Keith Arnell 0:00
My advice is just to start wherever you can, if you are somebody that can kind of help guide you or know there’s a lot of online, different information on all that. But just to kind of start in you don’t have to be an expert, but there’s a learning curve and as you do a consistent you’ll you’ll pick up little things every month

Abel Pacheco 0:23
Hello, hello. Welcome to the five talents podcast. I’m your host, Abel Pacheco, I interviewed the top commercial real estate investors and industry experts. So you can learn from their experiences. So if you’re an investor, a high w-2 earner or real estate or tech sales professional that wants to invest in real estate without having to manage properties or leave your day job, then this podcast is for you. Or if you’re already investing in real estate, but you’re doing it part time and you want to become a full time, multifamily or full time commercial real estate investor. This podcast is for you. So you’re going to learn a ton. You will learn from real life multifamily investors and other professionals in the industry. They’re going to share their blueprints for success. And I’m super excited that you’re here. So I hope you enjoy the show.

Hello, hello, my name is Abel Pacheco, I’m your host of the five talents podcast today. I bring you an amazing guest, Mr. Keith Darnell, Keith, thank you for joining brother.

Keith Arnell 1:26
Yes, thanks for having me on Abel ppreciate it.

Abel Pacheco 1:28
I’m super excited I get to spend a little bit more time learning more about you know, who you are, what you do. We met for those that are wondering, I met Keith through LinkedIn, we were doing a 10 day CRE challenge or something along those lines and kind of helping each other go back and forth and pushing up some social, you know, it’s been a good LinkedIn kind of networking, you know, kind of relationship. And now like when I learned about what you did, I think another session was like a virtual meetup. Right? Yeah. We did a breakout room and kind of got, you know, even tied closer together. There’s a good example for those that are listening. How the heck do you network during COVID A man. That’s how we keep her on the show together today. So anyways, I learned a little bit about what he does, and I thought he’d be amazing guests. Before we turn it over to you, Keith, let me make sure that I cover a little bit of your background. So people know, you know what they’re listening to the show for. So on this show, Keith is you know, he’s the founder, Pavilion Advisors, he did that. And since 2009, Pavilion Advisors, they’re an outsourced controller or CFO consulting company. So you know, Keith is a trusted finance and accounting executive. He’s got experience working directly with company executive teams. He’s done startups, he’s done real estate, he’s done funds. He’s done fund accounting, private equity experience. He’s done a lot of amazing things in our world, that a lot of times people don’t think about, like, Well, what about the financials, I promise you, you don’t want me doing any of the books in any of our deals. And I rely on experts like Keith to kind of help make sure that everything goes well. That’s why I wanted him on the show. He’s a certified public accountant. And then I know you’re, you know, an avid runner, and then you do some horse trading at the same time. And that’s, that’s awesome. So Keith, thank you very much. Let me turn it over to you. Tell us a little bit about yourself and who you are and what you do, man.

Unknown Speaker 3:21
Yeah, no, I appreciate it. Abel ppreciate, you let me you know, spend some time with you on your podcast and get to know your viewers a little bit as well. So I’ve been doing kind of a controller CFO, outsource accounting for small businesses, real estate, a lot of just different construction, General, General small companies for a while now. And so I’m more of a financial accountant, I go in, I kind of assess the financials, look at the balance sheet, the cash flow, the income statement, or profit and loss, really try to just get an idea of where the company is, it’s when I come in and assess it, try to help kind of get some idea of what their goals are for a company and what they’re trying to achieve. And then carve out some different things to help them say, Okay, this is where you’re at today, this is where you want to go, try to kind of put some budgets in their monitor, and then kind of just really do the month end close every month to really understand where they’re at every month and then kind of do some budget to actuals and, and different things like that. So on a high level, it’s just really trying to help them from a management perspective to to make decisions based on their financials or their cash flow. So I help with cash flow management systems and kind of, you know, seeing where they’re at and where they’re going to be over the next you know, 12 to 13 weeks and, and really help drive the cash on that side as well. So, from very high level more of a financial side, I am a CPA, so I do know a little bit about taxes, but I’m not I’m not a tax expert i i Don’t do tax filing or preparations, but I work with a lot of different tax firms to help, you know from his tax strategy as well, but not the expert, but more on the financial side.

Abel Pacheco 5:09
That’s awesome. Thank you very much for the background. And, and so you at a high level, let’s maybe start here, right? You deal more with the businesses accounting, as opposed to my individual tax situation, correct?

Keith Arnell 5:23
That’s correct. Yep, I do help kind of steer individuals owners on a tax strategy. But I’m working directly with the tax firm. I’m kind of the liaison on that, if we need to bring in a tax attorney, you know, somebody’s got a big land development deal, or, you know, real estate deal. And we’re trying to see some tax credits or, you know, different strategies like that we’ll bring in a tax attorney or a tax firm to help on that side. And I’m kind of there guiding the owner to kind of help that process. So, so I have my resources, I’m not going to play that person to say, Yeah, I’m going to do everything. But really, I’m helping the business owner, it’s like, you know, I’m the kind of the quarterback really helped the business owner, the team, get where they want wanting to be.

Abel Pacheco 6:10
Yeah, I love it. Because when I started commercial real estate versus when I was in single family, when a single family was like me, my wife were the decision makers. And we were the CFO, and where the, you know, the money and the investor, were everything, right? I go to commercial multifamily. And I realized, Wow, there’s so much, there’s so many moving parts, so many things that could go wrong. And the numbers are way bigger, and there’s more people involved way easier way better, there’s just a better way is to have the right experts for the right job. We all want to bring it we all want to have success. And the way we do that is have expertise in the right areas of our business in our company. And now I can rest easy knowing that I’ve got an expert, you know, somebody like yourself, helping me with my business. And then, like you said, there’s other experts for other things, and you can kind of determine which other expertise we need to bring in. And that’s really great. So the difference between that financial accountant, which really you are, is you’re helping the owner of that business, determine where you are, I think I heard you say where you are, where you’re going, and then, you know, give me the financial picture, you know, where I am today, so I can make the best decision? Yes.

Unknown Speaker 7:26
Yeah, that’s correct. We’re trying to steer them from a financial standpoint of, should we be monitoring certain KPIs or metrics, you know, where’s your cash, all those different things that when you when you really look at it a tax firm, just strictly tax firm, they’re there to file your taxes, which they do a great job. And they, they, they, they know, the tax laws, I’m gonna have to do all that. Yeah, but for the most part, most people are only talking to their tax firm once or twice a year, either once when they have to do an extension, or twice when they actually got to get their taxes in to get it filed. And so I’m working with the company on a month to month basis to help understand where they’re at every month. And, you know, if we’re seeing trends, where the revenues going down, or the expenses are, are increasing, we’re gonna be kind of monitoring looking at that same what’s going on here? Is your vacancy rate gone down? Or, you know, is it increasing, you know, all those different things that most people know when they’re in this industry, but it’s just a nice, easy way to report it and say, here’s where we’re at, this is what we’re looking for. And, and I’ve been in different companies where I’ve gone to a company where they’ve already got a CFO, for instance, it was about two years ago, I wouldn’t talk to an owner, they had a CFO, and they were paying, you know, premium dollars for the CFO, but the problem was, is the bookkeeper or the accountant or whatnot, that there was doing all the transactions. They were posting it into like a Uncategorized account, and it was 20 to 30% of those transactions. So here’s the CFO line, right? Right. Here’s the CFO trying to help them. But the data is not accurate or right. And so you can have the best CFO or controller or accountant or whatever. But if the data is not there, and it’s not accurate, then it doesn’t matter. So I try to help on that standpoint, too. We’re looking at it every month, if we’re seeing different things, why is this coded here? Where’s this? We need to fix that so we can get the better data so that you can have better decisions and that’s kind of what I help with.

Abel Pacheco 9:41
That’s so valuable, so important. When you think about from a multifamily. You know, we have a lot of multifamily investors passive and active. We have a lot of commercial real estate investors that are listeners or people that are trying to invest right. So as we’re going through this, you know, we’re buying not really buildings at a $10 million point we are, but we’re really buying income streams, we want to invest our money as owners, limited partner and general partners, the best income stream that we can possibly buy that generates the most cash flow the most return the best return possible. And part of that is looking at the numbers and the data as they come in every month to make sure this business or this income stream is generating as much revenue as possible so that we have the best returns. And when you have experts like Keith, is saying, like a CFO that just doesn’t understand where 30% of his expenses are coming from, it’s so hard to make a good decision like even an apartment complex, I can see, well, these expenses are way too high. In these categories, or this area, we’re spending way too much. You know, in utilities, maybe there’s a leak, maybe there’s a plumbing issue, I got to go fix this stuff. But if you don’t know where it’s coming from, then you it’s hard to make adjust any of those dials in the business or in your multifamily apartment complex, you know, to affect the return. So that’s where he is so valuable here.

Keith Arnell 11:06
Yeah, and one other thing that I was thinking about too, I had it I have a client now that I started, they were kind of more on the construction side. So we started saying we need to code we need to track every job that you do for income and expenses. And so that we can see a gross profit so that you know, if you’re bidding correctly on these jobs, because if you’re, if one job, you’re getting a 25% gross profit and the other job, you’re getting 5% You’re not bidding correctly, right? Now I’m tracking per job to try to understand, make sure he’s bidding correctly. And he’s looking at that going, Oh, okay, I needed a bit differently, right? So the apartment side or multifamily or commercial, it’s the same thing, we need to kind of track how much maintenance is being spent on each different unit, you know, or building. So that we can say, Hey, why is this building that’s just next door, you know, 10%, higher and expenses versus the one, you know, across the street or whatever. And so that helps businesses that kind of look at it going, Oh, hey, we’ve got a trend that’s, you know, 10% expenses or repairs or whatever. And then we’ve got this 125 or 30, then you can have a decision to be like, we got to monitor what’s going on, you know, did we change the maintenance? Guys? Is it more is that maintenance guy more expensive than the previous one? Any? All those different things? And that’s the value of trying to help and be more efficient on? Oh, instead of like a year later going, look what happened? It’s happened, people only come to me when they don’t have any cash. And then you’re like, Well, how am I going to get paid, if you don’t have any cash, and I’m supposed to help you, but so they’re great. And then two years later, they don’t have any cash or like, you know, eight or nine, you know, and then you’re like, Well, if you want to come to me six months ago, I could have helped see where you are right. So even in good times, it’s still important to kind of monitoring those because once the trend goes down, and there’s a little bit of lean, you need to really be able to dive in and understand where you’re at so that you can kind of push through that side as well.

Abel Pacheco 13:15
Yeah, those are some amazing insights. Exactly right. And, and if you’re an individual investor, and you’re thinking this doesn’t apply to me, we’re talking about multifamily businesses, it applies to the investments you’re getting into number one, but it also there’s just a parallel straight to your own p&l, your own personal financial statement, your expenses, your losses, man, look, if you’re not doing a PFS, you know, once a month or quarter or something, you know, there’s some regular check ins on your own personal financial statement. What’s my asset? What’s my liabilities? What’s my net worth? And how much income is coming in? And where are those red trends? Are you spending more, you know, frivolously this quarter than the last but anyways, I digress. So this is really good insight. You know, let’s kind of keep talking about this. Because this is really good. What are some of the best strategies that you see kind of the best, most profitable businesses that you manage? versus maybe some of the other ones that are poor? And I think you you touched on a couple, but, you know, what are some of the strategies that you see, you know, your highest performing teams, and what are they doing so we can try to model some of those things?

Unknown Speaker 14:27
Yeah, I think the most important is they understand where the business is their really monitoring those metrics, and when we talk about dashboards and metrics and different things, you know, really, if you look at some articles, and I’ve looked at some articles, they say, four or five tops is what you want to be looking for. Because if you do anything above that, 789 it’s just white noise, and it’s not standing out and really helping so I would say anywhere from four to five metrics that you look at every month. You monitor those. And as you dial those in, then you’re you know, maybe after a while you look at something else, because you’ve got those dialed in. But most people are really understanding where they’re at from a cash flow perspective and a financial standpoint. So they’re looking, and the p&l is important. But the balance sheet is almost as important. Because at the end of the year, if you have 50,000, or $100,000, in security deposits, and you’re supposed to, and you’re only supposed to have half of that, yeah, well, there’s a problem. Yeah. So or vice versa, you know, you paid for something and you’re not writing it off. So now you’re not getting it on the tax return, and different things like that. So it’s really, I think the biggest is timely, accurate, and relative financials. Yeah, you get it timely, right, you’re getting it within the first 15 months, or 15 days of the month. Because if you get it two months down, the road is too late, it doesn’t matter, you’re already two months, you need to be looking at something else. So timely, accurate, you need to make sure it’s accurate, and then relevant, you got to be able to be monitoring the correct data. And I think those people that are looking at that, if they’re seeing some trends that aren’t advantageous, then they’re going to be able to kind of start looking at that before, it’s a panic, and then once it’s a panic, then it’s, then you’re trying to get loans and lines of credits. And it’s just, it’s really hard.

Abel Pacheco 16:27
Yeah, that’s so good. All these are trying to take as many notes as quickly as you’re saying, if you don’t want to end up in the tar, then you need to have timely accurate, and relative financials TAR, but don’t end up in the tar man .so funny. So keep the cash flow, p&l balance sheet, you know, all kind of go together, you know, you’re trying to look at them and trying to make the best decision. Your KPIs are very important. If I’m flying a plane, and I, you know, hit the massive fog, and I can’t see anything. Well, my dials are going to tell me what altitude I’m at how fast I’m going, how much fuel I have. And I’ve got to be able to make the best possible decisions based off of my dashboard. And that’s what’s going to help me keep staring this blade if I hit the massive fog. Right. And so that’s absolutely, you know, critical to have those four or five top KPIs. What are my dashboards for us and apartment complexes? Or, you know, just commercial? Yes, is steering multifamily steering apartment complexes? What advice can you give me what are those top four or five KPIs just make it simple. For a simpleton like myself,

Unknown Speaker 17:45
right, if you’re looking at your vacancy rates, you know, most of them, you’re gonna want to be a vacancy rate of 5%, you know, 10% Max, but you’re really looking at that. I would also say your, your repairs, you kind of your cost, your repairs, and maintenance is a huge line item and in your apartment complex is your rent prices. Now, some people don’t talk about this, but it’s like I would say every year, once a year, you should be going around and getting a market value on what’s out there. I live here in Utah in Salt Lake. It’s crazy. And there’s other places there’s Dallas and Texas and California some of the other places. Phoenix is a big one, you know out here in West I don’t know enough about the east coast but those places are just a ton of people are moving from California, Nevada, you know, different things. And so you’re missing out on money if you’re not looking at those prices, and maybe every six months because it’s just so crazy right now, but I would look at that and and just determine Hey, should I raise the rents because you’ll miss out if you’re not in the right market, right? You want to make sure you’re getting tenants but at the same time you’re not losing money. So some of those the tenant turnover is a big one. If the tenants turnovers are, you know, high and consistent, then you’re going to want to find try to figure that out because it’s like any acquisition you want to keep that person in as long as you can. It’s just too much money to try to you go in and every turnover, you have to then you have to go and make sure everything it’s the cleaning fees, the repairs everything and so it’s just it’s expensive. So I would think that and you know, in your commercial side, your cost per square footage is a big one and revenue per square foot square footage. So those are the more common ones, you know, obviously your cap rate some of those but you know, there’s more out there but those are just the basics, really to be driving.

Abel Pacheco 19:41
Yep. Those are all really good KPIs and then a visual, you made me think about this. Somebody shared this store with me a while back and it kind of all came flooding back right now. When they were talking about the dashboard or your KPIs. The top ones to look at in the guy was describing I think it was a teacher. Were hadn’t anyways, they were describing a NASCAR or driving in a literal NASCAR. And you’re going, I don’t know, 100 150 whatever miles an hour, right? Well, it’s kind of hard to take my eyes off the road and look at this dashboard. And I’m like, Man, do I have enough fuel is my engine or heating, whatever. So that what he described was in a visual dashboard, he said, one of the top drivers said, Oh, it’s easy for me to maintain my dashboard. And he goes how, and he goes, Well, all those dials, they were all pointing in different directions, what I did was I turned them in, in a way that I knew as long as they were all facing up, literally facing up at the right direction, then there was no issue. I didn’t care if it was 33, quarters, full 75% Whatever my engine Temp was supposed to be here. I turned literally turned the dials in a way. So every single hand that was sticking up, as long as they were pointing straight up, I knew I was okay. So when you’re looking at your own KPIs in your own business, it’s probably great to talk to Keith and say, Hey, what are the sweet spots? And every one of these KPIs and just color code these things for me, man, make it easy, green, or red?

Keith Arnell 21:12
That’s a good analogy. That was actually that’s pretty interesting. I mean, I think it’s, you know, kind of the same as auto pilot. Hey, as long as there’s no, you know, yellow flashing, we’re good. Let’s just

Abel Pacheco 21:22
just keep going. Yeah, so you’re talking to an expert, like, you just say, Hey, man, what am I green areas? What’s my green, yellow, red, dump it up for somebody as simple to like myself, my friend. But these are all really good, Keith. Thank you very much, man. So I did have a couple other questions, because you also manage funds. For those that don’t know, fund is, well, I’m an individual investor, I work with a team of individuals, general partners, we go by this point in my career, I buy one deal at a time, you know, that’s enough for me to manage. But to make sure I crushed it on this one deal at a time, other investors have found that there’s goodness, in buying many multiple deals, at the same time you’re buying a portfolio, you kind of raise a fund, I can go draw as much, you know, capital as my fund requires. I can raise from investors, they’re trusting you to go spend their money wisely. And I might invest in multiple different deals, all at the same time. And that’s the fund. Right? So as a financial accountant, if I hired you to help me run my fund, what are the differences between buying one building and managing this fund? For me? How does that work?

Keith Arnell 22:41
Yeah, so usually on a one, you know, when you buy one building, and you may have it syndicated with a couple investors, right, you’re just dealing with that one building income comes there you have it, you know, file your tax return, etc, it’s, you know, you’re just dealing with one building, but when when you start into an investment fund, or real estate investment fund, now you’re pooling, multiple investors, you know, could be up to, you know, what, two or three up to hundreds or whatever, whatever that capacity looks like, or that structure, but you’re usually buying multiple buildings, you’re buying 2345, you know, and your portfolio will just continue to rise. And so now you’re, you have to kind of consolidate all these buildings and all these KPIs and all these different things into one fund and account for all those different revenue streams and the expenses and everything and so, so it gets maybe a little more complicated in a fund and and then how to allocate all the profit and loss to the investors based on each, you know, agreement per, you know, usually an investment fund has a manager, so those managers are going to get a carry in some of these other things. But yeah, you’re you’re you’re dealing with all those investors, and you want to make sure that you’re getting it all right, because if you don’t, then you’re not probably going to get any money ever again. Right.

Abel Pacheco 24:03
Like it worked out so well for the future. Yeah.

Keith Arnell 24:07
Yeah, that’s kind of the difference. You’re just dealing with one building for maybe one or two or three investors are, you know, whatever, versus Hey, now we’ve got this whole fund and, and one building if it’s really bad effects, you know, all the other, you know, as far as income and, and expenses and losses, so, so you’re trying to make sure that, you know, it evens out so that you get a decent return.

Abel Pacheco 24:32
Yeah, you’re essentially also helping me consolidate all of the financials from maybe let’s say, I run the fund, I raise the capital, and I’m invested in six step seven different syndications. And I want returns from each of them. But now I got to manage all of that. Well, this one gave me X percent. This one give me this percent, but my total fund invested across what is my return as a fund manager, and then how do I know how much to pay a individual’s 70/30 80/ 20, whatever, all those different things, you make it simple for somebody like me to go do that.

Keith Arnell 25:06
That’s the whole right.

Abel Pacheco 25:09
At least the financials, you keep me out of the TAR, remember? Yeah, that’s right. That’s awesome. So what are some of the things that you see people get in funds? Like when they reach out to you? Do you get a lot of people that have never done a fund before? Do you have people that are? You know, they’re experts? This is fun. Number seven, and they’ve raised $100 million. Is it a little bit in between or mix? What and then maybe talk to us about your common common everyday customers today, people you serve?

Keith Arnell 25:36
Yeah, so So I have a couple different securities attorneys that I know that they’ll refer me to different clients that are starting to fund and usually they’re, they understand what a fund is, but they are going to start maybe this is the first time so I get I get a lot of first timers are are relatively new managers that are going to start a fund. And then I get calls, like, I just got a call for kind of a private equity group that they’re going to start another fund that they’ve been doing this for a long time. But they’re going to do it in the in the oil and gas real estate. So yeah. And so I get different calls, but a lot are coming from startups or first timers, because because I get those referrals. Yeah. And so the biggest thing to really look at is that the cost to start a fund is pretty aggressive, pretty high, you’ve got the attorney fees, and you’ve got your PPM that you’ve got to start. That’s all the attorneys and then and then just all the cost of getting it ready and license then, and all those different things. And so, like I had one, a couple guys actually call me. And I actually talked to one of them out of it. And I said, I think you’d be great. But but there’s a lot of things that you need to be aware of. And, and it just wasn’t a good timing for him. And I kind of talked him out of it. Not that I didn’t think he could do it. But it’s just because there’s a lot of just different regulation and things that you just don’t really realize. And so if you’re ready to do it, that’s great. Because they can do you know, you can make some good money and do well, but but there’s also a little bit of the regulation part of it, too, that makes it sometimes a little bit of a headache.

Abel Pacheco 27:13
Now you got me curious, what were the biggest one that was like an aha moment for me is like, I didn’t realize that what was that one or two things?

Keith Arnell 27:20
Well, because I think a lot of people are like, Hey, let’s start a fund. And that sounds great. And I’m gonna make some money, right. But what I usually tell people I say, typically, and this isn’t always the case. But typically, if you’re only raising a million or two, it’s not really worth it, you got to be a little bit higher, you got to be more like five to ten and higher to be like, Yeah, this is really worth it. Because the first year is usually you’re not making a lot. And then after that it’s great, you know, and it snowballs and different things, you’re getting new investors, but if you’re saying, Hey, I’m just gonna raise a million or two, it might not be the best. It’s just a lot of work is good

Abel Pacheco 27:58
deal. Just go do a single deal. One or two million that’s kind of you know, just do a deal.

Keith Arnell 28:03
Yeah, because you’re dealing with anywhere from 15 to an I’ve seen up to $100,000 for PPM. Yeah. So they’re really expensive. And 15 is really, I mean, I got an attorney that will probably do it for 25. And sometimes maybe a little cheaper. But yeah, it is expensive, that the costs up front are just really expensive. And so you got to you got to make that up.

Abel Pacheco 28:25
Yeah. So if you’re listening now, you know, looking at your potential options, if you’re raising 1 million, 2 million bucks, to me, that sounds like going to do one deal. At a time we’re doing a, you know, a little under 100 units today, their capital raises a little at, you know, about $2 million. And we’re gonna close on this deal. You know, soon. And so we’re thinking, Okay, well, this is this not a fun territory, let’s just do one. Now, if I had, you know, book of investors, like what Keith is talking about, the private placement memorandum is the legal documents that you’re going to sign to go do that deal. If you’re, you know, you have 8, 10 million bucks, and you know that you’re going to be able to do that, that might be very worth 30, 40, 50, like you said, up to 100k investment to go do that. And now you can go invest in a bunch of deals. Right? So that makes a lot of sense, man, thank you very much dude. What else do you think you know about K1s? Not what do you think about K1s? But can you share some insight on the K1 process that you kind of help people with today? Whether I’m a fund or I’m investing in commercial real estate, how do you help them? The only thing I tell investors is like you’re gonna invest in the deal, and you’re gonna be a K1 owner. And the next question is, okay, well, what does that mean? And I go, Well, I’m gonna have somebody send you K1 and you’ll send it to your tax person and they’ll plug it in and you’ll get some losses God willing The deal but tell us you know, from your, you know, expertise, what is a K1 and what does that mean? Maybe active versus passive investor just, you know, help illuminate a little bit of this stuff,

Keith Arnell 30:01
yeah. When you’re a passive investor to get a K1 and really not understand the deal can be kind of a little bit like, what does this mean? So really, first of all, the passive investor, as most of you probably already know, is one that just puts money in the deal. They’re not active in the business, they’re not in the operations, they’re just putting money in the deal and getting the return. That’s a passive investor, obviously, an active investor, or an operator is one that actually is in the day to day business of the entity. And they have some kind of role on a day to day or month a month basis. And the passive investors obviously, you know, sometimes it just depends on usually a passive investors going to get better tax rate, because Because ordinary income is a higher rate than passive, but sometimes, like I have one fund that their fund is not a REIT. And so there’s some better tax advantages to investors that are in a REIT. But if it’s not a REIT, and that entity is this is what we do. This is our business, we’re not like doing on the side, that fund is a is an active fund. So the investors are getting, they are getting ordinary income. And so sometimes, even though you’re a passive investor, you’re still getting ordinary income. And so, so sometimes you’re thinking, hey, I’m going to get capital gains, and that’s not the case. And so the K1 really spelt Well, obviously, the operating agreement spells it out, but the K1 will dictate what’s on what the numbers and what line items are on the K1, you know, passive, you know, interest income was, is a little bit less than ordinary, then you have some other deductions. And when you’re in land development and different things, there could be some deductions actually, are really passive deductions, meaning they only can offset with passive income. And so you have to kind of look at that, because you may not get those deduction that year, you might get them the next year when they actually sell land, you know, as an investment income. So I guess high level is kind of tried to understand what the business is beforehand. Because you might think, Hey, I’m getting a great deal. This is passive income. And in reality, it might be ordinary. Yeah, a little bit higher taxes. So

Abel Pacheco 32:20
you definitely got to ask a lot of questions before you’re investing to make sure that you know, like, what keiths saying, I think all of our deals are we put individuals in and they want a tax return or paper losses from Cost Segregation studies accelerated appreciation, and we kind of preach that from the side. So we’re like, Yep, and you know what, we are trying to take advantage of this. You absolutely have to ask your syndicate your operative somebody investing with to make sure he is going to going to be the way it works out for me on my taxes or not. That’s a good point.

Hello, hello, this is Abel Pacheco, your host for the five talents podcast. After listening to a few episodes, deep down, do you know that multifamily and commercial real estate investing is one of the best ways to create financial freedom? If you said yes to that question, and you are where I was a few years ago, then I’d absolutely love to connect with you. A few years ago, I started personally consuming a ton of real estate education. I traveled all over the country, as many real estate conferences and seminars that I could go to, I took 200 plus hours of real estate education, I spent 1000s of dollars along the way. And I did this because I knew the path to financial freedom for me and my family was through commercial real estate syndication. So if you’ve made a similar decision, I’d love to connect with you. And potentially in the future. I’d love to partner with you as well. Take a moment go to 5tcre.com/invest. And I’d love to set up a time to talk.

Keith Arnell 34:02
Yeah, so those are the different types of different things on the k one, I mean, there’s a lot of different things that happen with real estate, like you said, depreciation and all those different things. And sometimes depreciation works most the time it does work for the individual, but you really have to look at your own individual personal tax return to see how that’s going to flow through correctly on your end as well.

Abel Pacheco 34:24
And also, this would be the difference between we should not reach out to Keith or not, they’ll reach out to you for my individual tax questions correct?

Keith Arnell 34:34
I mean, I can help if you have a tax or you know more of a personal CPA or whatever does your taxes but I don’t do tax filings and so

Abel Pacheco 34:42
and so those are the individuals that you need to reach out to when Keith is talking about his math or I think we are correct me if I’m wrong, is for your situation. You know, you may not be a real estate professional like maybe an active general partners or real estate professional, we can write off different you Know taxes here and there, we can take advantage of that depreciation more than somebody else. Or you know, if you have a lot of, you know, active income versus your passive income and how it relates. So make sure you’re talking to your CPA, you’re talking to your tax strategist, somebody to help you on your side to determine, hey, if I get a K1 like this, and that’s when we would leverage keith, hey, what does the K1 you think look like in this business? And then we’ll share that K1 with the CPA and say, oh, yeah, based on your situation, here’s what it’s gonna mean for you, and your individual w-2 or withholdings, or write offs and that type of thing, right? Yep. Did I get that? Right?

Keith Arnell 35:36
That’s correct. I’m going to help the business from their tax scenario and work with their tax firm, but on the individual level, you know, I could help but I wouldn’t be the main tax guy you that you’d use your own tax person or CPA, to kind of help with your tax filing, I’m more or less the liaison with the business side to help with their taxes on their on that side.

Abel Pacheco 36:00
Very good. So if you are a general partner, or thinking about a fund, and you want some help on the internals, your books, making sure you can see the dashboard, green, yellow, red, Keith is absolutely a fantastic resources you can tell in this space and kind of an expert in that area. While we’re on this topic. If our listeners resonated, they found that they want to, you know, hire you work with you get in your world, where do they reach out? What’s the best way for them to contact you, Keith?

Keith Arnell 36:27
Yeah, so my email or my phone number would be the best way to contact me, my email is Keith@Pavillionadvisors.com, and it may be Abel, you can just post my contact info on on the podcast or whatnot. And if anybody’s out there, you know, kind of thinking about different things I, I do more than real estate too, I have a lot of different companies that I do business for. And so if you have other entities or companies that you’re needing help with, you know, kind of month to month basis, then I can definitely help with, you know, those companies as well, but yet Abel feel free to, you know, put my contact out there, you know, we’ll do you know, text me or whatever. And I usually respond pretty quickly.

Abel Pacheco 37:14
We’ll do, I’ll make sure to put that in there. Also, for the listeners, the people that, you know, really just have a hard time with numbers. Financial literacy is so valuable, I realized that I don’t know in the last few years, right, I just have started digging into the p&l, the income, my net operating income, you know, all income minus expenses, let’s figure out what it is that balance sheet, the more that I learn, you know, and really have a better understanding of the numbers, the more that I feel like I’m in a position to earn more also, or buy a better income stream. And it’s been so valuable for me. But I can tell you, I don’t know, for years, I just never looked at a p&l. I was a sales guy was a tech guy, former tech employee. And actually, I had a pretty big team. I had 16, you know, sales guys under me. So I manage, you know, five different sales managers. We went from like $5 million dollars in revenue in the year $57 million in revenue. We grew our team, we had a lot of headcount growth, but I didn’t look at the p&l. It was actually my vice president over me that would say, Oh, well, here’s how much headcount, here’s how much we can afford again. And if I would have known earlier in that career, I bet you I would have even grown faster. Because I could have said, well, I could have looked at the dials and said, every time we hired another rep, and drove X amount of quota, you know, I got an extra 20% juice out of this. So let’s hire more and I can justify the expenses, and I just didn’t see it, you know, back then. Now. Now I very much see it. And this is kind of like what, uh, oh, is it a good deal? Let me see the financials, right? Trailing 12 and rent rolls and love it, you know, let’s look at the comps and see what I can push. But what insight or advice or just nuggets of wisdom, whatever it may be Keith, can you give somebody you know, like me four or five years ago? How do I learn more about the numbers, man? I mean, not to your level your expertise, but just to be able to understand what you’re telling me or showing me from your expertise? How do I do that?

Keith Arnell 39:25
Yeah, I think it’s just like anything, right? Anything that you’re trying to learn, and there’s a learning curve, if you’re, you know, starting out in the real estate world, and you’re trying to look at different homes and what’s the best price and it’s a learning curve, right? It’s experiencing different things. So with my clients, I tried to send them a kind of a financial report every month. And so my advice would be Hey, if you if you have somebody that you can, that they can look with you on your financials, then that would be the first start to kind of look through it. Start asking questions and then you may not have a lot of questions at first, but over time as you’re looking at different trends and looking at somebody that can kind of help you, you’ll start to learn more and more. And so, you know, and that’s what I try to do from a financial accountant and financial perspective is, I really want to let management know where they’re at, and understand the financials. And then and even if it’s only a half an hour phone call, they should be starting to pick up more and more of their own business and what the numbers look like. So my advice is just to start wherever you can, if you are somebody that can kind of help guide your know, there’s a lot of online, different information on all that. But just to kind of start in, you don’t have to be an expert, but there’s a learning curve. And as you do it consistent, you’ll you’ll pick up little things every month.

Abel Pacheco 40:44
Yeah, so awesome. What you’re saying exactly is, now that I think about, when I started, it was my passive investment, I invested passively, I took my money from my 401k, I direct it into a self directed IRA, I put that 50k into my first you know, 128 unit apartment complex. And I was riding along without any duties or responsibilities, but I get the profit and loss, I get the income statement, I get the financials. And I started looking at at those numbers. And that’s what started to soak in. And I go, Okay, this is what they mean. So, yeah, that’s great. Thanks. Yeah. Yeah, for sure. Is there anything we didn’t talk about today? That, or anything I didn’t ask you about that you really wanted to highlight or, you know, just any last parting words in time as yours?

Keith Arnell 41:33
I really appreciate you letting me come on. And, you know, just discuss some of this stuff. I mean, this is what I do. This is what I love, other than training horses. This is good at right. So yeah, but no, I think just trying to understand from a financial view of any business is going to give you insights into your business. And that’s what I tried to kind of help people is, let’s dig into your financials, let’s get an insight into your business. And let’s just try to understand where you’re at. And then once we understand it, then we can kind of make some goals or some different things on how to approach it, what the best strategy is to, you know, either increase revenue, decrease expenses, or what have you, because the name of the game is, you know, you’re trying to make money, right, you’re not trying to lose money. So, so the best way to kind of help being efficient and efficiency can create less expenses, right? So and I guess what I preach is, I want to help you with your financials and your accounting, so that you can just be in your business working on your business, and you don’t have to stress over all the finances, you know, that gives you 10 or 20 hours a month of your time to go do what you are an expert is or expert in that allows me to be an expert in my space, so that you can hopefully make more money that I’m bringing a value add and not just kind of a cost. So that it’s a win-win for both parties.

Abel Pacheco 43:01
Yeah, that’s awesome. Thank you so much Keith a really appreciate your time. And I’m very glad we got to do some virtual networking and now ended up in a in our podcast, and I hope to say you know, pretty close to you in the future and let me know if I can ever be a value to you, my friend.

Keith Arnell 43:17
Yeah, you the same. I appreciate you. And yeah, I love to kind of just get to know you better and your properties and what you’re doing because I think there’s there’s a lot of value there as well. So appreciate it.

Abel Pacheco 43:28
Yes, sir. My name is Abel Pacheco, I’m your host for the five talents podcast. And if you heard something today that provided you a little bit of value was good, educational, you know, insight for yourself, please give us a review. We would love a written review a five star review who thought it was awesome. And connect with Keith, his contact information will be in the show notes. And look forward to seeing you next. Next show. Thank you very much. Talk to you soon. Thank you.

Keith Arnell 43:56
Thank you.

Abel Pacheco 43:56
Thank you so much for listening to this episode of the five talents podcast. I’m your host Abel Pacheco. Each week we’re gonna bring you interviews from other industry experts and commercial real estate investors who followed their dreams and achieve massive success. If you enjoyed this episode, then you’re gonna want a copy of our passive investors guide. Tackling commercial real estate the easy way. It’s the guide we use to invest in $93 million of commercial real estate. It’s a 65 page ebook. It’s a great resource to learn the basic mechanics of multifamily syndications, and we’re going to show you how to evaluate your next passive investment opportunity. So if you subscribe to our podcast now leave us a review and a rating. I’m going to give you a free copy. So take a moment to do that now. We’d appreciate it and then you can register for the book at 5tcre.com/ebook, 5tcre.cm/ebook. Let us know and we’re going to send you a copy. Thank you so much for subscribing. To the Five Talents Podcast