! That summer, my friend and I fixed up the house during the day, and I went to school and did homework at night. Those were long days!
That was 10 years ago. The next purchase I made was a single-family home in Portland, Oregon. I rented rooms to friends to help pay for the mortgage. The property was cash flowing from Day 1! Can you imagine owning a house but not having to pay a mortgage? I was able to save nearly all of the money that I was earning from my day job (Underwriting Multifamily Syndications).
I’ve now been investing in real estate for a decade, slowing adding more properties to my portfolio. With each additional property I have acquired and developed, my monthly passive income has continued to grow.
But as my portfolio grew, so did the hassles of being a landlord. It was becoming another job, just like what my Dad had done. Then, I learned about passive investing, and it was a complete game changer for me.
Suddenly, I could get all the benefits of investing in real estate, with none of the hassles. How? Through something called Real Estate Syndications (i.e., group investments).
As a “Passive Investor” in these real estate syndications, I could invest my money and have a professional asset manager handle the day-to-day operations. And, I could invest in commercial assets like apartment buildings, rather than duplexes.
Real Estate Syndications and passive investing have made such an impact on my life, that I created Luxe Capital to help other busy people learn about and invest passively in real estate syndications.
Curious? Learn more: www.luxe-cap.com
