JF2773: 9 Ways to Acquire Multifamily Deals in a Hyper-Competitive Market ft. Cody Laughlin

Cody Laughlin serves as managing partner and director of acquisitions for his Houston-based multifamily firm, Blue Oak Capital. Since joining forces with his two partners in 2019, Cody has learned a thing or two about navigating the hyper-competitive multifamily market. In this episode, he explains what actions have helped his team to acquire 750+ units across four properties:

1. Prioritize broker relations. Brokers are your gatekeepers to the commercial real estate world, Cody says. All of his deal flow comes through broker relations. He and his partners have a list of about 40 brokers across their markets, and they make an effort to engage with each of them regularly.

2. …But make sure you don’t waste brokers’ time. These are very busy individuals who are going to spend their time where it’s most efficient — on people who are closing deals. Cody focuses on building broker relationships by closing deals and getting transactions done rather than attempting a wine-and-dine approach. 

3. Find ways to add value. Everything right now is coming down to price and risk capital, Cody says, so you have to find ways to be creative and add value when you’re acquiring properties. 

4. Be prepared to pay full market price. You’re also going to have to put up some sizable risk capital to give the sellers confidence that you’re fully bought in and you’re going to make this transaction happen, Cody says.

5. Increase your due diligence and inspection periods. The faster a seller can get to close, the higher your chance of getting the deal awarded. 

6. Leverage the experience of other operators when necessary. Due to the aggression in the marketplace and not having quite the track record as some of their competitors, Cody and his partners began cosponsoring with other operators with more experience and added value to those deals by raising equity. 

7. Build a robust marketing funnel. You’ve got to go out there and build your network, and you do that through thought leadership platforms, Cody says. He and his partners started with a meetup and a podcast, then incorporated email marketing and social media to grow their network even more.

8. Establish trust and relationships to attract investors. Cody believes creating successful investor relationships comes down to focusing on their needs, finding an alignment of interest, and being authentic. That method has worked well for him and his partners. 

9. Take action. Right now is still a phenomenal time to be in commercial real estate, Cody says. Although it is hyper-competitive, you can’t let that deter you or put you in a state of fear. Put yourself out there, take action, and go find opportunities.

 

 

Cody Laughlin | Real Estate Background

 

Click here to know more about our sponsors:

Cornell Capital Holdings

 

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Cody Laughlin. Cody is joining us from Houston, Texas. He is the managing partner of Blue Oak Capital, a multifamily acquisition firm focused on existing core multifamily assets across Texas. Cody’s portfolio consists of being a GP on almost 850 units, and he also works part-time as a registered nurse. Cody, thank you so much for joining us, and how are you today?

Cody Laughlin: Ash, I’m doing great, man. I want to thank you so much for having me on. I’ve been a big fan of the Best Ever podcast for many years now. It’s just an honor to be here, not only as a fan, but as a guest.

Ash Patel: Cody, the pleasure is ours. Before we get started, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?

Cody Laughlin: Absolutely. Again, as you mentioned, I’m a managing partner at our company Blue Oak Capital, and I’m also the director of acquisitions for our team. We focus on core, core plus assets across Central Texas, Houston, and San Antonio, primarily. I’ve been a real estate investor since 2010, spent many years in the single-family residential space, pursuing multiple different strategies in residential real estate… But realized after many years and after a lot of expensive lessons along the way that this is just really a hard model to scale.

For me, real estate was a path to financial independence, financial freedom, and entrepreneurship. So after many years of going through a lot of headaches, I decided to make a pivot and pursue multifamily syndication as faster scalability to reach my investment goals and theses. So here we are, met two great partners, we formed Blue Oak Capital in late 2019, early 2020, and we’ve been off to the races since.

Ash Patel: Before multifamily was it just single families?

Cody Laughlin: Yeah. Single-family, and I actually pursued some non-real estate-related business ventures, but that’s another topic for another day.

Ash Patel: That’s a whole different podcast subject. The two partners, how did they come into the mix?

Cody Laughlin: Networking. I was working with a different partnership group on another opportunity. In late 2019 I was introduced to my first partner John through a mutual connection, and we just really had a great synergy and great alignment of interests. We started finding opportunities to work together and really saw a long-term partnership developing, so we decided to formalize our partnership through that opportunity.

Midway through 2020, John met our third partner, Brian, through a virtual networking event, and connected with him offline, started building a little bit of rapport, and introduced him to me as well. Again, just great synergy, great alignment of interests, great complementary skill sets to our partnership. The stars aligned. We added Brian to our team and – just one more pivotal piece to the puzzle, so to speak,

Ash Patel: Is it one of your goals to do real estate full-time?

Cody Laughlin: Absolutely. This is definitely the long-term vision for us, and this is where we see our path to securing that financial independence that we’re all trying to achieve.

Ash Patel: And your role is director of acquisitions. How do you find multifamily units?

Cody Laughlin: That’s a great question. It’s really challenging right now in this market cycle. But all of our deal flow comes through broker relations. Brokers are your gatekeepers to the commercial real estate world, especially in the size of properties that were looking at, the 100-plus unit apartment buildings. All of our deal flow comes through broker relations, just nurturing those, and trying to be involved in looking at any opportunity that comes across that fits our investing thesis.

Ash Patel: What is your investment thesis?

Cody Laughlin: Again, that core, core plus really for us right now is our primary strategy given where we’re at in this market cycle and the execution risk that comes along with the value-add play, especially when you’re paying a premium, like we are right now in today’s market cycle. We really like the newer stabilized product, something that can be a long-term hold, with less deferred maintenance, less cap-ex needed to properly operate. We’ve made that pivot kind of halfway through last year and made that our core thesis moving forward.

Ash Patel: Cody, you’ve mentioned market cycle a few times. Give me your thoughts on that.

Cody Laughlin: Oh, man. It’s an interesting one, for sure. We entered multifamily 2019; a very, very bullish cycle. I think a lot of people at that time thought we were maybe at the top of that expansion cycle. With COVID hitting, again, everybody thought, “Okay, here’s the correction”, and then what would we see after? The market just exploded even more, and just even more aggressively. So I definitely think that we are still in an expansion part of the cycle as of United States. If you look at the supply and demand imbalance, we are in a significant supply shortage for multifamily housing and residential housing. There’s still a lot of tailwinds for supply and development. I think we still have a bright runway here for the next couple of years as far as commercial real estate goes.

Ash Patel: That’s why you guys are buying mostly newer properties?

Cody Laughlin: Yeah. Again, I think, obviously everybody knows right now that we’re entering a rising interest rate environment; how that will impact multifamily I guess it will be dependent on how aggressive the Fed will raise rates this year. But I think with that, if the market does slow down any at all, or even pull back some over the next couple of years – again, we want to be in a position to hold assets longer term, five, seven, even 10 years. When you’re holding that ’60, ’70 product that constantly has deferred maintenance issues or you’re constantly worried about what problems are going to need to be fixed tomorrow – that kind of rustles your feathers a little bit. We’d like to be able to sleep better at night, knowing that we have a quality product that doesn’t have all those deferred maintenance headaches that come along with it.

Ash Patel: Does your business model have value-add, or do you buy fully renovated properties?

Cody Laughlin: We’re typically finding properties, like I I said, that are in great shape and newer products. We are looking for a light value-add component. If you think about the market and how fast expectations are changing, how fast standards are changing, we’re looking for a product, let’s call it 2000-2015, that could use a light cosmetic upgrade. Maybe changing the color scheme, color palette, adding a few modern technologies like prop tech, things like that, that are becoming an expectation for today’s renters and demographic. So we are looking for a light value-add component but we don’t want to get into something that requires a $15,000-$20,000 per door renovation. Something just a few thousand dollars per unit that we can make a quick turn on, and capture upside on that.

Ash Patel: Cody, you mentioned broker relationships. Is it one broker, is it many, is it two or three that feed you most of your deals?

Cody Laughlin: Yeah, it’s many. We have a long list of broker relations across our markets, and we try to engage with each of them. I spend probably more time with those who are capturing most of the market share in our markets. There are several that we probably engage with more often than with the other ones. But yeah, I think you’ve got to be careful with isolating yourself just one or a small list of brokers. We probably have 40 brokers between our two markets.

Ash Patel: When you sell a property, do you just spread the wealth amongst these brokers?

Cody Laughlin: Well, there hasn’t been a circumstance where we’ve gone full cycle yet. But there is a kind of industry courtesy that’s expected that — most often you see when a seller sells an asset to you and you complete that transaction, when you’re ready to bring the deal to market and go full cycle, it’s a common courtesy that you go back to that same broker, barring a negative conflict. But we would expect to extend that same courtesy.

Ash Patel: That’s a good point. How do you get in front of your competition with these brokers?

Cody Laughlin: Now, this is a great question. It’s increasingly harder to stay competitive in this market cycle; even guys that are much more experienced than we are, that have much larger portfolios, are having challenges in today’s marketplace. Everything right now is coming down to price and risk capital. Ultimately, those are the two biggest drivers in today’s marketplace. I don’t think there’s really anything that’s market rate and that’s at a discount anymore. We get price guidance, and that’s kind of your starting point now, it’s no longer your target. So you have to find ways to be creative and find ways to add value when you’re acquiring properties… But you have to go in knowing that you’re going to pay the full market rate and you’re going to have to be putting up some sizable risk capital to give the sellers that confidence that you’re fully bought in, and you’re going to make this transaction happen. And then also looking at ways to increase your due diligence periods, your inspection periods; looking at shorter timelines. The faster a seller can get to close, the higher chance that you have of getting the deal awarded. I think between those three factors, that’s the most effective way to be competitive right now.

Ash Patel: Are there any soft sells? If you think back to like pharmaceutical or medical sales reps, they’re wining and dining the Docs a lot. Do you guys do that with brokers?

Cody Laughlin: I was just speaking on this with another podcast… To me, I don’t really find that to be very effective in the initial engagement. I think after you’ve transacted with a broker and you’ve kind of built that relationship and that trust of knowing that, hey, you can take a deal to close, then that’s an opportunity to make it more personal. But ultimately, these are very busy professionals. Let’s face it, there are a thousand new syndicators every single day that are calling all the same brokers. Their time is becoming more and more limited, which means that it’s becoming more and more valuable. They’re going to spend it where it’s most efficient which is going to be on guys who are closing deals.

Our focus is, “Hey, let’s close deals first, and let’s build a relationship that way. And then I’d be happy to take you to dinner and stuff after that.” But I don’t want to waste the broker’s time. I want to build that relationship by closing deals and getting transactions done.

Ash Patel: Good point. Cody, 850 units – how many properties is that across?

Cody Laughlin: That’s across four properties.

Ash Patel: What markets are you in?

Cody Laughlin: Again, our primary acquisition pipeline is Houston, San Antonio, and Central Texas, but our portfolio as a whole – we have three assets here in Texas, and then one in Columbus, Ohio that we co-sponsored.

Ash Patel: Why Columbus?

Cody Laughlin: The relationship with their lead sponsor; we currently sponsor Chris Jackson of Sharpline Equity; I’ll name drop for him. A great guy; we just wanted a way to build that relationship with them and work with those guys. They’re present in that market, they have assets in that market, so we trusted not only their experience, but their presence in that area. Once we looked at Columbus, we saw that it had really good fundamentals, so it gave us a lot of confidence to participate in that. But it’s just like anything else, it comes down to relationships and experience.

Break: [00:13:26][00:15:13]

Ash Patel: What value did you bring to the table?

Cody Laughlin: Our primary value proposition was being able to raise capital. We’d spent about a year and a half building a framework and infrastructure for our business, building out our database through our marketing funnels, so that way we can position ourselves to go and syndicate and raise capital. Ideally, that was going to be for our own deals. But again, with the aggression in the marketplace and not having quite the track record as some of our competitors, we knew that we had to leverage the experience of other operators to really break-in. So that’s how we started; we started co-sponsoring with other operators that had much more experience and we added that value through raising equity. We also love to participate in the asset management side as well, to be involved in some of the decision making and give input where it’s needed, and help direct the business plan.

Ash Patel: Cody, can you talk about the differences between multifamily in Columbus, Ohio, a typical Midwestern city, versus Texas?

Cody Laughlin: Different demographic. Obviously, the demographic there is a little bit different than it is here. Whether that be lower-income, working-class versus similar demographic here. Houston primarily where we’re based out of, it’s primarily a low-income working-class demographic. But on this core, core plus product, we’re typically focusing on more of your white-collar, young working professionals. I think that’s the biggest thing, is just working demographics. Both states have very similar laws and legislation around business owners that support business owners. We definitely liked that aspect; we want to be in business-friendly states for sure. But I would say the demographic is probably the biggest difference between the two.

Ash Patel: And rent growth, appreciation, cap rates?

Cody Laughlin: Cap rates are a little bit looser there. We’re seeing cap rates at about, call it, maybe five, mid-five cap rate, whereas, versus Texas here, everything’s kind of a sub four cap right now, which is kind of crazy to talk about; two years ago, we’d be gawking at that. But now it’s that’s our standard. It is more of a cash flow market, you’re going to be able to find a little bit better yield in a market like Columbus, versus here in Texas. Again, it’s very, very hyper-competitive; pricing is aggressive. It’s kind of harder to find those yields here in Texas.

Columbus, if you look at it from a fundamental perspective, it’s one of those Steady Eddy markets. It’s not like robust growth, you’re not having this massive net in migratory patterns like you’re seeing here in Texas. But it’s a great community for acquiring assets, operating efficiently, providing a good quality resident experience, and then just holding them for five, seven years for cash flow.

Ash Patel: Cody, you mentioned, you spent the better part of a year setting up your business before you started acquiring properties. One of the things you mentioned was your marketing funnels. Can you give us an example of some of those?

Cody Laughlin: Yeah. We built out a robust marketing funnel, and we started out with different thought leadership platforms, very similar to what we’re doing now. Our podcast, our meetup… And really, I give a lot of credit to Joe because I read his book, the Best Real Estate Investing Advice Ever book. He laid that out in his book, you’ve got to go out there and build your network, and you do that through thought leadership platforms. So we started that, we started a meetup, and started the podcast… And as we started to build our network, then we started putting things like our newsletter in place, our email marketing, and then really leveraging social media. This is a big one – social media is the way that the world is connected today. If you’re not visible on social media, then you’re really missing out on a prime opportunity to grow your database.

So we leverage social media in addition to our thought leadership platforms. And especially through COVID, when everybody was secluded to their homes and not really getting out and doing face-to-face networking, I think we 4X’d our database that year just because of all the virtual networking we were able to do and the outreach that we had from all those different funnels. So thought leadership platforms, social media, and email marketing were the biggest funnels for us.

Ash Patel: You know, I just googled that not too long ago. Best Ever listeners, if you google “Joe Fairless thought leadership platform”, he breaks down, I think it’s a top 10 list of things that you can be doing to increase the size of your network. Awesome. Is there a particular niche that you’re looking for in terms of size of units, purchase price, and cap rate?

Cody Laughlin: For us, we particularly look at value over count. We’d like to be above 100 units just from an operational efficiency perspective. As you go bigger, things get easier to operate, you can have larger teams, your property management teams can have more staff to operate your business plan… So we like to be typically above 100 units, but for us, we focus on value, and this is really from the debt side. Anything over 20 million, kind of the same thing, the debt gets a little bit easier, terms get to be a little bit more flexible; especially with the transactional volume of last year, the bridge, everything was executed on the bridge, so all the debt funds and bridge lenders really kind of exhausted their debt funds. Anything below 20 million, terms are a little bit more rigid, they were going to make you pay heavier spreads on some of those terms… Wo we like to really be above that $20 million thresholds. For us, our buy box is call it 30 to 50 million, 100 to 250 units I would say, and really focusing on that 1990s vintage or newer.

Ash Patel: Cody, what’s your return to investors?

Cody Laughlin: It’s going to be very deal-specific. For us, what we’re seeing in the marketplace right now, especially in our markets in this core, core plus product, we’re looking at a 4%-6% cash-on-cash, call it 12%-13% IRR or higher, and then we always look to achieve a 1.7X multiple. We’re typically modeling all of our business plans on a five-year hold.

Ash Patel: How do you sway investors to your deals when the returns are fairly similar amongst a lot of multifamily syndicators? What separates you guys?

Cody Laughlin: Well, it comes down to trust and relationship. You’re right, there are plenty of other operators out there that are probably equally or much more qualified than we are. But being able to leverage our relationships with investors, we find people that are attracted to us, for whatever reason… We like to think we’re good guys, we’re authentic, we’re transparent, and we’re relatable. We’re everyday people, just like you and me Ash, and I think that’s something that people can relate to. But aside from that, it’s just again, offering something of value, offering people opportunities to get into this direct private real estate, like commercial real estate, and grow their portfolios in a way that suits their thesis. But I think it just comes down to again, focusing on the relationship, finding that alignment of interests, and being authentic is key. It’s worked out very well for us.

Ash Patel: How often do you communicate with people in your database that are not investors?

Cody Laughlin: We send out monthly newsletters, that’s our primary way of communicating. Then we have a weekly, what we call drip mail campaigning that goes out. That’s to share the different content that we’re curating or things that we find valuable, that we can share through our database. Even though somebody is not actively invested with us or maybe not in our database, our direct contact list so to speak, we still try to engage with people, and we look for opportunities to add value to other people. “Hey, you may not want to invest with me and that’s completely fine. But maybe we know somebody that might be better suited for you. Or maybe we can make a referral to a connection, or a professional that may help you grow your business.”

So we try to have as many of those touchpoints as we can. We’re talking to potential investors or partners on a weekly basis. Brian is our second partner, third partner, and he’s our investor relations director. Between his schedule and mine, we’re connecting with 10 to 15 people a week on average, and just looking for ways to add value. It can’t just be about us. We’re not trying to be selfish in how we get value. It’s about how we give value back to others as well.

Ash Patel: Cody, what is your best real estate investing advice ever?

Cody Laughlin: Oh, that’s a good question. I would definitely say, take action. I think right now is still a phenomenal time to be in commercial real estate. It is hyper-competitive, but you can’t let that deter you or can’t let that put you in a state of fear. Put yourself out there, take action, and go find an opportunity.

Ash Patel: Cody, are you ready for the Best Ever lightning round?

Cody Laughlin: Let’s go.

Ash Patel: Let’s do it. Cody, what’s the Best Ever book you recently read?

Cody Laughlin: Think and Grow Rich. I read that book many years ago and I’ve been reading it again. Success is a mindset, so I really love just revisiting that book and its core principle. I highly recommend that one.

Ash Patel: Cody, what’s the Best Ever way you’d like to give back. So

Cody Laughlin: We leverage our platforms to try to give back to our community, for example, in our live in-person meetup events that we host every month. This past Christmas, we actually hosted a toy drive. For attendance, everybody, their admission to attendance was donating a toy to a local toy drive, which we ended up donating, I think over 100 toys to a local charity. That was really special. So we like to leverage our platforms to try to give back to our communities.

Ash Patel: Cody, how can the Best Ever listeners reach out to you?

Cody Laughlin: Well, we’re not hard to find. I like to say we’re all over social media. You can find us on LinkedIn, @codylaughlin. If you want to check us out, you can visit our website at www.blueoakinvestment.com. If you want to reach out to me directly, feel free to email me at cody@blueoakinvestment.com.

Ash Patel: Cody, I’ve got to thank you for your time today and for sharing your advice. You started in 2010, single-families, 2019, going to the multifamilies, assembled a great team, and you’ve got a great niche. Thank you again for sharing your story.

Cody Laughlin: Thank you so much for having me, Ash, I appreciate it.

Ash Patel:  Best Ever listeners, thank you for joining us. If you enjoyed this podcast, please leave us a five-star review and share this episode with anyone who you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2752: Why The Wrong CRE Insurance Could Lose You Deals ft. Danielle Lombardo

Do you find insurance and risk management hard to navigate? In this episode, Danielle Lombardo, Senior Vice President at Lockton, offers her expertise on selecting good insurance brokers and what common mistakes she sees investors make when choosing insurance plans.

Danielle Lombardo | Real Estate Background

  • Chair of Global Real Estate Practice within Lockton Companies, a global insurance broker and risk management consultant.
  • She’s an insurance broker and consultant for a variety of types of CRE firms. Within her specific team, they are focused on providing these services to real estate firms (owners, operators, developers, REITs, etc.) operating in all asset classes.
  • Based in: NYC, NY
  • Say hi to her at: dlombardo@lockton.com | LinkedIn
  • Best Ever Book: Twelve Hours’ Sleep by Twelve Weeks Old by Suzy Giodarno

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Danielle Lombardo. Danielle is joining us from New York City. She is the chair of a global real estate practice within Lockton Companies, which is a global insurance broker and risk management company. Danielle is also a broker and consultant for all asset classes. Danielle, thank you for joining us, and how are you today?

Danielle Lombardo: I’m doing great. How are you?

Ash Patel: I’m doing very well. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Danielle Lombardo: Yes. I’ve been in the insurance brokerage business for the past 15 years. I started actually in Los Angeles, I did the opposite of what most people do, going from LA to New York. Clearly didn’t come here for the weather… But always been focused on real estate insurance and started in the multifamily space. One of my first clients grew from 100 units to 10,000 units in two years. During that process, I found out pretty quickly how hard it is to not only place insurance on behalf of real estate owners, but actually service it on a day-to-day basis. I spent an almost 15-year career building our expertise, not only on getting the best rates and coverage, which should be an afterthought with your broker, but really the day-to-day servicing and the psychology of risk management within an organization.

Ash Patel: Can we deep-dive into that? Because to me, it’s almost like title insurance; we don’t really know what we’re getting or why are we getting it. What are we supposed to look for? It’s one of those things that until there’s a disaster, it really is just not in the forefront of what you’re doing. So what are mistakes that a lot of multifamily or any commercial asset real estate operator makes? What mistakes do we make?

Danielle Lombardo: What mistakes? Wow, that’s a great question. First of all, I was talking with a client of mine earlier today. He’s one of the largest multifamily developers in the country. We were just chatting about how inefficient and opaque the insurance market is; no one really understands it. You have to go through a broker to get to the insurance carrier, insurance pricing has become very volatile the past couple of years; it’s causing deals to die, unfortunately. I’ve had multiple situations where people have come to me at the 11th hour trying to get cheaper insurance to make sure that they could actually close on a deal. So it’s become one of these service offerings that is becoming much less like a title, where it’s commoditized because it is what it is on the title insurance… And on the property and casualty insurance front, you can become a lot more strategic around how you’re placing the insurance, the deductibles that you take on, etc.

So if we want to talk about your last question of what do real estate owner-operators, where do they make mistakes – where I see the biggest disconnect is amongst acquisitions teams and the C-level of an insurance company, particularly in risk management, the CFOs etc. who are looking at the long-term coverage implications of insurance. When you’re on the acquisition side and you’re just trying to do deals, you’re trying to get the lowest possible coverage that will meet lender requirements, in general. I don’t want to paint such a broad brush, but I would say amongst all of my clients, that’s generally the perspective. Then, when you’re dealing with asset management, risk management, CFOs etc. they generally have the experience of dealing with the actual claims. So where you may be saving money upfront to get a deal done, from a long-term perspective when you’re looking at the financials of the deal, if you have to fund millions of dollars for a deductible that you didn’t anticipate or there’s a huge gap in coverage, that will absolutely affect investor returns as well. So you really have to take a look at insurance through both lenses – the upfront NOI perspective and focus, as well as more long-term IRR, how is this deal going to pan out if we don’t have the right insurance.

Ash Patel: I’m shocked. Do people really just find the absolute minimum coverage?

Danielle Lombardo: Oh, absolutely. Are you being sarcastic or you just — [laughs]

Ash Patel: No, I’m being serious. So I’m not in the multifamily space, I’m in the commercial space. But we usually get pretty decent insurance; we don’t want the minimum. I mean, we want to know that we’re covered. What horror stories have you encountered and what lessons learned can you help us with?

Danielle Lombardo: There are a lot, and that’s why I’m pausing right now, to see what would be most effective in terms of answering. I would say, at the end of the day a lot of your peers do focus on cost first, and coverage, as long as it meets lender requirements, can be an afterthought. I do see that perspective differing amongst different types of real estate firms. For example, real estate, private equity, and REITs might have more of a conservative standpoint, family offices, because it’s their own money. When I talk to more of my syndicator clients that are just trying to churn and burn deals, three to five-year holds, they’re just trying to make most of their money on the upfront acquisition fees; I think it’s a different perspective as well.

I’ve certainly seen situations where clients have had to do capital calls for insurance-related claims where the deductibles were a lot higher than they had expected. For example, when you’re dealing with catastrophe coverages, like windstorms or earthquakes, you’re going to see three, five, and sometimes higher percent deductibles of your total insurable value, which can be millions of dollars out of pocket after a significant windstorm, or earthquake etc. A lot of times you’re not putting aside that money for a rainy day, and you’re not really thinking through the deductibles on an upfront basis.

I would say the other mistake that I see across more middle-market to small operators is not purchasing general partnership liability insurance, which is essentially a blend of directors and officers and errors and omissions. When you’re dealing with claims of misrepresentation and other claims from investors when deals go South, for example, regardless of what your contracts look like or how good your relationships are, or you think they are, with your investors, they’re generally going to come to you to try to find some reason to recoup their money.

The other side of that too is if you’re the property manager, there are certainly errors and omissions-related claims as well. If you, for example, placed the wrong insurance or you don’t pick the right deductibles, then you have to come out of pocket and you didn’t appropriately advise your investors how you chose those limits or those professional services. There’s a lot there from a professional liability and a directors and officers liability standpoint. Everything else just really skirts the coverage gap conversation around why you’re choosing to purchase particular limits upfront, and what happens when there’s an actual claim.

Ash Patel: Can you dive into the general partner’s liability insurance? What exactly does that cover? Have you encountered a situation where an operator had a loss and they were sued, and this insurance provided some safety?

Danielle Lombardo: Yes, I have. These are typically what we would call catastrophic claims, meaning you’re not going to see claims for $50,000 or $100,000, and that’s why a lot of times the deductibles are much higher. These are claims from investors who say, “You misrepresented on this deal, and I invested as a result. Now I’ve lost money and I’m suing you for $5 million.” Those are the types of claims that we’ve seen. Depending on how the lawsuit is worded and a number of different factors, we certainly have seen significant claim payments on that type of coverage. From a professional liability perspective, if you’re doing property management, we do see, unfortunately, a lot of employee theft-related claims and things like that… Now it all falls within the realm of management liability, outside of what you’re buying on a property level.

Ash Patel: Danielle, we’ve all heard the horror stories where somebody has a roof that blew off of, a fire, and the insurance company doesn’t want to pay. What tips can you give our audience on how to deal with situations like that?

Danielle Lombardo: I have this conversation all the time. The insurance companies want your money ASAP, but they generally will wait to pay claims or will take a while to pay claims. Especially if you’re dealing with catastrophic claims, because you have adjusters that are just overwhelmed. So I would say a couple of things… The way that your coverage policy forms are written upfront is very important. Most of my clients have what are called master insurance programs, that have a number of different insurance companies sharing in the risk. We have a locked-in-based form that we write on behalf of our clients, that tries to make it bulletproof at the point of the claim, so there are no questions and there’s not as much back and forth.

As strong as the coverage might be, you’re still going to have issues getting the right attention from a claims adjuster. So you need to have a broker that has an internal claims advocacy group, that’s sole purpose is to interact with and project manage with the adjusters, and have relationships with those adjusters. It’s actually a fairly small underwriting and claims community, if you can believe it, so having someone internally advocating for you on the front end and then project managing it forward is very, very important to get the claim towards resolution.

I do think that dealing with your larger insurance brokers, they’re going to have the leverage with the insurance carriers to get claims paid not only faster, but to maximize the claims payment. So I do think having a larger insurance broker is certainly key.

Break: [00:12:35][00:14:32]

Ash Patel: At what point do individuals qualify to get insured by these larger insurance brokers?

Danielle Lombardo: It depends on a couple of different factors. You need to have a minimum premium amount. I would say that minimum premium amount, at least for me personally and within our group where we can add the most value, is usually around $500,000 in premium. That can be a couple of thousand units, that can be even a thousand units if we’re dealing with Florida, because the premiums in Florida are that much higher, it can be 500 units in New York, because general liability insurance in New York is that much higher… So it depends on the geography and the asset class. But if I were to look at premium amount, it’s usually about that $500,000 mark.

The reason why, for us, there has to be sort of a minimum there is not only the service that we offer. We really act as an outsourced risk management department for our clients, so we’re heavily staffed more than a lot of brokers in that sense. But also, when you’re dealing with smaller portfolios, there tend to be one-off regional carriers that are more competitive than our carriers will be. Think farmers, and state farms… They’re obviously not regional carriers, but I’m talking carriers that are focused on smaller portfolios.

Ash Patel: Danielle, Neal Bawa, if you know of him, a multifamily legend, a Silicon Valley guy who just applies a lot of data to real estate investments – he did a webcast recently where he talked about how insurance companies are applying a different level of risk based on climate change data and past weather patterns. Are you seeing that as well?

Danielle Lombardo: We are. It’s a great question and it comes up at least once a week from clients and prospective clients. How are we addressing ESG, and specifically, from a climate change perspective, what is the insurance industry doing. At the end of the day, the reason why there’s so much volatility, at least on the property insurance side, is as you have seen over the past couple of years, there’s been an increase in frequency and severity in weather events. It’s very difficult to anticipate outside of any model out there of how things are going to pan out for insurers. So it’s very hard to underwrite when there’s so much unknown.

With that being said, there are catastrophe models that now have modules to address climate change. Think sea level rise, flood, wind, and other variables that they’re overlaying across their portfolio. We’re certainly seeing insurers focus on it more and we’re seeing clients focus on it more. I will say any catastrophe model that I’ve seen, whether it’s climate change-focused or not, it gives you thousands of years of data. But when you look at how it actually pans out in reality after a storm, it usually is a little bit far off. I think insurance carriers and clients are just reaching for any sort of data to help them make decisions, but at the end of the day, the reason why there’s so much volatility within the insurance market is that there’s so much unknown.

Ash Patel: They’re going to reach and try to stay ahead of the curve.

Danielle Lombardo: They’re going to try to, so what they do as they try to paint the accounts with a broad brush, and really, an insurance broker’s responsibility is to try to beat them at the pass, meaning underwrite internally, have the same types of systems and analytics that underwriters use, so that they can anticipate and be proactive about having conversations around their concerns… Whether it be weather related issues, catastrophe related issues, liability related issues… From a liability perspective, most underwriters are using what is called crime scores in order to evaluate their exposure in different neighborhoods from a multifamily perspective… And to be able to get ahead of that and have conversations with deal teams around what’s really going on within the neighborhood, and what cap-ex is being discussed on the front end, and really what the value-add strategy is at that location, and how they’re going to integrate security as well… So it’s really a lot about having the internal tools, whether it’s climate change or anything else, to be able to have those conversations with underwriters.

Ash Patel: Danielle, what is your best real estate investing advice ever?

Danielle Lombardo: My best real estate investing advice ever, from an insurance perspective, I will say you have to be able to marry both perspectives of upfront pricing and long-term coverage. I would say my advice, again, through the insurance lens, is around making sure that you’re looking long-term at really hedging against the volatility of the insurance market, taking on higher deductibles, putting in place and thinking through potential captive and risk finance opportunities so that you’re getting out of the dollar trading in the insurance market, and being more strategic around how you’re buying insurance.

You don’t want to be where I’ve seen most real estate companies have been over the past year or two, where you are beholden to the insurance market and you’re losing deals because of it. Everyone’s complaining about insurance, and it’s become a real issue when people just want to get deals done.

Ash Patel: Danielle, are you ready for the Best Ever lightning round?

Danielle Lombardo: I’m ready.

Ash Patel: Let’s do it. What’s the Best Ever book you’ve recently read?

Danielle Lombardo: Twelve Hours’ Sleep by Twelve Weeks Old.

Ash Patel: What was your big takeaway?

Danielle Lombardo: Getting my two-and-a-half-year-old and my one-year-old to sleep through the night.

Ash Patel: Got it. Danielle, what’s the Best Ever way you like to give back?

Danielle Lombardo: I love to learn about organizations that are close to the people around me, and continually evolve how I’m giving back. My passion is for at-risk youth, so any organization that focuses on at-risk youth, specifically teenagers, is where my passion lies. But I really do love to spark conversation with people around me, especially my clients and colleagues, what means the most to them and support them as well.

Ash Patel: Danielle, how can the Best Ever listeners reach out to you?

Danielle Lombardo: I think email is probably best, dlombardo@lockton.com.

Ash Patel: Danielle, thank you for your time today and sharing some insights on the world of insurance that’s often mysterious to a lot of us. Thanks for your time today.

Danielle Lombardo: Thank you.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2751: Use THIS Creative Strategy to Win Direct-to-Seller Deals ft. Dedric Polite

Struggling to find off-market deals? Dedric Polite, co-host of A&E series 50/50 Flip, shares his strategy for finding direct-to-seller deals, and how his method helped him close on his latest mobile home park.

Dedric Polite | Real Estate Background

  • Chief Investment Officer of Be Polite Properties LLC, which owns and operates income producing single-family, multifamily, and commercial real estate.
  • Portfolio: GP of 42-unit mobile home park and 66 units.
  • He and his wife, Krystal Polite, host the A&E home series 50/50 Flip, a six-episode series following the Polites as they renovate and flip 10 single-family and multifamily homes, each one for under $50,000 and all in under 50 days.
  • Based in: Burlington, NC
  • Say hi to him at:
  • Best Ever Book: Never Split the Difference by Chris Voss

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Dedric Polite. Dedric is joining us from Burlington, North Carolina. He’s the chief investment officer of Be Polite Properties. He is currently GP of 66 residential units and a 42-unit mobile home park. Dedric, can you start us off with a little more about your background and what you’re currently focused on?

Dedric Polite: Sure. Great to be on, Slocomb. Thanks for having me on the show. I’m a long-time listener of the Best Ever podcast. I remember listening to it eight years ago when I first got started. We are full-time real estate investors here in North Carolina. I got into real estate in 2017, started out with the goal to build a large portfolio of cash-flowing rental properties. We got into wholesaling first, because we didn’t have a lot of cash when we first started. We used wholesale checks in order to buy rental properties. Over time, we got into flipping houses; that’s actually how we landed on a TV show. We’re actually on the TV on A&E, we have a home renovation television show called 50/50 Flip, that I can talk a little bit more about… So I’m excited to be here.

Slocomb Reed: Awesome. You just started in real estate investing five years ago?

Dedric Polite: Yep.

Slocomb Reed: Gotcha. When did you buy your first commercial property?

Dedric Polite: Well, good question. So I started 2017, but I have to rewind a little bit. I actually bought my first investment property in 2007. Went to school, graduated college, did what your parents told you to do, “Go to school, get good grades, get a good job with benefits.” 2004, I graduated from Amherst College, got into pharmaceutical sales, was a pharma rep in the Boston area… I read Rich Dad Poor Dad a few years earlier, and I was like, “I’ve got to buy some real estate.” What I did was I do what people now call house-hacking. I bought a triplex in Boston, Massachusetts, I lived in the ground floor unit, I rented out the top two units, it paid my mortgage. I maybe spent 300 or 400 bucks out of pocket each month, and that was my first property.

Then I went back to just working my job. I had a good nine-to-five corporate job, so I didn’t really do too much. I continued to buy books and go to seminars here and there, but I was more of a watcherpreneur at that point. That was until I met my wife. My wife was a serial entrepreneur. Again, we were both working jobs. We got into franchises, so we bought a franchise in 2016. We ran that for a couple of years, and we sold that franchise.

Slocomb Reed: What franchise?

Dedric Polite: It was animal rides, animal scooters. If you’ve ever been to your local mall, you see these little furry scooters riding around with kids…

Slocomb Reed: Ah, okay, gotcha.

Dedric Polite: We brought that and we grew it, three locations in two different states, had like 13 employees. This is why we both were working jobs, we owned this business on the side. We sold that in 2017 and we dove into real estate at that point. It took about a year for us to fire my wife’s boss, and about two years to fire my boss to go full-time into real estate investing. But a mobile home park would be the first commercial property we bought. Again, we bought other multifamilies where they’ve been three-unit, four-unit properties.

Slocomb Reed: Gotcha. Dedric, I’m a house-hacker, too; my starter home was a four-family close to downtown Cincinnati. When my wife was pregnant and it was time for us to move out of downtown and get a larger place, I ended up talking her into a really nice three-family in a neighborhood here called Northside, so we’re on house hack number two.

Dedric Polite: Nice, nice.

Slocomb Reed: So your commercial property is this mobile home park, 42 units. Where is it?

Dedric Polite:  It’s in a town called Mebane, North Carolina. It’s about 30 minutes from Durham, North Carolina.

Slocomb Reed: Gotcha. What got you into mobile home parks?

Dedric Polite: That’s a good question. When I first heard about mobile home park investing, I was turned off, like most people might be. We’re like, “Trailer parks? You mean there’s really money in trailer parks?” As I did research, I learned that it has the highest cash on cash return of any commercial real estate, so that definitely piqued my interest. We’ve been looking to buy a mobile home park for quite some time; for some time, we started marketing directly to them. We were fortunate enough to find a seller that was in his 90s and he was looking to sell off his entire portfolio, which included several small multi families and a mobile home park. We actually were able to negotiate some pretty sweet seller financing terms to purchase a mobile home park.

Slocomb Reed: Tell us about those terms.

Dedric Polite: We bought the mobile home park for $800,000. The kicker was we negotiated seller-financed terms of a $10,000 down payment, the seller agreed to hold a note for $790,000, principal-only payments, no interest of $2,000 a month for 84 months. As is, this mobile home park – we just closed on it about a month ago – it’s worth a million as-is, we bought if for $800,000. After repair value, it’s probably closer to 1.5 million. But we’re not planning to sell it, we’re going to keep it long-term as a cash-flowing property. But you know, it was some pretty sweet terms on it.

Slocomb Reed: Is everything you’ve bought right there in North Carolina?

Dedric Polite: No, we own some property in Boston. I still own that one I bought in 2007. We started buying properties in Cleveland, Ohio before COVID; we had accumulated about 12 or 14 units there. Then COVID hit, so we had a hard time going back and forth and finding a contractor, so we sold everything we had in Cleveland. Right now, our focus is on North Carolina and in the Southeast.

Slocomb Reed: Gotcha. Nice. So do you guys self-manage them?

Dedric Polite: No. We started out self-managing, definitely been there, done that. But now, our properties are managed by a property manager. We also do short-term rentals, so we have quite a few Airbnb’s. So we have two property managers, because those are two different beasts; the long-term rentals have a property manager, and then our Airbnb’s have a separate property manager.

Slocomb Reed: Gotcha. Dedric, what is the biggest challenge you’ve had to overcome as you’ve gone full-time in real estate?

Dedric Polite: That’s a good question. The biggest challenge I think is always deal flow. I think if you find the deals, you can find the money. But that’s one of the things we specialize in, is marketing directly to sellers to find off-market deals for motivated sellers. So we’ve done a pretty good job of finding those off-market deals. Almost nothing that we buy is on market, it’s all direct-to-seller. But I think in today’s environment, with it being such a hot seller’s market, it’s gotten more and more difficult to find deals where the numbers make sense.

Slocomb Reed: Totally. I get that, Dedric. The only things I’ve ever bought on-market were for me and my wife to live in ourselves. Everything else, I’ve gotten off-market for a very similar reason. On-market deals just don’t have the same cash flow, and I have, especially now, the bandwidth for some serious off-market lead gen. Let me ask about that, Dedric. You’re going direct-to-seller – how is it that you’re getting in front of sellers right now?

Dedric Polite: Various ways. Cold calling works very well; text messaging, direct mail, a lot of referrals as well… People have gotten to know us in the market as serious cash buyers and people who deliver… So those are some of the ways we generate off-market deals.

Slocomb Reed: It sounds like you’ve got a lot going on. Did you say that you have people you’ve purchased from who are referring other owners to you?

Dedric Polite: Oh, yeah.

Slocomb Reed: Nice. Going direct to seller, Dedric, when you’re speaking with a property owner who has some genuine interest in selling their property, do you have an idea of how often those sellers are also engaged with other buyers and getting other offers, and how often you’re the only buyer at the table?

Dedric Polite: That’s a great question. Of course, you want that percentage where you’re the only one that they’re talking to be as high as possible. But we live in a real world here, so I would say, out of 10, probably 80% of the time there are other buyers in play, and 20% of the times there are not. We try to stack the odds in our favor where we’re the only or the first person that gets to them. We assess their needs and we can meet all their needs, so they don’t need to talk with anyone else. That’s really the goal where you can negotiate typically the best terms, where you’re not getting outbid by other cash buyers, people paying crazy prices and willing to accept minimal returns… Which is happening every day in this market.

Slocomb Reed: Yeah, totally. Even with going direct-to-seller, doing your cold calling, your text marketing, and direct mail, things like that, 80% of the time you’re still coming across sellers who are being approached by other people at the same time. The deals that you’re buying – how many of them are coming from the 80% where it’s competitive, and how many are coming from the 20% where you’re the only show in town?

Dedric Polite: That’s a good question. I’ve never really looked at those numbers. Just anecdotally, I would say probably 50/50. 50% come from that 20% where we’re the only game in town, and those are easy to pull the trigger to buy, because you’re usually getting it at a really good price if they’re truly motivated. The other 50% comes from where you’re competing against other offers and you have to get creative with how to win that deal.

Break: [00:12:16][00:14:12]

Slocomb Reed: Dedric, you talked about the mobile home park… Tell us about another time that you got creative to win a deal direct-to-seller in a competitive situation.

Dedric Polite: That’s a good one. One of them was a house in Charlotte. We came across this property in Charlotte half a mile from where the Carolina Panthers football team plays, walking distance there. We were the first ones to be on the scene, talking to the seller. We sent them a postcard, we found a driver for dollars, sent her postcards, she called us back, did the appointment, made an offer. A couple of days later when she was supposed to get back to us, she did say that there was someone else in play.

“Someone else contacted me, they want to buy it. You have competition.” What we did in that case was we offered other things, other than just a sale price. This was an older lady, she was in her 60s, she lived by herself, she had accumulated all this stuff over the years, so we offered her two things. We said, “First of all, we’ll help you move. When we buy the house, you don’t have to figure out how to move all this stuff; we’ll pay for your moving.” And, we offered to pay for a year of storage of her stuff, because she was downsizing from this four-bedroom house into a one-bedroom apartment. So by offering those two things, which most people wouldn’t think of, we were able to win that deal.

Slocomb Reed: Nice. I know some people would be chomping at the bit to hear more about the way that you negotiated the mobile home park deal. It sounds like part of the reason you were able to get it is that you were also interested in those three and four-family properties that the seller was looking to sell. What do you think are the factors that led the seller to a price of 800, which seems a little low, and to seller-finance 790 of that on principal-only payments? What are the factors that led to the seller being interested in and willing to take terms like that?

Dedric Polite: That’s a great question, Slocomb. I think it’s two things. One is we built a relationship with the seller, and two is we built trust with him. We met the seller in 2018. Again, we found one of his properties driving for dollars. We first got in touch with him, he’s like, “Yeah, I’ve got a four-unit I want to sell, as is.” We looked at it, it was completely trashed and we realized why he wanted to sell it. But when we looked this seller up, he owns 70 units. And oh, he was like 90. So we’re like, “Okay.” When I first met with him, I said, “With all due respect, sir, I would like to buy your whole portfolio.” He was like, “Well, slow down. You’re a [unintelligible [00:16:40].06]” He wasn’t ready to sell the whole thing, but he was like, “I’ll sell you this first one. Let’s see how you do.”

We bought the first one, it was a fourplex we bought for 55,000. That’s like some Cleveland, Ohio prices right there… But it needed everything. I mean, it needed everything, or a demo. So we were going to remodel it and rent it, do the BRRRR strategy, but this was early in our renovation experience career, so we were like, “Well, we got the renovation numbers.” We thought it was going to cost like 80 to 90 grand to fix it up. It turns out, it was going to cost like 150 to fix it up. So we’re like, “Um, I don’t think we want to take on this gut renovation of a four-unit where we’ve never done anything this big.” So we actually sold it; we put it on the MLS and sold it as-is. We bought it for 45 and we sold it for 55 as is on the MLS.

So we got out of that deal without losing money, but we performed. That led to the next deal; the next property he sold us was a single-family house he owned in Durham. Again, it was kind of a hairy situation; it had a failed septic tank and no one would touch this property, no one wanted it, because it was some type of special septic and needed to go through city approvals. We ended up buying that property when no one else could buy it from them, so we delivered on that. That’s when he started to be like, “Okay, I’m willing to accept some owner finance terms.” Because we’re like, “Hey, we want to buy two other four-units you have and a mobile home park.” After we’ve proven ourselves on a few deals and he saw that we were trustworthy, that’s what he’s like “Okay, I’d be willing to do seller financing.”

Slocomb Reed: You said you closed on that just recently, end of 2021?

Dedric Polite: Which one?

Slocomb Reed: The mobile home park.

Dedric Polite:  The mobile home park, we closed on that officially last month. We had it under contract for five months, but closed on it last month.

Slocomb Reed: So January of 2022, with a seller you originally connected with in 2018?

Dedric Polite: Absolutely.

Slocomb Reed: So it sounds like part of the secret here was your staying power and just follow up, and your willingness to perform on some of the smaller deals to gain trust, for sure. Yeah, get on base a couple of times and it lead to a home run. That’s awesome. Since you went full-time in real estate, Dedric, what would you say is the most important skill you’ve developed?

Dedric Polite: That’s a good question. I think the skill that’s paid off the most has been negotiating skills. Everything in life is a negotiation, but especially in real estate. Honing your negotiating skills is something; it can earn you an extra 20,000 per deal, it can earn you extra million on a deal if you know how to negotiate.

Slocomb Reed: For our Best Ever listeners, Dedric, do you have any recommendations on how they can develop their negotiating skills?

Dedric Polite: Yes. Again, people think you’ve got to be born a great negotiator. I wasn’t born a great negotiator, I had to learn it. One of the books I read was a book called Never Split the Difference by Chris Voss. Some of you have probably heard of that, Never Split the Difference. His background is he is a former FBI hostage negotiator. So we’re negotiating real estate deals, but you learn from someone who’s negotiating life and death situations. I read that book three or four years ago and I still read it once a year, because the tips you can pick up on negotiating from there made me millions of dollars.

Slocomb Reed: Nice. Dedric, are you ready for our Best Ever lightning round?

Dedric Polite: Yes.

Slocomb Reed: What is your Best Ever way to give back?

Dedric Polite: Best Ever way to give back… One of the things we do before we start a lot of our rehabs is we’ll go to a local homeless shelter and we’ll hire some of the guys from there who are skilled tradesmen. Like, you’ve got carpenters, plumbers, and people like that who just maybe are on hard times. We’ll hire them to do the demo and clean out on a lot of our properties. Some of them we’ll actually even give them full-time jobs. That’s one of the ways we like to give back.

Slocomb Reed: Wow. Let’s sit on this for a moment. You’re going to homeless shelters to find people to do the demo for your rehabs. How reliable have you found that workforce to be?

Dedric Polite: I would say fairly reliable. One of the things we have to do is — a lot of times they don’t have cars, so we have to send one of our guys to pick them up in the truck and bring them to and from; that kind of comes with the territory. But other than that, these are folks that, again, were productive members of society. They’ve just fallen on hard times for whatever reason, and I like to try to give them an opportunity to earn an honest day’s work.

Slocomb Reed: That’s awesome. Dedric, what’s the best book you’ve recently read?

Dedric Polite: I would say it’s that Never Split the Difference by Chris Voss. Anyone, especially anyone interested in real estate investing, I think it’s a must-read.

Slocomb Reed: What is the Best Ever lesson you’ve learned in a deal?

Dedric Polite: Best Ever lesson I’ve learned in a deal… that’s a good question. I would say do what you say you’re going to do. If you say you can do a deal, perform on that deal, because that speaks to your reputation. And again, with us being able to buy that mobile home park and buy pretty much this one seller’s whole portfolio, it was because we delivered and we were able to close on what we said we would.

Slocomb Reed: Awesome. What’s your Best Ever advice?

Dedric Polite: My Best Ever advice would be to just take action. Once you’ve done all the educating, you’ve read the books and taken the seminars, don’t be afraid to take action. You’ve got to make mistakes. I made mistakes, I still make mistakes every day. But you learn from those mistakes, you pick yourself back up, and you just fail your way forward.

Slocomb Reed: Where can our Best Ever listeners get in touch with you?

Dedric Polite: On all social media, Dedric Polite. You can also lookup Be Polite Properties, which is my company name. We’re on Instagram, Facebook, we have a YouTube channel under Be Polite Properties, Twitter, LinkedIn… All social media is just Dedric Polite or Be Polite Properties. In addition, we do have our television show 50/50 Flip, which airs on A&E every Saturday at 12 noon Eastern. They can check out the behind-the-scenes of how we renovate and flip houses and build wealth.

Slocomb Reed: Great. Well, Best Ever listeners, thanks for tuning in. If you’ve gotten value from this interview with Dedric Polite, please subscribe to our podcasts, leave us a five-star review. If you know someone else who would get value from listening to this episode, please share it with them. Thank you and have a Best Ever day.

Dedric Polite: Thanks, Slocomb.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2747: How to Find Private Investors for Buy-and-Hold Deals ft. Sam Primm

What’s the best way to find equity partners for long-term hold deals? Sam Primm—owner of FasterFreedom, FasterHouse, and Midwest Property Group—shares how he finds private investors for his deals and his strategy for refinancing and turning around these properties.

Sam Primm | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Sam Primm. Sam is joining us from St. Louis, Missouri. He’s a GP of 109 residential units and 50,000 square feet of covered storage. Sam, can you start us off with a little more about your background and what you’re currently focused on?

Sam Primm: Yeah, for sure. I appreciate being on. What I’m focused on now is growing this education brand. Where it all kind of started was just wanting to not work for somebody else my entire life and not do the whole nine-to-five until you’re 65, get social security, retire, enjoy retirement, and then you’re too old to really enjoy it. I started that journey about seven years ago and as you kind of said, it’s been pretty good so far; I’ve been getting some good traction and creating some multifamily and some self-storage. Now I’m just focused on growing that and then growing my brand to teach other people how to do the same thing.

Slocomb Reed: Nice. I know you are a general partner… These 109 units and 50,000 square feet – how many deals is that?

Sam Primm: That’s five apartment complexes. It’s a 12-unit, a nine-unit, a 32, 27, and 29. Those are five, me, and one partner, Lucas, on all that together. Then the self-storage facilities – there’s two of those.

Slocomb Reed: Gotcha. Did you say that you and your one partner – are you 100% owners of the apartments, or are those syndicated deals?

Sam Primm: Nope, we’re 100% owners of those. We also have about 90 houses in our rental portfolio asl well.

Slocomb Reed: Nice. And the covered storage as well – that’s just you and one partner?

Sam Primm: Yup.

Slocomb Reed: That’s awesome. So these are not deals then where you were bringing in limited partners or raising capital?

Sam Primm: Not really, no. We have a little bit of a hybrid of what we do. What we do is we bring in private investors through our network, sometimes we give them part ownership of the facility or the building for a couple of years, and then with increased equity, we buy their ownership out. Sometimes we just give them straight interest-only based on their investment. So each deal is a little bit different. We’ve done a hybrid model, whatever makes sense for the investor, because they’re family or friends, or usually acquaintances kind of thing, people that we have a relationship with. They’re definitely not that syndication route of people we don’t know, accredited investors kind of deal where you give up a lot of the equity.

Our goal is to always own 100% of the asset, whether it be right off the bat, or we give up a small percentage of ownership to get the money. Then with equity increase, with increasing income and decreasing expenses, and just running it more efficiently with our team, we’re able to create equity that we can cash out and buy out the limited partner, usually within two to three years.

Slocomb Reed: Sam, do you consider yourself a long-term buy-and-hold investor then?

Sam Primm: Yes, for sure. Everything we bought, our $26 million worth of real estate so far, we’ve probably only sold three or four houses, and those were for tax purposes. The goal is not to sell, it’s to hold for a long time.

Slocomb Reed: You’re speaking my language, man. I’m a buy and hold guy too, and very familiar with that 20-ish unit space, I have a couple of those. I’m wrapping up the value-add on one of them right now that I just acquired four months ago. Very familiar. I’m also personally interested – I know some of our Best Ever listeners are as well, Sam… I’m personally interested in finding ways to bring in private investors for buy-and-hold deals. Let me tell you what it is that I’m thinking about doing myself. Because similar to you, I, or a partner and I, are 100% owners of everything that we’ve got. We’re not reaching out to strangers, looking to raise capital, underwriting to a five-year hold, working on delivering on an IRR; we’re in it for the long haul.

What I’m considering doing is finding ways to either bring in debt partners or equity partners that I have the ability to refinance out of ownership in the property in a relatively short period of time, call it one, two, maybe three years. Is that what you’re doing with your private investors, you’re bringing them in and giving them a small equity piece, and then as you’re able to force appreciation, you’re refinancing your debt in order to buy them out?

Sam Primm: Exactly what we’re doing. Our play has been more of that two to three-year timetable on pretty much everything. We haven’t quite done it in one year to be able to, especially in today’s market, get a deal that you can just get so much equity and so quickly. So it’s usually been a two to three-year play, it’s been exactly that. We give them a little bit of cash flow in the meantime that the building’s producing, to just kind of keep them going. They like that and they have to pay ordinary income on that, but we buy them back out and give them a little bit of a kicker on the back end after two to three years. That makes their actual entire return appetizing to them, and they get taxed at that at cap gains, so that they like that as a way to get around that and not have to pay a lot of taxes, or as much as they might have to.

Slocomb Reed: Yeah, that’s awesome. You said you started investing in commercial real estate seven years ago?

Sam Primm: I started investing in single-family real estate, so I have a single-family realm, the multi realm, and then the self-storage. The single-family started in 2014 to ’15 timeframe, the multifamily started in 2018, so that’s a little bit newer. I started with the singles and then kind of graduated up to the multis. And then the self-storage has been about a year and a half to two years, so that’s even newer.

Slocomb Reed: Starting with apartments in 2018, I get what you’re saying about not finding a lot of big forced appreciation opportunities. Assuming, Sam, that you’re familiar with the way a lot of apartment investors talk about stable versus value-add versus distressed opportunities, most people who are underwriting to the five-year hold are looking to be in that value-add space, where they have the opportunity to improve the property, raise rents, increase NOI a bit, and provide three to seven years from now a solid, annualized return or IRR equity multiple for limited partners.

What I don’t often hear about interviewing people on this podcast is investors who have succeeded in bringing in equity partners, and then refinancing those equity partners out of ownership in the property, so they can own it outright. The question I want to ask – I can’t think of a more sophisticated way to put this, but how distressed of a property do you have to buy in order to be able to set it up this way, where you’re bringing on equity partners that you can refinance out in two to three years?

Sam Primm: That’s a great question. Our very first one that was pretty distressed, it was a 32-unit. We jumped in, and that’s relatively a pretty small building compared to a lot of the apartments out there. But for us, going from single-family, it was a big jump doing it this way. And that was a little bit more of a mess. In the first six months, we’ve evicted 18 of the 32 people in there. We did our best, but just trying to figure that out, because it was a pretty distressed property. So that one we were able to actually create more equity faster; that was the two-year play. Our investors ended up taking some equity and we were able to increase equity so much that they ended up getting a 29% return on their money when we bought them out.

But what we’ve done recently is we’ve been able to find properties through some connections we’ve made in brokers that are turnkey. They’re in great shape, they’re B class, B-plus in nice areas where they’re just more mom-and-pop owned, not owned by huge companies, and they’re 30% low on their rent. Recently, there’s a couple that we’re still in the process of that they’re just so low on their rent that with tenant turnover, we’re getting things up to market rent with minimal repairs. When tenants renew, we’re usually not bumping them all the way up to market. We don’t want that many vacancies and we don’t want to just come in and be like, “You’ve got to pay market.” We’ll try to meet him in the middle.

You know probably better than I do, doing all this in the space a little bit longer, that a 27-unit if you’re able to over two years, three years, raise rents from let’s say 900 a door to 1,150 or 1,250 a door, that’s really going to increase the overall value of the building by increasing that income, and managing in-house allows us to limit that side of the expense. So expenses go down, income goes up, it takes two to three years, and just with the relationships we’ve had with the banks and the people we use, it has worked out so far that we were able to give people their money back and we usually give them an overall return of maybe 12% to 18% by the time everything’s said and done.

Slocomb Reed: That’s awesome. To your point, Sam, we recently went through a $50 a month rent increase on a 24-unit that a partner and I own 50/50. At an eight-cap, estimating conservatively, that $50 rent increase across 24 units increases the value of the property by $150,000, based on an eight cap. First of all, you can’t buy an eight cap that’s actually cash-flowing and performing right now. But for the people who are listening who are still buying and renting single-families and duplexes, I hope you hear what Sam and I are saying about getting into larger apartments, and the ability to force appreciation and increase cash flow. An incremental rent increase on a single-family incrementally increases one rent. An incremental increase on a 27-unit increases 27 rents, which does a lot more for you financially. Tell me, Sam, so far in your investing, what is the biggest challenge you’ve had to face?

Sam Primm: The biggest challenge for a while was finding deals. We’ve always wanted to be aggressive, we’ve done pretty well, as you said, the 109 units earlier – that’s great, that’s nothing to get too excited about, but we’re pretty excited about it. But we’ve been doing it for four years, and we bought a couple our first year of multifamily investing in 2018. Then we went about a year and a half, two years without buying anything. We were focused on other businesses and doing other things a little bit. But we were trying to buy multifamily, and we probably underwrote maybe 75-80 apartments over those two years, and we probably offered on maybe 20 or 30, and we just couldn’t get anything.

So over this past year, year and a half, we focused on relationships. We developed relationships with brokers, we’ve created packets about us and our companies and sent them out to brokerages that deal in the commercial space, and just really started to develop deals. We got a really great brokerage relationship now who’s brought us three deals in the past eight months, and we bought all three of them. A $2.7 million deal, a $3.65 million deal, and then a $5 million deal, all of them he’s brought us; we’ve got first look at them, we were able to get them without any competition because of the relationship we developed.

So that was a lesson learned for us and hopefully for the listeners, it was one of our biggest struggles, was just finding properties. We’ll figure out how to take care of the tenants, we’ll figure out how to rehab if we need to rehab, we figured that out. But you can’t even do any of that if you don’t find a deal or you don’t have access to deals.

Break: [00:14:50][00:16:46]

Slocomb Reed: Sam, in my experience, when someone goes a couple of years underwriting deals, sending LOIs, and not buying anything, it’s one of two things that gets them out of that slump. One of them is exactly what I think you’re mentioning here, that you networked your way out of this slump by developing better relationships with brokers who could bring you deals. The other thing that I see that helps people get out of a slump is they change the way that they’re analyzing opportunities, or they finally recognize how they can capitalize on a shift in the marketplace. You were just saying recently that there are some more stable turnkey buildings that you’ve been able to buy, because they were owned by mom-and-pop landlords who aren’t really professional landlords or property managers, whose rent just hadn’t kept pace with the times.

Every MSA in the United States has seen rampant rent growth, if we can be frank, and that’s putting a lot of people who aren’t paying attention behind the wheel when it comes to keeping their rents up with what’s going on in the market. Is this a part of your success in taking down deals recently, after that – not a two-year hiatus, but two-year period where you weren’t buying anything? Is it about changing the way that you analyze the deals as well, or is it strictly the relationships that you formed?

Sam Primm: I think it’s a couple of things. I think it’s mainly the relationships we’ve formed, and I also think there were a lot of talks, and still is talk, of caps gains going up for people. There was talk that it was going to double, and all this stuff. A lot of these people that have had these for a long time are thinking “my taxes might double”, so they’re at least exploring selling, and they’re exploring taking these to some of these professional brokers. And these professional brokers are telling them, “Hey, you can get this for your property”, when they’re like, “No way. No way I can get 3 million for this property. I thought was worth 2.5, or 2.3 million.” They’re like, “No. With today’s rates, with the low-interest rates, I know they’re excitedly going up… With low-interest rates affecting the cap rate, your cap rates are going to go down as the interest rates go down, so you’re going to be able to get this much.” I think that’s how the last three we’ve gotten have been people that did not believe that they could even sell at the price we bought it at, and we’re happy with the price we bought it at.

So these people maybe aren’t as in tune to the rental rates, as well as the cap rates, and what these things are trading for, so they’re just trying to get ahead of this potential cap gains tax rate going up, and then they’re shocked at what they can get, because they’re just not in the space as much. I think that’s mainly it, honestly. I don’t think we’re underwriting them a ton differently.

We do look at future appreciation and rent growth a little bit, probably sometimes more than we should, [unintelligible [00:19:36].23] buying these things that what they’re operating for currently. I’m not really hedging too much on what they’re going to be operating for, but we do do a little bit of that. Maybe we have grown some confidence and underwrote them a little bit differently, but overall, I think it’s just the relationships, and then the market talking with the cap rates… And these people – they don’t understand that it can trade at a seven cap, they’re thinking it’s different.

Slocomb Reed: Sam, how many metro areas is your portfolio in right now?

Sam Primm: Everything’s in St. Louis, from the self-storage, to the multis, and singles. All in St. Louis, where I live.

Slocomb Reed: In your backyard. Do you guys self-manage?

Sam Primm: We do.

Slocomb Reed: I imagine that that level of experience and expertise in your home market is one of the things that allows you to hedge, as you said, on rent growth. You’ve got a lot of experience right there in St. Louis, and you’re not relying on a third-party manager to increase those rents for you. I know some of my real estate clients as an agent here in Cincinnati – sometimes they end up with a third-party manager that they have to push to be able to achieve market rents, because some property managers are behind the times as well on what’s happening with rent growth.

Sam, one last question, before we transition this conversation… Do you have a target metric for how much NOI, how much cash flow, or how much you need to increase a property’s value in order to be able to bring on equity partners that you are refinancing out of within two to three years?

Sam Primm: We do, yes. It’s kind of different for every deal. The goal is to be able to create enough equity – we kind of back into it – to be able to buy them out in that three or four-year time frame. If it’s going to take us five, six, seven, eight years, we probably won’t do it. So we need to be able to increase those rents quickly enough to get them their money back, plus a healthy kicker on top, is what I call it, on the back end, in that two to four-year timeframe, to be conservative. We look at that and we do look at the fact that we know the backyard really well. You kind of alluded to it, but it’s almost like insider trading, because I know the market so much better.

We flipped 250 houses a year here, we grew up here, we have a rental portfolio here, so we know it’s so well that I do feel like I am ahead of some of the curves of some of these hedge funds or these other people that aren’t in the space, where I can maybe avoid a deal that I think won’t be good in a few years, and maybe take a chance or do something that someone else won’t. So yeah, it’s kind of a roundabout answer to your question – definitely, we just make sure we can get their money back in three years. If we can’t, that’s our metric of – if it’s going to take five to six years to do it, we just don’t feel comfortable with where the market will be, where interest rates will be on the refinance at that time to take that deal down… So it just needs to happen sooner than that.

Slocomb Reed: It’s also a lot easier to be aggressive with your projections when you’re not using other people’s money, or you’re not using other people’s money long-term. Do you have a specific number with regards to how much you need to be able to increase rent or NOI in order to successfully cash-out refi your equity partners?

Sam Primm: I don’t know that there’s a specific number. Like I mentioned earlier, Lucas, my business partner, he is the engineering, background, underwriting guru. We look at them together and we have a sheet that we’ve made that we’ve improved over the years. And I don’t know that there’s an exact number; he kind of says, “Here’s where we need to be. Go get it,” and I go negotiate and get the deal. Not to sidestep the question by any means, but he’s definitely the one that has the exact numbers and knows that. His strength is underwriting, that deal-forming background, and my strength is networking, negotiating, buying, finding the money, all that kind of stuff. So we kind of yin and yang kind of thing to be able to do a lot more by offsetting each other’s strengths and weaknesses.

Slocomb Reed: So the metrics required to pull off one of these deals are fairly subjective. It’s on a deal-by-deal basis, it sounds like.

Sam Primm: Correct, yes. I don’t think that we’re talking about getting into the funds and all that stuff. In the future, we’ll probably need to be able to have that and have a little more, “This is this, this is this,” as we go after accredited investors and all that stuff. But for now, it’s been more relationship-based and deal-by-deal basis. I think it goes to show that it can be done in a few different types of ways.

Slocomb Reed: Sam, thank you for indulging my curiosities, and Best Ever listeners, I hope you’re getting some value from this as well. Sam, you said at the beginning of this episode that you’ve been focused primarily on your education brand. Tell us more about that.

Sam Primm: My education brand is something that I’ve done over the past year or year and a half. I started to post a little bit about the things we were doing with all of our companies and started to just get some traction on Instagram and Facebook, just from my local friends. Then I started to just take that onto a broader scale and created the Faster Freedom brand. That’s a brand where I give away more free information than pretty much everybody on TikTok, YouTube, and Instagram. I just give a bunch of free information, and then teach people how to buy real estate using other people’s money, whether it be single families, multis, or storage. I show them what I do that works, and what doesn’t work, and then we have a mentorship for those who want more. But it’s just more about getting my story out there, growing the brand, and giving back. Eventually, I think it’ll be pretty monetizable. But right now, in order to grow your brand, you’ve got to give away free information, that’s the phase that I’m in.

Slocomb Reed: Awesome. And the goal here is to create mentorship opportunities for people in the future. You’re in the phase now of reaching out with free information, connecting, building relationships, demonstrating the value that you have, so that you can build on that brand in the future. Yes?

Sam Primm: Yeah. We do have a mentorship already. We have 230 students right now, so we do have a mentorship. Now, I’m not going to do a heavy sales pitch on it here, or in anything I do. It’s just, “If you’re interested, hit me up, here’s the free training, check it out. Schedule a call with my team; we’ll make sure it’s a good fit. Great. If not, just enjoy the free stuff,” kind of mindset. It always will be that. We’re to the point where we are starting to monetize. We had 19 signups last week so we are getting traction and students are crushing it, but it’s more about just helping them. If the mentorship’s what you want, then we have that kind of mindset.

Slocomb Reed: Well, Sam, are you ready for our Best Ever lightning round?

Sam Primm: Let’s do it.

Slocomb Reed: What is your Best Ever way to give back?

Sam Primm: I recently started a nonprofit, it’s called Greater Giving. It’s focused on mental health awareness in the St. Louis community. That’s something that I’m an owner of, and on the board of. We’ve raised $140,000 last year; the goal is 200,000 this year. We give back to families that are in need, we give to charities that need money or support. That’s the way we give back, and it’s been awesome.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Sam Primm: Think and Grow Rich is a great book. I’ve heard about it a ton, I’ve read the Rich Dad Poor Dad stuff, but Think and Grow Rich really opened my mind. It was written 80-90 years ago, it was written like it could have been written yesterday. But just replacing that word rich with happy, successful, whatever you want; it doesn’t have to just be about money. Think and Grow Rich has been great.

Slocomb Reed: Yeah, looking back on it now, Napoleon Hill has a very antiquated writing style. It’s a book that’s definitely about joy and happiness much more than it’s about money. He was limited in his vocabulary of talking about joy, for sure.

Sam Primm: 100%.

Slocomb Reed: What is the Best Ever skill you’ve developed through commercial real estate investing?

Sam Primm: The best skill I’ve developed through this is just being able to relate to people. It’s helped in growing relationships with private lenders, it’s helped in growing relationships with brokers, and talking to banks… The banks we deal with – we have some Fannie money out, but we also have some small local banks out. So just being able to connect and develop and be authentic with people, they feel your authenticity, and then it just makes it so much easier to raise money to find deals, to fund sourcing, just being authentic and real and connecting with people.

Slocomb Reed: Sam, what is your Best Ever advice?

Sam Primm: Best Ever advice would be to just know that you have the ability to do what you want. You don’t have to take the blue pill for the matrix analogy, you don’t have to do what society says, you don’t have to work every single day for somebody else, making somebody else wealthy while you’re getting by, and retire, and give $800,000 to your three kids. You can create your own path and you can take control. You’ve just got to know how, and you’ve got to be willing to do it. Every single person listening to this podcast right now can go out and create their own future if they want. They just have to believe that they can.

Slocomb Reed: Where can people get in touch with you?

Sam Primm: As I mentioned earlier, mainly TikTok, YouTube, and Instagram are my three platforms. So message me on Instagram, I’d be glad the message back. And then fasterfreedom.com, they can find out a little bit more about what we do as well.

Slocomb Reed: Well, Best Ever listeners, thank you for tuning in. Sam and I are kindred spirits, and being buy-and-hold investors, we’re willing to take on more distressed assets for opportunities to cash-out refi. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and if you know someone who would get value from listening to this conversation with Sam, please share this episode with them. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2745: How to Analyze Political Climate Effects on CRE Markets ft. Sam Liebman

Sam Liebman, Founder of WealthWay Equity Group, has witnessed the drastic changes one election can have on an entire real estate market. In this episode, Sam shares his decades of experience navigating politically changing markets and his strategies for adapting to these shifts to keep business thriving.

Sam Liebman | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m with Sam Liebman. He’s joining us from New York City. He’s the founder of Wealthway Equity Group which focuses on syndications. He has a 30-year career in commercial real estate and his current GP portfolio is over 1800 units and 30 properties in New York and Texas. He’s also the author of a book that was just published in the last month, in January of 2022, titled Harvard Can’t Teach What You Learn From The Streets. Sam, can you start us off with a little bit more about your background and what you’re currently focused on?

Sam Liebman: Yeah. First of all, thank you for having me, it’s a pleasure. I was a kid from Canarsie, Brooklyn; I came from a very poor family, dysfunctional family, and I just kept fighting, fighting, fighting. We call Canarsie the mafia minor leagues, because every [unintelligible [00:04:16].03] seems to be connected. But when you grow up on the streets, you learn certain street smarts, you learn to get your spidey sense tingling, you think out of the box; you have to, it’s survival. And I used those lessons from the street and I combined them with the traditional education to become street smart and know my stuff.

One of the things we did was mastered the fundamentals. Started off as an accountant, a CPA, had a firm for a while. Then when I was doing people’s tax returns, seeing what they made, I felt like everybody’s scorekeeper. They were making millions, I was keeping score. I said, “You know what? I want to be on the other side.”

Slocomb Reed: Every accountant I know tells the same story of how they got into real estate. You have a 30-year career in commercial real estate; how long have you been on the GP side of syndication deals?

Sam Liebman: Well, I started off as a GP. What happened was in 1992 — I had worked as a chief financial officer at Mountain Development Corp at 27, and I got what I call my Harvard education there, because the company started with myself, a secretary, and the owner, Bob Lee. Three years later, we had over 20 million square feet in five different states. So I really got tremendous exposure, which is really important in the learning process. Then through accounting, I had met one of the clients who called me in one day – this was in 1992 – and said, “We want to buy all the banks foreclosures.” That time, you could buy properties for three times rent roll; nobody wanted Manhattan real estate. I said, “Well, guys…”

Slocomb Reed: When was this?

Sam Liebman: This was 1992. Cap rates were going from 9.75% to I think 12%, interest rates were 10%, and I always tell people, the best time to buy real estate is when nobody wants it. The price you pay is a permanent cost; you can’t change that. But if interest rates are high, that’s a variable cost; you can always refinance, you could always pretty much go down, and that’s what we did. Those properties that I bought for $575,000 are now worth $15 million, for a lot of different reasons that we did, and that 9.75% initial interest rate is now 3%. Well, lower. So I said, “Guys, let’s do syndication.” “What’s that?” I said, “Well, instead of buying two buildings with your money, we could buy 10.”

That sounded appealing until they saw the documents. I managed to streamline the documents and we bought our first deal, 110-112 St. Mark’s place, I remember that. September 23, 1993, we closed; it was 22 two-bedroom apartments, 50-footer what we call, and two stores. $575,000. And I remember all we needed at that time was $290,000 in equity, including fix-up. At that time, under nine people, you didn’t need to do a full-blown PPM as long as it was under nine people. So if I got a guy who put in 50,000, now the average went down to 30,000. We had people put in in these buildings at the time $15,000, that and now $500,000 investors, and we bought 40 of those buildings for dirt cheap. We thought we’d fix them up, and we would have cash flow and appreciation. Did we ever think about these prices? No.

Slocomb Reed: So you’re talking about investments that happened 30 years ago, turning 15,000 into 500k. Now, how much of that appreciation do you attribute to the 30-year hold period and how much of it do you attribute to, say, other factors like you purchased a distressed asset and forced appreciation, or you bought in areas where there was – the buzzword now is gentrification of course… You bought in submarkets that have since shifted – how do you factor that appreciation over 30 years?

Sam Liebman: Okay, good question. For New York City, the main thing was the political climate that changed. In 1993, most of the buildings were rent-stabilized or rent-controlled buildings. We were only allowed to increase rents according to the rental guidelines each year, that ranged from 3% to 5%, depending if there was a one-year or two-year lease. Buildings were in horrible shape, because there was no incentive to fix up the building, because the rents were controlled. In 1994, they came out with vacancy decontrol, which was a game-changer.

Initially, what that let you do is if you could get an apartment vacant and the legal rent became $2,000 or more, the apartment became decontrolled. So if you had an apartment that was $1,200 a month and somehow you could get it to $2000, it became decontrolled. Now, what’s the importance of that? Well, they came up with this new technique, and it was basically if you put capital improvements in the apartment, you improve the apartment, you’re able to recoup one fourtieth of the cost, monthly. So if you put $40,000 in basically, you could raise the rent — and the tenant had to be out, the apartment had to be vacant. So for 1000, I put 40,000 in, make it really nice, get it over 2000… Ket’s say I only got 2500. That $1500 for the apartment, when you divide the extra income by the cap rate, it’s a lot more than the $40,000, of course. And by the way, in the city, because everything got better, that $2,500 apartment became worth 4000-5000. So the political climate was a major reason. Also, there were a lot of abuses in there; throwing tenants out. The game was to get an apartment vacant, by any means possible, [unintelligible [00:10:26].03]

This displaced a lot of buildings, but we became multimillionaires, and we did it the right way. There were tenant buyouts, again, using that cap rate formula to increase valuation. Over the years, the cap rates dropped, obviously. Now that was a change in the political climate. What I would tell your listeners now, if they’re looking for buildings, beware of the political climate where you’re investing. For instance, there’s a movement for national rent control, and it is horrible, because Minnesota, Minneapolis just passed, maybe two months ago, universal rent control, limiting new buildings to 3% increases. And they were all crying, “We need more affordable housing.” But what developer is going to sign a $30-$40 million construction loan when insurance is doubling, real estate’s doubling, and operating expenses and construction costs are doubling because of the pandemic, and then they’re going to cap you. So 10 projects immediately stopped, you could look it up.

Slocomb Reed: I want to hear a little bit more about your experience with the changing political climates and markets where you have been buying your properties. I know you have your current portfolio, some of it is in New York and some of it is in Texas… How much did the political climate of each of those states or each of those MSAs play into your decision to invest in those areas?

Sam Liebman: A big part. When we invested in Manhattan, we owned over 40 buildings or so at one time; it was a positive political climate. That has changed dramatically. I will not touch anything in New York City right now. I think I have a couple of buildings left.

Slocomb Reed: Sam, let’s go back to Manhattan. Can you give me a couple more inflection points? You talked about decontrolled vacant units in 1994. Can you give me examples of other political inflection points that drastically changed the commercial real estate landscape for New York City?

Sam Liebman: Sure, there’s a lot of them. Interest rates went down obviously over the last 30 years. The dollar became stronger; we’re talking about now. But over the 30 years, the dollar was weaker, so a lot of foreigners –and there was no virus… A lot of foreigners came into this country because they had cheap dollars. There was also a lot of political… Like the EB-5 program.

Slocomb Reed: What is the EB-5 program?

Sam Liebman: The EB-5 program, I think it was passed during the Obama administration. What that enabled was a foreign person, like Chinese or whatever, to come to the United States and invest, I think it was originally 500,000 and that became a million, and basically get citizenship. All the big companies now are getting all this EB-5 money that was funneled towards these big projects. So it was a way of getting tremendous amounts of foreign investment in this country. In fact, China was the biggest beneficiary. I remember probably about four years ago the quota was filled in January; that’s how popular it was. And there were other popular programs; there’s a lot of popular programs now, from the federal government.

Slocomb Reed: And you’re saying that the popularity of these programs for bringing non-US citizens to the United States is having a big impact on the real estate market in New York City.

Sam Liebman: Yeah, they were bringing in a tremendous amount of capital into the United States.

Slocomb Reed: So just to make sure, our Best Ever listeners and I are on the same page with you here… The influx of capital to the city increases property values, increases rent rates, correct?

Sam Liebman: Well, it increases demand. You bring in the money, you’ve got to do something with it.

Slocomb Reed: Yeah, of course. How long have you been investing in Texas? What about Texas attracted you to the markets where you’re invested there?

Sam Liebman: That’s a great question. I sort of saw what was going on in New York City, a little bit. About 2006 I think it was, somebody convinced me to go to Texas and take a look at what’s going on there. What I saw was tremendous potential. I saw infrastructure being built, schools being built, technology, and also there was a migration from California. I think it was close to, at that time, 200 people a day were moving into Austin. You had the West Campus part of Austin,  where the University of Texas is, and you had about a mile away downtown. And it was vibrant, it was entrepreneurial. And they had a master plan in Austin, it was called UNO – University Neighborhood Overlay. That plan really attracted me, because they were very pro real estate. They were rezoning areas, and they wanted capital to come in and build up the city. You had a young workforce, educated workforce. It had everything… Except water. But it had everything. They were building parks in Dallas, they were connecting uptown to downtown. So I saw all this going on, and I just said, “Wow, this is a great place.” And I just liked everything about it.

Slocomb Reed: So you said Austin had a master plan, UNO, and that plan excited you. On a smaller scale, Sam, in the city of Cincinnati, we’ve seen some tremendous revitalization of the urban core, and there were some major players, both governmental and private capital in making that happen. Since then, a lot of other neighborhoods and villages and jurisdictions in the MSA have come up with their own master plans for virtualization, publicized them, and many of them have not come to fruition at all.

When you see master plans like UNO in Austin, and you see potentially emerging markets that are demonstrating an intentionality about being pro real estate, how do you know that these are plans that will actually be acted upon and how do you know that they will actually result in pro commercial real estate growth?

Sam Liebman: That is a great question. The perfect example of that is Atlantic City.

Slocomb Reed: Atlantic City?

Sam Liebman: Right. Atlantic City, all the casinos, all the other things that are built there – Atlantic City failed because the jurisdiction there failed to develop the outer areas. The whole reason people came in was with that promise that they were going to build up the outer areas. It never happened, and that crushed Atlantic City. I’ll give you another area, Trenton, New Jersey. We bought a building there because we were promised — we’d met with the city council people and they were going to build the Mets… Or no, the Yankees had a minor league baseball team they put in; there was a hockey team put in, and they were going to do all these things. New jurisdiction came in, new political people – nothing happened. So you’re 100% right with that, that is a tremendous point. You don’t know, because one election can change everything.

Slocomb Reed: Is it really the elections that determine whether or not these sorts of master plans come to fruition?

Sam Liebman: Sure. Who’s controlling the money?

Break: [00:17:53][00:19:50]

Slocomb Reed: Let’s create a hypothetical situation. I’m tracking some emerging markets, let’s say, in the Southeast and in the Midwest. My investors and I are looking for cash flow, but we’re looking for long-term growth. I identify three markets, hypothetically, where I think strong growth is possible, and I am seeing a political climate that is favorable to the development of my asset class in these markets. If I see a brilliant opportunity, obviously, I’m going to pounce.

When I’m looking at not necessarily marginal deals, but when I’m looking at opportunities that would require that the market grow as is expected in the current political climate in order to reach my metrics, what should I look towards to ensure that the current commercial real estate favorable political climate will survive? Should I just be tracking elections? Is there something else? Is it possible, and how can I make myself certain that a market is going to remain with good conditions for developing commercial real estate?

Sam Liebman: Okay. Well, it’s a good question, and you have to decide if you’re going to be a pioneer or not. I don’t want to be a pioneer; I’m going to wait to see what’s being developed, how projects are getting approved or not approved. We do look at, in Austin for instance, how many student housing properties were put in for approvals. You can see, you can talk, but I’m going to wait until I see progress before I jump in, especially if you’re doing construction. You want to see unions, you want to see what the climate is there. Are they friendly towards developers? What are the views? We have an ever-changing political climate now, and depending on who gets in, it can change everything.

Just look at the president — not getting political, but from Trump’s policies to Biden’s policies, it’s a 360, 180-degree turn. So what I do is I follow — I don’t want to be a pioneer. I want to follow a pioneer and see how it is.

By the way, in Texas – that’s what happened in Texas and Dallas. There was a company called Power Properties, and on Gaston Avenue we bought over 20 properties. We watched our properties go in, renovate these classy properties, and we saw the rents they were getting. And they were the pioneers, we just followed them, and we were very, very successful. That’s a perfect example of what I’m talking about.

Slocomb Reed: Thinking about inflection points – you don’t want to be a pioneer, you want to follow the pioneers. I’d like to talk about this using Simon Sinek’s language around the bell curve of innovation. I don’t know if you’re familiar, let me give a quick summary for our Best Ever listeners. Everyone knows what a bell curve is shaped like. When you’re talking about innovation, you start the bottom left corner, and you look at the bell curve of the population. Let’s say it is the population for us; I’ll use two examples. One of them is the air pods from Apple that are in my ears right now. Someone has to innovate, and that’s where the bell curve starts. Apple announces that they’ve created this new headphone experience, this new phone call experience, whatever you want to call it. Apple is the innovator.

There is a group of people, a certain percentage, the moment Apple announces any new item, they immediately go wait in line in front of the store 24-48 hours, because they want to be the first to have it. Those people are called early adopters. The early adopters want to see an innovator or a pioneer come up with a great new thing, or create change in the marketplace, and then they want to pounce on it.

After you have the early adopters, you have the early majority. The early majority needs to know that not only has an innovation taking place, but some people have gotten positive results with that innovation. I would be early majority when it comes to these air pods. I don’t stand outside of a store and wait for anything in the cold for 24 hours. But as soon as I saw other people wearing them, I needed to know, because I hate holding a phone to my head. After then after early majority, you have late majority, and then you have what Simon Sinek calls the laggards.

I’m hearing you say, Sam, that you like to be either an early adopter or in the early majority when you see that a political climate is favorable in an emerging market for commercial real estate and development. Where would you put yourself, and how is it that you identify those moments at which you see that the innovators are innovating, or you see that there are early adopter developers coming in and that they’re seeing some success? How do you track that?

Sam Liebman: Okay. So it was an old saying in real estate, you’ve got to have a nose; a nose for deals. On my tax return, when it says occupation, you know what I put down? Opportunist. I’m an opportunist. I made it fortune buying other people’s mistakes. Now, you can be a frontiersman and go out in the wilderness if you choose. I choose to find other people’s mistakes, obvious value-add… My success and what I try to teach my students and followers is to master the fundamentals so you can see opportunities overlooked by others. That’s how I did it.

I don’t go with bell curves, I don’t go with this. Yes, I look at demographics, I look at all of that… But you have to get to a point, as you know, as a developer, where most of the stuff you do is on the back of an envelope, because you know so much that you get a few facts, and boom. That’s where you need to be. You need to be where a deal comes in, you can act fast, you know what to do, and that’s why I say I’m an opportunist. You haven’t yet, but if you asked me, “Well, do you want to go in the commercial sector, do you want to go in the residential sector?” It doesn’t matter, I want to go where the opportunity is.

Sometimes it’s development, sometimes it’s rehab, sometimes it’s in industrial, sometimes it’s what you explained to me, warehouse, which is very good. So that’s what I do. I get so many deals in that you have to weed through them and I have so much experience that I know pretty much right away which one I want to pursue and which ones go into the circular file.

Slocomb Reed: Back of the napkin math is incredibly helpful for deal analysis. I know doing my own off-market lead generation here in Cincinnati, I know apartments. Sometimes I don’t need the back of the napkin to know whether or not a deal makes sense if it’s an apartment building in the size range that I’m already operating. But I’m also looking at office, retail, other commercial uses, and I still need more information and more analysis before I know that I can pull the trigger on something. So that makes a lot of sense.

Sam Liebman: I’m going to tell you something that might differ with you. I think office buildings or retail – there’s going to be Armageddon, and you’re going to be able to pick up those prices at tremendous discounts soon. You don’t need to live in a city to do business with the city anymore. You know what the occupancy rate in New York City is right now? 30%. Now, in my humble opinion, I don’t think it’s ever going to go over more than 65%. If I’m right, all these leases that are going to mature — we have a law firm, 30,000 square feet; you’re paying $80 a foot. You only need half the space now. “Hello, landlord, we’ve got to talk. I don’t want to pay anymore $80. I can get better space for $55 across the street.”

Now, if you look at the ramifications of that, where the owner now has to retrofit the old tenants from his 30,000 square feet to his 15,000 square feet. Maybe the bathrooms are on the wrong side, he’s got to redo that; it costs money. Then he’s got to retrofit the new space for the new tenant, 15,000 square feet. He’s got to pay retrofitting it, he’s got to give TI to the new tenant, probably four or five months free rent, he’s going to have to pay a broker, and he’s going to have downtime. Now that’s one tenant. And this is what’s happening in Manhattan. So I hear people say, “Well, they’re going to be vacant. Maybe they’ll repurpose the space, convert it to residential.” Yeah, maybe you can do that. But actually, when you convert it to residential, it’s not that easy. You’ve got to cut the building, so you lose a lot of space.

I’ve been through it. Remember, I bought the buildings for 575,000 that were 4 million in 1993. I’ll tell you another story. We bought a package of 15 buildings in Dallas, we paid I think was 12.2; five years before that package was $56 million. So this can happen.

I believe that the retail sector, because of technology –and we’re seeing it happen– and because of the office building issue, there’s going to be Armageddon, and banks are going to be inundated with foreclosures. I have a lot of relationships with banks, and they agree with me; they’re gearing up for it.

Slocomb Reed: So whether or not you pounce on a deal has much more to do with the micro economic factors impacting that particular property and its particular distress, more so than trying to predict the markets that are going to see growth?

Sam Liebman: Well, again, the price you pay is, to me, the most important thing. The price you pay is a permanent cost, so yeah. If you’re talking about where I see it going – I could be wrong; actually, I hope I’m wrong, but I don’t think so. One of my successes is being able to time markets. I timed the market in the ’90s, I timed the market in the 2000s… And right now, we’re sitting back, we have a tremendous amount of capital, and we’re just sitting back waiting for the right time to pounce in again. There’s a shortage of rental housing, for a lot of reasons… So I do think that the rental housing sector, which is my favorite sector, because you can get tremendous financing. Who’s going to finance an office building or a retail building? You think you can get attractive financing for that? Maybe if you have a small shopping center with Triple A tenant, you will. But for an office building – banks don’t want to go near that unless you put in a personal guarantee, 50% cash, interest reserves… Who wants to do that?

So I go where the financing is, and residential is the place to be. I think residential is going to keep going up, for a lot of reasons. But the housing market is too big, too strong, too high; people can’t afford houses. There’s also a change in culture with millennials. A lot of millennials would rather rent. There’s a movement now called build to rent; have you heard about that?

Slocomb Reed: Yes, I have. It’s much more popular in other parts of the country than where I am in Ohio, because it has a lot to do with market rents. My understanding is it’s much more popular on the coasts than it is in the middle of the country, because the rents that you can command are proportionally higher there, relative to construction costs.

Sam Liebman: Well, my point was though is the change in the younger generation and the older generation, that they don’t want to own, they’d rather rent. Everything has become disposable and portable now, so you’ve got to look at that. Restaurants are changing the way they construct their restaurants now, because millennials would rather take the food, bring it to their house. It’s like my wife and I. At night, she’s on her iPad, I’m on my iPad. It’s getting to be where there’s no reason to leave the house anymore, which is sad, but it’s the reality.

So all these changes in culture, all these changes – there’s a lot of them. People have asked me, “So where do you think real estate is going to be?” The answer I say is, “It’s Bob Dylan’s song. The answer, my friend, is blowing in the wind.”

If the wind blows this way and interest rates go up, there are other factors or variables, and I can tell you which way I think it’s going to go. If the wind blows right, and interest rates go down, or something happens where they change the laws, I can tell you that. But I can’t tell you which way the wind’s going to blow. And that’s the problem, there are so many more variables than there were years ago.

Slocomb Reed: Sam, are you ready for our Best Ever lightning round?

Sam Liebman: Oh, I never did one of those.

Slocomb Reed: What is the Best Ever book you’ve most recently read?

Sam Liebman: My book, Harvard Can’t Teach What You Learn From The Streets. No, there’s a very good book that I read years ago and I read it again about two months ago… It’s called the E-Myth and it’s by Michael Gerber. I don’t know him or anything, so this is an independent one… But the premise is, to be a successful business, you need three qualities. You have to be entrepreneurial, you have to have management skills, and technical skills. And if you lack in any of those, your business will fail. I’ve found that to be — it’s only like 110 pages, an easy read. I thought it was a great book, really…

Slocomb Reed: Totally, foundational. What is your Best Ever way to get back?

Sam Liebman: That’s what I’m doing now. I’ve given up trying to be the richest guy in the cemetery. Honest to God. I wrote this book, Harvard Can’t Teach What You Learn From The Streets in English, with real-life stories. You can learn to build lasting wealth through real estate by mastering the fundamentals; that is what people don’t understand. You must master the fundamentals to build upon. It’s like being a tennis player and you’ve got a forehand, and right away you want to learn the backhand. But if you don’t master that forehand, there’s going to be a part in your growth where you’re going to play someone that’s going to take advantage of what you didn’t perfect.

So I always mastered the fundamentals, and I’m giving back by doing podcasts that I hope people will learn from, I’m giving lectures, I’m mentoring young kids… I love it, because a lot of kids are lost now. When you mention real estate, it’s a big, hot subject now, and you see these kids… I’ve got a kid coming in Tuesday, he’s in graduate school, and he’s going to come in and start, and I want to keep getting more kids involved. I love it. I love doing it. That’s how I’m giving back.

Slocomb Reed: You’re leading right into our next question here… What is your Best Ever advice?

Sam Liebman: Master the fundamentals, be a gym rat, be passionate. Develop passion. That’s what I did. Real estate was the perfect industry for my personality. Bricks don’t talk back. I never wanted to get involved with raises and salaries of people, but I love increasing property value; it really turns me on. I’ve never been focused on how much money I was going to make, I always focused on, “If I do this right, there will be money.” Master the fundamentals, love what you’re doing, and don’t take shortcuts, especially in due diligence.

Slocomb Reed: Sam, how can our Best Ever listeners get in touch with you?

Sam Liebman: samliebman.com. I’d be happy; if you go in – just join, it’s free. We have articles, see all my buildings. With the building, I put a story of what we did to it pretty much, which I think people will find very interesting. My passion right now is to teach. I’m working on an online real estate academy called Street Success Real Estate Academy. I market myself as the kid from the streets who overcame a lot, became successful, and I’m the same guy I always was; straight-talking, no bull, and that’s it. I’m who I am and I did alright.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to the show, leave us a five-star review, and please share this episode with your friends so that we can add value to them, too. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2742: 3 Advantages of Self-Storage Over Multifamily ft. Paul Moore

Are you tired of fighting for multifamily deals in a competitive market? Return guest Paul Moore suggests looking into self-storage, an asset class he believes is often overlooked despite its many advantages. Paul shares why he transitioned from multifamily to self-storage, how he finds deals, and how he’s grown his portfolio to where it is today.

Paul Moore | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Paul Moore. Paul is joining us from Lynchburg, Virginia. He is the founder and managing director at Wellings Capital. His firm has invested 71.3 million with 11 operators, and has a total of 229 assets across all combined funds. He’s actually a third-time guest; he’s already shared with us in other episodes about creating a fund, building a hotel, and adapting your business model when the deal flow slows down. Paul, can you start us off a little bit more about your background and what you’re currently focused on?

Paul Moore: Absolutely. I sold my company to a public firm at 33 years old, and I thought “I’m a semi-retired investor now.” I was really an idiotic speculator is what I was, because I didn’t know the difference; investing is when your principal –I now know– is generally safe and you’ve got a chance to make a return. Speculating is when your principle is not at all safe, and you’ve got a chance to make a return. So I was a speculator, I lost a lot of money, I made some money along the way, I started investing in flip homes, then I started flipping waterfront lots at Smith Mountain Lake and Virginia, started a couple of websites, and I always wondered how to get involved in commercial real estate. I finally jumped into multifamily in North Dakota during the oil boom there in 2011, later wrote a book on multifamily investing, and since then, we’ve added self-storage and mobile home parks, as well as RV parks, light industrial, and similar assets to our funds. We manage five funds that allow investors to get a portfolio of recession-resistant assets with one investment.

Slocomb Reed: I understand, Paul, you’re more focused on self-storage now?

Paul Moore: Yeah. I did not have the success that Joe had in acquiring multifamily. We just got really frustrated, beating our head up against the wall, trying to find off-market deals and deals that made sense and penciled out. When we finally looked at self-storage after a couple of years of beating our head against the wall, we realized that — my multifamily book is called The Perfect Investment; a humble title, would you agree? I realized it’s not perfect if I have to overpay to get these deals. In self-storage, I found 50% of the owners were mom-and-pop single facility owners, and a lot of them didn’t have the knowledge or the desire or the resources to make upgrades, increase income…

Slocomb Reed: When was this that you were getting into self-storage?

Paul Moore: This was 2018. So I immediately started looking for every book I could get on self-storage. I didn’t find very many great ones out there, some self-published ones, so I decided to write one myself. I waited a couple of years until I knew more about it, but that’s when we jumped into self-storage.

Slocomb Reed: That book is “Storing up profits: Capitalize on America’s obsession with stuff by investing in self-storage.”

Paul Moore: Yes, that’s right. It was published by BiggerPockets in late 2021.

Slocomb Reed: Nice. The reason I asked, Paul, about when you got into self-storage is that it’s a much trendier topic now in 2022 than it was four years ago. Are you feeling that in the deals that you get to underwrite? Are you feeling like there’s a lot more competition now and that competition is driving up prices and compressing cap rates?

Paul Moore: Great question. Cap rates are terribly compressed. They’re just about the same as multifamily. The difference is — I recently wrote an article, “Call me a heretic, but maybe cap rates don’t really matter as much as we thought” on BiggerPockets. The point of it was, well, if the asset is completely mismanaged, like the deal we bought in Grand Junction, Colorado that had 80% delinquency, or the deals that don’t even have websites, or even signage hardly even, basically just completely mismanaged.

Then the cap rate doesn’t matter as much. If you tear down the cap rate and realize that’s the net income divided by the value – well, if the cap rate’s 2%, but the income is only half of what it could be, well, then the cap rate doesn’t matter as much. That’s why we really like these mom-and-pop self-storage and other assets in any asset class. They’re just easier to find in self-storage than some others.

Slocomb Reed: It sounds like you’re talking specifically about the cap rate based on the current performance of the asset when you purchase it, correct?

Paul Moore: Right.

Slocomb Reed: I predominantly concern myself with cap rate for two reasons. If I’m going to sell this, what can I sell it for, and what is my debt going to look like when I go for a refinance? I primarily personally focus on the cap rate at the end. I totally get what you’re saying though about not focusing on it on the front end. I will say though, when you find a self-storage facility that has 80% delinquent rents, and you find those kinds of opportunities, have you found that it is more difficult to secure bank debt for those, based on the current operation?

Paul Moore: When we dove into this, we realized we didn’t have the track record, the team, the technology we needed to do this right, so we decided to partner, as you mentioned earlier, with 11 operators over the last several years. They have such a phenomenal relationship with their banks and their track record is so solid that they have a leg up in that area. But we also give them enough cash so they can go buy these for cash, turn them around, and then refinance them.

An example is they acquired one in Beeville, Texas, 607 units, from five feuding siblings after the parents passed away. They wanted 5.5 million for it, but it was acquired for cash for 2.4 million. After three months (three months!) it got an appraisal of 4.6 million. We put 2 million in debt on that; that was a 43% LTV rather than 83, which it would have been, again, at the original price of 2.4. That asset was later sold for 4.6 million; it was like a 300% return on the investor’s equity. It’s hard to find deals like that. But again, the cap rate’s not that important when you’ve got to deal with that much upside. So investing with cash is definitely an option in those cases, and that was a very good question.

Slocomb Reed: Paul, you may have already answered this question at least partially, but why are you paying cash when you purchase?

Paul Moore: Well, the answer would be we wouldn’t want to pay cash, but in that case, there were these five feuding siblings, they wanted 5.5 million – they wanted a quick out; they wanted to end their misery. It was just easiest with that one to pay cash and turn around and finance it in three months. We started the financing process, I should say, in three months. So again, it wouldn’t be our normal practice.

Slocomb Reed: Gotcha. Were you direct-to-seller on this, or was this deal brokered?

Paul Moore: 93% direct-to-seller through this particular operator.

Slocomb Reed: Gotcha. Okay, so you went cash… Going direct-to-seller, of course, means there’s less competition. Is self-storage, a space where you have seen that being a cash buyer makes you more compelling in competitive offer situations?

Paul Moore: Yeah, absolutely. Actually, you didn’t ask this exact question, but it is interesting… In the mobile home park realm, a whole lot of the owners who are selling, who have been around for, let’s say, 40 years – they assume they’re going to have to owner-finance it to sell it. Because until Sam Zell, America’s most successful real estate investor, led the charge into getting financing for mobile home parks, they were very hard to finance in years past. That’s kind of a fun little fact – if you can go into one of these guys with cash or with your own financing, bank, or agency financing lined up, it can really help a lot.

Slocomb Reed: You’ve started five funds, you’ve said; you’re in a breadth of asset classes. You’ve invested over $70 million, and yeah, now you’re diversifying the asset classes that you’re investing in because it feels crowded, cap rates have compressed… Let me ask – when did you start raising capital to invest in commercial real estate?

Paul Moore: Well, I did my first one in 1999. But as far as raising capital for commercial real estate, I think 2011 or 2012 when we were doing the multifamily quasi hotel in North Dakota.

Slocomb Reed: So investing for over 20 years, raising capital for over 10 years… With your breadth of knowledge and experience, Paul, what’s the most crucial skill that you’ve developed over the years, that informs and empowers are investing today?

Paul Moore: I’ll tell you, it’s more of a mindset than a skill. I was listening to my first podcast ever when I discovered… I had heard “podcast” before, but I discovered that little purple icon on my iPhone, and listened to Richard C. Wilson tell the story about how you want to survive if you live way up North. This may sound silly, but it changed my life. If you live way up north in the wilderness and you want to survive, you want to live on salmon, you can either be a spear fisherman, which would mean you have to learn to shape the spear, you have to learn to throw it straight, you have to learn to retrieve the salmon, and you have to hope that a salmon swims by in that dark water. Hope is not a good business strategy.

The other strategy –this is kind of silly– be a grizzly bear in the waterfall, standing there with your mouth unhinged and waiting for salmon to jump into your mouth. That mindset means I’m creating educational materials. I’m becoming the go-to expert. By writing books, doing podcasts, doing webinars, doing videos, doing videos on BiggerPockets, by speaking at live events, all those types of things create a situation where people are coming to me to ask if they can invest. I think that mindset, more than a skill, has changed everything for us. We went from literally a handful of investors – and I mean literally five – to over 500 now since I flipped that mindset switch.

Break: [00:14:01][00:15:58]

Slocomb Reed: The mindset being that you’ve made yourself the grizzly bear standing at the bottom of the waterfall with the salmon investors coming to you… Because you begin by adding value, being the thought leader, educating, and you attract people to you with that.

Paul Moore: Right. That’s the goal.

Slocomb Reed: In all of your investing right now, are there any asset classes you’re avoiding?

Paul Moore: Oh, yeah. I’m writing a book called Warren Buffett’s Rules for Real Estate Investors, taking his principles and applying them to real estate. One of the things he said is “Successful people say no a lot.” The very most successful say no almost all the time. We have a whole lot more that we would say no to than yes, for a variety of different reasons. One that we like, we just haven’t found the right operator, would be senior living. We really like that space; there are five aspects to that — actually, six different strategies within that, and that’s something we’ll be looking at someday.

Another one that we’re not doing yet because we haven’t found the right operator – if you’re listening call me – we’re looking for great operators in the RV park space. People that have had years of experience, the track record, the team, and the opportunity to buy mom-and-pops and upgrade them for large profits. Hotels, retail in general…

Slocomb Reed: Hotels and retail are things that you’re avoiding right now?

Paul Moore: Yeah, we’re avoiding hotels and retail right now. We’ve got a lot of questions about those, and I think with the online economy we’ve seen, and then, of course, the damage from COVID, even if it was only for a year, the hotels just sort of kept us away from those. We certainly wouldn’t invest in restaurants. I know there are probably lots of other asset types I’m not even thinking of. Office scares me right now. I do know a company that’s doing a great job in office, but again, with a shift in American thinking with office, I think I’m going to hold tight on that.

Slocomb Reed: Hospitality, retail, office, you’re naming all of the stuff that was most impacted by COVID. Is COVID the origin of the reasons why you’re shying away from those spaces, or were you opposed to them prior to COVID?

Paul Moore: You know, I don’t want to sound like we’re some kind of gurus who knew the future, but honestly, we were squarely – and you can go back and look at everything we’ve said since 2017 – we were squarely in the multifamily, then self-storage, then mobile home park arenas for all these years. We weren’t really drawn to those other asset types, and COVID just kind of sealed the deal.

Slocomb Reed: You were avoiding them back before 2020 then?

Paul Moore: We’ve never invested in them, so absolutely, yes. There is a retail strategy I really like, and here’s the summary of it. Buying a strip center and then selling off the outparcels to pay back the equity quickly. That’s a strategy I really like. If there’s 30% equity and you can sell off the restaurant and the bank outparcels, let’s say, for 30% of what you paid for the whole strip center, that’s a pretty compelling strategy. I know people doing that that we would look at.

Slocomb Reed: Gotcha. For those of our Best Ever listeners, Paul, who are not newbies, they wouldn’t consider themselves amateur investors, they have some experience, have not yet succeeded at the level that you have, and they want to get under the waterfall and open their mouths themselves, what is your top tip for getting into thought leadership for someone who thinks it’s time for them to start raising capital or it’s time for them to start attracting partners to themselves?

Paul Moore: Joe Fairless wrote a little blurb for my new book, and I so appreciate it, so I’m going to throw it back at him right now. Joe Fairless gave I think us all the best tip on this, and I’m just going to do my best to quote him. I don’t know if this is exactly what he would say if you asked him, but I know what he told Whitney Sewell. He told Whitney, “Go out and start a daily podcast. While you’re at it, start doing other things, like social media postings, eBooks and books, and all that, but start a daily podcast first.” That’s exactly what Joe told Whitney. Everybody knows that Whitney, one of Joe’s star students, went from zero to hero in about three and a half years doing that. So I guess that’s what I would tell people.

Slocomb Reed: Start a daily podcast.

Paul Moore: Yeah. I think that’s what I would do.

Slocomb Reed: Awesome. Well, Paul, being that you are a repeat guest, you’ve been through the lightning round before, I just want to ask now, what is your Best Ever advice?

Paul Moore: My Best Ever advice is, going back to the beginning of this show, and that would be to say, please think hard about the difference between investing and speculating. By the way, it’s fine to speculate, it’s fine to invest in bitcoin. I believe true wealth is having assets that produce cash flow. Bitcoin doesn’t do that, and the value is very subjective as we’ve seen by Elon’s tweets a couple of times. There’s nothing wrong with that, but I wouldn’t make that my centerpiece for investing. My investing centerpiece would be boring assets. Think about self-storage; my goodness, four pieces of sheet metal, some rivets, a floor, and a door, but the value-add potential in self-storage is stunning. People just don’t realize that even though it’s boring, maybe because it’s boring. So I would focus on investing over speculating.

Slocomb Reed: Are there any asset classes you’re currently investing in outside of real estate?

Paul Moore: I just did a little Bitcoin with my IRA and a little other cash I had on hand about a year ago. It’s actually done okay. Even though Bitcoin itself has kind of really been up and down as it always has, my portfolio is up about 50% because I’ve got a guy managing it; it’s like multiple crypto assets.

Slocomb Reed: Gotcha. Tell us a little bit more about your new book on self-storage.

Paul Moore: Well, self-storage is amazing, because – think about it, if I’m renting you a $1,000 apartment and I raise the rent by 6%, you might leave rather than sign up for $720. That’s 60 bucks a month for a year. In self-storage, if I raise your $100 storage unit by 6%, you’re probably not going to get a U-Haul, get your friends together, pack up all your junk… Excuse me, your treasures, and move them down the street just to save six bucks a month. So you can do multiple increases a year and people will just gripe, but they won’t leave. 53,000 self-storage facilities in the US, that’s about the same as Subway, Starbucks, and McDonald’s combined.

The first third of the book is about that. It’s about the premise for why self-storage works so well. The middle third of the book is four strategies to build a self-storage empire. That would include buying value-add, buying stabilized, reconfiguring an old warehouse, or a Toys’R’Us, or a Sears building, and the fourth would be of course ground-up development.

The last third of the book would be why anybody wanting to get into any area of commercial real estate would probably benefit from, and that is seven different paths to becoming successful in commercial real estate. Whether it’s commercial multifamily, self-storage, mobile, home parks, whatever; it’s seven different paths to get to the top.

Slocomb Reed: Awesome. Well, thank you for sharing with us, Paul. Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and please share this episode and this conversation with Paul Moore with a friend so that we can add value to them with our podcast too. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2726: How to Build a Social Media Content Engine to Scale Your Business ft. David Toupin

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, David Toupin—CEO of Real Estate Lab, a multifamily real estate software company—shares his social media hacks to help grow your real estate business.

Register for the Best Ever Conference here: www.besteverconference.com

Check out David’s previous episode on the podcast: JF2039: Experience Shouldn’t Stop You From Starting With David Toupin

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

David Toupin: Well, hey guys. I think we’ve got some slides popping up here pretty quick. I’m really excited to talk to you all today about social media specifically, about how it pertains a lot to the multifamily space, and building a content engine at the end of the day. I’m not just a social media guy, my main business is multifamily. I own two companies, Obsidian Capital and Real Estate Lab. I buy apartments, that’s what I do every day, day in and day out. I started at age 20 in college, bought a 12-unit, house-hacked a 100-unit deal shortly after that. Since then, I’ve syndicated as the primary GP, 800 units, building around 200 apartments at the current time… And recently, I started a software company called Real Estate Lab for multifamily investors, tackling their pipeline and analyzing deals, all online.

It’s kind of what I do, and I’m training to be a pilot, kind of something on the side that I’m doing as well. So all I do is real estate, and I really want to talk to you guys today about how social media has helped me take my real estate game and absolutely exploded over the years. I think this is really powerful, especially in the times we’re in, with everything that’s happened since early 2020 with the Coronavirus. Today has become an absolute virtual world. It’s no question that if you are not involved in some form of social media or virtual outreach, you are missing out on a lot of business. So it’s really important today that we pay attention, we learn what’s going on in the social media world, what are the trends, what’s happening, what is the most impact that we can create on different platforms, and how to reach people that can become potential investors, customers, clients, relationships, business partners.

Something really powerful, –I keep my slides pretty simple, but… Social media equals attention, attention equals influence, and influence equals income. The more people that we can put ourselves in front of, the more attention that we can gather through social media, the more influence we’re going to get. Speaking on different topics, teaching people, educating people about apartments and multifamily – it’s part of the reason that syndication has become such a large business nowadays. When I started back in 2016, syndication wasn’t so much of a common thing. But nowadays, a lot of people who get into the single-family space are quickly led into, “Hey, multifamily is a great place to be in.” And I agree. And that’s because of all these social media influencers, Joe and a lot of others, we’ve garnered a lot of attention online and created the influence. It has driven a lot of people towards this, which is hopefully creating a lot of passive income for you guys.

So you really need to focus on social media. I’m going to go through a couple of different ways you can do it and how to get started. Also, I think the two things I’m going to touch on are if you’re not doing any right now, how to get started, and if you are doing it, how to really ramp it up and treat it like a business. Because nowadays, social media is not just a hobby, it’s not just something fun that you’re doing on the side. A lot of people do use it that way, but if you are in the business world, or you’re in real estate, there are a lot of ways that you can be using it to really help grow your business and grow your impact and your influence.

So I’ve got a couple of false statements I want to share. I’ve been hearing these for years, back when I started when I was 19 and 20, just getting into this business… It’s “people with money don’t use social media.” It’s simply not true. I remember talking to people four or five years ago, and they’re all telling me, “Why are you spending so much time on social? You’re trying to raise capital, or you’re trying to do this and that in real estate; social media is not the place. You need to be out and meeting people one on one.” I agree, all that’s great. But the fact of the matter is that a lot of people with money use social media. I have personally raised over $4 million just through connections, private investors that I’ve met on social media. So it is very powerful. A lot of people with money – you’ll find them on LinkedIn, Instagram, Facebook, it’s huge. You definitely need to be connected with people that have the capital. In social media, it’s very possible.

You can’t build real relationships over social media. Some of my closest friends today — and I’m sure a lot of you guys listening have stories similar. Some of my closest friends today are all other young real estate investors, people that are successful in the business – I’ve met them through social media. I’ve created a pretty great network of good people all through social media. Nowadays, we are in a virtual world. This is an online conference nowadays because of Coronavirus and other factors, and we’re going to keep seeing a lot of these virtual conferences, virtual events, and meetups… So you really are forced to build relationships over the internet, and social media is the best way to do that. This is a fact – if you are not using social media in 2021, you are missing out on major business opportunities, investors, partnerships, and more, in this multifamily space. I’m a strong believer that if you go very strong in 2021 on social media, you can grow twice as fast than if you are not using social media.

How social media has helped me – I just want to give a couple of examples, guys, because I know it’s always like “Well, what do you actually get out of social media? How can it actually help you?” So I’ll give a couple of examples. I did mention that I’ve raised north of $4 million in capital from private investors, probably over 50 private investors, through social media. That’s Facebook connections, Facebook groups, Instagram, making posts, direct messaging, LinkedIn, YouTube, all that. I bought a 230-unit apartment complex last year, and that was through a friend of mine I’d met on Instagram, who had shared that lead with me. We ended up buying that complex.

I’m right now building a 150-unit apartment complex – that was through referral. The landowner, who is partnering with us on this development, and she’s contributing her land to this development – her son met a friend of mine up in Dallas, who told the son of the landowner that I was down in Austin doing some new developments, so she referred him my way. Through a friend, through social media, I’m now, 150 plus 230, almost 400 apartments that I’m getting into just through social media. So it’s absolutely something you need to be doing. Over time, it grows into this spiderweb network of all this business that can come your way, that you can refer to other people’s way. Very powerful stuff.

I just wanted to talk about a little bit where to start. If you are new to social media or you’re just using it right now for entertainment-wise, there are definitely a couple of ways that you can just get in in an easy way. I know it can be overwhelming, there are a dozen different platforms you could be on nowadays… So my advice to people would be to pick one to three platforms – I’d say it’s probably best to just start with one or two. Let’s say you take Facebook and Instagram, which are the first two that I really went strongly into when I started. Take those two and run really just focus on that. Pick what your niche is, tell your story to people, and explain what you’re doing day-to-day. It’s not going to be easy, especially at first, if you have a current audience that’s maybe not real estate focused; maybe they’re just a bunch of friends, relatives, and whatnot, and you’re not very heavy into social media. One thing you could do is create a separate account just for business. Or you take your current account – this is kind of what I did when I started. I said, “Hey, I know most of my current network is not real estate focused. But over time, I know the more that I talk about real estate, the more I’m going to attract real estate-related people to my page.” So what started as an audience that was very heavily weighted towards college, high school friends, family, and relatives – I just started talking about real estate constantly, talking about the projects I was working on every day, what I was doing, telling my story to people… And over time, it just created a huge influx of people through referrals. The way that algorithms work on these social media sites is they drive people who have similar interests together. So the more you talk about something, the more I talked about real estate and connected with other real estate people, it snowballs over time.

So a couple of tips – don’t worry about what other people think about what you’re posting; it really doesn’t matter. At the end of the day, if you’re going to use it for business, treat it like a business. You wouldn’t be worried about anyone else off social media in regards to your business, so don’t worry about what people think about it. If you love it and you’re passionate about it, talk about it, share your story and you’re going to attract a lot of people towards what you’re doing.

A couple of ways that you can make it very structured, as opposed to really just getting sucked in… I know it’s easy to get sucked in on social media sites nowadays, where you can scroll for hours if you really had the time… But what I’d say is block out one day every week to record a few hours of content and take some pictures. Let’s say you’re focusing on Facebook and Instagram – take a couple of hours out every weekend or every Saturday, record a couple of one to three-minute videos talking about different days, or talking about what you’re working on, take a bunch of pictures that you can either put text over or a caption with, take some nice pictures and just stockpile some content, begin to do that. Then throughout the next seven days, or that next week, you have a bunch of stuff you can post. You’re not worrying about taking the content all during the week, and “Oh, I don’t have anything to post.” It’s because you planned ahead, you scheduled it out, you took a bunch of content, and now you have that to post throughout the week.

Block out two hours every day to post and to interact with your followers. It’s one thing to just post content and outwardly post content, and it’s another thing to actually interact with the people that are following you. My philosophy has been, since I’ve started, is I like to respond to every single comment or direct message that I get. If you catch me on Instagram nowadays, within a day, I’ll at least be able to get back to you as best I can. I have a team of people that help respond to direct messages for me now… But interact with people. One of the biggest ways that I’ve grown my Instagram following, which is my strongest network, is because I’m always constantly direct messaging and interacting with people. I’ve got people like Grant Cardone directly through DMs, and we’ve connected that way, or other very successful real estate people I’ve found through Facebook and Instagram, and connected with them in a way that it probably would have been hard to through their emails, because they’re so flooded in their emails, and maybe they don’t have a huge social presence, but they’re very successful investors. I’ve connected with some really cool people through social media that way. So definitely interact with your followers, get out there, follow other people that are in the space, comment on their posts, get your name out there, consistently post stories.

On Instagram, for example, I’ll post two to five times a week, but then I’ll be posting on the story. There’s a story function where you’re posting just 24-hour posts that go away after a day. I’m posting on that pretty much every day, consistently.

Break: [00:13:45][00:15:41]

David Toupin: If you’re starting, pick one or two platforms and learn how they work, learn what type of people you meet through there, and get good at it… Because Instagram is different than Facebook, it’s different than YouTube, it’s different than LinkedIn.

I’m going to share with you guys – I think my most impactful sites right now are Instagram, Facebook, YouTube, you guys all know these, LinkedIn, Twitter… I really don’t use Twitter much. I know some people who are successful on Twitter in building relationships for real estate. TikTok, I would say is very much so in the younger generation. I don’t use TikTok a lot, but I know some people who are very successful, maybe on the real estate agent side, through TikTok. I don’t know many multifamily investors, but maybe there’s a space that’s kind of ripe for somebody to take over on the multifamily side of things there; it’s a little untapped. Bigger Pockets, obviously, you guys want good social sites or a lot of forums you can post and stay active there, commenting, creating relationships, and networking.

One that’s, I think, pretty noteworthy, because it’s fairly new, is Clubhouse. I’ve tried to spend a good amount of time on there. It’s a very new network. Imagine live conference rooms; there are constantly different conference rooms that are popping open, you can hop in and listen, it’s audio-only, and you have various speakers that talk on various topics. You can sit in these rooms with people that are very influential, and have conversations with them, and ask questions. Clubhouse is great, I’ve gotten a lot of reach on there. I’ve actually transacted with a couple of people business-wise through people I’ve met on Clubhouse. These are the ones you guys should be focused on right now, in my opinion. The most bang for your buck, I guess I’d say, would be across these platforms.

So if you’re a little bit more advanced and you are getting into really ramping up, let’s say you already post business-wise on social media, Facebook, LinkedIn, and you guys have a couple of different platforms, what’s really key next is starting to treat your social media like a business. No longer should you treat it just like something fun you’re doing on the side, or just for entertainment. If you’re really partially kind of doing it for business, and you want to take it to the next level and tap the full potential of social media, you need to treat it like you treat your syndications. When you do syndication, you have a process for gathering investors, you have a process for finding deals, underwriting them, making offers, and then you have a process for due diligence, and you have a process for asset management after the fact. It’s the same thing for creating this social media content engine. You want to have a process for this that you can follow, use, and get in a groove, to where you’re getting the most reach, the most impact, and the most interaction with your followers.

I’ve started to do this over the last six months. I hired a Chief Marketing Officer and we have a team of content producers, creators, editors, and then people who will go and schedule these posts. So what I suggest – maybe you can hire one person part-time at first to help with this. Some kind of content creator would be I think one of the first people; a professional videographer or photographer… And you want to start recording lots of content. What I do is schedule a couple of sessions every month with a videographer, and we’ll get together for three to five hours, and we’ll knock out a ton of videos and a ton of photos. I do that a couple of times a month. I take all this content, I store it in Dropbox, I then have an editor that will go in and start editing all these videos, cuts them down, and we repurpose them in multiple ways.

I might record 60 minutes of content talking about how to raise capital. Well, we’ll take that full video, we’ll chop it up a little bit, maybe down to two 30-minute videos, and we’ll put those on YouTube. Then I’ll take a couple of two to five-minute clips from that; maybe out of those 60 minutes, I can get five good two to five-minute clips, and I’ll post those on Instagram, IGTV, and I’ll post those on Facebook. And I’ll get a bunch of 20 to 60-second clips that I could post quickly on Instagram, my stories, Facebook, LinkedIn, and whatnot. So an hour of content, I have now created 10 to 20 different pieces of content that I could post on various platforms from that.

So we’re creating a content database that is going to drive this engine. Your content engine and your social media engine are driven by the content that you put out so we need a lot of that. So we’re doing that, we’re storing it all, and then my CMO goes in and he schedules all these posts to go out. He’ll either do that on a weekly basis or a monthly basis.

I have various pages. On Instagram, I have a personal page, I have a business page for my real estate company, I have a business page for my software company… So we’re scheduling our posts for those over the course of the month. We already have the content, we’re scheduling them; that means day-to-day, I’m not having to personally worry about it or Steve’s not having to personally worry about going in and posting all this content. It’s all scheduled, you can time block that; it’s easy to do, systematize it.

Once a month, we actually have a content meeting with our team, and we go over all the content, my team writes up a bunch of captions, they’re writing a bunch of copy and text to go along with these posts, and then I’m reviewing it, I’m approving, I’m making sure it looks good and it sounds good.

What’s being posted goes is according to what I’m trying to convey at that current time. So every month is different. One month, I might be really trying to push users into my real estate community. Another month, I might have a deal under contract and I’m trying to raise capital, so that’s what I’m going to talk about. Another month, I’m really just trying to build awareness for my software coming out; or maybe it’s a week-by-week. So I’m always changing up my focus of what I’m talking about, along with consistently providing value, videos, and texts that either inspire people, educate people or provide value to people, so that when it comes time for me to want to raise some money or I have a product to sell, I’ve given enough value to where value will now come back to me.

So treat it like a business, schedule your posts, record the content in batches, keep it in a Dropbox or something where you’re storing it, where you just have this bank of content and photos, and then you’ll never be behind, you’ll never be wanting, you’ll never be in need of going out and taking a photo, because you can just go back and look through 100 pictures and say, “Hey, I want to post this one today, and this is my caption.” So that’s kind of how you create this engine, treat it like a business and systematize it.

I’ve just got some final tips for you guys and then we’re wrapping up here in a minute. I would say the number one tip for social media, the number one secret is consistency. You are not going to start up and make an extra million bucks in your first month of using social media. It’s it doesn’t work like that; it’s not what it’s intended to be. Social media is like anything – you’re building rapport with people, you’re building a relationship, you’re creating a brand for yourself. That takes time. It took me probably two and a half years before I did any type of monetization. Four years after I really had been consistent with social media; I’d put out a community that I started this past year about six months ago, and we did multiple six figures in revenue within a 30-day period. So I provided constant value for people == over four years I’ve been providing value and connecting and building relationships. Then in a 30-day span, we did about 150,000 in revenue on a singular product that we offered out to the community. So consistency is key.

Number two, I’d say, is focusing on a niche. It is very hard to spread yourself thin. It’s like anything, if you want to focus on buying apartments, it doesn’t make sense for you to spend time looking at single-family homes, commercial, or in 10 different markets. If you want to buy apartments, you narrow your focus, you figure out what size, if you want to buy 50 to 100 units, it’s the same thing; focus on your niche. Find a niche, focus on it, talk about it, and you will attract people in that same niche. Be yourself. People will recognize if you’re fake; there’s a lot of fakeness out on social media nowadays. A lot of people definitely are fronting and can act like something or not. It’s very easy to tell, in my opinion, nowadays. So just be real, be yourself, be a good person, and I promise you’ll attract a lot of really good people to you. Interact with your audience. If you’re just posting, but you’re not replying to comments or questions, you’re not replying your direct messages, people will shortly forget about you and they’re going to go interact with somebody else who actually will give them that attention back. It’s a two-way street, that’s how you build these relationships.

Tell your story. If you have an interesting story or you’re creating that story at the current time – maybe you haven’t bought a deal yet, but you’re working towards it, you’re working towards buying your first property. Post about that; hold up your camera and take a video on LinkedIn, Facebook, or Instagram on what you’re doing, like, “Hey, I’m touring a deal today. This is what I’m up to.” Somebody might comment on that and be like, “Oh, you do real estate? How does that work?” You tell them “I raise money from investors and go buy apartments.” They’re like, “Well, I’ve got 100 grand and I’m interested in investing real estate.” There you go, boom. You’ve created value, you’ve told people what you’re doing, you’ve shared your story, people will comment, interact, and you will create those type of relationships.

The same thing at this last point, you’re going to automatically attract the people that like the same things you like. That’s how these algorithms work. Once you start talking about it, those people will become attracted to you. Guys, lastly, if you’re not using social media, like I said, if anything you get from this, please start using social media in 2021. If you’re already using it, think about taking it a little bit more seriously, treating it like a business, like anything else you do in your business. I know personally, I have made a couple million extra dollars in the past five years specifically because of social media. If I hadn’t used it, I wouldn’t have met my current business partner, I would have bought less deals, I would have raised less capital. It’s huge.

Thanks for having me today. I hope you guys enjoyed this. Connect with me on social media here. Here’s a lot of my tags, look me up. If you want to get in touch, the best way would probably be through a direct message on Instagram.

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2721: How This New Multifamily Investor Closed 4 Deals in First 6 Months ft. Amy Sylvis

How do you gain credibility as a new investor? Amy Sylvis, an active investor in multifamily, developed a strategy that helped her close four deals within the first six months of her entering the commercial real estate space. In this episode, Amy shares how she sourced these deals and the methods she uses to build trust with investors and partners.

Amy Sylvis | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Amy Sylvis with us. How are you doing Amy?

Amy Sylvis: I’m amazing. How are you?

Slocomb Reed: Doing great, excited for this conversation we’re going to have. Amy is the founder of Sylvis Capital, which buys large multifamily complexes in emerging markets throughout the US with her investors. They focus on Class B properties with a value-add component. She is currently the GP of 276 units in Evansville, Indiana, 20 units in Huntsville, Alabama, 58 units in Clarksville, Tennessee, and 80 units in Augusta, Georgia. It took her close to 10 years to enter the commercial real estate multifamily space due to her cystic fibrosis. She’s now been on the GP side for seven months. Seven months and she’s already got four deals under her belt. Amy is based in Los Angeles. So you’ve had a pretty busy seven months, haven’t you?

Amy Sylvis: It helps to have partners, right? They say it’s a team sport, so – I don’t want no illusion that I’ve done this all on my own, but it’s been great.

Slocomb Reed: Well, tell us, Amy, what got you into commercial real estate?

Amy Sylvis: This is my favorite question. As you mentioned briefly in my bio, I’m not shy about some of the health challenges I grew up with. For those who don’t know what cystic fibrosis is, it’s a genetic illness, or essentially, the lungs kind of give out over time. From a very young age… This story is good, I promise. It’s not going to end up being a downer.

Slocomb Reed: Please continue. There is nothing about you right now that is telling me you’re a downer.

Amy Sylvis: I appreciate it. From a very young age, I kind of understood my mortality, but also had this really strong drive to be self-sufficient. So I searched and searched for ways to become independent, kind of a bigger, badder W2, that kind of thinking. I eventually stumbled on to multifamily real estate as a way to really decouple my ability to trade my time for money. As you can imagine, as it ties into health, knowing that perhaps one day my health might not be so great, this was a really exciting solution to support myself. So that’s a kind of a quick rundown.

Slocomb Reed: I think you said accidentally stumbled. I’d like to unpack that. How did that actually happen?

Amy Sylvis: On my journey — I used to work in biotech — I was excited to be able to find an industry where I could give back to others, especially having health challenges, knowing how important it is to be able to help others in their time of need, when they have bad health. I was always looking for the bigger badder job, as I mentioned, with a higher income. I went and I got my MBA, I took two years off to be able to do that… And wouldn’t you know, right after I graduated, I stumbled upon that purple book that we all know of called Rich Dad Poor Dad, randomly, at the Santa Monica library. My head popped off; I just couldn’t believe that there was such a thing as passive income and that was attainable.

Slocomb Reed: I have to give a shout-out to the Best Ever podcast really quick. I got my dad listening, and it wasn’t until he realized how many times I referenced Rich Dad Poor Dad on this podcast that he finally read it for himself. I’m so excited to be able to talk to him about it.

Amy Sylvis: Slocomb’s dad, good job!

Slocomb Reed: Yes. He’s already retired and has a great retirement and a great lifestyle that he thoroughly enjoys, so it’s going to be a different kind of conversation, but I’m looking forward to it, because it is a really important book. It’s been really important to me for the last nine years at least. You said it took you 10 years to enter the space, due to cystic fibrosis. Why 10 years? What was the reason for the delay?

Amy Sylvis: Thank you for that. Part of cystic fibrosis is chronic lung infections that require hospitalizations for two weeks at a time, often several times a year. Despite the energetic person that you see me as today, holding down a W2 while trying to do a side hustle of real estate, it just really ran my health down. It was even someone like myself, who thought I had superwoman powers, struggled to overcome. Thankfully, around two years ago, right before the beginning of the pandemic, a miracle medication came to the market for cystic fibrosis and really unlocked my ability to finally enter into the space. So it took a while but the persistence paid off for sure.

Slocomb Reed: So that’s 10 years before you participated in the general partnership of a deal, but I imagine that’s 10 years of studying, research, networking. Am I wrong?

Amy Sylvis: You’re spot on.  It’s all about laying the groundwork. Yeah.

Slocomb Reed: And then all of a sudden, you pop off, four deals in your first six months. How did that happen chronologically? Correct me where I’m wrong. It’s like a miracle drug, some sort of time-lapse, and then all of a sudden, all four of these deals at once. Were these all in the works at the same time? How did you come across all four so quickly?

Amy Sylvis: To your point about the timeline, the big exponential growth factor there was finding like-minded partners with similar values. I am an only child, and I learned very quickly that working with others, finding others, and that’s where Quattro Capital came in. I found Maurice Philogene; many probably recognize his name in this space. Our values aligned firmly that real estate is great for the money, money is not a bad thing, but really, it’s a vehicle to be able to buy ourselves time, own geographic freedom, and of course, be able to give to others. So once I was able to sync up with him with a deal that I had found, things just rolled as the other parts of Quattro Capital were able to surround me, and we would partner to be able to take down many of these deals.

Slocomb Reed: Nice. Evansville, Indiana, Huntsville, Alabama, Clarksville, Tennessee, Augusta, Georgia – so the South and the Midwest. How many different emerging markets were you looking in to end up in those four?

Amy Sylvis: Well, I’m sure many people can agree, it is a seller’s market, to say the least. So we looked very heavily at emerging markets. Obviously, it’s a little bit easier in the Southeast, and it’s just really a matter of understanding those demographics, but also understanding where perhaps not everyone was looking for deals. We were competing with institutional money… So it is, to answer your question, several emerging markets combined with great opportunity.

Slocomb Reed: Gotcha. In all of this so far, Amy, what has been your steepest learning curve? Whether that be an experience you’ve had, or a hurdle that you had to get over, or something that you had to sort out. What’s your biggest learning curve?

Amy Sylvis: I think the biggest learning curve was getting my first deal and finding my first deal. I’m sure many of the listeners can relate. When you’re the brand-new kid on the block, getting credibility, making brokers believe that you’re going to be able to take the deal across the finish line was something I really struggled with before I had the a-ha moment of how I could leverage a team and develop a mutually beneficial relationship with folks that already had experience.

Slocomb Reed: You bring up something that a lot of people, if not all people who get into this space, feel. I’m new, no one’s going to take me seriously, I don’t have any experience, and I need to convince different kinds of people, investors, lenders, brokers that I’m going to be able to perform in a space where I’ve never operated before. Give us some of the specifics of what that looked like for you putting your first deals together, with the understanding that all of our guts turn hearing you say that, because we’ve all had that same feeling. Give us some specifics about getting it done for your first deal.

Amy Sylvis: Happy to. So the biggest pieces I alluded to was finding partners. The way I found Quattro Capital and partners was by figuring out what their needs were. I think all of us have the thought process of “This is what I need, this is where I want to go”, but I really tried to flip it on its head and figure out what do these folks, who I think are amazing, have a great experience, and great knowledge, what do they need that I could possibly provide, and give freely with an abundance mentality, and knowing that that would eventually lead to them knowing, liking, and trusting me, because I was able to put them first and provide value there. I don’t know if that’s specific enough, but I’m happy to keep going if you’d like to learn more.

Slocomb Reed: If I were trying to give that answer a punch line, Amy, it would be that you networked your way out of the newbie dilemma.

Amy Sylvis: Perfectly said.

Slocomb Reed: Cool. Why Evansville, Huntsville, Clarksville, and Augusta?

Amy Sylvis: All emerging markets, all at various kinds of stages of emergence. But we love looking at job growth, first and foremost. I know that of all of those that you mentioned, Evansville probably doesn’t pop up as the sexiest market everyone’s thought of right now… [laughs] But we see it as being likely growing on the scale of Chattanooga. I think Chattanooga [unintelligible [00:13:04].07] came in, and Toyota set up a big plant. It’s kind of a similar size there and the state of Indiana is investing massively. So that brings me to my next point, is the state, our local governments investing in infrastructure? Are they on top lists where folks want to live? Is it affordable? So we look really heavily… And b we, it’s a little bit of an obsession that I leave with the folks I work with, just because we know the power of what an emerging market can do to appreciation. So that’s what they all have in common. They’re all within our chosen property managers’ sphere of operation as well, which was an important piece.

Slocomb Reed: Gotcha. Amy, within your partnership, what do you specialize in? You said you really like analyzing what’s happening in the job market in these areas. What is your steak and potatoes?

Amy Sylvis: I would definitely say good market research, as you mentioned. Also, I do bring deals, I find deals, I build relationships with brokers and sellers, and I dabble in capital raising. I’m out here in Los Angeles; as you could imagine, not a ton of people are interested in investing here, which I get, I’m not either… So providing opportunities for folks that are looking to diversify outside of the stock market and paper assets. So I do a little bit of everything, to answer your question. I know that’s not the straightforward bread and butter maybe answer you’re looking for, but I’m a little bit of a generalist in that sense.

Break: [00:14:32][00:16:41]

Slocomb Reed: Market analysis and capital raising. In your backyard, you’ve got a great opportunity for capital raising, I would imagine. I don’t know where your literal backyard is, but being in Los Angeles should put you in a good opportunity for capital raising. I’m in Cincinnati, Ohio; you’re in a better spot for it than I am at least.

Amy Sylvis: I used to live there. It’s a great city.

Slocomb Reed: Oh nice, cool. So these emerging markets in the South and in the Midwest… Amy, we’re talking about markets where you’re projecting job growth. Are you underwriting to the five-year hold? Is the plan to hold these for about that amount of time and then sell?

Amy Sylvis: I love that question. It is. We really go by what our investors demand, so the five year hold is kind of the industry standard in that respect. That being said, as probably others have seen that are invested in emerging markets, we’re reaching some of our five-year proforma’s in 18 months. We’ve got a portfolio in Knoxville, Tennessee that we have on the market, we think that markets tapped out, and we think it best serves our investors to sell at this point, even though it’s a little bit of a shorter turnaround, and go find the next emerging market. So the plan is five years, we don’t ever promise anything short of that. But sometimes circumstances arrive, like in Knoxville, where we go ahead and have a disposition early.

Slocomb Reed: Gotcha. Underwriting to the five-year hold. I am a buy and long-term hold investor, Warren Buffett style, buy and don’t sell. I’m happy to trade up, but I’m not underwriting personally to a five-year hold, I am underwriting to what my grandkids will inherit. So Amy, you said Evansville, Indiana feels like Chattanooga, Tennessee 20 years ago. When I hear that, that makes me want to buy in Evansville, Indiana and hold it for 20 years. I have a feeling I know your answer already, but I’d still like your opinion on this, because you’re in this deal. Why not buy something in a market like Evansville and just continue to see that long-term appreciation, rent growth, increase in cash flow? Is it simply that you need to provide an IRR to your LPs and the sale is going to be what does that?

Amy Sylvis: I love this, because it shows the nuances of how you can customize these deals based on what the GPs want and what the LPS want. And your point is well taken. I think all of us want that long-term, multi-generational wealth. There are several strategies. We say in our PPM and we let our investors know that they may be refinanced out of the deal, as opposed to us selling; that’s one option. As you mentioned, some folks need liquidity; LPs aren’t happy with a 10-year hold.

The other thought process is as you think of an emerging market and kind of the slope there, without getting too mathematically in depth, you really have kind of a little bit of an S-curve. So you have appreciation and rents that are increasing at an increasing rate, and then you have them kind of roll-over and they’re increasing at maybe a decreasing rate. That doesn’t mean that they’re decreasing, it just means that the rate of change is decreasing.

We love to hit these markets when they’re increasing at an increasing rate. So if we can be in the market during that cycle, or that part of the cycle, and then find the next emerging market, and keep hitting that, we find that our investors appreciate that market identification and being in the emerging market at the most lucrative point. That doesn’t mean that there will continually be growth in Evansville and we won’t stay there in some sort of capacity, but at five years, we want to find the next Evansville that’s taking off and that is really emerging like that.

Slocomb Reed: That’s a really helpful explanation, Amy; thank you. The trajectory, the acceleration rate of rent growth; is the rent growth accelerating or decelerating while still growing. That makes a lot of sense to hit that point, where you see the top of the bell curve coming even if rents aren’t going to go down, you see that the rent growth is slowing, and that’s a good time to get out. Because it also means with rent growth and with projected future rent growth, it’s still going to be an easily saleable asset, because somebody else is going to want that growth.

You said it’s in your agreement that you may refinance LPs out. Talk me through the logistics of that. You as the GPs decide you want to hold on to an asset and go ahead and deliver the ultimate return to the LPs that they were looking for. Walk me through the step by step of how you make that decision, that that’s what you want to do, and you decide this is an asset you want to hold longer, and what is it that you’ve agreed to disperse to your LPs in the event that you make that decision?

Amy Sylvis: Candidly, we’ve never done it before. It is something we have on the table, we like to be able to be fully transparent about what can go on… But what I just mentioned to you about the emerging market equation – we want to participate in that, too. We know full well that the market can go where it goes, and sometimes scenarios are difficult to think of five years in advance, so we give ourselves that option. Above and beyond that, I wish I could provide you with some experience in that respect, but we just haven’t reached that point. We’ve always decided to sell up until this point.

Slocomb Reed: So let’s talk about it hypothetically then. Again, Best Ever listeners, I’m asking the question that I want the answer to, and bringing you along to hopefully get some value. Thinking like a long-term hold person myself, if I were engaging in deals, underwriting to the five-year hold the way that you are, I would be excited at the opportunity of being able to deliver the promised return and retain the asset. Speaking hypothetically, what are the hypothetical conditions, Amy, in which you see that happening with one of your assets? Not necessarily one of the current ones, but forecasting into the future? Under what circumstances do you refi, deliver on your promises to your LPs, and keep the asset?

Amy Sylvis: So I think the biggest scenario, of course, is serving LPs. We’re in constant communication with them. If they want liquidity, if they want five years is up for them, everyone has individual circumstances. So if that’s kind of the general thought process and theme that we get from our investors, then that’s the number one priority. We in the GP team felt like it would be good idea to hold, but our investors are telling us that they want money back – we can have that conversation.

Something else to keep in mind is we’re all kind of looking at these cap rates going, “Holy moly, how much lower can they go? What’s going on in the market?” Hypothetically, I think we’ve all had the issue of “Yeah, it’s great to sell. We’d be able to realize a lot of appreciation, but where are we going to put the money? Where else are we going to put it?” Ideally, finding the next emerging market is great, but I think if we are unable to find something that makes business sense to redeploy, 1031 into, or something like that, holding the asset while also giving our investors back their return I think could hypothetically make a lot of sense in that scenario.

Slocomb Reed: Got you. One last thing before we move to the last section of this interview, Amy… The more distressed the asset is when you purchase it, the more opportunity you have to force appreciation. So you focus on B-class value-add in these emerging markets, and you said you have been able to reach your five-year expectations in 18 months. Have you considered purchasing more distressed assets that require more activity on the front end in order to produce a higher return? Or possibly produce appreciation so much that you could refinance out your LPs, deliver their return, and still leave some equity on the table for yourselves to get a loan instead of having to sell?

Amy Sylvis: Absolutely. The asset I mentioned in Augusta is just that. It is a full gut… A heavy-lift is a light term for what’s going on there. The previous owner was put in jail for fraud, there was some interesting element that we’ve had to work through to kind of turn over the tenant base, and we’re pouring in quite a bit of money. So yes, we do occasionally dabble in that type, exactly what you mentioned. There is some great appreciation we can force there, but the flip side of it is we’re in inflation, we’re in the highest inflation we’ve seen in 40 years. That’s a wild thing to be able to project, control costs, and still be able to do all that. So it can be done, but even though I dye my hair, I’d still like to not be fully gray with all the stress there… [laughs] So we’ll do it every once in a while.

Slocomb Reed: Alright. Amy, are you ready for our Best Ever lightning round?

Amy Sylvis: Let’s go.

Slocomb Reed: Amy. What is your Best Ever way to give back?

Amy Sylvis: I love an organization called Emily’s Entourage. I mentioned how life-changing the new cystic fibrosis drug has been for me over the past two years. Unfortunately, there are about 10% of people with cystic fibrosis that do not benefit from this medication. As you can imagine, the devastation that we all feel for those folks who are “left behind.” We are determined and we focus every day to making sure that we find something for them. Emily’s Entourage is who I dedicate my time to, giving back to make sure my dear friend Emily Kramer-Golinkoff and the other folks in that part of the cystic fibrosis community get to enjoy the health that I do.

Slocomb Reed: Wow. What is the Best Ever book you recently read?

Amy Sylvis: I just reread the Creature from Jekyll Island for the fifth time. It’s amazing how things play out in what I read five years ago, now fast forward five years ahead, how poignant it is. I can’t read that book enough, I can’t recommend it enough, it is eye opening, and I recommend it to everybody.

Slocomb Reed: It’s a long book, though. Make sure you have an extended weekend or some long amount of time that you can dedicate to reading it, but there is high-quality information in there, I assure you. Definitely, it’s a powerfully opinionated book, but it is also very eye-opening as to how our federal monetary system works. Very helpful. What, Amy, is your Best Ever advice.

Amy Sylvis: Best Ever advice is to have the Go-Giver mentality. I don’t know if anyone’s read that book by Mr. Burg.

Slocomb Reed: Another good one.

Amy Sylvis: Another incredible one. It is such a powerful way to live. Obviously, it involves empathy, but you’re really unstoppable when you think about others before yourself, how you can serve others. Whether it’s in business or in your personal life, there’s just a limit to what can be done and what good will come to you when you care about the needs and wants of others. That’s my Best Ever advice.

Slocomb Reed: Amy, where can people get in touch with you?

Amy Sylvis: Sure. I love LinkedIn and I’m very active there. Please get in touch with me over on LinkedIn. Of course, my website, sylviscapital.com. That’s it.

Slocomb Reed: Awesome. Well, Amy, thank you, this has been a great conversation. Best Ever listeners, thank you for tuning in. If you enjoyed listening in on this conversation, please do follow and subscribe to the podcast. Leave us a five-star review and share this with someone who could benefit from what Amy has shared with us today. Thank you and have a Best Ever day.

Amy Sylvis: Thanks so much.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2719: Top 10 Things to Ask Before Investing ft. Ryan Gibson

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Ryan Gibson—CEO and co-founder of Spartan Investment Group—shares the top 10 questions you should ask an operator before investing in a deal.

Register for the Best Ever Conference here: www.besteverconference.com

Check out Ryan’s previous episodes on the podcast:

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year, that is still relevant today and will be beneficial for you.

Ryan Gibson: My name is Ryan Gibson, CEO, and co-founder of Spartan Investment Group. I’ve made some bad decisions passively investing and what I’m about to share with you today is hopefully going to prevent you from doing that. I’ve made some bets on some operators that didn’t do a very good job, and the signs were there based on the information I’m about to share with you. If I had just known to ask it, then I probably would have been able to research and figure out that these operators were not people that I wanted to invest with. I’ve also invested with some outstanding operators. So all of this I’ve kind of sort of put together and really made a concerted effort to provide this type of information and provide this type of resourcing at Spartan Investment Group for our investors.

Without further ado, the first thing you’re probably looking for with an operator is to find the operators. I get asked the question all the time, “You guys do self-storage, who else do you know in multifamily, or mobile home parks, or different types of space?”

So before you get together your questions and your routine for interviewing an operator, you want to find them. These are kind of six ways that I find operators. You can find them online, there are two really great resources. 506investorgroup.com lists a lot of different syndicators and operators, there are probably, I don’t know, maybe 100 or 200 on there. A great group put together. You can read reviews on operators and see how other passive investors have rated them.

The other thing I like is an interesting website called formds.com. That provides you with a list of every single syndication that’s ever taken place legitimately and listed on the MCC website. If you search a company on formds.com, you’ll see active raises, what the raise was for, how they’re raising capital, and things like that. If you want to find some 506B offerings, if you’re sophisticated or not accredited, that’s a great resource for that.

The next thing I do is networking. Obviously, you’re doing that now, so congratulations; I won’t elaborate too much on that. Funds, when I say funds, there’s Fund of Funds, Hunter Thompson, RealtyMogul, CrowdStreet, things like that, where there’s a platform or there’s a representative that’s raising a fund and finding great operators to place capital with. Syndication groups, obviously – there are great meetups that you can be part of or privy to. And then projects. Sometimes you’ll be in your neighborhood or your street, you’ll see a project and you’ll figure out that that’s syndicated equity. A lot of times you’ll figure out that a lot of things in Main Street investing are syndicated equity and you can kind of figure out who that operator is. And a lot of that is – once you get the operator that you really like, ask them who they know in other spaces. Great operators will give me great referrals, we do all the time.

First, setting the stage. If you want to invest passively with an operator, how do you structure that interview? Maybe you get 15 minutes, 25 minutes, or an hour, or that sit-down coffee or meeting and you want to ask questions to the operator or the person who’s syndicating the equity to do a deal. This is how I like to structure my interview. Ask open-ended questions. So get the operator talking, and kind of see what the things that they talk about the most are. Write down everything that you ask, everything that the operator says, and keep a log of that, keep a log by operator, maybe in a Word document, “This operator, this is the things that we talked about, this a the things we discussed.”

The other part of that, too, is to see if they’re interested in what you have to say, and really kind of determining what kind of investor you are and what you’re looking for. So it’s kind of a two-way interview there. You’re trying to see if you’re a good fit for one another. Ask for their portfolio projects; this is every deal they have now, every deal that they’ve done and closed, the historical performance, referrals, and maybe a property location that you can go by if you have time.

Okay, are they an operator or a syndicator? The first question you’re going to ask them is are they syndicating equity for somebody else’s deal, disconnected? If they’re an operator, determine what role their company is playing in the operation. Just go into this with eyes wide open – are you going to a fund of funds, are you going to an operator? If they are an operator, how much of a role do they play in the operation? Are they property management? Are they construction management? Are they simply syndicating the equity, buying the deal and outsourcing it? There’s nothing wrong with either lane that you go down, but just get clear on who you’re really investing with. How are they compensated and how are they aligned with the deal?

If they’re an operator and they’re doing all aspects of the business, figure out how their alignment is through their fees, through their splits, through their structuring… How are they aligned with the project? And lastly, are they aligned with the success of the project? Are there compensation and incentives based on the success of the project and your ultimate success? Just make sure that you’re really clear in the PPM, how the waterfall is structured, and how they are being compensated, and how you’re being compensated if the deal does well or doesn’t do so well.

My favorite question of all time is – tell me about a deal gone bad. Somebody might say, “Well, all my deals have gone perfect.” That probably means they don’t have a lot of experience. Because as we know, in real estate eventually something goes bad. It may be the fault of the operator, it may not be the fault, it may be a blend, maybe kind of the operator’s fault, and maybe some outside circumstances… If nothing’s gone wrong and they’ve been in business for 30 years, it’s probably a good chance they’re not being truthful with you. And then get them talking about the deal going bad and listen to how they responded to the bad issue.

This happened in 2020, this is a picture of my business partner, Scott Lewis. He’s standing in front of an RV park that we own that was ripped apart by an F1 tornado in West Texas. You can see here that the deal went bad; we had a tornado rip through our property. Fortunately, there were no injuries… Well, a limited number of injuries, and everybody was okay. Within a couple of months, we had the park completely restored, and actually, the park is distributing a return to our investors within the same year. So you know, talk about that story. What happened? How did you respond to it? What kind of operational team did you have on the ground within a certain period of time? You want to really try to learn what type of capability the group has to respond in bad situations.

Another thing about this is, is the company well-capitalized? Never mind the deal; the deal can be well-capitalized, I understand that. But if the operators doing 10, 20, 30 deals, and one deal goes bad, does the main corporation or main company have the liquidity to sort of handle these one-off deals needing an infusion of cash to get things kind of going again before insurance catches up? So kind of gets to know the company more than just the deal.

Mission, vision values, alignment. This is huge. If they’re just one way talking to you on that interview and not learning about who you are, you’re never really going to kind of figure out if they’re really interested in you and kind of helping your goals and your mission. Read the company’s mission/vision/values and see if it’s kind of aligned with your way of thinking, your values, and your culture. Ask them for an example. “Hey, give me an example of how you’ve completed your mission recently. Maybe tie it to an investor situation.”

Who’s on the team? Here’s the great picture of the one-man band. Are they a one-man band? Are they doing everything themselves? Do they have a deep bench? Do they directly hire the team? Are they vertically integrated? Do they have a property management construction company? Whatever it might be, kind of understand their business model; understand when they take fees on the front end of a project, are they going out and finding great employees to run your projects? Or are all those fees sort of just going to them, and maybe they might hire the person to complete your deal or not. So kind of find out who their team is, who’s on their team, and how many FTEs or full-time employees that that business has.

Break: [00:11:49][00:13:58]

Ryan Gibson: What is their business model? You may have an operator who is a business coach, they’re selling an education platform, they’re teaching classes on the weekends, they have all these webinars and education platforms… But are they focused on their deal, or do they have people focused on their deal? Are they working another full-time job? Are they a guru? We all know the gurus out there that are doing great guru stuff, but they’re not doing great deals stuff. Or maybe they have a great team, and they can be a guru and have projects go really well. So just kind of figure out what their core business model is and where they focus their attention on stuff.

What’s their communication plan? This is probably the number one most important thing to me when I’m deciding to place capital with another operator, and the number one focus inside Spartan Investment Group in our Investor Relations Department. Do they have best in class, or a minimum standard of communication? That is our communication plan up on the screen. We do a monthly email project reporting, we do a quarterly financial reporting of the quarter, and we do an investor conference call every quarter where we get all of our investors on a call and we go through just kind of high level of how every deal on our portfolio is going. Not just their deal, but we go through all the deals. We can usually get through an optional conference call in 30 to 45 minutes and really kind of have an opportunity for everybody to ask questions to get answered.

The thing is, a lot of people say, “Oh, yeah, we are so good at communicating. We communicate with our investors.” Say “Okay, great. Can I see your last three communications with your investors?” You might gain a lot of information from that. If they said they had great communication, I asked them, “Hey, can I see the last three communications that went out on specific deals?” That will give you a better understanding of their communication style, the reporting standards, how they’re communicating to you when you’re inside of one of their deals. And is their plan in writing? What I mean by that is we put our communications policy in our operating agreements or the deal. We’re actually putting down in writing that we’re not just saying this, we are putting it in an operating agreement, and we’re committed to the communication plan.

Performance and portfolio. I really like this one, because there are a lot of different ways to present data and project performance to people. What I like to see is a historical performance, proforma versus actual. You might see something that was a low return and you might say, “Oh, these aren’t great returns,” but they could be a core or core-plus asset. So you kind of got to understand, when they’re projecting returns in their portfolio or they’re showing historical performance, do you have the context of the business plan? Did they meet their business plan and exceed it, or did they just perform below it? There’s a type operator that’s going to tell you the performance is here and they’re consistently coming in down here. So you want to start to see what performance they had in the past, what performance they have now, and kind of reconcile if that’s better or worse than they projected.

My favorite is, what is project-level IRR or is it an investor-level IRR? Are they giving you the total project IRR, which could look great, or are they giving you what went to the actual investor? And consistent metrics. There are a lot of different ways to spin IRR by return in capital, or return on capital; you can really manipulate that number quite a bit.

What I like to look at are two things as part of my overall analysis – let’s look at equity multiple and how long it took to get that equity multiple. Because equity multiple is giving you a true, time-tested return on how much money you earned on your initial investment over a certain period of time. IRR might be something that might not be as representative; it’s a tool to use that is consistent across multiple asset class types, but it might not be the best metric. So find consistent metrics, and then when you’re looking at different operators or evaluating opportunities, you can kind of figure out if that’s consistent across multiple deals and multiple operators.

References and background checks. My favorite way to get a reference is not to ask somebody for a reference, it’s to find my own reference for that person. [unintelligible [00:18:04].18] when you get job candidates or you get people that are applying for a position, who in the room has actually given someone a bad reference? It’s kind of funny, when you ask for references and you get references, I always check them, but it’s something that I’m not going to give a bad reference; at least I hope somebody wouldn’t. If they did, that’s bad, because they probably don’t have anybody that they can call that are going to say good things, and that’s even worse. So try to find other people that have invested with that operator and ask them how it went. How did they communicate, and all the questions that I prepared you with earlier in this presentation, ask them. When was the last time there was a distribution? How did the communication go? Kind of get the feeling, too. The business plan was set out and they’re not quite hitting the business plan – that’s okay, so long as they’re doing something to fix it or get the project back on track, and how they responded to that.

Other ways – look on BBB, visit Better Business Bureau, Google reviews, the 506 Investor Group, etc, and see what’s out there on the internet about not only the company name, but also the individual sponsors that are on the deal. Google the actual principals in the deal and kind of see what information you can dig up on that. That’s very helpful.

Insurance. So I always ask this in the syndication process, if something goes bad, it may not be you that have the issue, it may be another investor that has an issue, and if the syndicator operator isn’t covered by insurance, they could be financially strapped and fighting a lawsuit if they don’t have the proper insurances in front of them to protect them. You may not be the issue, it might be another investor that has an issue and that is making an issue, frankly, out of nothing, but you’re still getting dragged into a lawsuit. So ask them, does their SEC attorney provide E&O insurance to cover lawsuits? Title insurance; what exclusions are on their title policy? If they’re doing raw land development, you may want to look at their title policy and see that they’ve done as much as they can to kind of mitigate what’s covered in their title insurance policy. For property level insurance, minimally A-rated carrier giving them coverage on the property. Just ask for any other insurance that they might have.

What we do is, is we put our civil engineers and architects — we require them to list Spartan Investment Group on their E&O insurance. That way, if they design a big building for us that we go out and build and they do it incorrectly, we have an insurance to go after for our architect and civil engineers. So there are a lot of things that an operator can do, but just get them talking about and see how cavalier they are about insurance or how dialed in they are about how they’re insuring a property in general.

And [unintelligible [00:20:33].02] access is a great one. As a limited partner, generally, it’s up to the operator when you sell. But just kind of get their feelings on how they go about deciding to exit a project. A lot of these are five-year or seven-year holds. You’ve got to ask yourself, if the business plan is completed early and I’ve got the right offer on the table, are we going to sell? What is your thought process for doing that? Deciding to exit is great early in the project, but is the operator going to put numbers in front of you and show you the justification why they’re exiting? They don’t have to justify and get your permission necessarily, but you want to make sure that they’re keeping you on board and you kind of understand with eyes wide open why we were going through an exit. Ask them about deals that they’ve exited. How many deals have they exited and how did that go? How did it compare to the original projected timeline, and what was their decision to decide to exit early, later, or on time?

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2708: How Teens Can Work Toward Financial Freedom Through CREI ft. Dan Sheeks

How much closer would you be to hitting your goal of early retirement if you had started when you were just a teenager? Author Dan Sheeks believes teenagers should have the opportunity to learn about financial freedom and the way real estate investing can help them achieve their financial goals. In this episode, Dan shares how to get teenagers involved in learning about and achieving early financial independence.

Dan Sheeks | Real Estate Background

  • Founder of Sheeks Freaks, a community in which young people can learn finance skills to help them reach early financial independence.
  • Portfolio: Own 17 units of residential. Their portfolio includes STRs, long-term, single family, small multi-family, out-of-state properties, and BRRRRs. They also rent out their basement in their primary residence.
  • Full-time job: Public high school business/marketing teacher.
  • Published a book with Bigger Pockets Publishing, First to a Million, which is a teenager’s guide to achieving early financial independence.
  • Based in: Denver, CO
  • Say hi to him at: www.sheeksfreaks.com

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Best Ever listeners how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Dan Sheeks. How are you doing, Dan?

Dan Sheeks: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that and it’s my pleasure. A little bit about Dan. He’s the founder of SheeksFreaks, which is a community in which young people can learn finance skills to help them reach early financial independence. He has a portfolio of 17 units, and he just published a book, congrats on that. It’s called First to a Million, A Teenager’s Guide to Achieving Early Financial Independence. It was released through Bigger Pockets publishing. It’s a book specifically for teenagers, and talks about real estate and how they can get involved. Based in Denver, Colorado. With that being said, Dan, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Dan Sheeks: Sure, yeah. As you said, I’m based here in Denver, Colorado. My wife and I have a portfolio of 17 units, all residential. My main gig, however, is I am a high school business teacher, been doing that for 19 years. I absolutely love my job, I love working with young people every day; they energize me, and they kind of get me out of bed in the morning. I teach business classes like entrepreneurship, personal finance, marketing. My wife was a teacher as well and she retired a couple of years ago. She manages our real estate for us and we’re just living the dream here in Denver.

Joe Fairless: I was not offered those classes in high school. Are you employed by a private school?

Dan Sheeks: I’m at a public high school, it’s a large public high school. When I was in high school, they didn’t have these classes either. But most large high schools nowadays offer a variety of business classes, but they usually are always electives. Not every kid’s taking them but they are available.

Joe Fairless: That’s awesome. I’m glad that that is the case and I’m glad there are teachers like you who are teaching these subjects to teenagers, also, ideally to adults, and everyone, honestly… Because a lot of us didn’t get this education that early on and some of us still don’t have that education. I’m glad that you’re getting the word out.

So I’d like to focus our conversation on your area of expertise, which is teaching teenagers these financial topics. I’d like to hear what you have to say about how to share a message with teenagers about financial independence, about real estate investing, and sharing it in a way that resonates with them. Let’s start with that. How do you communicate with them about this topic in a way that resonates?

Dan Sheeks: It’s a little tricky. Not every teenager is in a place where they’re ready to, not just learn about personal finance and financial independence, but actually, be motivated enough to put what they learn into action. That’s okay. But I do believe that every teenager should be exposed to, absolutely without a doubt, just basic personal finance education, so they are financially literate. Unfortunately, in our country, that’s never been the case. Most high school graduates graduate high school without any personal finance education. That’s slowly changing, but it’s a long road there.

To get young people interested in these topics, I do what I can. First of all, with technology, social media, the internet, and stuff today, many, many young people, as well as adults, are finding these topics, these concepts, these strategies on their own, through Tik Tok, through Instagram, through YouTube, through blogs, through podcasts like this one. So a lot of young people I meet are already somewhat self-educated on these topics, and they’re just burning to learn more about how they can create a financial future that looks very different from the average person. But in my classroom, it’s a little bit different. Most of those students are probably in the class because they want to learn a little bit about personal finance, but the idea of early financial independence, which is what my book is about – that’s a very foreign concept to them, and honestly, to most adults in the US. The idea that you can stop working and be financially free before age 65 is not something that’s commonly known.

I’ll do things like I’ll throw out there “Hey, what do you think about retiring before your parents? Wouldn’t that’d be kind of cool?” That’ll get a lot of ears to perk up. Or I’ll say something like, “Would you like to be a millionaire before you turn 30?” This is absolutely doable if you make some right decisions around your personal finance. Or I’ll all talk about the idea of financial freedom. The term financial freedom is much more attractive and interesting to teenagers than the term retirement. I stay away from that word. To them, that is so far in the future and such an abstract concept because they are teenagers. But financial freedom, many times will get them interested enough to learn some stuff.

Joe Fairless: Let’s talk about, you wrote a book, First to a Million, A Teenager’s Guide to Achieving Early Financial Independence or financial freedom. What is the guide? How do teenagers achieve that?

Dan Sheeks: Well, as a teenager, I don’t think they can. It’s going to take five or 10 years at a minimum to reach financial independence. But the teenager can start and should start learning about personal finance, learning about early financial independence topics. The book covers many different areas, everything from the mindset in entrepreneurial topics to things like frugality, earning extra income, side hustles, investing in real estate, index funds, and all the different things that most of us and your listeners know that if we could turn back the clock and go back to when we were teenagers, we wish we would have known all of this stuff. It’s really not that difficult to set yourself on a path to early financial independence and get there in a few years. It’s not a pathway for everyone, I tell all my kids that. This information you should know but it may not be the right path for you. You and only you can decide if early financial independence is something that you want to strive for. If it’s not, that’s totally fine. There’s nothing wrong with working until you’re 65. What I do think is wrong is if you think that’s the only option and no one tells you that there are other options out there.

Break: [00:06:48][00:08:26]

Joe Fairless: What are some tactical tips that you provide regarding any of those items, mindset, entrepreneurialism, frugality, extra income, or side hustles index funds?

Dan Sheeks: There’s a lot. I’ll go over things as basic as building a credit score as a teenager, if you’re 18, you can get your own credit card and you should. You should also use it responsibly, which I talked about, but you should start building that credit score’s early as you can. If you’re under 18, then the best choice is to get added to your parent’s credit card as an authorized user and that will build your credit score even before you’re 18. Then going into things like earning income as a teenager. That could be as simple as a part-time job, it could be a job that what I call a higher-level job where you’re working in an industry or in an office that has to do with something that you’re interested in. Many of the readers of my book are interested in real estate investing so I talk about maybe getting a job at a property management company, or a real estate brokerage firm, or with a contractor so that you’re in the real estate space and you’re learning and connecting with others who have that like interest.

Frugality, I talk about paying yourself first, which I think is maybe the most important topic in the book, that concept of paying yourself first. Even as a teenager, your income isn’t probably very high but you probably have some income even if it’s just an allowance, mowing your neighbor’s lawn, or a part-time job. The idea of saving a certain percentage off the top every time you have money come into your life, setting yourself up for a high savings rates and then investing that money is something we talk about a lot in the book as well. There are many other tactics even teenagers can employ, just learning, just self-educating, and continuing to read books, listen to podcasts, or watch YouTube videos. There’s so much free information out there nowadays that it’s easy… I should say it’s simple, but maybe it’s not easy. Because teenagers want to spend time doing other things like video games and Netflix. But many of them are willing to spend some time learning as well.

Joe Fairless: What are some of the topics that you find really resonate as it relates to the subject with teenagers? And what are some topics that ideally would resonate but don’t really land as well as the other ones?

Dan Sheeks: I talk a lot about being trapped in a job, living paycheck to paycheck, that lifestyle. When I do that, I know a lot of the students, they think immediately other parents. They see their parents go to work every day, sometimes really stressed-out checking emails at night, maybe working on the weekends, talking about their job negatively. Maybe it’s just that they don’t like their job or maybe it’s that they hate their job. What really resonates with students I think, is saying that the life of being trapped in a job isn’t one that you have to lead. You can make certain decisions now and over the next few years, to allow yourself to have the option to work.

You can still work if you have a job you love as I do, then continue to do it by all means. But the freedom of knowing you don’t have to work and you’re doing it because you want to, or you change your career, or to start a small business that you’ve always wanted to, to follow a passion, to give back more, to volunteer to be of service. The freedom of having those choices is so empowering that teenagers, I think even get that at a young age, especially when they have parents who are trapped and they see the stress in their family around money.

Joe Fairless: On the flip side, what’s part of a guide that will help them achieve early financial independence that you wish would resonate a little more but just isn’t quite doing it?

Dan Sheeks: I would say it probably is that self-education piece. When students are in my classroom, they really don’t have any other choice but to listen to me. I mean, they could tune out in they sometimes do, we all have those moments. But without a doubt, I think, Joe, you would agree that making smart financial decisions, especially when you’re an adult and you’re out there in the real world, so much depends on your own knowledge, your own confidence in making the right choices. Teenagers just don’t have that yet, they haven’t been exposed to enough information. To get them to do those things I was saying, like listening to one or two YouTube videos a week, or a podcast a week, or read some blog articles, or read a book, some of them are motivated enough to do that but it’s a tough battle. Teens have such short attention spans and they’re still in that amazing life, which I miss. High school and college where you’re around dozens and dozens of friends every single day so there’s so much trying to pull your attention away from self-education. It’s only the most motivated students who are really going to go all-in on that route.

Joe Fairless: Which makes sense that you created SheeksFreaks. I haven’t been to your website yet but I’m reading in the bio that it’s a community of young people that can learn finance skills and help them reach early success. I read the word community, so is there a forum component to that?

Dan Sheeks: Yeah. The SheeksFreaks community has been around for a couple of years now. It’s a place for young people 15 to 25 years old, young people, who are actually those motivated individuals to just go out there and crush their financial future. It’s a small percentage of teens and young people that would actually take action and join a community to be around like-minded people. But there’s enough out there that the community is thriving. We have our own platform now and soon we’ll have our own app. Once they’re in the community, they have to join, there’s a free membership, there’s a paid membership, both have a ton of value. But once they’re in, the biggest feature, the most important feature is that they can connect with like-minded individuals. As we know, you are the five people you surround yourself with, the five people you spend the most time with, that’s what your future looks like, that old Jim Rohn quote.

That’s the biggest feature or benefit of the community is being around other people, they can connect with them, message them, share resources. We have about 45 different groups in the community that are more niche, real estate investing, house hacking, index fund investing, cryptocurrency, entrepreneurship, mindset. They can join the groups that they want, that they’re most interested in, connect with others even on a more niche and more specific level. We have a weekly zoom call every Sunday night where we have different guests, we have different topics, we have check-ins, accountability, all that stuff. It’s really fun for me as a facilitator of that group to watch these young people just crush it and they are doing exactly that.

Break: [00:14:49][00:17:46]

Joe Fairless: It makes a lot of sense because when you were saying, and rightfully so, there’s a lot of competition for their attention as there is with everyone’s attention. But when they’re in high school, or maybe just graduated, there’s a lot going on there in that stage of life. So having these peer groups to be able to connect with on self-education content is necessary in order to continue that path. You mentioned the Jim Rohn quote, the one that comes to mind for me is Tony Robbin’s learned from Jim so I’m sure that he just modified that. Tony talks about how people’s lives are a direct reflection of the expectations of their peer group. It’s great…

Dan Sheeks: I love that.

Joe Fairless: …that you’ve cultivated that type of community. Anything else that we haven’t talked about as it relates to messaging to teenagers to help them achieve early financial independence that you think we should before we wrap up?

Dan Sheeks: I would just say that I think, Joe, your listeners likely have teenagers in their lives. It could be their own kids, nieces, nephews, neighbors, their friend’s kids. I think probably most of your listeners, we would all consider ourselves pretty lucky and pretty blessed to be in the arena of real estate investing and all the benefits that come from that. If your listeners are interested in sharing that wealth-building knowledge with young people, which I hope they are, I’m sending them to the book biggerpockets.com, I’m sending them to the SheeksFreaks community, sheeksfreaks.com, mentoring them, helping them, guiding them, and maybe even holding them accountable. If you buy the book for them, tell them you’ll pay them 100 bucks if they read the book. Because it can actually really change their lives drastically, at least their financial future drastically.

You’ll maybe read the book with them. There’s a workbook as well. The book kind of lays the foundation and there’s a First to a Million Workbook that I actually think is more valuable and more meaningful because it tells the teen what to do, when to do it, how to do it, and it lays everything out in four month increments of time, we call them freak phases. Every four months, they have a checklist of 10 things that they need to get done, but the workbook tells them exactly how to do it every step of the way. That workbook covers like a five-year period, it’s very flexible as far as how old they are when they start. Get them that workbook too, work through the workbook with them and just watch them take off. Pretty fun.

Joe Fairless: Dan, thank you for being on the show. How can the Best Ever listeners learn more about what you’re doing? I know you just mentioned ways to get access to the book, is that the best way?

Dan Sheeks:  Getting a copy of the book is definitely one way, but in sheeksfreaks.com, there’s a ton information on the website. There’s also information about the community that they can join on the SheeksFreaks community, on our website. Or anyone who wants to connect or talk more about any of this stuff, I’m always willing to do that. You can just shoot me an email at dan@sheeksfreaks.com or find me on LinkedIn, Instagram, Bigger Pockets, any of those will work.

Joe Fairless: Dan, thanks again for being on show. I hope you have a Best Ever day and talk to you again soon.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2707: 3 Red Flags When Evaluating Operators as a Passive Investor ft. Dan Handford

What qualities should you look for in a potential operator? What if they don’t have a lot of commercial real estate experience? Does the size of their team matter? In this episode, Dan Handford answers these questions and more by sharing three red flags that passive investors should be aware of when evaluating operators. 

Dan Handford | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Dan Hanford. How are you doing, Dan?

Dan Hanford: Doing great, Joe. How are you?

Joe Fairless: I am well, and looking forward to our conversation. This is round three with Dan. If you want to hear his Best Ever advice – well, you can simply click a link in the show notes, or you can go to Episode 1609. That’s where we talk about his Best Ever advice, and talk about more of his background. And if you want to hear about team building, you can go to Episode 2027. The title is Strong Team of Three, with Dan Hanford. So if you’ve got two other partners, or if you’re considering having two other partners, then that will be a beneficial episode for you to listen to. Today, we are talking to you, passive investors, or aspiring passive investors, because Dan has three red flags that we’re going to talk about when evaluating operators as a passive investor.

A little bit about Dan – he’s the managing partner with passiveinvesting.com. They are a national passive equity real estate investment firm based in the Carolinas. They’re experienced, they’ve got properties valued at over $820 million, which consists of at least 3,700 units. You can learn more about the company at, surprise, surprise, passiveinvesting.com.

With that being said, Dan, let’s talk about red flags as LPs. Both you and I are both LPS, as well as GPs. I’ll speak for myself now – I’m an LP on nearly 100 deals. I’m obviously a GP, but I’m also an LP. So I love learning from others’ experiences as LPs, so this will be an enjoyable conversation for me also. I know you’re an LP on deals. First off, anything that you want to mention before we get into the specifics of the three red flags that we’re going to go over?

Dan Hanford: Yeah. Like you said earlier and just a minute ago, we’re both LPs in various projects. I’m not at 100 or just under 100 just yet; I’m only about 60 to 65 I think right now is where my number is. But I’m getting there, I’m getting there, Joe. But I do this for the same reason that you do it. Yes, the returns are nice, you want to see the cash flow, you want to see the bump in the end when we sell. But one of the real main reasons why I like to do it is to be able to kind of see how other people do things. Oddly enough, there have been some things that I’ve seen people do that I’m like “Oh, yeah. It’s a great idea.” There have been probably more things that people do and I go “Yeah, I want to make sure I don’t do that.” So there have been experiences on both sides of it, being an LP in other people’s projects. It helps me kind of build up my investor relations process and management for our passiveinvesting.com team.

But before we dive into these three red flags we’re going to talk about today, we really need to kind of define what a red flag is. Because sometimes people think of a red flag as just like, “Oh, let’s just stop and think about it.” But it’s really not; that would be a yellow flag in my book, where we’ll pause and go, “Okay, at least I know that there. But then I need to maybe just think about a little bit further as to whether or not you want to move forward.” A red flag truly is a big red stop sign, is really what it should be. If one of these three red flags is present, you shouldn’t do the deal; you shouldn’t put your money as an LP with an operator that has one of these red flags present.

Now, the red flags that I’ve come up with that we’re going to talk about today are my experiences, with my wife and I, investing our own cash as an LP in other people’s projects, and also from just learning from other people about what we want to put in place for us. So this might not be something that is exact for everybody out there, but it’ll give you a good starting point for being able to start at your own type of a red flag list where if you see some of these certain things present 0 you just stop doing any more research and you just move on to the next investment. Because there are plenty of other operators out there and plenty of other investments that are out there that you can put your money into at this point in time.

Joe Fairless: Okay. Thank you for teeing that up. Now let’s talk about the first one.

Dan Hanford: The very first one – the red flag itself is an operator that has no successful background in business. It doesn’t necessarily mean all the managing partners that are part of it. Like, if you have two or three managing partners, all of them have to have some sort of successful background in business. That’s not necessarily true, but at least one of them on the team should have a successful background in business. I’m not just talking about a background in business, because you and I both know people, Joe, that have had a background in business, but it wasn’t very successful. They had a good background in business and running it into the ground. We don’t necessarily want to be operating with somebody like that, we want to make sure we’re investing with somebody that has run a business successfully. Because in any business, there are going to be challenges, and how you handle and overcome those challenges is how you can prove to your investors – whether this is the very first syndication that you’re trying to do or if it’s your 10th one, you want to make sure that your investors know that you know how to run a business. At the end of the day, we are buying apartments, but we’re buying, at the end of the day, a business that just so happens to have real estate associated with it. Because you still have to know how to manage people, you still have to know how to put systems, procedures, and processes in place, and that really comes from having that successful background in business.

Joe Fairless: So I want to make sure I’m understanding something, because there’s a distinction here that is important. So are you saying a successful background in business, or are you saying a successful background running a business?

Dan Hanford: I would say that it could be either-or. However, the end business – there has to have been some form of leadership role. It couldn’t have just been a technician or a worker or whatever, and you were the one doing all the work, but you didn’t really make any leadership or management decisions. So if you’re in business and you have a leadership position where you had to make difficult decisions, you had to lead a team one way or another, and you made those difficult decisions – that’s really the critical thinking that I think is important for a syndication business, it’s having that ability to lead. Whether you were a leader in the business or whether you owned the business. Obviously, being the owner of the business, there’s a lot more on you than just being the leader or a management role, if you will. But I would say either one of those would be a good, solid background for somebody when you’re investing with them.

Break: [00:07:04][00:08:43]

Joe Fairless: And the successful part – I think there are two groups of people as it relates to what we just made the distinction on – either they were in a business or they are running a business. Let’s just talk about, first, successful in a business. It’s not their business, but they’re successful in a business.

The one thing I can think of is looking them up on LinkedIn and saying, “Okay, they were at this company for X amount of time and they got promotions, clearly”, at least according to LinkedIn, whether that’s true or not. But I would think typically, that’s true because you’d have other people in the company who can call BS on that if it’s not true. Any other way for people who were W2 employees, but are now presenting this syndication to me as an LP – how do I determine how successful they were? How do I qualify that, or even quantify how they were as W2 employees?

Dan Hanford: Yeah. Well, I will say that it is challenging to actually figure out exactly whether or not they were successful in that role. One of the best ways you’re going to find out is just to ask the person. And yes, they could lie to you, but to me, most people if you ask them, they’re going to tell you what they did. You can usually just tell by what they did, what role they were in, as to whether they were successful or not; were they seen successful, or were they seeing successive promotions? If there are successive promotions, you know they were probably doing something right. If they got promoted and then just kind of stayed in that same position for many, many years, and maybe didn’t get or see a lot of success, maybe they moved up the ladder a little bit, maybe they didn’t see as much.

So it is a little bit harder to really quantify the success, if you will, for somebody who’s working in the business. Even if you kind of just kind of go straight into somebody who owns her own business, what’s the success of that? Obviously, again, asking them and saying, “Hey, how can you describe to me how you ran that business? How successful was it?” They should be able to talk to you about numbers and could be challenges that they had. That’s maybe something you can do too, is ask, “What kind of challenges have you had in business and how did you overcome them? Did you just kind of roll up in the fetal position and suck your thumb and cry? Or did you really kind of tackle it head-on?”

If you wanted to take it a step further, obviously, you could ask for references. But one of the things that I have always found with references is that no one’s going to give you somebody named that is going to talk bad about them. That, to me, is even not as beneficial as just asking somebody, “Hey, what kind of success have you had? Did you grow your company from x to x in two years, or five years, or 10 years, or whatever it was? What kind of challenges did you have along the way?” But I will say it, it is a little bit harder to quantify that success.

Joe Fairless: And what would be a reason why someone who was successful running a business would leave that business and do a different type of business model, like doing a syndication?

Dan Hanford: Well, I look at my own background in business – I still have them today; I have a group of nonsurgical orthopedic medical clinics that my wife and I started from scratch. They’re 100% debt-free, they cash-flow very nicely, we’ve built those clinics up, and we have a great solid team of about 40 employees that run that for us now. We actually have built that business to the point where it’s 95% passive at this point. So we don’t go into the clinics every day and we don’t do everything. But we wanted to keep more of what we earned, so we stepped out of that business, and went into the real estate space.

That’s kind of how passiveinvesting.com got started, when we merged, Danny Randazzo and Brendan Abbott, all three of us came together and started passiveinvesting.com, to be able to help other people that maybe have a successful business and they don’t really want to get out and do something different; they want to stay in it, and we can kind of help them invest their hard-earned money to be able to increase their return and grow their wealth.

Joe Fairless: What’s the second red flag?

Dan Hanford: The second red flag that I would bring up today is about managing partners. The red flag itself is anybody who has only one managing partner. The reason why I always say more than one managing partner… Obviously, I think the preference is at least two, but ideally, three. Obviously, because I’m…

Joe Fairless: Why is that ideally three?

Dan Hanford: I say three because, for our group, it’s great, we have three managing partners and we have all these three different lanes… I would say at least two, but of course, with our group, we have three; I think it’s a great number. But I’d say at least two unrelated people, meaning that you couldn’t be a husband and wife. Because they could possibly go on a trip to Mexico one day and fall off a cliff and you never hear from them again. So really kind of where we came up with this was not from our own experience. It was with somebody else that we knew, who had an experience where they invested $200,000 of their own money in an investment, and they actually convinced one of their friends to bring in and invest $200,000 in that deal with an operator. Within about six months, the operator disappeared, and they can’t call him, they can’t text him; they tried to go to his house, they tried to go to the property management company, nothing.

The property management didn’t have any communication with the person and they just couldn’t find him. And of course, how do they get access to their return or their money or their properties like that? They had to go through this long court process to try to get access to their funds. For one, they had one of the things that’s in the operating agreement is that they had to arbitrate before they go to court. Well, how do you arbitrate with somebody you can’t find?

So to avoid all of these issues, I’d say at least two managing partners that are unrelated. That way, if for some reason somebody has a problem, you can always get access to somebody else. Obviously, as the team grows, it obviously makes the investors feel even more comfortable, because… I know your team has grown quite a bit. We just hired on the 30th team member that works full-time for us. So even if all three of the managing partners went out, there are 27 other people that they can reach out to, to try to find somebody. But with this particular group, it was a new syndicator, he was pretty much the only one running the ship, and he wouldn’t ghost on them. To this day, they still haven’t found him. It’s been quite a battle for them. I think they’re still going through this process to try to get access to it. So that would be the second red flag is really only one managing partner.

Joe Fairless: What’s the downside to having three managing partners?

Dan Hanford: [laughs] Well, I’d say right now, I don’t really have any downsides. I think one of the downsides that could come about when you have three managing partners is if you have managing partners that do not have complementary skill sets. This also is kind of the same thing when you have any more than just one. If you have two, three, four, five, right? I think four and five is getting to be too many; more than five is always way too many, there are too many cooks in the kitchen. But even with two or three, you can partner with somebody that does not compliment your own skill sets and it could cause conflict.

The tendency for us as humans is we like to hang out with people that like the same things as us. You go to a conference, you meet somebody that likes to do underwriting, and you start talking geeky underwriting stuff, and you guys just hit it off, “Let’s partner together.” The problem is that down the road, you start to butt heads about how you want to do underwriting. Then you realize, “Wait, we need to have somebody that does investor relations. We need to have somebody that’s doing the marketing. We need to have somebody that’s doing the asset management,” all these different additional pieces of the puzzle. That’s a lot of times why partnerships… Not even just in real estate and in this stuff, but just in business, in general, where partners get together and they don’t have complementary skill sets.

So when you’re trying to find that other partner to partner with, try to find somebody that does not like to do the same things that you do. If you’d like to do underwriting, find somebody who likes to do on-site due diligence, asset management, broker relations, and investor management. So I would say the biggest downside for any type of partnership, whether it’s two, or three, or four, or five, is having partners that do not have those complementary skill sets.

Joe Fairless: And number three…

Dan Hanford: I would say number three is when you look at distributions as “return of capital” versus “return on capital”. The actual red flag would be distributions as “return of capital”. It’s one of those things where you really have to watch carefully on a lot of the PPMs, because it’s literally one letter different, on versus off. For us — not just for us, but in general, it’s better to have “return on capital” with distributions versus “return of capital”. The main reason why is because if you think about your preferred returns, the preferred returns are based off of the unreturned capital contributions, which is, if you’ve put in $100,000 and you’re getting your preferred return off that 100,000, if you have a, let’s just say, a 7%, preferred return, so you’re given $7,000 the first year, if it’s a “return of capital”, now that unreturned capital contribution balance goes from 100,000 to 93,000. So now your preferred return is actually based off of a lower amount, so over time, your preferred return actually goes down. So it certainly benefits the operator but it does not benefit the LP.

Now the operator will many times try to convince the LPs that it’s actually better for you from a tax perspective. Because from a tax perspective, if it’s returning of your capital, then you’re not going to pay more taxes on it, because we’re just giving you back the capital that you put in. But the thing is, it doesn’t really advantage me, because I’m going to be balancing out in the end when we sell anyway. And along the way, I’m getting negative paper losses, like K1s with negative passive losses with depreciation. That’s going to offset my return on capital distributions anyway. So both ways have similar tax advantages and they’re going to both balance out in the end anyway.

So really, the return of capital for distributions is really only benefiting the operator. From an LPs perspective, you have to look very carefully at that, because a lot of times that’s just another way for operators to kind of –I don’t want to say sneak in if you will– a juicing of their own returns by having distribution classified as return of capital.

Joe Fairless: Where would that be located?

Dan Hanford: The best way to do this… I’ll just kind of share with you real quick how I review deals. The first thing I do is I get the PPM and I just search the PPM for distributions. There’s usually two, sometimes three, what they call distribution waterfalls. There’s the cash flow waterfall for what happens to all the cash that comes in during the whole period, and then there’s going to be a – when you sell the property or when you do a refinance, what happens to that cash. So I go there and I look exactly what’s going to happen. Okay, first, this is going to happen; second, this is going to happen. Usually, inside of that language will actually state that the distributions will be classified as “return of capital” or “return on capital”, so you can kind of determine how they’re actually going to classify your distributions so that you know exactly how they’re going to classify those distributions.

Break: [00:20:04][00:23:01]

Joe Fairless: Anything else that we haven’t talked about as it relates to these three red flags that you think we should before we wrap up?

Dan Hanford: I think we pretty much hit it on these three red flags. The biggest thing I would say is these are red flags that I’ve come up with from my wife and I going in and investing with other people. These are three things that you can go study and figure out for yourself how you want to do things. But these are three red flags for us in our family, like if these are present, we’re not going to invest. You just have to take these, study them. I would suggest that everyone who’s listening come up with their own red flags so that when they’re looking at investments, they know what these red flags are. Also, as your family grows, if you have children or whatever, start to teach them some of these different things and walk them through them so that they can fully understand it along the way as well. I’m kind of doing the same thing with my daughter, she actually is investing in a couple of our assets through me. She’s not an accredited investor yet, but she’s investing through me. I’m teaching her how she can invest and get some of these types of returns with these investments I have for a minimum investment of $1,000. Once she gets $1,000, she can invest. She’s got two of them so far and she’s working on her third one.

Joe Fairless: How old is she?

Dan Hanford: She’s 11.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Dan Hanford: Sure. You can go to our website I mentioned earlier, passiveinvesting.com, or if you want to link with me, you can go to linkwithdan.com, just go straight over to my LinkedIn profile.

Joe Fairless: Dan, thanks for being on the show. Thanks for sharing these three red flags or stop signs, as you mentioned, and talking through them each in detail. Hope you have a Best Ever day and talk to you again soon.

Dan Hanford: Thanks.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2693: The Secret Strategy for Turning Motels into Profitable Long-Term Housing with Andrew LeBaron

Andrew LeBaron decided he needed to niche down his real estate strategy. That’s when he had the idea to convert motels into long-term stays. Varying slightly from an apartment, Andrew’s motel conversion strategy allows him to cut certain costs and hurdles that typically accompany multifamily properties. In this episode, Andrew walks through the benefits of long-term stays over apartments, the budget differences between motels and multifamily, and how he’s created his conversion strategy.

Andrew LeBaron | Real Estate Background

  • Syndicator, Apartment Motel Owner. His business model is reviewing small to midsize motel/hotel assets, underwriting the deal, purchasing, converting, and refinancing.
  • Portfolio: GP on motel assets: 42-unit, 13-unit, 22-unit, and an 18-unit.
  • Upcoming deal for a 129-unit Motel that he will convert to apartments.
  • Based in: Phoenix, AZ
  • Say hi to him at: buymoretime.com | Facebook and Twitter: @andrewinvestor
  • Best Ever Book: Raising Capital for Real Estate by Hunter Thompson

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Andrew LeBaron with us. Andrew, how are you doing?

Andrew LeBaron: Excellent, man. How are you?

Slocomb Reed: Doing great. Good to be here. I’m excited about this interview. Andrew is a syndicator and apartment, motel owner. His business model is reviewing small to mid-sized motel and hotel assets, underwriting the deal, purchasing, converting, and refinancing. In his current portfolio, he’s the GP on 42, 13, 22, and 18-unit motel assets. He’s got an upcoming deal for a 129-unit motel that he will convert into apartments. He’s based in Phoenix, Arizona, doing a lot of work in Show Low, Arizona. What got you into real estate Andrew?

Andrew LeBaron: A long time ago I used to work for Chase Bank. I was in the mortgage department, customer service, making a whopping 40,000 bucks a year… And I took a call from a gentleman who said he needed the payoff quote for 10 of his Santa Monica or SoCal real estate properties. I noticed that his name was not on the loan. Now, he had 10 properties he owned on the deed, but his name was not on the loan. So I thought something fishy was going on. I said, “What’s going on?” He said, “Well, I took over payments on these 10 properties.” And I realized that he only owed a third of the value of the Santa Monica, SoCal properties. So he instantly made 6 million bucks, just about seven years ago, by taking over payments on these properties that were struggling, and then sold them to another investor. And I thought I’m in the wrong niche, I’m in the wrong business; I need to stop doing what I’m doing and learn real estate. That’s when I just started…

Slocomb Reed: Or at least you’re in the wrong seat at that table.

Andrew LeBaron: That’s exactly right.

Slocomb Reed: Gotcha. Now, your niche is motels?

Andrew LeBaron: Yes.

Slocomb Reed: Cool. You convert them… Am I correct in assuming that means that you’re buying properties that are currently operating as motels and then converting them into long-term apartments?

Andrew LeBaron: That’s correct. I source C class, B class motels that could be long-term or apartment assets, and they need to be in areas where housing is needed. It’s an interesting niche, actually. It actually works really well, because there is a huge need for housing. After COVID, a lot of these motel owners took a huge hit. COVID really stymied their business, their operations; they had to shut down — if they had a pool at their motel, they shut that down; if they had continental breakfast, they shut that down. So it really messed up their operations as far as just running it as a motel short term. So I found that opportunity as “Hey, why don’t we pick these up? Why don’t we add some basic needs like kitchenettes, add a stove range top, add a microwave, add a refrigerator? Why don’t we turn these into longer-term stays?” It’s been working really, really well. The price that you pay for a motel and the cap rate that it turns into when you put long-term people in there is wild. Motels are significantly cheaper than apartments.

Slocomb Reed: What is the difference in cap rate there?

Andrew LeBaron: It doesn’t make any sense, honestly… So here’s a good example. If I have a 20-unit in Phoenix or a 20-unit in Arizona, investors are going to purchase these properties at 130,000 to 140,000 bucks a door, which might bring you around a six to 8% cap rate. A 6% to 8% cap rate is a pretty decent target for multifamily. For these motels, what we’re paying for 20 units might be… I paid $690,000 for 22 units, and each unit brings in 1,250 a month. So just outlandish cap rates when it’s all said and done.

Now, cap rate also includes [unintelligible [00:05:02].08] your vacancy rate and capital expenditures or operating expenses, right? We don’t really put much into these buildings. I think it’s just because the market is so hot, we don’t need to, and everybody needs a place to live that’s affordable. We’re hedging alongside inflation, so people don’t even care if there’s a kitchenette; they’ll live there, they’ll live there long-term now. We need to be good stewards of our guests and residents, so we’ll add what we need to add there for people to be comfortable… But I guess that’s the big difference between motels and apartments as far as cap rates.

Slocomb Reed: Andrew, what I think I just heard you say is that you can buy motels in your area for between 30k and 40k a door. If they were traditional apartment buildings, they’d be worth 130k to 140k a door, and you’re not putting all of that much money into converting them. It sounds like a dream come true, right? So what other issues, other hang-ups do you come up against? Do you have any trouble dealing with local government authorities getting certificates of occupancy? Do you have to do that for this kind of conversion?

Andrew LeBaron: You don’t have to do that. Now, we could go down the route of rezoning. In fact, on one we’re about to put under contract – it’s a 129-unit – and that will be converted into 82 units when we’re done, but getting a zoning attorney to zone it multifamily high-density would be wise. In Arizona, we don’t worry about that. As far as we’re concerned, as far as our attorneys are concerned, there’s no issue with having a long-term stay option at a motel acquisition. We don’t have long-term leases; we don’t write leases, these are not lease agreements. We still treat this as a motel, but we allow them to stay on a month-to-month basis. Now, my attorneys have said, if you do introduce a lease agreement, then you are subject to the landlord-tenant act, and you are subject to formal eviction protocols. Right now, we’re not. If you don’t behave, if you don’t pay, you’re out; you’re trespassing. So it avoids eviction orders as well.

Slocomb Reed: Got you.

Break: [00:07:02][00:08:41]

Slocomb Reed: Andrew, I’m hopefully putting myself in the perspective of our Best Ever listeners… Mentally, I’m trying to figure out where are the problems, what issues do you face with this kind of strategy… Because it sounds amazing. I wonder if it’ll work in Cincinnati where I am, because if so, I’m going to go find some motels. But it’s pretty close to a BRRRR model of investing, it sounds like, where you’ve got a cash-out refinance on the back end to get your money out to go buy the next one. Do you come across any issues with the refi? Are appraisers and lenders treating this as an apartment building when you’re done, or are they treating it like a motel that just gets a lower cap rate?

Andrew LeBaron: Yeah, that’s the tricky part. You’re going to get a much better cash-out refi option, even up to 80% LTV, or LTC rather, loan to cost, which is completely different than LTV, as you, I’m sure, are aware, if you do rezone multifamily. If you rezone multifamily, your lenders are going to be happy. They’ll be much happier than if you say “Hey, I’ve got a motel.” You kind of lose them after that.

Where this comes in is you leverage private capital, you leverage fund capital, and you’re able to paint the picture. If you don’t rezone, your exit should still be able to allow you to cash flow, and/or sell, 1031 exchange, liquidate, refinance. Now the refinance, if you don’t rezone, from as far as what I’ve seen, unless there’s a lender out there that wants to help me out, I could use that; the refinance [unintelligible [00:10:15].00] And it’s a commercial loan, it’s around 6%, no cash out option, unless it’s below 50% of appraised value for this specific lender. They’re very conservative, they’re very safe, they’re very cautious. But yeah, hopefully in the future, we find another lender for our partners and it might work out.

Slocomb Reed: I’m trying to wrap my head around the basic numbers of a deal like this. Do you normally acquire between 30k and 40k a door?

Andrew LeBaron: No, it varies. Our best deal is 19,000 bucks a door. The yields per door are not as high, though. Of course, they’re still really decent, it’s still 900 to 950 bucks a month per door on a $19,000 a door, but they fluctuate. The reason why I’m attacking these motels is because — there’s gotta be some room. Now, you said, “Hey, it sounds too good to be true. What’s your problem? What’s the problem child?” Well, I’ll let you know. These aren’t subdivided units, so your utilities are still going to be combined. That’s problematic; some people don’t like that. I don’t mind it, as long as the name of the game has cash flow and equity. If I’m locking in equity and it has a really decent yield, then I’m not too worried about it. Of course, it helps me out too, because most investors that are in the multifamily – they want that subdivision big time. They want those utilities to be divided, electric, sewer, water, trash, and everything else. I don’t care; there’s less competition that way. I just wrap it all inside of one fee when they pay month to month.

Slocomb Reed: Did you ballpark how much you’re paying in rehab to put in these kitchenettes, to do the things you need to do to attract long-term — well, I guess we’re not calling them tenants, are we? Because they’re not on a lease. Long-term, month-to-month guests. Generally speaking, what does that renovation cost per door?

Andrew LeBaron: $8,000 to $14,000, depending on what the bid is. Honestly, we’re just leveraging the back bathroom wall. If you close your eyes and visualize this right now, you walk into a motel room, you see a bed, you see a TV, and you go to the far back – and hopefully, if these are larger motel rooms, you’ve got a bathroom; there’s a back wall that you tap into, and you got your drain, you’ve got your water supply. So you’re going to put in your bottom cabinets, you’re going to put in a small slim-line RV style dishwasher, you’re going to put a small 20-inch range stove… If you’re going to add a range stove, you need to add 220 electrical, which isn’t a huge issue. We could do it for pretty cheap, now we’ve done this for a little bit… You don’t have to do that either. You could say, “Look, there are no ovens in here, but there’s a flat top.”

We don’t need venting for a flat top. If you need venting for a flat top in a specific area, you just use a microwave hood. You put the microwave above the flat top, and they have those installed vent hood microwave combos, you just vent it up through the attic, to the roof. But that’s pretty much it, that’s all you’re doing, you’re creating studios.

Now you can combine rooms and you kind of have to evaluate, “Okay, if I combine two rooms to make an official one bed, one bath, or I can combine three rooms together and make it a two bed, two bath. Am I really going to get the bang for my buck? Is my IRR going to turn out better if I combine them or if I leave them as is? I think a healthy mix is wise, to have a healthy mix of all of them. Plus, it gives you a better resale value when you want to liquidate.

Slocomb Reed: It gives you a better resale value to have some of those one and two beds, as well as studios?

Andrew LeBaron: Correct.

Slocomb Reed: I assume that three studios would gross higher rents than one two-bedroom apartment. Am I wrong?

Andrew LeBaron: No, you’re correct. The only reason why we would do a combination is just diversification. You have different types of demographics of tenants and residents. Some of my partners really like the fact that you have a small family in a two bed two bath, then you have a bunch of single people in all the other studios. We actually separate them, we make sure that the families are maybe in one area, and the studios are in a different area. It’s an ecosystem. When you have an apartment complex or you have a multifamily, it’s an ecosystem. You’ve got to really think about that planning, and how you want people to interact with each other.

Slocomb Reed: Speaking of an ecosystem, there are very few investors operating at a high level like you, Andrew, who can say that they’re creating affordable housing. And there’s definitely a high demand for affordable housing right now, because that’s not what gets built ground-up. So finding opportunities like this, buying motels, converting them into what can be affordable long-term housing, there’s a definite need there, and I can see where it would be profitable. Coming back to me wrapping my head around the general numbers and bringing our listeners along with me… Your acquisition, let’s say it averages around 30k to 40k a door, and let’s say your renovation averages another 10k to 15k, you’re at 45k to 55k a door, an acquisition. And then assuming — let’s just talk about the studios, we’re not talking about combining units. The average rents that you’re seeing on these studios that you’re all in for 55k or less?

Andrew LeBaron: Yeah, it’s around $1250 a month.

Slocomb Reed: $1250 a month. And are you raising capital to buy these?

Andrew LeBaron: Yes. It’s funny, I’m in a very interesting transition. I recently spoke to Joe about this, too. I am in the transition of building a fund rather than just syndicating each deal one by one. That’s a very funny place to be. I’m re-pitching the same deals over and over again. I do give up equity in a lot of these deals, but the private investors that jump in get really excited when they see the price per door and the yield per property.

Now, you have to remember that I said $1250 a month on the studio, but that includes sewer, water, trash, and electric; it also includes gas. And what’s great, Slocomb, is I don’t compete with other apartments. There is no competing; I’m cheaper than them, and you don’t have to qualify for utilities, because I provide that. It even includes internet and cable. So it’s an all-inclusive price. Most people don’t like the hassle of calling up their cable company, or the internet company, and the utility company; it just takes time.

I also don’t charge deposits. So if it’s $1250 a month, it’s $1250 right off the bat. If you have a pet, there is a pet deposit and there is a pet fee. But I don’t charge one month’s deposit. If I need you out, I call the police and you’re out. I haven’t had to do that yet, but I think people behave much better inside of this type of setup, because they know the ramifications if they don’t comply.

Slocomb Reed: How long have you been doing these motel conversions?

Andrew LeBaron: A little over a year, not even that long.

Slocomb Reed: A little over a year. Okay. This may be a tricky question then, but what is your average length of stay? What’s your average vacancy? How long is it?

Andrew LeBaron: Yeah, that is a weird question, only because each asset is so different, they’re so unique. If I were to put them all together and give an average, I would say it’s under 10% vacancy. And the length of stay, I’d say four months.

Break: [00:17:33][00:20:30]

Slocomb Reed: Your average length of stay is four months. So when someone moves out, how long until you have somebody else in there?

Andrew LeBaron: It’s a line. We pre-sell spots all the time. We say, “We’ll hold it for you. Come on in, take a look.” “Oh, can I come now?” “No, we’re cleaning up. No.” Our management team make sure that there’s a healthy five to 10 people deep of people that want that backup broom when someone’s vacated it.

Slocomb Reed: I get that. One of my apartment buildings is in an area where there just aren’t that many apartments, so we just leave our marketing active year-round to attract people… And just because there’s much greater demand than supply in that area, we can get things filled up pretty quickly. So I’m sure the way that you’re running things, that’s not hardly an issue. Andrew, what is your Best Ever advice?

Andrew LeBaron: Make excellent relationships with sellers, with private money partners, and you’ll be just fine.

Slocomb Reed: Awesome. Well, Andrew, I know you’ve been a guest on this podcast before. Are you ready to go back through the lightning round?

Andrew LeBaron: Yes, let’s do it, man.

Slocomb Reed: Awesome. Let’s do it. Andrew, what is your Best Ever way to give back to the community?

Andrew LeBaron: I like to pick up the phone and just help people out. When they have a question, when they need help, when they say “Hey, I’m struggling to raise private capital, or I’m struggling to find a deal, or I kind of feel like I’m pushing too hard to make this deal work.” I give them my honest opinion and I tell them exactly what I would do. I’m not charging fees for it. Honestly, nothing against people that do that, nothing against people that charge coaching fees, nothing against that, but I’m just trying to help others because I know it’s going to come back. It’s just the law of reciprocity.

Slocomb Reed: Totally. What’s the best book you’ve recently read?

Andrew LeBaron: I really like Hunter Thompson’s book, Raising Private Capital for Real Estate. That’s a really good book. He talks about how the deal should come first, and then the money. That’s always a question. Should the money come first, then the deal? Well, if you have a great deal, great money follows. It doesn’t mean you could put the deal together, it doesn’t mean you really qualified the deal, because there’s talent in there, there really is connectivity and relationships that need to be built… But look and source great deals.

Slocomb Reed: What’s the most money you’ve lost on a deal?

Andrew LeBaron: I bought 45 houses in a portfolio, I paid $5.3 million dollars, and the deal… Get this, this is a great story. The deal was I went to a hard money lender, I [unintelligible [00:23:03].25] all my properties, my duplexes fourplexes, and everything, just to get the hard money loan. This was years ago, about four and a half or five years ago. I liened on my properties, got pretty much a title loan for 5.3 million, bought the 45-house portfolio, and we created a waterfall structure. For Best Ever listeners, that’s if I sell a property, all the proceeds have to go back to the lender first before I get paid. And it was a strict waterfall debt structure. I kept selling all these properties. I was actually wholesaling, not really wholesaling, because I had to close on them. So I bought them, sold them quickly, and I had a balance of $1.8 million left, and 13 properties left. And I undersold so many properties that I had a whopping 1.8 million left I owed the lender before I could make a dime.

The monthly payment on it was like 18k. After four months of paying 18,000 bucks, I just couldn’t do it anymore. I went to the lender; the lender is a friend of mine. I said, “I can’t do this anymore.” He’s like, ”Well, I’ve got to foreclose.” He’s a fund manager, so he says my partners can’t just [unintelligible [00:24:13].16] high and dry. I said, “Well, why don’t we do a deed in lieu?” He’s like, “Yeah, we could do a deed in lieu. That’s totally fine.”

So we do the deed in lieu foreclosure, I give him all the 13 properties back to him, he sells them, makes a profit for him and his investors, so I’m glad and I’m happy for him… I didn’t get any of my properties back that I liened; those were absorbed. So I literally started with zero, and I probably lost three million. That was a really sad story. But in real estate, you can rebound extremely fast.

Slocomb Reed: Tell me about that. Tell me about the most money you’ve made on a deal.

Andrew LeBaron: I’ve made a lot of money on equity that I haven’t realized yet, if that makes sense. We’re all sitting on equity, so I don’t know if that counts… But I’ve made a couple hundred thousand dollars on the flip on a six-plex flip. We bought the six-plex for 60k down, the seller agreed to a 3% interest-only payment, which is five years interest only. I only paid $1,350 a month on the six-plex. Each unit makes around 1,300 bucks a month, and I sold it for 200k more. I shouldn’t have sold it, now that I think about it. It bugs me that I sold it, but I sold it for 200k more just a year later, so I made over $200,000 on a really quick and easy seller carry purchase and sell.

Slocomb Reed: Nice. You’ve had some valleys for sure, but you’ve definitely had some peaks, too. Tell me a little bit about this 129-unit you’ve got coming up.

Andrew LeBaron: So the 129-unit – we are about to lock in a contract; the same owner that sold me the other motels is selling me this one. He’s already on board, we’re good to go. I submitted it just a couple of days ago. It is a 129-unit, 1976 roadway inn, an Econo Lodge. If you’re familiar with Econo Lodge, these are just motels that you see across the US; these are awesome boxes. This one’s in Phoenix, it’s two miles away from a 750-million-dollar development that investors are going to build. So I’m going to undercut their rates. Typically, when I source a deal, I look for activity in the area, and where I can kind of slide in, and be very competitive if this is a great deal. So we’re going to condense the 129 units to 82 units, we’re going to have 18 two-bedroom, two baths, 15 one bed, one bath, and 45 studios. We’re going to take the office, we’re going to blow it out, we’re going to make the office two-story, with a business lounge and amenity center. It’s going to have a hot tub and gym.

On the second floor, it’s going to have three residences with exterior stairs that get to the second floor, and then there’s going to be a rooftop lounge. We’re adding a dog park, which is crazy… One of my investors is like, “Dude, we need to add a dog park.” I’m like, “Why?” He’s like, “I’m telling you, people love their dogs. They travel with their dogs, they live with their dogs, and they need a dog park. But you won’t compete.” I’m like, “Okay. We’re going to do a dog park.”

But yeah, it’s an exciting deal. The total acquisition is five million; renovation cost and reposition all-in is close to four million, which includes a rezoning of about 100k rezoning. The rezoning should bring us to a valuation of 15 million when we complete it. So 82 apartments in Phoenix, that’s the comparable value after the appraised value. That’s a prospective appraisal, by the way; that’s not set in stone. But anywhere from conservatively 12 and a half to 15 million.

Slocomb Reed: Got you. And what does that look like? I assume that is planning for a five-year hold. What kind of return are you giving investors on that?

Andrew LeBaron: Yeah. It’s going to be 8% pref; I charge a 2% catch-up, and it’s going to be a 60/40 split on the back end. It’s an eight-year fund. But the exit on this particular one, hopefully, it’s going to be within five years. The goal is to sell and 1031 exchange into another asset.

Slocomb Reed: Well, this hasn’t been very lightning-y of a lightning round…

Andrew LeBaron: Sorry about that. [laughs]

Slocomb Reed: No, that’s fine. I’m the one who’s supposed to be in control, asking the questions. Where can people get in touch with you?

Andrew LeBaron: You can find me on Facebook. Just search Andrew LeBaron, I show up, I’m wearing a white shirt and tie. I probably should be more realistic, I don’t even wear a white shirt and tie usually. I’m on Facebook, or you can email me andrew@buymoretime.com.

Slocomb Reed: Awesome. Well, thank you for tuning in, Best Ever listeners. If you enjoyed this episode, be sure to leave us a five-star review and share this episode with someone you think could benefit from the best real estate investing advice ever. Don’t forget to follow and subscribe to our podcast so you don’t miss anything. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2689: Scale from LP to GP with These 3 Tips with Joel Fine

Starting out as a Limited Partner, Joel Fine did everything he could to learn about multifamily syndication: he read books, listened to podcasts, and even asked to be part of a weekly GP meeting on one of his passive deals. In this episode, Joel discusses how he scaled from being a Limited Partner to a General Partner.

Joel Fine | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Joel Fine. Joel is joining us from Austin, Texas. He is a multifamily investor and syndicator that buys undervalued assets, improves them, and then sells them. Joel’s portfolio includes over 1000 doors as a GP and over 5000 doors as an LP. Joel, thank you so much for joining us today and how are you?

Joel Fine: I’m great, Ash. Thank you very much for having me.

Ash Patel: It’s our pleasure.

Joel Fine: Really appreciate getting to talk to you.

Ash Patel: Yeah. Joel, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Joel Fine: Absolutely, yeah. I originally went to college to learn to be an engineer. I worked as an engineer for many years, then as a project manager, and a program manager. Back then I was living in California. I started doing real estate on the side, but only did real estate outside of California. I didn’t like the characteristics of the California market; no cash flow at all, we were just counting on the appreciation. As it turns out, in hindsight, the appreciation was great, but I didn’t want to take that risk on buying properties that didn’t cash flow.

But eventually, I came around to learning about other markets that do cash flow. I bought a single-family house in Texas, and then some duplexes and triplexes and other small stuff in Ohio. I learned about syndication and started getting involved with syndications, first as a limited partner in a passive capacity, and then later, as an active general partner or sponsor. About the time I was starting to invest more heavily in real estate and ready to make the transition from passive to active, my wife and I moved from California to Texas; we moved about a year and a half ago, right in the middle of COVID. That was a kind of an exciting story in itself. At the same time, I left my W2 job and decided to go full-time into real estate. And at that time, that’s when I decided I want to pursue the active side of syndications, the active side of large-scale commercial multifamily… And I haven’t looked back since.

Ash Patel: So you moved to Austin right when it was popping?

Joel Fine: Yeah. In fact, I think I beat the flood by about a month. We moved in May of 2020, and within a few months, things just went crazy here.

Ash Patel: So Joel, for all those years that you invested as an LP, what were some of the things that you learned that GPS do well and that they don’t do so well?

Joel Fine: Let’s see. Things that GPS do well – first off, when they’re putting together a transaction, the assumptions they make about the transaction are absolutely essential. They can make assumptions that really can affect the apparent quality and value of a deal. For example, one of the assumptions you make is how quickly rents might rise over a period of time. If you move that a little bit, let’s say from 2% per year to 4% or 5% per year, it doesn’t sound like a big difference, but that can make a huge difference in the apparent outcome of the deal. So you have to look carefully at what kind of assumptions the GPs are making.

Beyond that, I love to see GPs that are transparent, that share a lot of information about what’s going on, both before the deal is closed, then after the deal is closed, and while they’re operating the property. Sharing the good and the bad. When things go well, and when the plan is being executed properly, but also when things aren’t going so well.

Sometimes you might have higher delinquencies than you anticipated, it might be a little more challenging to get renovations done, and so forth. So when things aren’t going well, it’s important to share that with the passive investors. They’re really not in control of the investment; most of my passive investors are remote, they don’t live in the Austin area. Likewise, when I was a passive investor, I didn’t live near the properties I was investing in. So there was really no way for me to make any first-hand observations about the property, so I was dependent on the general partners sharing information about the property. For me, that was really critical, this transparency. And then just diligence, making sure that they’re paying attention to the other properties operating, focusing on the key metrics, managing the property manager effectively; just good, high-quality execution.

Ash Patel: What made you transition from being an LP to wanting to become a GP.

Joel Fine: So when I first became an LP, it was sort of with the intent of, “Okay, I’m going to learn about this enough that I can decide if I want to be a GP or not.” I was content buying the small stuff, the duplexes, triplexes, and quads. But I felt like scaling up might be a good way to go. And as I learned about syndications and about how to go about investing in commercial multifamily, I realized that being on the active side is a much more effective way of scaling up. It gives me an element of control that I don’t have as a passive investor, and I’m willing to put in the time to do it.

As I said, when I moved from California to Texas, I left my W2 job to do this full-time. So I figured, “Okay. If I’m going to do it full time, I want to do it in the most effective, most scalable way possible.” For me, that was being on the sponsorship side over the general partnerships.

Ash Patel: Joel, what was your first deal as a GP?

Joel Fine: Let’s see… The first one was 42 doors in Austin; it’s a 1983 property, mostly untouched. The exterior looked pretty good, the interiors were pretty much what we call classic, which means they really hadn’t been renovated, they hadn’t been updated since the property was built in the ’80s. So there was a lot of opportunities there to improve the property, mostly cosmetically, which is really the ideal situation. A lot of properties, they’ll have issues like maybe foundation issues, or they’ll need a new roof. Things like that, you’ve got to do the repairs, but they aren’t going to really improve the top line, the rent you can get. A potential tenant isn’t going to come to a property and say, “That’s a beautiful new roof. I’m willing to pay an extra 50 bucks a month in rent to live here.”

On the other hand, if you swap out the interior components, if you repaint, put in new cabinets, countertops, new flooring, new plumbing fixtures, and lighting, that can really improve the property, not only from the perspective of the potential tenants, but also from the top line. Tenants are willing to pay more to live in a place that looks better. So anyway, that’s one of the characteristics of this property. Again, it’s 42 doors. As it happens, a few months later we bought the property next door that had 44 doors. Combining them, that’s 86 doors, and they’re literally next door to each other; they share a fence. We’re now running it as a single property.

That’s really important, because a 42-unit deal has challenges in terms of its scale. Below about 70 to 75 units, it’s really hard to manage effectively, because you can’t really afford an onsite property manager full-time. But once you go above 70 to 75, you can afford a full-time property manager and maybe even a full-time maintenance tech. That’s what happened with these properties – we combined them, a 42 and a 44 to 86. Now we’re running them as a more efficient property.

Break: [00:07:24][00:09:02]

Ash Patel: Joel, on the 42 units, how much did you raise for that deal?

Joel Fine: Let’s see. I think that was 1.9 million, purchase price was 4.4 million.

Ash Patel: The whole time that you were an LP knowing your end goal was to become a GP, were you prepping investors, gathering emails? Or did you wait until you found the deal?

Joel Fine: No. In fact, I started letting people know that I was involved in real estate, focused on real estate, and planning to syndicate. One of the things I did was I updated my LinkedIn profile to make it clear that I was no longer in the high-tech engineering IT field, I was now full-time in real estate, and I talked about the deals that I was a passive in. Because even as a passive, that’s a great learning opportunity to find out what syndication is all about, how the industry operates, how people manage their assets. In fact, in my first LP deal, I got the general partners to allow me to dial in to their weekly property management calls. I would dial in every week and just go on mute and listen. That was a terrific learning experience for me because I got to hear what kinds of problems they were having, how they addressed those problems, the problems that lingered and were difficult to solve so I used that as a learning experience. Then I communicated that kind of information to friends, family, acquaintances, people I knew, I attended lots and lots of meetups. I had been attending meetups in California. When I moved to Austin, I attended as many meetups so that I could hear, meet locals, just get to know the real estate community, and hopefully have them know me as a potential investment partner.

Ash Patel: Can you walk us through raising that 1.9 million?

Joel Fine: Yeah. I have to backup before the raise actually. My partners in this deal, there were three of us. My apprentice actually found the deal, got it under contract, and then brought me in to help out. We agreed that we would share the responsibilities of the capital raise. So we did the underwriting, reviewed the property, we wrote up a pitch deck, developed information that we could share with potential investors, and then we put together a webinar where we presented information about the deal. In that webinar, we shared all kinds of information. Again, transparency is important to me. We talked about not only the property itself and the business plan about the property, like what we wanted to do to the property to improve it, but we also talked about the markets, what was the neighborhood like, what’s the Austin market doing. We talked about what sort of comparable properties were in the area and why the behavior of those comparable properties justified the numbers we were putting together. We laid out our expectations of, “Hey, if we do the following upgrades to the units, we think we can get this much in additional rent, we think we can improve the net operating income, and so forth.”

We put that information together in a pitch deck, in a PowerPoint slide deck, presented that in a webinar. I think we had, I don’t know, at least 40 people attend. From there, it was actually fairly straightforward. It took us about two weeks to get all the commitments we needed to fund the deal. At that point, it was just a matter of going through the rest of the purchase process, including due diligence and getting the lender approval, getting the appraisal done, and so forth. It actually was very smooth. I think Austin is a very, what I would call a sexy market. When you tell people you have a deal in Austin, there’s a lot of interest in it. They know that Austin’s a fast appreciation market, it’s a place where jobs are growing, people are moving to Austin, so the demand is high. There’s a shortage of housing here so people are inclined, are attuned to invest in Austin. I think that was part of what made it relatively easy for us to raise the money. But within two weeks, we had the money and ready to go.

Ash Patel: What do you say to those people in New York, Austin, and Southern Florida, that say there’s no good deals here?

Joel Fine: Well, it’s very challenging to find deals, there’s no question about that. I have to give credit to my partners, they’re the ones that found that deal, and they found a couple of other deals since then that I participated in. It’s really all about relationships, getting to know brokers, getting to know sellers, getting to know lenders who might have access to deals. When you find deals, you underwrite them, and you have to be ready to move quickly. It can be challenging to get a deal to underwrite, to get a deal to look like it’s going to do well. But if you’ve got your ducks in a row, if you understand the market well, you know where the rents maybe are under market, and you have a good sense of what you can do to a property to improve it, there are opportunities. We’ve done two deals already in Austin, we’re in contract on numbers three and four. I’ve also done a couple of land deals here that are very promising.

Ash Patel: That’s incredible. Joel, in my experience, engineers make some of the best real estate investors because of all the systems and processes they employ. What’s one of the biggest mistakes you’ve made so far in your real estate investing career?

Joel Fine: Ooh, a mistake that I’ve made. I guess I would say one big mistake that I made was early on. One of the first properties I bought was a quad in Cleveland, Ohio. That was before I was really doing any syndications. In fact, I think it was even before I started being a limited partner. But this particular property was four units, it was in a suburb of Cleveland called East Cleveland. For folks who aren’t familiar with Cleveland, East Cleveland has a very poor reputation. It’s kind of the hood. This particular property was in a pocket of East Cleveland that was isolated from the rest of the city by a big park. It was right next to a much nicer suburb called Cleveland Heights. I was really optimistic about that. I convinced myself that my property, because of its location, was going to attract Cleveland Heights type tenants and not East Cleveland tenants. In hindsight, I was wrong. Bought it for 145,000, I did about $80,000 worth of renovations to it, it really needed a lot of work, rented it out for a couple of years. While I was renting it out, I had a property manager running it, but it consumed a lot of my time. Between vandalism, there were delinquent tenants, there were fistfights on the property, broken windows, broken lights. I finally gave up. I sold it for a little bit more than I paid for it, but much less than I put in, including the renovations. I probably lost about 60k on it. In hindsight, I suppose it was a good learning experience. I’ve heard folks call that expensive seminar.

Ash Patel: Just time and money.

Joel Fine: Exactly. It did help me on my journey. If I hadn’t bought that quad then I wouldn’t have bought other things I did buy in Cleveland that worked out much better. I wouldn’t say I regret it but it was certainly, in hindsight, a mistake.

Ash Patel: Yeah, thanks for sharing that. With your investors on the 42 unit and a 44 unit. What’s their projected return in such a competitive market?

Joel Fine: On that one, when we underwrote it, we were projecting 16% to 17% internal rate of return, IRR, with I think it was 10% cash on cash return. We had an 8% pref, we’ve been operating the property for a little less than a year, I think nine months now. When we bought the property, the units were almost all one-bedroom. The units were getting 950 to 975 a month, we underwrote for 1100 a month. We said, “Okay, we think after the renovations we do, we can get 1100 a month.” We did the renovations on a handful of units and tenants were willing to pay 1250 a month. We went from 1100 a month in our expectation to 1250 a month. We expect to beat our forecasts substantially. We haven’t quantified that, I don’t know what the number will work out to be. But we’re feeling really good about it. It’s like I said, the rent is higher than we anticipated that we put in our spreadsheets and so that’s just really good news for us and our investors.

Break: [00:16:43][00:19:40]

Ash Patel: Did you have appreciation as part of your proforma?

Joel Fine: Well, with commercial multifamily, the appreciation is embedded in the improvement to net operating income. It’s different from single families where appreciation is all about the comparable sales. If you’ve got a three-bedroom two-bath and your neighbor has a three-bedroom two-bath, you’re not going to get much more than your neighbor no matter what you do to the property, no matter how much rent you can get. But on a commercial multifamily property, if you can increase the rents and increase the net operating income, you can increase the value of the property, it’s almost linear. If you double the NOI, the net operating income, you can almost double the value of the property. For us, that’s what it’s all about. We can force appreciation by improving the property, by renovating, upgrading the tenant base, increasing rents, and thereby increasing the net operating income. That creates the appreciation so we don’t have to count on market appreciation. What we’re counting on is our ability to force that appreciation and then derive the benefits from it.

Ash Patel: Was your exit cap rate lower than your entrance cap rate?

Joel Fine: No. We always underwrite for a higher exit cap rate. It’s a more conservative thing to do. That particular property, I think we bought it 4.25% cap rate, which isn’t bad for Austin. In Austin, three and a half is not uncommon. But we bought it at 4.25 and I think we underwrote for 4.75% cap rate. It works out to about point 1% per year, which is roughly where we like to be.

Ash Patel: It’s very conservative underwriting. Good for you on that. Do you have a waterfall structure? If let’s say the cap rate is even lower when you exit and the appreciation is just through the roof.

Joel Fine: We haven’t put a waterfall structure on any of our multifamily value-adds. But the one land deal that I syndicated, I did put a waterfall again. That one, we have a 10% pref and then I think it’s something like 70/30 up to 20%, and then 50/50 after 20%. We figured, if we can deliver a 20% IRR to our investors, that’s pretty awesome. We all can be dancing in the streets. At that point, we’ll take a little bit more of the top-line as an incentive, as a reward for all of us for doing better than that.

Ash Patel: Joel, what is your best real estate investing advice ever?

Joel Fine: Best advice. I would say if you’re trying to get into the business, be ready to partner up. One of my limiting beliefs that took me a while to get over was I thought I had to do things on my own. When I was buying the little stuff, the duplexes and triplexes, I thought, “Okay, whatever I’m going to buy, I have to be able to afford to buy on my own.” Now I was dealing with debt, I was getting bank loans, but for everything I bought, I would have to come up with 25% of the purchase price. Once I broke through that limiting belief and decided I could partner up, suddenly I could buy much bigger assets, because I didn’t have to come in with 25% of the purchase price. I could come in with a much smaller number, maybe one or 2%. My other co-sponsors would come up with a little bit of it and then my passive investors would come up with the rest of the down payment, that would get us to 25 or 30%, the bank would do the rest. But the key thing is, by partnering up, both with other sponsors and limited partners, that enabled me to scale up substantially and buy a very different class of properties.

Ash Patel: Joel, are you ready for the Best Ever lightning round?

Joel Fine: Absolutely. Bring it on.

Ash Patel: Alright. Let’s do it. Joel, what’s the Best Ever book you’ve recently read?

Joel Fine: Well, let’s see. There are two of them, I want to give a shout-out to. These are actually for passive investors. I love it when people read these books and then have a conversation with me as potential passive investors because it makes them much more knowledgeable. One of them is called The Hands-Off Investor by Brian Burke and the other one is Passive Investing in Commercial Real Estate by James Kandasamy. They’re similar in terms of the content they present, but slightly different angles on the content. But the key is, they’re really great for people who are thinking about investing passively and just want to understand how to get into that, and how to do their due diligence since they can’t necessarily visit properties, they can’t necessarily look through the books the way general partners do. They’ve got to rely on a lot of information that the general partners are feeding them. Those books are really excellent resources for passive investors to learn about the business.

Ash Patel: What’s the best type of way you like to give back?

Joel Fine: A couple of things. One is, giving back for me is a kind of an interesting phrase because I think what I do on a daily basis improves lives. For me, that’s what’s giving back. When I buy a property and I renovate it and improve it, I’m improving the lives of my tenants, I’m giving them a better home to live in. That’s important to me. I’m also improving the lives of my investors by giving them a great return on their investment, by giving them good risk reward trade-off that allows them to diversify their portfolio and buy into asset classes that they might not otherwise be able to. I also run a meetup locally in Austin. I love to have people who want to learn about syndication and multifamily investing. Join me in my meetup. The education of other investors is important to me. When I was in California, I actually ran an educational nonprofit that focused on social and political education. I did that as a way to give back. I haven’t run across a charity organization in Texas just yet, but I’m hoping to find one that I can participate in.

Ash Patel: Joel, how can the Best Ever listeners reach out to you?

Joel Fine: Well, they can go to my website, lakelineproperties.com, or they can email me joel@lakelineproperties.com.

Ash Patel: Joel, thank you so much for joining us today, sharing your story, going to college, becoming an engineer, and getting into LP investments knowing your end goal was to be a GP. Congratulations on your success.

Joel Fine: Thank you very much. I appreciate the time.

Ash Patel: Best Ever listeners, thank you so much for joining us and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2687: How to Find First GP Deal with Melissa Elizondo

Melissa Elizondo wanted to branch out from her marketing firm and looked to add commercial real estate investments to her portfolio. In this episode, Melissa shares her current business strategy and analyzes her methods for closing on her first GP deal.

Melissa Elizondo | Real Estate Background

  • Partner at 1 Vision Capital which is a syndication group focused on converting existing landlords with single family portfolios into LPs on multifamily deals.
  • Portfolio: Limited Partner for 118-unit in Savannah, GA.
  • Full-time career as owner of marketing firm, Heartwood Marketing Solutions.
  • Based in: New Braunfels, Texas
  • Say hi to her at: 1visioncapital.com | Facebook and Instagram: @therealmelissaelizondo
  • Best Ever Book: The Energy of Money by Maria Nemeth Ph.D.

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

 

Follow Me:  
Facebooktwitterlinkedinrss