Pro athletes like Tom Brady, LeBron James and Phil Mickelson score millions of dollars in income each year. But just because they’re millionaires doesn’t mean they’re automatically equipped with investment prowess.
That’s where a guy like Joe McLean comes in. McLean is managing partner of Intersect Capital LLC, a wealth management firm based in San Ramon, Calif. Among his clients are about 60 athletes in an array of professional sports.
In reviewing the finances of his wealthy clients in the sports arena, McLean coaches them to put a 10 percent to 15 percent share of their portfolios into commercial real estate sector, but into only one asset category: class-A multifamily.
This is how a typical deal works:
Intersect Capital recently partnered with institutional investment professionals in a $50 million deal for a 187-unit multifamily property. Those professionals made the purchase, then refinanced the acquisition to select investors, including some of McLean’s athlete clients. As a result, each athlete benefits from an institutional-grade investment approach—without the associated fees—and owns a direct stake in the property, according to McLean.
To sign up with McLean’s firm, an athlete must commit to investing at least 60 percent of his earnings.
In a Q&A with NREI, McLean explains why he concentrates on class-A multifamily, why he doesn’t dabble in class-B assets and what other high-net-worth investors can learn from his “disciplined” athlete clients.
This Q&A has been edited for length, style and clarity.
NREI: What are you recommending to your athlete clients these days in terms of investing in commercial real estate?
Joe McLean: With each of the clients, the first reminder to all of them is that they’re already wealthy, and that it’s not what you earn, it’s what you keep. At the end of the day, we’ve found a lot of them who were getting into real estate were getting overleveraged, with too much debt, or were buying in the city they grew up in because there was some type of passion they had for the community and wanted to invest in it. We wanted to change that mindset to get them to think about, “How do we maintain the wealth and have the ability to retire and, also, sustain the same lifestyle?”
So, with that, we needed to invest in higher-quality assets with more consistency of income. Traditionally, we’ve invested only in class-A multifamily properties. When we invest in those properties, we look for locations where people are moving to, not from. We’re actually headquartered in California, but we invest very little in California, frankly. We’ve been primarily focused over the last couple of years on Seattle, the Phoenix area and Texas (Austin, Dallas-Fort Worth and San Antonio).
We’re not always trying to go out and get the best yield for the clients in the short term. They get pitched all the time by different people, and they may say, “Well, this person is saying I can get a 5 percent return, but this person is saying I can get a 12 percent return.” The first reminder is that 12 is not better than 5; it’s just more than 5. And what risk are you taking to get more? We would much rather get more consistency of income, between 5 and 7 percent, versus trying to go out and hit homeruns all day long.
So, we’re going to invest in high-quality, diversified assets. Typically, we hold them for anywhere from six to nine years, and we’ll take advantage of getting that more tax-deferred income in the short term, and then when we sell them is when we’ll get more of that capital return.
NREI: Aside from geography, what else are you looking for when you’re in the market for class-A multifamily properties?
Joe McLean: We like to look at the growth around the properties. We like to see a growing income in terms of who’s renting. We like those young executives who are still not willing to purchase a home who are earning income in excess of $100,000, because we’re going to get our rent paid on time. Typically, it’s the high-quality units that can be sold to an institutional investor in eight to 10 years for a potential conversion into condos.
NREI: Why not diversify and get outside the class-A bubble?
Joe McLean: I know the model of investing in class-B works. For now, we know what works for us, and we try to stay consistent and true to that. Getting into class-B is not something that we say we will never do, but we like to stay in our lane.
Our average net worth for a client is about $25 million, and they use this as a diversifier and for some steady income. They like the way we buy the properties. We never have more than 55 or 60 percent debt on a property. Also, we use the right property managers; they’re consistent in terms of the values they have for us and what they maintain for us.
For the clients, it just becomes another bond portfolio with an upside of total return at the end.
NREI: What can other high-net-worth investors learn from your athlete clients, particularly as it relates to investing in commercial real estate?
There’s always a bias. With an athlete, their bias is they know the sport they play, but they’re not necessarily emotionally attached to technology or stocks or bonds or real estate. They have more of an open mind as to how to diversify. That’s versus an executive who’s very heavily weighted in technology and they know technology, so therefore they invest everything they have in technology. A lot of the conversation with them is, “I understand and fully appreciate what you know and where your expertise lies, but we also should realize the inherent risk in terms of your bias toward that one particular sector.”
Even though we talk diversification all the time, quite often it’s difficult to get someone to actually recognize and implement the value of taking some of what they don’t know and some of their money and investing in that area and learning about it over time. It is nice that the athletes are willing to be open and to be coached, whereas some of the executives know what they know and they want to stay in that space.
Part of the message that we preach—and this is inherent to wealth—is that wherever there’s an abundance, quite often you have less discipline. Maybe athletes can recognize the fact that you may go up against a lot of players who just have incredible talent, but they just didn’t work as hard. And if they would have worked harder, then they would have become all-stars. If you have talent plus discipline, that’ll lead to a lot of success.
Now, if you think about that with money, quite often before you have money, all you know is how to spend and to save a little bit. And then, all of a sudden, when you acquire a lot of wealth, you’ll lose discipline. When you have great abundance, it’s just inherent as humans that you have less discipline. If only wealthy executives and business owners were able to adhere to what a lot of our athletes are doing—staying disciplined, taking the emotions out of it, being very process-oriented in terms of how you save, paying yourself first, building out investment strategies.