JF2776: 7 Things Experienced LPs Look for in a GP ft. Bryan Miller

L.A.-based musical composer Bryan Miller knew he needed a retirement plan, so naturally, he started buying and investing in real estate as both a GP and LP. He was so successful that he now co-owns Capital Stack Investments while still working as a composer for TV and film. After sharing how he got into development and how he develops build-to-rent deals in LA, Bryan took some time to explain in detail what he looks for in potential GPs:

 

1. They’ve been in the business a long time.

Bryan Miller wants to see track records when evaluating a GP. In fact, he prefers to work with those who have been in business since before the economic downturn in 2008 so he can determine how they handle stress and uncertainty.

 

2. They produce consistently high returns.

Bryan advises against chasing asset classes that promise high returns. It’s a better bet to seek out an operator that has produced 10%–20% returns consistently over a long period of time. 

 

3. They’ve been recommended by someone he trusts.

Bryan tries to leverage investment groups and advice from other people to find quality GPs. Ideally, he prefers to know the operator or receive a glowing recommendation from a friend who has had a positive experience with them.

 

4. They have investors they’ve been with for 5+ years.

Bryan recommends talking to these investors to determine how the GP acts when times are tough and how well they stick to their word.

 

5. They have deep pockets.

One multifamily deal Bryan was a part of wasn’t doing well, so the principal lent the project $1 million to keep it going. “If you don’t have a partner that has some deep pockets with the ability to weather some storms … then it’s a really tough position,” he says. 

 

6. They stay out of legal trouble.

With GPs who don’t have a long track record, Bryan examines other aspects of their lives — for example, do they have a lot of litigation in their background between partnerships? Do they have any bankruptcies or divorces? These can be indicators that the GP doesn’t perform well under pressure.  

 

7. They plan for the worst.

It’s a major red flag when the success of a deal relies on the hope that the market will improve in the future. Bryan sticks to GPs who underwrite conservatively. 

 

Bryan Miller | Real Estate Background

Greatest lesson: Be ready when opportunity strikes. Timing can be life-changing. I ran into the burning building of real estate in 2009 when everyone else was running out and was scared and made 1000%+ returns.

 

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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, Bryan Miller. Bryan is joining us from Rancho Mission Viejo, California. He is the co-owner of Capital Stack Investments which curates development projects in the LA area. Bryan is a GP on almost 100 units and an LP in over 15 different deals. He also owns a TV commercial and film composition company that works with all the large studios in Hollywood. Bryan, thank you so much for joining us and how are you today?

Bryan Miller: I’m doing great. Nice to be here.

Ash Patel: It’s our pleasure to have you. Bryan, 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?

Bryan Miller: Sure. My background is I’ve been a composer and still am a composer, writing music for film and TV projects. Out of that, I knew I had to build my own retirement plan. There was nobody funding the 401K except for myself, so out of that I started investing in real estate, buying real estate, and getting into it as a long-term strategy, just to have income in the later years… And then it turned out so well that it’s become its own business run.

I’ve been involved with lots of different things from owning a single-family portfolio, investing in lots of syndications, doing flips with partners, and now doing a lot of development deals where it’s basically like a build-to-rent. So how do you acquire assets in this market under value? Well, if you build those assets you can acquire for a six cap, in a market where you could sell for four cap, so that spread is your profit.

Ash Patel: Explain that to me, please.

Bryan Miller: Sure. Basically, it’s hard to go to the market and find a bargain now. Everybody wants premium prices in LA. There are buildings selling in the three caps, and maybe even some below that, there are rumors out. It’s really hard to make money in the short-term on those deals. People buy those deals, it’s a great store of value, they know Los Angeles is a great market, it’s going to appreciate over time. So people park money there, they make a little bit of cash flow, but not that much.

But let’s take a $10 million building – if you can build that building all-in for 8 million bucks, you just made $2 million. Because now you have a $10 million asset, but it cost you 8 million. What it does cost you is maybe a year or two of tying up your capital until you can complete that building and create a $10 million building for $8 million. So that’s how you build your profit. And actually, there’s a lot of downside protection in that, because if you went and bought the $10 million building that was just stabilized and the market drops 20%, now you have an $8 million building, and you just lost 2 million bucks. But if you’re building it during that time and the market corrects, and it comes down to $8 million, you just built an $8 million asset that’s worth 8 million. So there’s more downside protection in that than if you just go in the market and really don’t have any upside, and you’re just hoping that the market is stable and that you can push rents over time.

Ash Patel: So this is a build-to-suit type deal, right?

Bryan Miller: Yes, either build-to-sell or build-to-rent.

Ash Patel: Got it. Okay. So you find the land and then you find the potential tenants, or the other way around?

Bryan Miller: Everything would come from finding the property that you can build on first, then actually building it. We learned a lot in that whole process. The whole plan is be as simple as you can possibly do. We want to go into a buy right situation, which is you have the legal right to build four units or five units on that property, rather than the typical development play, which is an entitlement play, which might say, “Hey, I hope I can build 30 units here and I’m going to take the next three years lobbying the city to get permission to do that.”

The main goal is to go as simple as possible, and just go at an asset where you know you have the right to build that, so you don’t have to go through that normal entitlement process, so you reduce a lot of the risk of normal development.

Ash Patel: And Bryan, what’s a typical tenant? Is it retail, office, industrial?

Bryan Miller: Oh, these would be small multi-families.

Ash Patel: Got it. Okay, interesting.

Bryan Miller: LA has a huge supply demand imbalance. There’s very little new stock, there’s a lot of old stock. But because we have rent control – it’s funny, this is like the unintended consequences, like a politician — like, if we have rent control, we’re going to do good things for a renter. But let’s say you have a million units of rental units; well, 80% of those people are never going to move, because they have under-market value rents. They don’t want to move to market value rents, so they stay there. So instead of a million units, now you just cut out 80% of market, now you only have a sliver of the availability, a sliver of the supply, so you really restrict supply in that scenario. When you have restricted supply what happens? Prices go up.

Ash Patel: Interesting. Right now, I’m assuming you can build for a lot cheaper than you can buy.

Bryan Miller: Typically, yes; the building would cost you 10 million, but you can build it for eight. So yes, there is a spread there.

Ash Patel: What’s the typical return on investment on a deal like this?

Bryan Miller: It really depends, there’s a lot of factors. I tend to offer going for as simple as possible, building duplexes, building wood frame construction; all those things are simpler, faster, easier to build. Your more elaborate construction – it’s a higher degree and higher bar of inspections, a higher degree of scrutiny by the city, more inspections, more complicated fire sprinklers… All of it is more complicated. The simpler is better, but I would say it depends on how the deal performs. A typical deal would be 15%-25%. There are other partners that I deal with, they make 33% on a project level. That’s not net to LPs, but on a project level, they’re averaging out that as a typical return.

Ash Patel: And Bryan, you’re a lifelong composer; how did you get into development?

Bryan Miller: Well, when I was five years old, I got into development. My dad was a school teacher, and every summer we built a house. From June, July, August, I was out swinging hammer, sweeping floors, driving nails, and basically doing that. Every summer, we built a single-family house, and my dad would make almost as much from that one spec house as he did from his teaching salary. So I kind of got the vision of, “Hey, you build it, and if you create value – a wonderful thing; you’ve just figured out a great way to create wealth.”

Ash Patel: The good old days when you could build a house in one summer.

Bryan Miller: Yeah, exactly. Exactly.

Ash Patel: No supply chain issues.

Bryan Miller: Exactly.

Ash Patel: Very cool. So that was kind of implanted in the back of your mind, that no matter what you do, there’s a way that you can supplement your income.

Bryan Miller: Sure. For me, it was really how do I take capital from this business that’s doing really well and make sure that it keeps repeating. You don’t want to be like the typical guy in the music business, blowing through large amounts of cash and then broke in just a few years. I was like, “How do you take that and develop that?” That was part of that long term strategy of let’s take the good years, build it, and put it into assets that are going to continue to produce revenue for forever, until you sell that asset.

Ash Patel: And Bryan, you’ve got a 37 units subdivision in LA. Can you walk us through that deal?

Bryan Miller: Sure. It was actually kind of three different parcels that we put together; those are called small lot ordinances. People don’t typically build condos in LA, because there’s a lot of legal risk, because it’s really easy to do a class action against the condo builder if there’s any problem in the first 10 years; you can get sued. People went away from that, so a small lot is actually they’re single-family houses, but they look like townhouses. They look like they’re adjoined and almost like a row house but they’re actually separate; there’s actually six inches of air in between even though you can’t see the air. You actually have separate walls, so that makes those single-family houses.

And again, people in LA are paying $3500, $4000, $4500 a month in rent so when you give them the option to purchase that, when interest rates were in a really good stat, you could purchase about that same payment so it made a lot of sense for millennials to go and buy that asset, versus continue to rent.

Ash Patel: You took three parcels and develop 37 units. Are there any amenities or do you not have to offer anything, it’s just…?

Bryan Miller: There’s really no amenities.

Ash Patel: They’re just desperate for housing.

Bryan Miller: The amenities are rooftop decks, garages… But again, we’re talking about a millennial buyer; they don’t want a yard, they don’t want maintenance. The rooftop deck is a great place to go hang out, have friends over, get some fresh air in the evening. But there’s no swimming pools or massive infrastructure plays like that.

Ash Patel: What’s your role amongst your team?

Bryan Miller: Well, a little bit changed over time. I helped with the capital raising advising the developer, I’ve stepped in and helped with a lot of project management over the last year and a half, kind of driving the project to the finish line.

Ash Patel: And how do you find time to compose music?

Bryan Miller: That’s a good question. It definitely takes some diligence about trying to do time blocking. During this time, I’m going to push on these things. I try to be super organized, try to use Google Sheets, so people can reply without having to have a lengthy phone call; I try to streamline that, and I try to get really efficient in the writing, too. The process of being really disciplined, get your three or four hours of uninterrupted time, bust it, and then jump on to other things, and then come back to that.

Ash Patel: Bryan, you’re an LP in over 15 deals – mobile home parks, retail, multifamily self-storage, as well as LP and development deals. How do you look at where to invest your LP funds into?

Bryan Miller: Great question. I guess the easiest answer is you look very carefully about where you want to do that. As I’ve done this for a while, I’ve had partners who have just blown it out of the building; have invested 50 grand, and got back to 200 grand two and a half years later. Those are kind of like the home runs. There are other things that have performed at two or three or 8%, so LPs all perform differently.

But if I look about now as to how I evaluate those, I want to look for people that have been in the business a long time, I want to look for long track records, I want to look for if it’s possible that they were in business before the 2008 downturn, that’s a plus because you see how people handle stress and uncertainty. It’s interesting, people – like, LPs that you turn your money over to, it’s very interesting… Some personalities when they’re cornered, are fighters, they’re very creative, they’re scrappy, and they’ll figure out “Well, if I do this, I switch that, and I leverage this, and I give up this in order to gain that, I’ll be able to live and play another day.” There are other guys who basically go in the fetal position, suck their thumb, and basically get really stuck.

You don’t really know until the tough times come, what your partner is going to really do, and that’s the tough thing. So the way you look around that and mitigate that is you look for long track records, you look for a long history, you want to find investors that have been with them for five, seven, 10, 15 years. Because even if a person has success over a five-year period, it doesn’t guarantee that they’re going to be successful in the next five. It depends on what they do, who else was on the team, when they were successful; did they lose any key members, are they growing too quickly? There are still things, but that long track record of really doing what they say they’re going to do and being willing to pony up when the times are tough.

I was just in a multifamily deal in Georgia, it didn’t perform super well, and it had some problems. The principal on that deal lent the project a million bucks to keep it going, and he didn’t charge interest on it. So if you don’t have a partner that has some deep pockets that have the ability to weather some storms, when the storms do come, which they will come, then it’s really a tough position. You want to look for people that can have experience in weathering that emotionally, that they can stay in the fight when things get tough, and the phone calls get really tough, and the conversations get tough, but also, that they have some deep pockets they can write a check to help solve problems.

Ash Patel: Great advice on how to evaluate GPs on your deals. If you have a GP that has not been in business before 2008, what’s a good way to stress-test them? Because they’ve only seen positive economies and upticks and everything’s been great. How do you stress test somebody like that?

Bryan Miller: It’s really a tough question. I don’t know that you can, because the thing is, I think we can get freaked out. We’ve had such tailwinds since 2010. If you bought real estate between 2010 and 2020 and you lost money, something is horribly, horribly wrong. Because the market has been helping you, cap rates have been compressing, and interest rates have been coming down through that period… There’s been so many positive things that a lot of people performed super-well; it may not be a reflection of their skills, the market might have helped them out.

And take it wherever you get it but again, but it’s tough to look at and say, “How is that person going to perform?” I don’t know exactly how to answer that question other than you start to look for other things. Have they been in other businesses? Were they in a different business that happened in 2008? Do they have any bankruptcies? Do they have divorces? Do they have a lot of litigation in their background between partnerships? Any of those things that come up, I’ve found that history tends to repeat itself. So if a person has problems, or difficulty getting along with others, or is involved with multiple lawsuits, that probably means that’s going to happen again in the future. So those should be all serious red flags that you pay attention to.

Ash Patel: Interesting. I love that. Very cool. Bryan, out of all the LP deals that you’ve done, what has the best returns consistently? Mobile home, retail, multifamily, self-storage, development? How about the top two in order?

Bryan Miller: Oh, that’s a great question. I think a lot of this is operator-dependent, not so much asset class-dependent. Because I’ve done some great deals in multifamily where we did serious value-add on 188 units and it turned out great. So some of those have been my outliers on best performance. I’ve had some development deals where it’s 37% IRR, those are great; so probably those are the top two. But again, asset class does not equate to success. People can get their self-storage buildings repossessed and taken back. It’s happened to friends of mine who just had really unfortunate circumstances, like a brand-new class A facility being built right across the street. They had deeper pockets, so they were able to just lower rents, and all the renters from their facility went next door. Overnight, you go from 80% occupancy — not overnight, but after a couple of months, you can go down to 50% and 40%, and now you can’t debt-service. Even a super stable, “Hey, self-storage is great. You can’t lose money in self-storage.” Yes, you can.

All those are still — operator and environmental things go into that, so I just want your listeners to not be chasing asset class. I think it’s more chasing that operator that has produced 10%-20% returns consistently over a long period of time. That’s a much better bet than maybe some guy that got an outlier and hit a home run once, but you’re not sure maybe he’s going to strike out next time.

Break: [00:17:28][00:19:15]

Ash Patel: The GPs that you’ve invested in, have they all been recommended to you? Or have you ever sought out GPs from doing research?

Bryan Miller: A little bit of both. I’ve invested very rarely with the GP that I talked about the outsized return on. He was recommended — I was looking at some multifamily to buy myself in Phoenix, and that broker recommended me to this operator. We had a meeting, we had a long meeting, I pulled the trigger on him, because I liked him, I felt like he was really savvy and he was like a do whatever it takes guy… But it was a bit of a gamble, and I knew it was a bit of a gamble. But mostly, I’ve tried to leverage investment groups and other advice from other people.

I’ve invested with Jeremy Rowell, who – many of your listeners will know who he is; I’ve done a number of syndication deals with him. Again, you want to have the voice of experience and the voice of someone who’s been there, who knows to look for things. When I started out, I didn’t know a lot of the intricate things to look for, and most people don’t. It’s really tough when you first start to really know where all the pitfalls are, or even how the difference of “Is this distribution or return of capital that’s going to reduce your prep, or is it really just your prep and you’re going to keep your same capital account?”

There are so many nuances to this game, so it’s really important that you find people that have been in the business for five or 10 years. I have relied heavily on recommendations. The 506 Group is an amazing group of really smart investors who recommend things… They’ve had experiences, positive or negative, and they’re willing to share those. That really speeds up your learning curve.

Ash Patel: Bryan, if you’re active on LinkedIn, you probably get hit up with a lot of deals. Do any of those get your attention enough for you to follow through and potentially invest with them?

Bryan Miller: As a general sense, no. I get text messages from people, “Hey, I’ve got a brand new deal. We’ve got to invest right now. We’ve got two weeks.” It’s sort of off-putting, honestly. Again, I’m looking for that partner that I’ve either invested with previously, they’re doing more deals in the future, again, they’ve treated me well in the past… It needs like a serious recommendation, because again, even in the best of times that we’ve had that we’ve talked about these last 10 years, there are people that have screwed up deals, and have lost investor principal. It’s like, “How did you mess that up in the best of times?” But it happens.

So it’s really important to look at that track record and the due diligence. I’d be more likely if other friends of mine were in that deal, or I know that operator… Again, this is the trouble. It’s like, everybody when you’re starting up, hey, they’re new, but you don’t really know what’s going to happen when things get tough. You’re taking a real risk if you’re going with somebody that you don’t have a lot of experience with or they don’t have a lot of track record.

There are some other groups that are relatively new, but again, they’re building great reputations. People are saying, “Hey, they’re delivering, they’re doing a great job.” You see what they’re doing in the marketplace, and it’s impressive what they’re doing. Those, I would say, I’m warming to those. But if I can find an operator that’s been in business longer, that has more of a track record, that’s less uncertainty, then I’ll choose that as an option.

Ash Patel: How intense is your due diligence of that group?

Bryan Miller: It sort of depends. I would say I’m almost depending more on people that have had that tenure track record with that group; that’s more the due diligence. Because, again, every proforma looks good, every proforma’s a shiny paper, you know what I mean? Like, you’ve never seen a bad one that you go, “This looks like crap, I’m definitely not investing in this.” They all look good, all the numbers look good. And if you’ve ever tweaked a proforma, you know that you can achieve the kind of outcome that you want by modifying the assumptions.

So you have to look more into the assumptions. If they’re saying, “Well, we’re buying it at a 4.5 cap, but we’re selling it at a 4.0 cap,” meaning that the market is going to help you more on the exit, that’s not a realistic expectation. It might happen, but there’s a greater likelihood that it would get worse and you have to plan for the worst. If you see them making assumptions that are very unlikely to happen, that should be a big red flag, because it means, one, these aren’t conservative underwritings to get to those kinds of returns, and two, they probably haven’t been around the block and they might be trying to sugarcoat this to make it look like a better deal than it actually is.

Ash Patel: Yeah. So the lesson here for the GPs out there, use your existing investors to capture additional investors.

Bryan Miller: That’s a great takeaway point, definitely. Again, I’ve invested with deals because a friend of mine, Joe Feng, “Hey, I’ve invested with these guys, they did great for me, blah, blah, blah.” I take that recommendation way higher than, again, the shiny brochure or the, “Hey, we’ve got a new syndication deal. We’d love to get you involved.” That might be really good, but I’ve heard enough stories and experienced partners not doing what they’re supposed to do or what they promised to do that you really have to vet those deals very, very carefully and realize that 50 grand could go away if you’re not careful.  So it’s like, who are you trusting? Who do you have that kind of level of trust?

I think for the GPs out there, how do you build that kind of trust? What can you do to demonstrate that when the chips are down, or you’re going to do what it takes, or you’re going to be willing to step in, or you’re willing to give up part of your side in order to make LPs more whole or get them to the number that you promised them on the proforma? Some guys are willing to do that, but not everybody is.

Ash Patel: Yeah. Bryan, what is your best real estate investing advice ever?

Bryan Miller: It kind of comes back to that Warren Buffett quote, “Be greedy when others are fearful and be fearful when others are greedy.” That was a life-changing thing for me. I started buying real estate single-family in 2004, 2006, then I saw the market just go crazy and things didn’t make sense to me. I was like, “This doesn’t make sense, I don’t understand.” People were like, “Well, I’m losing 250 bucks a month, but it’s going to double in the next six months. I’m going to make a killing.” Well, the party came to an end.

But during that time, I bought up a lot of single-family for 25 cents on the dollar. I was buying units for $33 a square foot, and I knew the build cost was like $100 a square foot, so eventually, it would come back to there. My Best Ever deal was taking 20 grand buying a $100,000 house in Phoenix around 2010, then 10 years later, it’s worth $500,000. You make $400,000 of profit on a 20 grand investment, so that’s like a 20X return. I did that as many times as I could during that period, and knowing what I know now, I would have done it more.

Ash Patel: Yeah. We all have that hindsight, and we have the luxury of having lived through that time. Do you see any similarities in what’s going on today?

Bryan Miller: You definitely see the euphoria, you see the craziness, you see the “you can’t lose,” you see people paying a lot of money for assets, you see people bidding over ask, you see people putting a million dollars hard day one to try to secure a deal… Now, as the market continues to appreciate, those look like really smart decisions. But if you know the term “Return to the mean,” that’s going to happen. Historically, we don’t know when it’s going to happen. But if you look at any chart, here’s the normal, you can be way up here. But over the course of time, you kind of come down to that line, usually below the line. Because it doesn’t go like this; it’s above and below. I’d say we’re above the line now. At some point, we will revert. That’s going to happen, and I think there will be pain in that. And again, choose your operators carefully. A good operator will also keep you from a bad deal. They’re going to see more of the pitfalls or what would happen if somebody builds a brand-new self-storage building right across the street. They’re going to have more wisdom and life experience, so they’re going to be in a better position to choose that investment.

Not only in evaluating that investment, but that operator is going, “This is a great asset. Even if these market conditions things happen, this is going to be well-positioned because of this.” So good operators are also going to steer you into good deals, where other people may be just looking for an opportunity to get in, they may not be thinking through as many of the critical downside. Everybody tends to look at the upside, and it’s harder to take that discipline to look at what if things didn’t go well, what happens if interest rates do go up 2%, what’s going to happen then? So it’s good to have that foresight of thinking that bad things could happen, to be prepared and make the best choices you could.

Ash Patel: Yeah, a lot of good points in there. I think, from my perspective, if you have an operator that has an exit cap, let’s say 100 basis points lower than their entrance cap, that’s a red flag.

Bryan Miller: Absolutely.

Ash Patel: Exit at the same cap rate or even higher, but don’t anticipate cap rate as your savior.

Bryan Miller: You should plan for that. Maybe if you’re buying at a four or plan to exit at a five, you don’t know where the markets going to be in three to five years or seven years. There’s a lot of uncertainty. Who would have thought in November that there’d be a war going on in Ukraine right now? It’s like, uncertainty happens very, very quickly and it’s hard to anticipate that. Right now, it seems like “Hey, the sun is out. It’s shining. Buy, buy, buy, buy.” With inflation, that may be really good advice, but you have to be prepared for the unexpected to happen.

Ash Patel: Bryan, that self-storage operator – you’ve got me thinking. Did the competitor opened right across the street?

Bryan Miller: Yes.

Ash Patel: Man. So that’s got to be like on your due diligence list from here on out. If you have a mobile home park or RV park or self-storage, you’ve got to make sure within eyesight, there’s no available land for someone else to do the same thing. If there is, beat them to the punch.

Bryan Miller: Yeah, that is one of the downsides of self-storage. The entry cost is relatively low, because you’re using cylinder blocks, some garage doors, and you’re in business. It’s a much lower barrier than to build a multifamily right across the street. Also, absorption rates, how many units can the market really support? In multifamily, if somebody’s built right, you might be okay. The nice thing with mobile homes is it’s very unlikely they’re going to build a new mobile home, because it’s very restricted, and basically, cities are not granting new licenses, so I think there’s better moat of protection around that business than there is the self-storage business.

Ash Patel: Yeah, I agree. But what a crazy thing to do, to crush your competition by building right across the street. That’s not cool. Bryan, are you ready for the Best Ever lightning round?

Bryan Miller: Let’s do it!

Ash Patel: Bryan, what’s the Best Ever book you recently read?

Bryan Miller: The Best Ever is The Art of Possibility, Benjamin Zander. It’s really about thinking and about changing the way you think about outcomes and life. It’s a terrific book, I highly recommend it.

Ash Patel: Bryan, what’s the Best Ever way you like to give back?

Bryan Miller: A friend of mine moved to the Philippines and started an orphanage about 20 years ago, so I know the money is being well spent to give money to kids over there. A kid in a third-world country can go to college for 1000 bucks a year. So for four grand, you can send an orphan to school, for four grand. It’s a great use of capital, it’s a great way to give back, and it’s the ability to change somebody’s life for a very low amount of money.

Ash Patel: Yeah. Is that Will Crozier?

Bryan Miller: No.

Ash Patel: Oh, it’s not. Okay.

Bryan Miller: This is in the Philippines.

Ash Patel: Give that person a shout-out, please.

Bryan Miller: Sure. Lorraine DiGesu is my friend. Faith, Hope and Love Kids Ranch in the Philippines is her organization. Anybody can reach out to me and I can connect you if you’d like to support them.

Ash Patel: Awesome. Bryan, how can the Best Ever listeners reach out to you?

Bryan Miller: Sure. A great way to reach me is the website capitalstackinvestments.com, Bryan E. Miller on LinkedIn, those are two great ways, and I love to be connected. Also, on Capital Stack investments, there’s a resource called Lessons From 50 deals. Those are just lessons that my partner and I have learned from investing in deals. What went right, what didn’t go right, what were our learning lessons… It’s a great way to speed up your education as an investor and learn from people who’ve been doing it. Just go there, sign up, it’s free, it’s a way we give back, and it’s worth doing.

Ash Patel: Bryan, thank you again for sharing your time with us. Your story, always wanting to be a composer and having the inspiration from your dad who built houses in the summer to supplement his income. You followed in his footsteps and have built something incredible. Thank you for sharing your story with us today.

Bryan Miller: Oh, thank you for having me. It was nice to spend time with you, and well done.

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. Also, follow, subscribe, and have a Best Ever day.

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JF2772: 7 Reasons to Focus Your Funds on RV Parks ft. Robert Preston

Marine Corps Veteran Robert Preston began wholesaling and flipping while still on active duty in order to make extra money. He then moved on to value-add Class C apartment buildings, but as cash flow and cap rates have compressed, he decided it was time to find a new niche. Robert began investing in mobile home parks next, and his current focus is on RV parks. In this episode, he shares why he is so passionate about this particular asset class:

1. The variety of tenants. In addition to vacationers, RV parks attract tiny home renters, professional workers who frequently travel, and families living in their RVs long-term out of necessity. His ideal mixture is 50%–60% long-term/traveling professionals, 30%–40% short-term vacationers, and 10% tiny home renters. 

2. He’s able to deliver better returns than with multifamily. Because the multifamily market has become so competitive, Robert has recently been outbid by buyers who are offering much lower returns than his standard of 8% cash-on-cash and 15% IRR. RV parks allow him to stick to and often exceed his targets.

3. Limited supply and consistent demand. If the economy were to take an impact, Robert says, an RV park can be converted into a mobile home park overnight, allowing RV owners to make their homes there long-term, simply by adjusting his marketing. 

4. Fewer expenses compared to multifamily. Robert doesn’t have to worry about toilets, structures, or roofing in his RV parks.

5. Freedom to raise the rent. While raising rent for an apartment complex can often result in pushback from tenants, because RV park tenants typically don’t mind paying a few extra dollars a night, Robert can raise rents as he pleases — sometimes up to 25% overnight — without complaint.

6. He’s seeing a cultural shift in recreation and travel. Since the pandemic, people are beginning to realize that they have more freedom to work remotely and travel — and they’re also realizing flying isn’t the ideal traveling experience. This is causing an increase in professionals hitting the road and working remotely along the way, resulting in an increase in demand for RV parks.

7. He’s an RVer himself. Robert and his family enjoy the RV lifestyle, so he purposely seeks out properties in areas where they would like to vacation.

 

Robert Preston | Real Estate Background

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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 Robert Preston. Robert is joining us from Pensacola, Florida. He’s the co-founder of Climb Capital, an investment firm with commercial real estate operators that specialize in RV parks. Their current portfolio – they’re a GP on 809 units, with 45 million in assets under management. Robert, can you start off by giving us a little more about your background or what you’re currently focused on?

Robert Preston: Hey, thanks, Slocomb. I’m really honored to be on the podcast. I follow you guys a lot and read all the books, so – really cool to be out here today. My background is relatively simple – I graduated from Compton University and went into the Marine Corps as a Marine Corps pilot. I flew the Osprey, the V22, and did a couple of deployments to Afghanistan. Through that process was when I started in real estate, really 2012. I finished out my Marine Corps career in 2020; a great time to leave a full-time paying job to be a full-time real estate investor, the summer of 2020… And since, I started and founded Climb Capital with Jeremy Hans, and here we are today.

Slocomb Reed: Does that mean, Robert, that the 45 million in assets under management have all been acquired in the last two years, since the summer of 2020, or did you start before that?

Robert Preston: No, we started well before that. As an individual, I started investing in real estate really 2012. I started out as a wholesaler, wholesaling and flipping single-family houses, and then needed the residual cash flow income. Bought our first mobile home park, bought an office building, and start buying the class C apartment complexes [unintelligible [00:05:13]. However, I would say, that 45-million asset is probably all properties we purchased in the last two years, because we’ve also sold most of those deals that we bought in the beginning.

Slocomb Reed: Gotcha. So you have experience in a lot of commercial niches, but currently, your focus is RV parks. Tell us about that, why RV parks?

Robert Preston: Great question. Like most of us, I started out looking for a value-add class C. I need something full-time management, just by the book. We did that, and we’ve been very successful through it, but I think everyone would agree that it’s getting really, really difficult to find a great deal. I used to think an expensive deal was like a seven cap, and I’m sure we would all buy that in cash, hard moneym, day one, if we could find a seven cap. So our strategy or thesis has always revolved around the idea of cash flow first, and not the phantom or the market appreciation to make our returns. We’re okay with forced appreciation, I’m not really okay with betting on market appreciation.

So as the competitors and the competition came in and the prices increased, thus the returns have decreased, and so we moved to mobile home parks. Now we’re seeing that similar trickle effect coming down. We bought our first RV park in also 2020. Since then, just really saw a great opportunity there, both from the buy-side and the sell-side, and the excellent cash flow. Basically, just out of necessity getting pushed out, searching for returns has pushed us down to the RV park. I’m also an RV-er, I’ve got four little kids, and I love the lifestyle. It’s a lot nicer to buy somewhere you would go on vacation than a classy apartment complex that I’m not going to go on a vacation to. So  it’s a little bit of a lifestyle as well.

Slocomb Reed:  Yeah, that’s awesome. Let me try to summarize, Robert; please correct me anywhere I need to be corrected. Active-duty Marine Corps, deployed a couple of times, started wholesaling and flipping while active duty in order to make money on the side; you decided you wanted it to be more residual income-based.

Robert Preston: Yup.

Slocomb Reed: And found class C value-add apartments to get great cash flow. As you have seen cash flow and cap rates compress, you’ve moved into a new niche. A lot of people went from apartments to mobile home parks; as you’ve seen, and as you’ve just said, now cash flow and cap rates are compressing with the mobile home parks, so you’ve moved on to RV parks. Added bonus, you’re an RV-er, and you’re buying properties that interest you personally, and in places where you want to take your family.

Let me ask Robert, when was it that you decided with your partners that it was time to shift industries within commercial real estate? Did you have specific target metrics that you just realized you were never going to be able to hit, so as soon as all the deals fell below a certain cap rate, a certain cash-on-cash, you just decided to move on? Was it more of a gut thing? When was it that you made those decisions?

Robert Preston: That’s a really great question. I’ll try to answer it, because I think there’s a couple of components there. First, I’m a bit of a deal junkie, so whatever I think I can make money on it is what I’m going to do. Part of being a naval aviator is that we are very thorough in our planning and we’re very precise in our planning, but we also realize generally about five minutes into the flight, everything we did and worked on it for the last three months’ worth of planning is just out the window, and you’ve got to improvise and make it work. So being adaptive and flexible is one of our core values to what we do.

So through this process, I just randomly came across our first RV park; it was a per acre, per pad, whatever, it was just extremely cheap. I looked at it and was like, “We don’t know anything about RV parks, but it’s got great financials just like anything else. We’re going to make, whatever it is, a 30% IRR return on this. Let’s just figure it out.” So by dumb luck, a little bit, of falling into that first one in 2020… Our metrics for our investors are 8% cash-on-cash and a 15% IRR at a minimum. I think that’s kind of the generic target standard.

So for us, that pivotal moment really was the end of 2021, when we would get outbid by millions of dollars on apartment complexes. I know the numbers, I know there was no way they’re going to meet those metrics, and then I started seeing the other sponsors sending out stuff that was 11% or 12% IRRs on a best-case six cap exit plan, with a very low expense ratio. I was like, “No offense, but there’s no way that’s going to work perfectly. Your plan, if it was executed perfectly, you wouldn’t make that. And even if you did, a 12% IRR is just not sufficient.”

That’s when we realized we’re always going to get outbid by someone who is willing to reduce their underwriting to make the deal work, and lower the returns. So really, at the end of 2021, we’d already bought three RV parks and were operating them, so now we’ve made a hard shift; instead of just letting them come to us piecemeal, now we’re targeting direct to the owners and really pushing hard this year.

Slocomb Reed: You went from apartments to RV parks by way of mobile home parks, correct?

Robert Preston: Correct. Yeah.

Slocomb Reed: So you’ve made this transition twice now?

Robert Preston: Yeah, two pivots. The RV park is a little bit of a natural progression into the RV parks, because some of the lower quality RV parks are really a mixture between a mobile home park and an RV park. So there’ll be some mobile homes in there, and then there’ll be some long-term tenants living in an RV park. So that was our first exposure, it was really a glorified mobile home park with RVs in it. Now we buy more of the resort-type, vacation, your by-the-night rental.

Slocomb Reed:  That’s my understanding – limited experience with RV parks of course, but my understanding is that there are really two business models within RV parks. Similar to apartments in this way, you have long-term tenants and you have short-term guests.

Robert Preston: Yup.

Slocomb Reed: So the people who park their RV there year-round, and the people who come in for the weekend, or the week, or a couple of weeks; are you saying that you focus primarily on the shorter stay, resort location type of deals?

Robert Preston: Yes. Originally, the first couple we bought were purely long-term, by necessity, living. There are also two types of long-term RV-ers. There’s the individual or family that is living there out of necessity because of their inability to afford some other type of housing, or there’s a long-term RV-er who — by their profession, dictates movement. Traveling nurses, construction managers, and even certain engineers working on big projects. They’re highly paid, well compensated, and great residents. They’re just out of necessity going to be gone for six months or eight months from their residence, and so they live in…

Slocomb Reed: Gotcha.

Robert Preston: To answer your question, currently, we like parks that have that latter, so the professional worker, and then also we have the retail. So for us, the ideal mixture of a park is we bring in tiny homes at about 10% of the pads, we rent about 50%-60% of the pads on the monthly rate to the traveling professional, and then that leaves 40%-30%, depending on that ratio, to the retail overnight vacationer traveling person. It’s awesome for us, because it’s just a couple of levers we can tweak and pull, based off the season, based off the demand of the area, to always kind of optimize the cash flow and NOI.

Slocomb Reed: You mentioned 10% for tiny home homes. Now, are you talking about tiny homes on wheels, or are you talking about the thing that people are constructing from the ground up in a location?

Robert Preston: You would also refer to them as park model homes. They’re on wheels, on the frame, they look like a little log cabin, front porch, very cutesy, a lot of exposed wood, loft, that type of stuff.

Slocomb Reed: But you can hitch it to your truck with a tow package and take it somewhere?

Robert Preston: Technically, yes. A very big truck.

Slocomb Reed: Yes.

Robert Preston: Yes, not your normal truck. But technically, yes; they’re still titled as an RV, which helps us to eliminate a lot of zoning setup criteria. So we can pull it right into a lot, plug it in essentially, and be ready to go.

Slocomb Reed: Gotcha. Robert, I would like to play devil’s advocate.

Robert Preston: Sure.

Slocomb Reed: You’re clearly experiencing some success. Actually, before I do that, you are syndicating some of these RV deals, yes?

Robert Preston: Correct.

Slocomb Reed: Have you gone full cycle with an RV deal yet?

Robert Preston: Yep. We’re recording this March timeframe. We sold one a month ago, in February. It was a relatively small deal that we bought for $575,000 and we just sold it for $1.2 million two years later.

Slocomb Reed: Gotcha. How much did you have to put into it after you bought it?

Robert Preston: Nothing. No capital.

Slocomb Reed: Got it. I imagine you offered a pretty juicy return then to your investors. What did that look like?

Robert Preston: They made a three multiple on their money. Per year, it was close to 76% IRR. It’s sort of a ridiculous number.

Slocomb Reed: Yeah, that’s awesome. How long was the hold period on that?

Robert Preston: Right at two years. Exactly two years.

Slocomb Reed: Two years. Okay. Awesome. On the deals that you’ve most recently closed that have not gone full cycle, what kind of return are you projecting for your investors?

Robert Preston: On an IRR perspective, low 20s. The syndication we just closed had a 10% pref on it, and still will come out to be low 20s, mid-20s IRR.

Slocomb Reed: Gotcha. Now that I’ve given you the opportunity to talk about how much better your returns are than apartment investors, I’m going to attempt to knock you down and I want you to have the opportunity to respond.

Robert Preston: Let’s do it.

Slocomb Reed: Good. I’m an apartment investor, because that’s what got me into real estate. I just haven’t gotten to the point in my career yet where I’ve chosen some other asset class. But thinking from the perspective of apartment investors, or from the perspective of LPs who hear what we’re saying right now, and maybe thinking something along these lines, here we go. Robert, the reason to stick with apartments instead of going to mobile homes and then going to RV parks is that first of all, the apartment industry is massive. It’s also much less impacted by major fluctuations in our economy.

We are building a lot more new apartments than we are mobile home parks and RV parks. So yes, returns compress; a lot of people get into the mobile home park space. Inventory is limited if not capped when it comes to mobile home parks in a way that it is not with apartments. It is similarly limited or capped, and probably smaller for RV parks, the industry as a whole, than it is for mobile home parks. I’ll confess, I don’t have the numbers on this, but my gut tells me, Robert, that an RV park is going to fluctuate a lot more with the market cycle and what is happening in our economy than apartments.

So not only is the apartment industry much larger, but it’s also less impacted by where we are in the market cycle, it has opportunity for growth… There will be more apartments this time next year than there are this year, unlike mobile home parks and RV parks. And some people will be willing to take a lesser return for the type of certainty that apartment deals provide. Robert, what do you have to say about all that?

Robert Preston: Dude, that’s like a lot of questions.

Slocomb Reed: We’ve got some time to dissect all of this.

Robert Preston: Alright, so now we got some meat for this podcast.

Slocomb Reed: Yes.

Robert Preston: Let’s break it down. You mentioned the supply chain for apartments; we’re going to build more apartments, they are coming online… And first and foremost, we still buy apartments, we still buy our mobile home parks, and we still buy office buildings. I want to throw it out there, we still do those deals. But to your point though, to me, that would be an advantage of the RV parks side. As you pointed out, most municipalities, counties, cities, etc., RV parks, they’re okay with, if they come and go. But mobile home parks, certainly you’re going to have the struggle to build a new one and develop it up.

So limited supply generally I would associate to a higher price. The demand is either going to stay constant or increase a little bit. So supply-wise, I think that’s a good thing; they’re less likely to be built up. When we talk about the demand from a housing perspective, why do we all like class C apartments, hypothetically? Because there’s always going to be a need. The necessity of life for someone to live – you need food, shelter, and housing. You don’t have to have great housing, it doesn’t have to be class A housing, but you have to have a place to live. That’s why we all started out in a class C apartment avenue.

So I would argue that the same applies particularly to mobile home parks; not so much RV parks, if you think about the RV park on the surface. However, going back to that first RV park that we bought, which was essentially 36 people living in an RV out of necessity, because that was the cheapest way that they could find housing. So my worst-case scenario for a lot of these RV resorts is that if the economy were to change or impact, I’m still insulated, in the fact that I can convert that RV resort to a glorified mobile home park overnight, by just adjusting that marketing, adjusting my criteria, my restrictions, to allow anyone to come in there with whatever type of RV and live there instead of on vacation.

The reality is, I’m getting the same rent as most people are getting for an apartment complex per square foot, and I have no expenses, I have no toilets, I have no structures, roofs etc. I’ve got electrical outlets, I’ve got a water spigot, and I’ve got a hole for stuff to go out. So presently, we’ve got a great economy, people are traveling, and we’re going to do the retail vacation model. If that were to adjust, well, people are going to get pushed out and we would be one of the cheaper places where people live. So I think we will still have plenty in demand there, we’ve seen that in the past.

And then I’m pretty certain there’s a big change in culture, particularly when it comes to recreation and travel. You’ve probably flown recently, I’ve flown recently; it’s just not a pleasant experience. It just isn’t it anymore. So the idea of traveling overseas and going through that harassment, for a lack of better words – it’s not as exciting anymore. 2020 taught us a lot of things, and that was it’s okay to work from home, it’s okay to travel, it’s okay to work on the road. You and I are doing this via Zoom, I’ve got three employees that work remotely… So the idea of work travel and working from the Rocky Mountains on your laptop – why not; from the RV park, instead of wherever you came from.

So more people are working out of the office, and people are enjoying outside more, more space from a safety perspective… So the industry of RV sharing is a whole entire industry; it really popped up in the last three to five years, with basically Uber for RVs. You don’t have to own the RV anymore, or the travel trailer to go on vacation and go camping; you can rent it off your neighbor, for a lack of better words.

That’s a whole new supply of customers that has never existed before in history. Then you just look at the RV sales by unit, it’s just astronomical over the last three years, and so there’s a ton of inventory there from a customer perspective.

Break: [00:21:01][00:22:47]

Slocomb Reed: Robert, that was great, thank you. A few things from that. I should have thought of this before, but it makes so much sense to track RV sales as a metric for RV park investing. Do you have some numbers behind that increase since COVID? To your point, we’ve seen a change in lifestyle over the last couple of years – again, recording in March of 2022. I want to respond and give an apartments argument, but I will concede that the idea of flying to a destination being the only way that people go on vacation is done. The world doesn’t operate that way anymore. My question was, do you have the metrics on the increase in RV sales since COVID?

Robert Preston: I do, but not intelligent enough to speak here in public. One of the metrics would be, I think Jayco, which is one of the leading mid-grade $20,000-$50,000 travel trailer. Not even mid, probably lower mid-grade. They’re back-ordered, with $14 billion in backorders right now. So they will not produce a unit that has not already been accounted for, for the next three years. That’s one metric percentage growth-wise; I think last year was like at a 40% growth for the year. That was a one-time uptick. But think if I remember the metric – don’t quote me on this – between 2010 and 2020, so for the decade,  it was around an 11% growth rate, RV users. That’s correlated to what we’ve seen is about a 12% price increase per year over the last three or four years.

Here’s another thing that’s really cool about what we do. You’ve got your apartment complex and it’s $1,000, a month’s rent. You can raise it to $25 or $50, and probably not get a whole lot of pushback. But if you think about that, percentage-wise, that’s 0.25%. We bought a park in December, and the nightly rate was $37 a night. The next day, I changed the rate to $45 per night. To the customer, that was $8 to them, per night, no one cares. But if you think about that from a percentage perspective, how that extrapolates over the year, basically increase the rent by about 25% overnight, and your customer doesn’t care. They’re happy, I’m happy, it’s great.

Slocomb Reed: No tenant in an apartment building is happy about a 25% rent increase, for sure.

Robert Preston: No.

Slocomb Reed: Points to RV parks. We were talking about your model of breaking down the way that you rent your spaces in your RV parks into three different market segments. When you are projecting the returns for your deals, the returns that you share with investors, for example, are you basing those returns on a divided into three pieces model, or are you basing them on the conservative, have to turn this into a lower-income housing type situation?

Robert Preston: That’s a good question. We underwrite it — I think we’re still conservative, and here’s why. Realistically, with our monthly rentals, we’re using around a 75% occupancy rate for the year. The reality is most of the time we’re in the 90s, just like an apartment complex would in the long term. For the cabin rentals, the tiny homes – again, we’re using something we would pull from like AirDNA, VRBO, and Airbnb. Similar comp, occupancy’s usually running 40%-50%, and then same on the nightly rates. We would, for the year, probably use an occupancy of around 40%-50% for those. So we’re using different rates and different occupancies for each category.

Again, most of the time – we’ve got parks in Florida, they’re just full all the time no matter wha; they just are. So even though we’re underwriting at maybe a 50% occupancy on our overnight stuff, the reality is we’re running about 85% even, nightly rate. We tend to err on conservative; everyone says that, I really think that we are. The exit cap rates we’re using, most of the time, we’re still using nine cap on the exit, which I’ve already seen decompresses a significant amount since we started in RV parks. But that’s how we’re coming up with our returns.

Slocomb Reed: Gotcha. One last piece to the argument. Thinking specifically about prime locations for RV parks versus apartments – we do in apartments have something similar, and you kind of touched on it. We can go short-term, or we can go medium-term. It’s a different business model; it does jack up returns, jacks up gross revenue, net cash flow, and it becomes a different industry. You put yourself in hospitality, instead of landlording, but we can do that in apartments too, if you’re in the right location and if you’re willing to stomach the change of business model from long-term rental to hospitality.

If I can summarize this argument, I do think it’s clear, Robert, that the return that you were able to deliver when you have a full cycle on your first RV park, and the returns that you’re projecting for your deals are higher than the returns that are being projected for the vast majority of apartment syndications. Whether or not there is more risk in other asset classes than apartments is up to our listeners to decide for themselves and their own investing strategies.

Robert Preston: Sure. One final comment – I don’t really want to convince you.

Slocomb Reed: No, totally. This is a good point, Robert. There should be people on both sides of this argument. And frankly, hearing the returns that you’re getting, that’s part of the reason that I knew we could have the argument in the first place. I knew that there should be people who decide going both ways for themselves. This isn’t necessarily about convincing anyone how they should be investing, it’s more about – well, first of all, having fun. We do a lot of these interviews; it’s not often that I get to go at somebody like this.

Robert Preston: I’m okay with not having a lot of competition. I’m okay with that.

Slocomb Reed: Yeah, totally. I get that. As of today, over 30 of my episodes of Best Ever have aired, and I’ve only spoken with one other person who’s in RV parks, and they’re not doing it full-time. It was just their first foray that they closed on a couple of months ago. They were excited, citing some of the similar things that you are now about their first RV deal. So yes, I understand. Not trying to create any more competition for you, but this has been great. Are you ready for the Best Ever lightning round?

Robert Preston: I’m ready.

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

Robert Preston: One of the ones I love is Pitch Anything, Oren Klaff.

Slocomb Reed: Pitch Anything.

Robert Preston: Yup. Oren Klaff, Pitch Anything.

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

Robert Preston: I thought about this and I want to be careful how I say it, because I don’t really see it as giving back, but me and my wife are foster parents and adoptive parents. And just seeing the difference in a little kid or even a baby coming from a very traumatic — and then being in a good household… And this is not trying to brag on myself or the family. But just seeing how a kid can flourish so quickly and recover so quickly when they’re just loved and cared for. That’s my passion.

Slocomb Reed: That’s awesome. What is, Robert, your Best Ever advice?

Robert Preston: It’s pretty simple. You don’t need permission to get started or to be successful. I think we’re all just waiting for some type of metric, some type of event, some word of advice or confirmation. You’ve got to get going, get moving. Take the first step and figure out the next step after that.

Slocomb Reed: That’s great. Robert, where can our Best Ever listeners get in touch with you?

Robert Preston: Our website is climbcapital.com, info@climbcapital.com would be an email, and my cell phone is 850-712-5139.

Robert Preston: Awesome. Well, Robert, thank you for sharing with us your investment journey, your path from asset class to asset class, as you have been chasing the high returns that you shared with us, and thank you for engaging in some debate with me about various asset classes. I do believe we’ve given some value to our Best Ever listeners here.

Best Ever listeners, thank you for tuning in, I hope you agree with me. If you found value in this episode, please do subscribe to the podcast, please leave us a five-star review, and please share this with a friend who you think will also enjoy and gain value from this conversation here with Robert Preston. Thank you and have a Best Ever day.

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JF2764: Building a Business Around Your Lifestyle ft. Tim Bratz

Tim Bratz shares his insights on starting a business, starting over, making your time count, and maintaining balance through it all. Here are some of his top tips: 

 

  • Humility is key. After liquidating his portfolio and starting back at square one, Tim realized that spending money to display wealth actually keeps most people from truly achieving wealth. Today, he prefers to spend money on vacations and experiences with friends and family.
  • Audit your time. Tim wanted to see how much time he was actually spending generating revenue each day, so he performed an audit. Every 15 minutes, he wrote down what he did, followed by either a zero or a dollar sign to indicate whether or not that activity made money. His next move was to hire an executive assistant with all of the “zero” items in their job description.
  • Focus your energy on things that are fulfilling to you. Tim did another thing when he audited his time — he followed each task with either a happy face or a frown to indicate whether or not he enjoyed it. Items that received zeroes and happy faces included spending time with family, exercising, and walking the dog. He made sure to continue to prioritize these things as well.
  • Learn to time block. Tim says that the greatest indicator of your priorities is how you spend your time. He realized that, while he constantly blocked off time for work, he didn’t do the same when it came to spending time with his family. He began time blocking evenings, weekends, and Fridays to do just that. Although he might miss out on a deal, he says he is no longer willing to miss out on his relationships to make an extra dollar.
  • Don’t be surprised if you become more efficient. When Tim began time blocking, he condensed his work schedule to seven-hour days, four days per week — and he noticed that he was suddenly much more efficient. Because he had less time, he was able to focus and prioritize better than he ever had before. His business also grew as people noticed and respected the fact that he valued relationships over money.
  • Life isn’t about what happens to you — it’s about how you respond. Tim’s Best Ever advice is to take 100% ownership of your life and your business regardless of what might stand in your way. Doing this, he says, will move you in the direction you truly want to go.

 

Tim Bratz | Real Estate Background

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TRANSCRIPT

Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and with today’s guest, Tim Bratz. Tim is joining us from South Carolina. He’s a previous guest on episode 1471. If you Google Joe Fairless and Tim Bratz, the episodes will show up. Tim is the CEO and founder of Legacy Wealth Holdings, a multifamily and commercial real estate investment company. His portfolio consists of being a GP on approximately $400 million of assets. Tim, thank you for joining us, how are you today?

Tim Bratz: Doing awesome, Ash. Thanks for having me, buddy. Excited to be here.

Ash Patel: We’re glad to have you back. Tim, 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?

Tim Bratz: Yeah, absolutely. Again, I love what you guys are doing and I appreciate all the value that you guys put out there. It’s an honor to be back. My background is in residential real estate. I was going through college when the market was going crazy before, so in ’07, I graduated and I got involved in real estate. I think a way a lot of people do it is you get your real estate license. So I’m a kid from Cleveland, Ohio originally, I moved out to New York City, got my real estate license, brokered some deals, actually parked my license with a commercial shop. So I brokered some retail leases and office leases and I saw how much money there was to be made on owning real estate, not just brokering real estate. I was like “I want to be on that side of the coin.”

So I moved out of Charleston, South Carolina, started out in residential real estate doing single-family wholesaling, and single-family flipping. Eventually, I raised some private capital, joint ventured with some private money investors, and started buying and holding single-family rentals. I built that up to about 10 units, chased some shiny objects, almost went broke, and decided I want to get back into real estate. Some of the shiny objects were other businesses, and things like that.

Ash Patel: It wasn’t trips to Vegas…

Tim Bratz: It was buying a Mercedes, it was going on fancy vacations, it was joining the private dining clubs, and then it was pursuing other fanciful businesses that were “make more money in less amount of time” kind of a thing. I think a lot of people, at least for me, you see get rich quick on these e-commerce stores, cryptocurrency, NFTs, and a lot of different other things… But to me, real estate’s always been time tested; since the beginning of civilization, wealth has been measured in landownership. I knew that it wasn’t an experiment, I knew that it wasn’t a tech startup or something like that, that could go boom or could go bust. I knew that it would eventually work if I just stuck with it. So I got heavy back into real estate in 2000. I was really still involved, I still had a couple of properties, but went full-time back in real estate in late 2012.

Started doing everything again, fix and flip, high-end, low-end, buying and hold, single-family, and then I found my first apartment building in December of 2012. I just loved the efficiencies, I loved the economies of scale that were available there, and I went all in on apartments. So ups and downs, business partnerships, had to liquidate my portfolio in 2015, start over again… But you don’t really start over because you always have your business acumen, your experience, your knowledge, your resources, your connections. Since 2015, I built my current portfolio. Yeah, it was up to almost 500 million in portfolio value, but I sold off a bunch, and I’m actually still selling off a bunch. I’ll probably drop down to around $200 million in holdings in the next six months, and then I’m going to go back on a buying spree.

I think a lot of times, properties that got us here aren’t the ones that we want to hold on to maybe long-term. I started out in really war zones, in tough areas. Then I elevated into more C class and B minus properties. I bought some small buildings, then some big buildings, and I sold off a lot of my small buildings, now I’m selling off my C plus, B minus type properties… And really just focusing on A class, B plus class, 100 units and bigger in the Southeast. That’s where my buy box is now.

Ash Patel: You already put your time in, it’s time to move up now.

Tim Bratz: I think a lot of times, especially on social media, it’s so easy to start comparing and seeing what other people are doing and being like, “I need to start buying more.” But the reality is what I’ve seen in my businesses, we go really hard, we go in acquisition mode for a couple of years, and then we refine that portfolio. We trim the fat, we get rid of the small buildings, the management-intensive buildings, the headache properties, the bad joint venture partnerships or operating partners, whoever we’re joint ventured on in any of those, if we are… And we just kind of refine. We’ll spend a couple years growing, and then we take one step back in order to make some bigger leaps forward.

Ash Patel: Tim, when you had to start all over what was the hardest part?

Tim Bratz: Well, I kind of pressed reset twice. One was in 2012 when I chased all those shiny objects. The difficult part on that was just having the humility. I had a Mercedes, I traded it in for a 2005 Honda Accord instead. I owned my own home, I had to sell it and then go and live in a family-owned property for a couple of years just to get my finances back organized and get that going again. I think a lot of people try to still maintain the lifestyle. Here’s what I find – they try to prove something to other people, fake it till you make it. And that entire mindset of spending money on garbage that gives you a perception of having money actually denies you the ability to actually make money. Buy those things once you have assets. It’s wildly ironic that you trying to show off wealth by buying fancy clothes, fancy cars, fancy watches and gimmicks, and all this other nonsense, is actually the one thing keeping you back from actually achieving wealth.

I think having the humility early on of saying, “Hey, I was a bad steward of money…” By respecting money and giving it the respect that it needs, I’ve become a much better steward of capital. Now I don’t buy fancy things even though I can. Knowing that I can is enough for me. I’m not trying to fill some void because I didn’t have money before. I was trying to fill a void by buying fancy things that really didn’t fill that void. Does that make sense?

Ash Patel: Yes, such an important lesson. Everybody wants to flex with the cars, the watches the clothes. Once you have the ability to buy all that, it doesn’t bring any satisfaction to you.

Tim Bratz: No. Now here’s the thing, you can tell that to people 100 times and they’ll be like, “Ash, let me figure that out for myself.” You know what I mean? I was too strong willed that I was like, “Let me go and screw this up, let me achieve that, and then figure it out for myself.” But it’s an absolutely 100% true and accurate to what you stated. If you get it and you’re like, “This is it?” I’d much rather today spend that money buying back time to hang out with my friends, to hang out with my family, to go on awesome vacations and trips, and do experiential type things. I have no problem spending money on that stuff, but spending money on material objects just doesn’t give me a rise or fill my cup at all.

Ash Patel: A crazy segue or question, but Tim, knowing that the young people in their 20s, the young Tim in his 20s, wasn’t going to listen to that advice… Still, what would you say to that young Tim to try to ingrain this advice into him?

Tim Bratz: I’d say, “Hey, listen. You can go and buy the toys, just buy the assets first. Have the assets that then pay for those liabilities; or take that liability and turn it into an asset.” I’ll give you an example. I fell into this psychology back in 2017. I’m from Cleveland originally, I had moved back to Cleveland after I went broke in 2012, and I lived in Cleveland for about seven more years, and moved back to Charleston about two years ago, three years ago, four years ago, I don’t even know this. Anyway, I lived in Cleveland when the Cleveland Cavaliers won the championship, they beat the Golden State Warriors in 2016 and I had season tickets that following year in 2017.

The season ticket person emailed me when the Cavs went back to the playoffs and they said, “Hey, we have a suite to the Cavs, the last suite left. Do you want to buy the suite? It’s for the Eastern Conference Finals against the Celtics. It’s $30,000 for the suite.” I was like, “What?!” I remember sitting in my chair in my office reading that email, deleting it, and being like, “Who the hell would pay $30,000 to go to a basketball game?” Then I thought audited, I started thinking about my thoughts. Why am I saying that? Because obviously, other people are buying these suites; it’s the last suite left. Chances are, it’s probably one of the worst suites because it’s the last one left. I was like, “Somebody’s buying these things. Okay, well, who’s doing it? Are they making it a business expense? Are they paying for it? Are they getting somebody else to pay for it? Are they selling tickets? How are they monetizing it?”

It led me down this path of “How can I take this liability of going to a basketball game and getting a badass suite, how can I turn it into an asset?” I thought, “Hey, maybe I can put 15 people.” They gave me 18 tickets to the suite, I was like, “Maybe I can put 15 people in a room, host a one day roundtable mastermind event during the day, and then package that up with a suite. I might be able to sell tickets for $2,000 apiece.” Because I don’t think I can sell a ticket just to a basketball game for $2,000. Could I sell it to a mastermind for $2,000? Maybe, but really attaching the suite to it made it that much cooler and enticing. So I put it out to seven of my buddies that were in real estate or entrepreneurship and I said, “Hey, two grand, one day mastermind with a ticket to the suite to the Cavs Eastern Conference Finals.” I went seven for seven of people saying yes.

So I put the suite on my credit card and I filled up the last eight seats, I had hosted a one-day mastermind. Then I was able to come in full circle, to your question, of how do you take a liability — I was able to take something that was a liability, that would usually take money out of your pocket, and I was able to turn that into an asset, get people to pay me to come out and do this event. By the way, from doing that event, I raised $700,000 of private money, I wholesaled a small multifamily property and made about 25 grand on it… So those are things that that came that I didn’t even think would come from turning this liability into an asset. I was able to do that just by thinking a little bit differently; not just spending the money, but trying to figure out how you make a liability into an asset.

You could do it with Airbnb, you could do it with Turo on cars, you could do it with all these different things. Take cool vacation homes or second homes, or a cool car and exotic car and rent it out, get it to cash flow and pay for itself, instead of you paying for it out of your own pocket. So that’s what I would try to tell 20s Tim on how to not blow all your money and go broke.

Ash Patel: What an extreme example. I love how your mind works. Man, very few people would have thought along those lines. Thanks for sharing that with us. One more challenge to you, Tim… I had a conversation with somebody earlier, maybe a couple months ago. It was me telling them a story where I would go out and replace a toilet in an office building, just because I could. I’ll do it when the kids go to bed, it’s 10 minutes from my house, I’ll do it… And then I realized how stupid it was, because it took me two and a half hours fiddling my way through this. The Home Depot sign said “Installation for $99.” And what an idiot I was. My wife brought up the fact that at a young age, they have more time than they have money. So young people don’t understand the value of time; we do now, because we’re a little bit older than our time is stretched thin. We don’t always get to do everything we want to do, so how do you have that conversation about time with young people?

Tim Bratz: That’s a great perspective to look at it. They maybe have time, but they don’t have money, and they can use that to their advantage. There are people like me who don’t want to work as hard as I was willing to work in my 20s. Somebody with that, “Listen, I will run through a brick wall. You can call me 24 hours a day, seven days a week if you need anything from me. I will list your property or joint venture with you, or I will run into those war zones. I’ll manage that stuff, if you just believe enough in me.” That’s a really cool angle that you can take as a kid in your 20s who may not have the business acumen or the access to resources that maybe you or I do, but that gets him a seat at the table.

I remember when I first got started in real estate, I reached out to a guy actually here in Charleston, his name is Patrick Riddle. He’s big in the copywriting space and that kind of stuff. He used to be like a guru in real estate back then and I remember sending a message. I was like, “Dude, I will shovel dog crap in your yard for free two to three days a week. I’ll do anything, work for you for free, two to three days a week, if you just pour into me.” He’s like, “You know what, dude? Nobody really reaches out to me and offers to work for free, or do anything I need them to do for free. That’s a different mindset that you have. You’re worth sitting down and grabbing a cup of coffee with.” You know what I mean? A lot of people are like, “Let me pick your brain.” Think about your brain being picked, Ash. It doesn’t sound very appealing… And they don’t lead with value.

I think what people, especially young kids, don’t understand is that money is a measurement. It’s like a ruler measures distance, or a clock measures time; money is a measure of value. The more value you can create for other people, the more money you can attract to you. So you’ve got to go out there, you’ve got to figure out a way to how do you provide value to somebody who really doesn’t need more access to money or they have the business acumen. Instead of you just sitting down and trying to take, take, take and pick somebody’s brain, lead with value.

I think that’s a big deal of how you can get yourself into the right circles, the right networks, and attract attention from somebody who has the business experience and the level of success that you’re looking for, especially at a younger age. I think that’s a big deal; and you use some of those things as your advantage. “Hey, I’m willing to work for you, I’m willing to take phone calls in the middle of the night, I’m willing to do whatever it takes to show you that I’m willing to pay the price here.” I think that’s just a different angle that you can definitely take and use to your advantage as a young professional.

From a time perspective, I think the simplest example is just understanding $99 for something that would take you two to three hours to do. Essentially, you’re paying yourself $33 per hour, if it takes you three hours on that. Do I want to make $33 per hour? You start doing the math and you make –I don’t know what the number is– 50 grand a year, 60 grand a year, whatever. If that’s what you want to make, then yeah, go ahead and do those kinds of activities that yield that dollar per hour. If you want to make $100,000 or $500,000 or a million dollars a year, then you figure out what the hourly cost is on that time. If you’re working 40 or 50 hours a week, you can reverse-engineer the numbers and say, “Hey, my time is worth $250 per hour.” Now, anything that’s $250 per hour or less, you’ve got to staff it out.

I think it’s hard to think that way early on, when you don’t have access to a lot of money or you’re trying to do everything, get your hands on everything… I was doing accounting, I was doing bookkeeping, I was swinging a hammer sometimes, I was collecting rent, I was taking the maintenance phone calls, I’d find deals, sell deals, raise the money… I’d do everything. It’s hard to let go of some of those things, I think. But when I really put it in perspective of what are the revenue-generating activities, and what are the not revenue-generating activities, and I just audited my time.

I took my calendar for a full week, and every 15 minutes, I wrote down exactly what I did, every 15 minutes. I woke up, went to the bathroom, got cleaned up, had breakfast, walk the dog, worked out, went to work, spent two hours on social media wasting time, did this, did that, did all these different things. I audited my time after an entire week of everything that I did. For every line item, every 15 minutes, I wrote either a dollar sign or a zero next to it. Meaning did it make money or did it not make money? Is it a revenue-generating activity or is it not? And my first hire was all the zeros on there, that was their job description. This is your responsibility now, this is your roles and responsibilities for my personal assistant, my administrative assistant. That was the first hire; they took all the non-revenue-generating activities off my plate, so I could then focus on the revenue-generating activities.

2014 was the first year ever made six figures, I made 130 grand. I hired an assistant and did that exact same thing. I hired the assistant March 1st of 2015. In the next 10 months, I tripled what I made the year before. I made $400,000 in 10 months, because I just focused on revenue-generating activities.

So understanding the value of time and what you’re spending your time on – if you can learn that early on, it’s irreplaceable. It will set you up — and stuff compounds, it gives you quantum leaps forward in your life and in your business, if you’re spending your time on the things that actually count, that move the needle.

Ash Patel: Incredible, powerful advice. I had a visual of the scales of justice; on one side there’s money, and the other side there’s time; it’s a constant balancing act. I’ve got to ask you – I struggled with this for years… Yeah, sometimes my time could be worth thousands of dollars an hour, but other times I’m idle and it’s not worth anything. So why wouldn’t I go out and do some of these menial tasks? What do you tell that person who hasn’t fully grasped what you’re saying because they still have a bunch of free time?

Tim Bratz: There are certain things… I remember early on, there’s a lady who came in and spoke at an event that I was at, let me tell her story. She goes, “I own my business. It’s a consulting business.” She started out as a solo consultant; she would go in and coach executives of companies on how to live a more balanced life; I don’t even know what it was. Or be more productive, whatever. She goes, “The company started growing, I got all these contracts, I’d hire other people. Other people then went out and I found myself running the business, essentially being the HR person, managing all these different consultants, and all these people. I didn’t enjoy my business any longer.” She said, “Just because I own the business, it doesn’t mean that I can’t go out and do the certain tasks that fulfill me.” So she loves going out and coaching. So instead of hiring other consultants that were kind of lower-level on the totem pole, she hired a CEO to run her business. Even though she owned it, she paid a CEO a salary, and then she went back to doing the things that fulfilled her. So if going out and doing those activities is fulfilling to you, then by all means, go and do it.

The other thing that I did when I audited my time – I didn’t only do a dollar sign or zero, I went back and I put either a smiley face or a frowny face also. That was like, “I want to do the activities, even if they don’t potentially make money.” It’s hanging out with my kids, walking my dog, working out. Those are things that got smiley faces but they had zeros next to them. Those are things that fulfill me personally, that I still had on the calendar. The things with a frowny face and had a zero next to it, that’s the stuff that I gave really, to my admin.

So if it’s things that still fulfill you, great, go ahead and do it. If it’s not something that fulfills you and you’re just like, “Yeah, well, I’ve got extra time”, I’d say spend that time on something that actually does fulfill you, that does give you some sort of enjoyment. Why the hell are we doing this? We’re doing this to actually enjoy some life and buyback lifestyle. We’re focused on doing things that’s going to make more money, that then you can pay somebody to go out and do those activities.

So go out and source more deals, raise more capital, focus on operations or dispositions in your business. Those handful of things are really the things that move the needle, and will give you the highest return on your time, until you get to a level where you got a team built out doing those things for you. Then it’s probably doing things that are painting a vision, building out the organization. That’s the next level of what I spend my time on today.

Break: [00:22:37][00:24:33]

Ash Patel: Such incredible advice. Best Ever listeners, if you know somebody that’s younger, starting out, that can appreciate this advice, please send them this podcast. Because I wish I had a lot of this advice when I was starting out. This is incredible. I want to share a quick story with you, Tim… I was at a dinner, and I met a guy who was a score counselor, but he was also one of the most well-connected people I’ve ever come across. I wanted to pick his brain or get some of his time and advice, because I know he could add a lot of value to me. But I didn’t want to just come out and ask for it. I knew money wouldn’t move the needle. He was retired, did very well, he’s not looking to make any more money.

The way that I approached it, I said, “Hey, Lee, I would love to get some of your time.” During the dinner, I found out what his favorite restaurant was. So “Happy to meet you at this restaurant, buy you dinner. In return, let me know what I can help you with, whether it’s things around the house – cleaning the garage, hanging a TV, odd jobs that just need two people to get done.” He was blown away, and we’re very good friends to this day. It’s important to add value. Tim, one of the things that you’re known for is building a business around your lifestyle. Man, that sounds like a T-shirt. Let’s dive into that.

Tim Bratz: Not always. Before, it was work, work, work. It kind of bought into that bag of goods that I think a lot of people do… Just like, “Let me work my tail off and tell myself I’m doing it for my family.” Does your family care if you make an extra 10 grand a year, even 100 grand a year? I guess maybe it depends… But once your basic needs are met – you’ve got a roof over your head, you’ve got food on the table, you’ve got clothes on your back, you live in a safe neighborhood where you don’t have to worry about getting broken into or robbed or whatever – once those basic needs are met… And in most communities, that’s $50,000 to $60,000 a year in household income. It doesn’t make a difference if you make 70 grand a year or $70 million a year to your happiness. There’s statistic after study after study after study, metrics on all this stuff, there’s no difference in level of happiness once your basic needs are met.

Now, it’s about fulfillment, now it’s about making impact – that’s the stuff that actually moves the needle, not making more money potentially. “Well, let me try it out for myself”, and I did. I just kept on trying to make more money, and it got to a point where… I had a daughter, she was two years old, and I came home from work one day from the office, and we had dinner as a family… And after, I quietly sneak into my office, I answered some text messages. My little girl, right after dinner, right before bedtime, I haven’t seen her all day and she comes in, she’s tugging at my shirt, “Daddy, daddy, will you will you come and play with me?” I was like, “Yeah, yeah, yeah, hang on one second.” I don’t even look at her, I’m texting, and I’m sending this text. “Daddy, Daddy, will you come and play with me?” I was like, “Yup, baby, hold on one second. I’ll tell you what – why don’t you just go and play and I’m going to be over there as soon as I’m done sending this message, and then we’ll play together.” “Okay, daddy.” She goes over to the play room, which I can see from my office; she’s over there playing by herself. I finished sending the message, and I look at my daughter playing by herself, because I just sent her over to play by herself… I looked down at the message and I realized it’s not urgent and it’s not important; it could have waited until tomorrow. Potentially, I could have just deleted it and not even responded at all and it would have handled itself. Yet, my daughter came over to me and she’s tugging on my arm wanting to spend some time with her daddy, and I’m trying to make an extra dollar. And I’m ignoring my daughter; whether she knows it or not, I’m planting a seed subliminally in her mind that this phone and this work is more important than she is. How many times do you plant that seed before it actually takes root, before it actually starts being cultivated over and over and over, and then it actually grows? Then all of a sudden, she associates daddy, not with love, comfort, safety, and somebody she can confide in, somebody she can laugh with, and have a good time with, but instead, of being ignored. She all of a sudden associates love with being ignored, and not being treated the way that she should be treated, as a little princess.

All of a sudden, she starts dating guys in high school who would treat her like [bleep [00:28:56] or who are [bleep [00:28:57] or tries finding fulfillment in different ways that nobody wants to talk about their daughter doing; through sex and drugs and other horrible stuff. This all happened to me, as I’m sitting there after dinner, looking at my daughter… I canceled everything the next day. Next day was a Friday, and I cancelled all my appointments. I realized I block out time for a podcast, I block out time for a phone call, I block out time for lunch meaning, I block out time to post on social media or whatever; why don’t we do that for our family? We time block for work but we don’t time block for our family.

So I essentially deleted everything that I had the next day, I canceled everything, and I time blocked the entire day. Not answering the phone, not taking a phone call, not doing any meetings… I took my daughter to the zoo. We went to the zoo, my wife, me, and we hung out at the zoo that day, we had a great time. I was like, “I’m not going to let this happen again.” I started time blocking in the evenings also. So “Hey, you want me to jump on a podcast, or do you want me to come out and speak at an event, or even attend a meeting or something in the evenings? I can’t. I have an appointment. It’s with my wife, it’s with my daughter, it’s with my son who then came along, it’s with my family.”

I started time blocking in the evenings, I started time blocking the weekends, and then eventually Fridays. We call it Friday family fun day; it was a fun thing to come up with. Before the kids got in school, Friday family fun day, Friday family fun day! It was fun. They get to decide whatever we wanted to do, go to the park, go to the zoo, go hike in the woods, go to Chipotle, just go play at the playground; whatever they want to do, it was up to them. You’re like, “Damn. Well, Tim, I’m building my business. I can’t not be available. I’ve got to take that phone call. It could be a client, it could be a private money lender, it could be this person, it could be that person.” I was very clear with everybody I did business with that I do not take phone calls after five o’clock. I put my phone away, that way I can recharge the batteries, personally, and spend time with my family.

If I miss out on a deal or if we don’t do a deal because of that, I totally understand, but I’m not willing to sell out my relationships to make an extra dollar. You know what happened by time blocking and creating constraints with my work schedule? Because now I’m only working 10 to five, Monday through Thursday – what is that? That’s 30 hours a week.

Ash Patel: Did you become more efficient?

Tim Bratz: I became more efficient. Now you’re not wasting your time on a bunch of crap that didn’t matter. Now you’re in the office and you’re like, “I’ve got to get things done.” You zoom through emails, you zoom through messages; you don’t drive a half hour to go grab coffee and then drive a half hour back, waste an hour in a meeting that could take a 15-minute phone call. I started doing things like that, that made me way more efficient, that actually I started growing the business more because I focused on those things that moved the needle. The other thing that happened is there were people who are now business partners in my organization, that before they were just clients, or like — my business attorney is who I’m thinking of right now.

He was my business attorney, he’s like, “Dude, I respect you more because you don’t value money over relationships. Because of that, I want to do more business with you.” He eventually came in-house and is now a partner of mine. We’ve bought hundreds of millions of dollars of real estate together because of that. So you think you’re going to lose out on business – I actually gained business from it; I actually grew my business because I created those constraints in my schedule. It’s a powerful, powerful notion is to time block for yourself personally, to work out, to meditate, to read a book for personal development, whatever that looks like, and then for your family, for your friends, time block some of those things; schedule a date with your wife, schedule a date with your daughter, schedule a date with your son, go and play putt-putt.

Here’s what’s important to understand – we all play the psychological game of ourselves of “I’m doing it for my family. Eventually, I’ll be able to retire. I’m going to do it for my retirement.” I get it, I actually forego a lot of present, where you give up present benefits…

Ash Patel: Living in the moment.

Tim Bratz: Yeah, for long-term benefits kind of a thing. Here’s what I found, though…

Ash Patel: Are you thinking like short-term pain, long-term gain?

Tim Bratz: Yeah, I’ve always believed in that. But the reality is, by creating those constraints, you’re going to be happier. Because you’re going to be happier, you’re going to show up better to work, you’re going to be more productive at work. People are going to hear on podcast and in phone calls, and in your business dealings; it just moves everything forward so much more. So time blocking – the greatest indicator of your priorities is how you spend your time. We tell ourselves, “I’m going to work, and I’m working all these hours because it’s for my family.” The reality is you’re prioritizing work, not your family. It’s how do you spend your time, and that’s the greatest indicator of your priorities.

Ash Patel: Again, just mind-blowing advice; a lot of good points in there. A lot of excuses that we all use, “Okay, listen. If I can get to X number of dollars, I can retire.” And you keep moving that needle; “Well, that might not be enough. “Okay, I’m going to get to this dollar amount.” In all honesty, we’ve established that once you have enough discretionary wealth to buy whatever you think that’ll make you happy, you don’t end up buying it. So really, why do you keep moving the needle? I’ve never seen anybody happier at a $2 million net worth versus a $500,000 net worth. Such great points… The efficiency – you think back to college or high school even, when kids had jobs, they get better grades, and it’s proven. They get better grades in school because they have a scarcity of time, they use it more efficiently.

Tim Bratz: To your point, I think that’s so powerful and something that needs to be addressed. Because I remember in high school, my mom told me, she’s like, “No, you need to play a sport or do something every single season.” I was like, “Why?” “Because if you don’t, Tim, you’re going to get in trouble, because you’re going to have too much time.” So I always played three sports. Hi, beautiful. This is my little girl.

Ash Patel: How are you?

Tim Bratz: She’s almost seven years old.

Ash Patel: Tell me your name.

Tim Bratz: What’s your name?

Penelope Bratz: Penelope.

Tim Bratz: Penelope.

Ash Patel: Penelope, my name is Ash. So good to meet you. We were just talking about you.

Tim Bratz: We were just talking about you. So one of the things that my mom told me, she’s like, “If you’re not busy, then all of a sudden you find trouble. You go and find things to make yourself busy. Typically, it’s not good, positive, productive, positive influences in your life.” That always resonated with me, because I watched the kids who weren’t busy, and they were doing drugs after school, or they were at the mall, stealing stuff, or they were just getting into trouble and not getting good grades. I had a finite amount of time to study because I had work, and then I had fun time, or whatever. I had to go and study and get it all knocked out, be very productive with all that stuff, because I was constrained on time. If you want to move the needle forward, don’t have too much time. Time-block for these specific things and really be all in during those time blocks.

Ash Patel: Tim, I want to touch on a couple of those things. I had a pivotal moment as well, where I think my daughter was one or two, and just learning how to walk… I’m sitting on the sofa, on a laptop, and she would come over and try to close the laptop. I didn’t think much of it other than, “Well, listen. I’ve got to get this work done, blah, blah, blah,” all the excuses. In reality, that was the same thing that you mentioned earlier, is that was competing with her time. I’m glad you had your daughter just come in here when she came home from school… I hope we don’t edit that out, and I’m asking that we don’t edit that out. Because I used to let people know, if I’m on a podcast, if I’m in a Zoom meeting, my door is closed, these studio lights are on, you can’t come in. Now the rule is, come in anytime. If you need something just come in; know that I’m on a podcast, but if you need me, come in. Same thing with your phone – guys, take baby steps. My phone would never leave my side before, and then it’s incredibly powerful to know that you can leave your phone on your desk, in your office or wherever, go to the kitchen, hang out with the kids… It’s just refreshing, man. You don’t have to be glued to these things.

Tim Bratz: It boils down to awareness. The reality is these phones are created to be addictive. They feed the same dopamine in your mind, the same thing that the cocaine does, the same thing that drugs do. It’s meant to do that and to be addictive; there are studies on it. If you feed a bird, they tap, tap, tap, tap, tap five times, and then you feed them a piece of seed, they tap, tap, tap five times, you feed them a piece of seed; tap, tap, tap five times, you feed them a piece of seed. They get to know that every five taps, they’re going to get a piece of seed. If you feed them randomly, and they tap, tap, seed, tap, tap, tap, tap, tap, tap, tap, tap, seed, tap, seed, tap, tap, tap, seed, and you feed them randomly instead, they will continue to tap, until they essentially fall over out of exhaustion. That is what happens with our cell phones. That’s exactly how social media is created.

You scroll, scroll, scroll, scroll, scroll, dopamine; scroll, scroll, scroll, scroll, scroll, scroll, scroll, scroll, scroll, dopamine, scroll, dopamine; and it feeds the exact same thing until eventually, two hours, three hours later, you’re like “What did I just do with my time? I wasted all of it.” When you realize, when you have awareness that you can actually put the phone away, not be addicted to it, and it doesn’t control you, and instead you control it, it’s a game changer for sure.

Ash Patel: Tim, we’re heading to the end of our allotted time. Normally, I asked what your best real estate investing advice ever is. Today, I’m going to ask you, what is your best advice ever?

Tim Bratz: Oh, man… I’d say, I think the big thing that I want to convey to my kids is take 100% responsibility. You are who you are where you are. There are some external forces that sets you up, but the reality is, once you’re an adult, you are where you are because of the decisions that you make, or don’t make. It’s the rooms that you put yourself in or don’t put yourself in. The books that you read or choose not to read. The shows that you watch or choose not to watch. All those things feed into who you become as an individual, and it’s your decisions. It’s all 100% up to you of are you putting yourself on a path of progress, or putting yourself on a path of more regression or stagnation? What does that look like? You are 100% responsible for you.

Yeah, the economy happens to everybody, social impact happens to everybody, all these different things happen all of us; we all have negative influences on our life. But it’s like what Jim Rohn said, he said, “All these winds blow on all of us.” Social winds, economic winds, political winds; all these winds blow on all of us. We’re all like little sailboats. The difference is not the wind that blows, but it’s the set of sail. If you set the sail, it’ll take you anywhere that you want to go, and it’s up to you. All these external things; not about what happens to you, it’s about how you respond to what happens to you. And if you take 100% ownership over your life and over your business and over your family, I think it’s going to set you on a path to really move things in the direction that you want to go, knowing that you have control over it and you can dictate what your life is going to be designed to be like.

Ash Patel: Tim, do you do any coaching now, or is that part of the plan in the future?

Tim Bratz: A little. I’m really active on social media. Connect with me on Facebook and Instagram, I’m real active on there. I do a little bit of how to scale from a single-family into apartments, I’ll do that maybe three times a year, two or three times a year. Then I have the mastermind group as well, where we get together a few times a year and talk about business and life and all that kind of stuff.

Ash Patel: What’s it called, the mastermind group?

Tim Bratz: Legacyfamilymastermind.com, that stuff is cool. It’s a lot of real estate people, but we have a lot of other general business folks too. It’s more about business building and stuff. We offer a lot of real estate type things, insights and concepts. I’m just a real estate guy, so most of my network is real estate, but it’s more business building, lifestyle building, and it’s a powerful group. We get a lot of good people in there and it really checks all the boxes on fulfillment for me. It’s not the biggest moneymaker for me; actually, probably last in line, but it’s the most fulfilling thing that I do. I love doing the coaching, I love helping people see themselves as more than maybe they can see themselves on their own, and connecting with the resources, help them fast-track that success.

Ash Patel: I think when this podcast airs, a lot of the Best Ever listeners are going to reach out through that website. Tim, are you ready for the Best Ever lightning round?

Tim Bratz: I love it. Yeah, let’s do it.

Ash Patel: Alright. Tim, what’s the Best Ever book you’ve recently read?

Tim Bratz: Who, Not How, it’s really good. It’s all about instead of you saying, “Hey, I need to take on something new and put it into practice. Oh, hey. I went to this conference and got a lot of amazing things and I’ve got to add all these things to my plate.” Instead of saying, “I have to add all these things on my plate,” you say, “Who do I need to hire to then implement these things in my business?” It’s a totally revolutionary thought process. It’s a really, really good book.

Ash Patel: Yeah, that was a huge eye-opener for me. Tim, what’s the Best Ever way you like to give back?

Tim Bratz: Doing the coaching, social media. I get people “Hey, can I pick your brain? Can I do a lot of this stuff?” I love social media, because if you use it to create content, not necessarily consume. Or if you are going to consume, make sure it’s a very disciplined consumption. But for me, I can reach out to a lot of people, I can make a big impact across many people; it’s a one-to-many platform that can be used as a phenomenal marketing tool. So I try to put out as much valuable content on social media as I can.

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

Tim Bratz: Hit me up on Facebook, Instagram, I’m very active on those two platforms. I even have a TikTok, LinkedIn, and stuff now. But Facebook and Instagram I’m most active. Hit me up there, and if there’s anything that I can help you out with, a resource that I could connect you with, or a direction I can point you in, happy to do so. I appreciate you, Ash. Thanks so much for having me, brother.

Ash Patel: Tim, thank you. It’s been our pleasure to have you. We didn’t have an agenda but, man, what an incredible conversation. Thank you so much for giving up your time today and sharing that with us.

Tim Bratz: Thank you. Appreciate you, man.

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

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JF2761: The Key to Underwriting Retail Deals ft. Philip Block

What are the advantages of investing in retail over multifamily? Philip Block, Managing Partner for LBX Investments, made the shift from investing in apartments to shopping centers almost four years ago, and currently has $284.5M in AUM. In this episode, Philip details his underwriting process that has helped him close multiple deals.

Phil Block | Real Estate Background

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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 Phil Block. Phil is joining us from Los Angeles. He has a multifamily background, but his company LBX Investments is primarily syndicating shopping centers right now, and they are fully vertically integrated with over 284 million in assets under management. Phil, can you start us off with a little more about your background and tell us more about what you’re currently focused on?

Phil Block: Sure. Thanks for having me, it’s great to be here. I founded the company with Rob Levy, my partner; he and I have worked together for a really long time. We had a large company in New York called Centerline Capital, which is a public company; he was a CFO and then CEO and I ran corporate finance, after doing some investment banking in New York prior to that. We’re value guys, so when we sold the company in various kinds of iterations, we were looking for something for our own account and looking for value. Multifamily was expensive, felt expensive to us six years ago, so we were wrong, because it continues to appreciate… But really saw an opportunity in the retail space. We both have retail backgrounds in prior lives, so we started buying shopping centers, largely in the Southeast, and now all around the country.

Slocomb Reed: Yeah. The seven-year real estate cycle has been ending for like the last five years.

Phil Block: Exactly.

Slocomb Reed: Everybody thought apartments were overpriced back in 2015, 2016 and here we are. So you’re value guys; that’s one of those terms, I use it. Many people, they do the value play or they do value-add; what does that mean for you guys specifically?

Phil Block: In general, what it means is we are looking for yield that we feel is mispriced, where the risk is mispriced. That typically means buying when other people are selling, particularly institutions, and selling maybe when other people are buying. It’s still true today, but we started this, as I said, we had a prior partnership six years ago and we started LBX four years aago… And when you bid on a multifamily deal, you know how many guys are you competing against. It was 40 guys; it’s hard to say — I really found value when I beat 40 guys in the deal. You may end up making money and doing well but that is a pretty competitive landscape. We’re bidding against four or five folks typically and we’re buying larger institutional assets, and trying to hit an in-place yield with some upside where we think the market is not understanding what the real risks are there. Anyway, that’s our focus.

Slocomb Reed: So you’re looking for mispriced yield or mispriced deals, which means you have to get out of multifamily, because multifamily is so picked over. Even if something is mispriced, as you said, there are 39 other people who are going to bid on it. So that has moved you into shopping centers; and Phil, feel free to correct me where I’m wrong. What you’ve found in shopping centers is an asset class where you could become an expert, if you weren’t already one, and you’re finding more deals where there’s potential for value that other people are missing. You have more of an analytical advantage, we could say, in shopping centers over all of the competition that you’re facing to buy multifamily, is that fair?

Phil Block: I think that’s right. I think you have to think about how we think about things. There’s macro and there’s micro. From a macro standpoint, especially four years ago, but still true today, there’s a narrative in the media that retail is dying, everything’s e-commerce, Amazon’s going to take everybody’s lunch. What we said is that doesn’t make a lot of sense for a lot of the retail today. Now, are class C malls in the middle of America, where the population is declining, a good investment? Probably not. We’re not at all interested in that; we’re not going into enclosed malls with a Sears, a JC Penney, and a Dillard’s, or whoever your anchors might be, where you have 500,000 square feet of vacancy.

What we thought is grocer-anchored centers, Target anchored centers, and Walmart anchored centers in the best locations, in the best markets, from a macro standpoint; that felt and feels great and sustainable. Especially, we were focused on just fundamentally great real estate, so growth markets in the Southeast, where you saw population and demo growth, that felt fantastic. And just in terms of we’re buying on main and main. If you think about retail, you’re normally main and main; if you’re buying office, you might be in some office park way out off the road. If that goes away, how are you replacing that? Same with industrial.

Retail, you’re right out on the road. You have 50,000 cars going by every day, especially when you buy the best stuff. So that’s macro, and we felt this way makes a lot of sense, and we both were and are experts in this sector. And it’s hard, there aren’t that many people that understand it. Everybody understands apartments, it’s why there’s so much capital that floods it; it’s not that hard to understand or to underwrite basically what your rental growth is going to be, and what your vacancy, and you can underwrite multifamily. With retail, we’re looking at the credit of the tenants, we’re looking at the long-term trends in that submarket, and we’re thinking about how much does it cost to replace those tenants, because we have large TI dollars and leasing commissions…

We’ve become, we think, probably better than anybody in the market at underwriting that risk, which is why we’ve beaten our underwriting on every deal we’ve ever done. So macro, thinking about this… And then micro, what’s the best specific asset? What’s the grocer that’s doing the best in that sub-market? What are the rents on a tenant-by-tenant? How much is it going to cost me to replace — maybe there’s a 20,000 square foot box tenant; pick one, Bed Bath & Beyond… But is their rent well below market? Can I improve that over time? Are they paying too much? Really, understanding the nuances.

Slocomb Reed: Speaking of one of those nuances, Phil, do you guys do single-tenant properties? Do you have a preference there for single-tenant or multi-tenant? Does it matter to you?

Phil Block: Yeah. We don’t do single-tenant; we often sell single-tenant. One of the strategies that we employ is we will buy an entire center, and it’s like buying wholesale and selling retail. So you buy a whole center, maybe it has a Publix grocery store, a nail salon, a pizza shop, etc, and then you have Chick-fil-A or McDonald’s out on the road. So if we can buy the whole center at a seven cap or an eight cap, and then sell off those outparcels at, as you know, three cap, four cap, five cap, we can really reduce our basis and enhance our yield.

Slocomb Reed: Awesome. A couple of other questions for you… I have an apartments background, and I’m conversational in shopping center investing through my associations and through my work at this podcast. I want to ask you a couple of quick questions about the way that you analyze properties, and then I want to dive into the numbers and hopefully get into the specifics of one of your deals. First, Phil, I want to ask – this is a term that we hear often… What counts to you as main and main?

Phil Block: Sure. They’re typically arteries running out from whatever major city you’re talking about. We are not buying urban core retail or real estate, but kind of first and second ring where you see the suburban population growth. We’re talking about major intersections, and there are normally just a few in those submarkets. We’re typically thinking 30k, 40k, 50k car per day type vehicle counts on both roads.

Slocomb Reed: I’m imagining Phil, you get off of the interstate at an exit, you end up on a road that also has a state route number, and then you hit a red light where another road also has a state route number. That probably sounds like the kind of main and main you’re looking for, right?

Phil Block: That’s right. Yeah, I’m sure all your listeners are familiar with where the Targets are, the Walmarts, etc. Home Depot.

Slocomb Reed: Yeah, absolutely. I’m using the apartment terminology here. Tell us more about how you underwrite for the cost of vacancy?

Phil Block: Sure. We’re talking about the cost to replace the tenants. Typically, what we found is that the best retail is pretty well occupied. There are very few — I wish I could tell you and your listeners that were buying 80% or 70% occupied shopping centers that you can come in and immediately lease that space up; it’s mostly going the other direction. When there’s a vacancy — not 100%; we have maybe one or two examples of deals we bought where there was an obvious vacancy. Two that I can think of off the top of my head. But in general, that’s the type of very clear value-add that you do end up with a lot of competition. What’s more typical is if you drive just in your neighborhood, my guess is the better shopping centers you go to are full. Maybe there’s a small shop space or one of the anchors left, but it was immediately replaced, that kind of stuff.

But the key to underwriting is what’s your current cost, what are they paying, what’s your current rent, and use an anchor space; 20,000 square foot, the guy like a TJ Max, Marshalls – they’re probably paying somewhere around $10 a foot a year; maybe it’s 12, maybe it’s eight, it’s just depending on the market. And how much the TI, the tenant improvement dollars was. If they’re going to go out, they’re leaving or maybe you already have that vacancy, you’re going to have to spend tenant improvement dollars to get somebody else in, you might have to white-box the space, it’s called, to bring it to very plain, vanilla space.

Slocomb Reed: Do you have an average cost per foot metric for your white boxing?

Phil Block: You can’t exactly… The white box we do, the TI dollars can vary considerably. Some tenants are on an as-is basis, so you underwrite a range of outcomes, thinking about who do you want and what does that look like. The more dollars you have to spend — obviously, you can buy up rents, but that can cost you in the long term.

So the typical TI, if it’s expensive — like, splitting a box could cost you 70 bucks a foot, $80 a foot, something like that. What does the HVAC look like, because that’s always one of your major costs; what does the roof look like, do you have to redo the roof for your new tenant… That’s why the variables within retail are pretty dramatic. From, “Hey, we’re going to do an as-is deal”, to  “You need to give me $100 a foot for a medical use, and white-box it, and get new HVAC.” Doing a new grocery store probably costs you $100 a foot, something like that, to build out.

Slocomb Reed: Yeah, dramatic variables; to your point though, they create the opportunity to find value. How much it costs to turn a two-bedroom apartment with one bathroom is fairly uniform in a market, much more uniform than the kind of stuff that you’re talking about. Especially if you’re subdividing a space, or you have to put new air handlers in because it used to be one-tenant and now you’re going to have two in that same space. That makes a lot of sense. Do you have a rule of thumb for anticipating how long a space will remain empty after a tenant moves out?

Phil Block: Yeah, you probably started 12 months for a shop-type vacancy, just like that 1,000, 2,000 square foot from an underwriting convention; and then in an extremely hot market, you may shrink that. Just the time it takes to go out and lease it, sign a new lease, get somebody in, get the space renovated for them, and have maybe some free rent periods before they start somewhere – call it a year, and we typically beat that.

Slocomb Reed: Gotcha. So you estimate conservatively, conservatively meaning a longer time. You’re estimating a 12-month vacancy when someone moves out of a 2,000 square foot space.

Phil Block: The honest answer is we go space by space for every new deal, and it varies. But if you’re asking for a very general rule, that’s pretty safe. The larger spaces that anchor 5,000 to 50,000 square foot spaces are certainly more uniquely done, tenant by tenant, but always longer than a year. Those leases take much longer and the timeline to get somebody in takes much longer.

Slocomb Reed: Phil, just a couple more general questions and then I want to different direction. Let’s say, you’re going to have an anchor tenant vacate and let’s say you’re going to have a 1,000-2,000 square foot tenant vacate; in those two scenarios, how often are you courting new tenants for the space before the space is actually vacated? Like, come see this actual operating restaurant in the space where you’re considering putting your own restaurant, as opposed to getting the tenant out, white box it, and show it as a fresh new clean space to a prospective tenant? Where’s the balance there? Are you trying to get people in beforehand, or are you waiting?

Phil Block: Always before. Especially in commercial leases, we have sometimes a year notice, sometimes nine months. It’s never like tomorrow they’re out; that’s just not how it works, or even 30 days. We have a long lead time, and our head of leasing is just fantastic. He’s out of Charlotte, and he’s been doing this for 30 years, and he’s as good as it gets in the industry. And then we work with the best local leasing teams depending on where our shopping centers are, and he’s managing them, and we’re having calls weekly between them and they’re showing that space and pushing it long in advance of a vacancy.

Slocomb Reed: Gotcha. Let’s turn the conversation for our Best Ever listeners. Phil, have you gone full cycle on a shopping center?

Phil Block: We have refinanced, we haven’t sold anything on purpose. If you think about our timeline, we started LBX four years ago almost exactly, and started buying shortly after that. In our first shopping center, we bought all the equities out; we have another two deals now out of our 11, three out of the 11, I think, that all the equity is out or with a refi happening now, it’ll be out.

Slocomb Reed: All the equity is out meaning that with the cash-out refinance you bought out your limited partners.

Phil Block: They stay in the deal, but meaning that as unlimited partners, as a limited investor, you have all of your money back, and you’re still getting a pretty significant distribution quarterly.

Break: [00:18:22][00:20:18]

Slocomb Reed: If you could, for us, Phil, pick one of those deals… I want to go through it from start to finish in the next few minutes here. Treat me like one of your LPs and tell me a couple of things. Keeping in mind that I could put my money in apartments any day of the week, that there are plenty of opportunities at 8% pref, 15% IRR, underwritten on the five-year hold, get my money back in three to seven years – that’s out there. And I’m considering you instead of that. One of these deals is obviously already worked because, in reality, you’ve gotten the LPs all their money back and they’re still in the deal, and still receiving returns. Start with how you pitch this to me as your limited partner, and then move me through the steps of executing your business plan until you got to that cash-out refi. What did that look like?

Phil Block: Sure. I’ll use the first deal we bought. A deal called Alafaya Commons, which you can see on our website. It’s in Orlando, it’s right by UCF, University of Central Florida, which is I think either the largest or second-largest school in the country now by total student population. And as we talked about before – main and main; so there’s an artery running from downtown Orlando east which is where UCF is, and once you run East then there’s another one main road and it’s Alafaya Trail and Colonial Drive. Colonial Drive runs East out of downtown, then Alafaya Trail runs North-South, and it’s on the corner of this main intersection. It couldn’t be more dense in growing faster, it’s just absolutely tremendous real estate. As a shopping center, we bought at a nine cap going in. For today, it’s pretty small for us, but call it $20 million, just under $20 million.

Slocomb Reed: Day one, nine cap.

Phil Block: Day one, nine cap.

Slocomb Reed: Is that fully occupied?

Phil Block: I don’t have it in front of me, call it 95% occupied; right around 95.

Slocomb Reed: 95% occupied. Okay, that’s the first number that jumps out on an apartment investor Phil. Ain’t nobody buying nothing at a nine cap right now.

Phil Block: Well, you’re not buying retail at a nine cap anymore, but this–

Slocomb Reed: Sure. Well, yeah. To your point. When was this?

Phil Block: This was three and a half years ago.

Slocomb Reed: Pre-COVID. Gotcha. What does that cap rate look like?

Phil Block: For what’s left in the center, it’s probably a seven; but call it right around a seven cap.

Slocomb Reed: So 95%-ish percent occupancy, you’re opening at a seven cap, you bought it at a nine three years ago; today it would be a seven cap. How much of a value play did you have when you bought this three years ago at a nine cap?

Phil Block: Significant. One of the things, as we talked about, you were asking me about single-tenant, do we ever buy single-tenant, and I said we sell it. So here, there was a Taco Bell, a thing called Amscot, which is like a check-cashing place, but right out on the corner, paying a huge rent, and they had a 10% rent bump coming with a 10-year option that they had to exercise within six months of our buying it or a yar of our buying it, and we knew they were going to do that, or we felt strongly that they would. And there was a local Chinese restaurant out on this main road that made no sense to us really, again; kind of a single parcel. And Academy Sports was one of our anchors; it was on the end and could easily have been parcel. If you’re not familiar with Academy sports, it’s like Dick’s Sporting Goods.

So what we felt was we were buying this wholesale — and frankly, a number of the rents in place were significantly below market, and the shock… While it’s 95% occupied, a large chunk of that is because of Academy Sports; they were 50,000 something square feet. So we did have a decent amount of shop space, and the truth is, the kind of the secret sauce, that’s where you make your rent, that’s where you make your money, because shop space goes for three times the cost of your box space. And a lot of the time, the institutions are great; the institutions that we buy from. We were buying from Regency centers, which were the large public REIT. They’re great at leasing your big national anchors, they’re not very good at your local shop space, because they do what you did, which is say, “95% occupied, that’s great. It checks thei report and nobody’s really paying attention.”

If I leased that last 6000 square feet at $35-$40 a foot, that’s four times what you’re leasing your anchor space at, and it’s adding significant value; you’re tapping that. So what we did is we said we can parcel all of these individual single-tenants, sell them, and reduce our basis. So as I said, we bought it a nine cap, we sold Amscot, first we let it bump by 10%, and then we sold it on the new income for a 6.5 cap. We sold the Taco Bell for, at the time, I believe a five cap, either a 4.5 or a five cap, it was a low market rent. We kicked out the Chinese restaurant because he was struggling and we brought in Jollibee. Are you familiar with Jollibee?

Slocomb Reed: I’m not.

Phil Block: It’s like the McDonald’s of the Philippines, they’re absolutely massive. We just did that deal and sold it at a 4.5 cap. Then we went to Academy, we created a tax parcel for the giant Academy box, and we sold that at an eight cap, which was a good deal for the buyer, to be honest… But because of our basis, we now have all of our money out just from selling all those, and then we effectively own the rest of the shopping center for free. We’re pretty close to that.

Slocomb Reed: How much of the shopping center is left?

Phil Block: There’s a gym [unintelligible [00:25:49].05] shop space, call it 55,000 square feet, 60,000 square

feet, something like that.

Slocomb Reed: How long did it take you to create and sell off all the outparcels?

Phil Block: There was a timing issue for just waiting on the last, the Jollibee, because we had to kick out that Chinese restaurant and deal with that. But it was all done within two and a half years.

Slocomb Reed: Wow. That’s pretty impressive.

Phil Block: We haven’t refinanced yet, and the investors already have all their money back.

Slocomb Reed: Gotcha. What kind of a return were you proposing to investors when you were first acquiring this, and what does it look like now?

Phil Block: I think we had modeled and said… Again, I don’t have it in front of me, so you’ve got to give me a little leeway. But call it a 16 or 17 net return IRR over a five-year hold, and we’re certainly well into the 20s. We’ll see ultimately — how long you hold, etc, but we have a lot of very, very happy investors in that deal.

Slocomb Reed: Yeah, I believe it. Fast-forward to 2022, are you putting together any deals right now?

Phil Block: Always. Yeah. We have one in Atlanta that we are signing the contract on today or first thing Monday morning, we’re finally in agreement on it, and we have a large public steel in Florida that we are in interviewing for on Tuesday; that’s like best and final submitted. We’re one of a few groups being interviewed and we’ll see.

Slocomb Reed: Gotcha. Last question – with the deals that you’re looking at right now, how do the returns that you’re offering to limited partners compare to the typical B class value-add apartment, eight pref, 15% IRR over five years?

Phil Block: To be honest, the biggest difference is that our underwriting’s correct and believable, if we’re being honest. Most of our returns are driven by cash flow, not by the idea that we’re going to get 5% annual rent growth and sell it at a four cap in a rising interest rate inflationary environment. I feel much better about our projected returns, because it’s not speculative. We’re paying typically double-digit cash flow out of the gate, or it’s an eight or a nine, and there are pretty simple things like selling outparcels, a little bit of lease-up, that generates the added yield, it gets us to a high teen; it’s why we continue to look at multi. And I understand why people like it, because I love the multifamily business. But buying things at two caps or three caps saying “We’re going to have 5% or 10% rental growth forever and that’s how I’m getting to a 15 or a 16” is dicey. Maybe that continues, I’ve been wrong for the last few years… But that is, to me, much less achievable than buying a great shopping center, paying an eight, or a nine, or a 10 day one, and just doing little bits around the edges to achieve your enhanced return.

Slocomb Reed: Phil, let me put what I think you just said in my own words, tell me if I’m wrong. The biggest difference between the underwriting you’re doing and the underwriting most multifamily syndicators are doing is that the projected growth of the apartment market is predicated upon the current position of the market cycle perpetuating itself for at least a few more years. All the rent growth we’re seeing, the cap rates remaining low, probably not going to compress anymore. I don’t know that anyone is projecting a compressed cap rate five years from now.

But the returns that we’re seeing underwritten in the apartment market are predicated upon the ability to do the things we’ve been able to do for the past few years, due to COVID and due to where we are in the market cycle. With shopping center deals like yours, the value play is already in the paper, the rent growth potential is effectively step-ups that may already be in place, or specific to the micro factors of the property and that individual market. Specific to the factors affecting that property and that market, the value that you’re finding and seeing the spaces are underutilized.

Phil Block: I think that’s right.

Slocomb Reed: And you also have opportunities for additional exit strategies and value plays in that… If you find properties with outparcels that could individually be sold at a lower cap rate, based on effectively changing the asset class to something single-tenant with a lease that’s corporate-backed, you’re taking something that you can buy at a higher cap and sell off a smaller portion of it at a lower cap.

Phil Block: Yeah, that’s right. Everything we do is about protecting our downside first. What I struggle with, what we struggle with in the multifamily space – to compare that, since that’s what you’re asking about – is most of those guys today, as you know, Fannie and Freddie are not getting to the leverage that most of those syndicators need to get their deals done today. So they’re getting debt fund type borrowing, which is SOFR based; so if you run it on a forward SOFR curve, you buy something at a three cap; that’s what you’re seeing on a value-add multifamily today. So you buy a tertiary, I don’t know, 3.5, somewhere around there, and you finance SOFR-based bridge debt that’s going to cost 5%. SOFR at 300 is today 3%, and it’s going to be 5% in six months if you use the forward curve. You need a lot of rental growth to cover you. If things go slightly in the wrong direction, your cap rates widen, which I think they have to. Not a ton, but they probably have to a bit, because you have to have some positive leverage… And your equity is actually underwater. Not just “Hey, I’m not going to hit a 15”, you’re going to lose your principal.

That’s what scares me. It’s worked well — if you put on low leverage long-term financing on multi and hold long term, you’re fine. But a lot of the debt fund, “Hey, I’m going to get you this return in a three to five-year hold,” is much riskier to me, I think, objectively, than what we’re doing.

Slocomb Reed: Phil, I’m based in Cincinnati; no one here is buying a three cap. Our multifamily cap rates are higher than that, because they have to be; our deals are smaller. But to your point, the opening cap rates on deals like yours – I have friends who are operating in that space and getting day one cap rates that you just don’t see in multifamily. So to your point, there’s more cash flow in that right now even in Cincinnati. Phil, are you ready for our Best Ever lightning round?

Phil Block: Let’s do it.

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

Phil Block: I just read Shoe Dog by Phil Knight, which was a great book.

Slocomb Reed: Shoe Dog by Phil Knight. Nice. What is your Best Ever way to give back?

Phil Block: Well, giving great investment opportunities to the retail community.

Slocomb Reed: What is the Best Ever skill you’ve developed as a commercial real estate investor?

Phil Block:  That’s a good question. I think, honestly, capital structure and protecting our downside.

Slocomb Reed: Structuring your deals to protect your downside is the best for you.

Phil Block: Absolutely, yeah. Not over-leveraging, using the right kind of debt, relationship-type borrowing. We cannot lose principal; I will not lose investors a dollar, that’s our number one goal.

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

Phil Block: For real estate investing?

Slocomb Reed: Yes.

Phil Block: I think it goes back to what I just said. The market has been tremendous, as we were talking about at the beginning of this podcast, for how long has this cycle been going. It’s easy to forget that things can go the other way. I came out — we own the largest special servicer; C3 was part of Centerline, and you can see… When things go wrong – I don’t think we’re going to have a GFC again, but what happens when you’re over-levered and you don’t have the type of relationship with your lender that enables you to have the time to weather that cycle… So protect yourself, make sure you don’t have leverage that things go wrong and your time it badly, they take your investment. That’s the number one thing, protect yourself.

Slocomb Reed: Phil, thank you. Where can our Best Ever listeners get in touch with you?

Phil Block: Our website is lbxinvestments.com. Easy to sign up as an investor on that. I think my cellphone is probably on the site, and my email is phil@lbxinvestments.com. Would love to hear from you.

Slocomb Reed: Great. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please do subscribe to our podcast, leave us a five-star review, and share this episode with a friend who you think can gain value from this conversation we’ve had with Phil Block. Thank you, and have a Best Ever day.

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JF2756: How One Cup of Coffee Kick-Started Her CRE Investing Career ft. Alessandra Thompson

When a mentor offered to grab coffee with Alessandra Thompson if she was ever in town, Alessandra didn’t hesitate. The next day, she showed up to Nashville, and that coffee date ended with a business partnership. Alessandra shares how she made the bold move to move across the country from California to Tennessee, her experience as an underwriter and asset manager, and what she’s planning for the future.

Alessandra Thompson | Real Estate Background

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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, Alessandra Thompson. Alessandra is joining us from Nashville, Tennessee. She began her journey into real estate syndications after moving across the country. Alessandra now has two properties under management and she handles day-to-day asset management and operations. Alessandra, thank you for joining us and how are you today?

Alessandra Thompson: Thank you for having me. I’m doing really well. I’m happy to be here, excited to just be on the show.

Ash Patel: It’s our pleasure. Alessandra, 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?

Alessandra Thompson: Yeah. A little bit about me is that I’m originally from California. I started my real estate investing journey probably last March 2020. A little bit of education a couple of months before. I always knew that I wanted to just get into something that would free up my time and where I wanted to live, and also just help me out financially. This is something that I just wanted to really get educated in. I started out by just looking at all the different ways of how I could get out of my W-2. I wanted to get more passive income, so this is something that just clicked with me in the multifamily world.

I was just working in marketing in Los Angeles and it wasn’t until COVID that I realized how unhappy I was with just going into an office, especially with the LA traffic. I was able to just get my life in order of where I wanted to be. I fell into multifamily, I found some mentors and people that were doing what I wanted to be doing, and I just got started and moved to Nashville to be in my market. I’m just super-excited to be here. I love the industry, I love the multifamily space. That’s a little bit about me.

Ash Patel: I’ve got a lot of questions. First of all, you’re in your mid-20s and you had this epiphany that you wanted more free time, you weren’t happy with the W2. Do you know how many people I interview in their late 30s, 40s, and 50s that had just had that revelation? How did you come to this? I would Imagine a lot of people at that age are just like, “Alright, I’m going to work, I’m going to grind harder, and then I’ll retire early. Or I’ll save up enough money and then I’ll move on to something else.” How did you have this awesome mindset at that young age?

Alessandra Thompson: I think it’s just that I’ve never been able to sit still in an office, and look outside and be like, “I want to travel the world and I want to be able to have the opportunity to spend more time with my family and friends.” Also, my father passed away about four years ago and he was working until the day that he passed, and that just really struck a chord in me that that was something that I could not do. I wasn’t able to spend enough time with him, I wasn’t able to just be able to go on a trip with my family and friends, or go out somewhere, because it was always just about work. I think that life is meant for more than that. I think that there are just boundaries that need to be had, so I wanted to just be able to free up my time and be able to do the things that I want to do, when I want to do them. That’s a lot of where it came from.

Ash Patel: Yeah, sorry to hear that, and thank you for sharing that. So you had that in the back of your mind… How did you bring yourself to take the action of leaving your job, pursuing real estate and moving to Nashville? Now, you said Nashville was my market – did you have the property first, or did you move to Nashville just because Nashville is awesome?

Alessandra Thompson: That’s a really long story, but I’ll get into the nitty-gritty. I was living in Los Angeles and then COVID happened. I didn’t see anyone for three months, I was just like, “I’m just going to get my life together a little bit.” My brother was living in Florida, he was doing door-to-door sales, and I just went. So I haven’t seen anyone — Florida seems like the other right place to go just to visit. So I went and visited, I stayed there for the entire summer, I started doing door-to-door sales with him. I made a good amount of money doing that while working my marketing job at the same time. I knew that I’d always wanted to get into real estate, so I was just like, “Okay, I’m going to put this money to use. I’m going to buy maybe a duplex and rent out one side.”

It didn’t seem like it was going to replace my job or my W2, and so I wanted to think outside the box of like, “How can I scale bigger?” That’s when I started falling into multifamily. I got on Clubhouse when it first started. It was an interesting space, because I was just asking any question I wanted on the platform and just meeting different people, getting on phone calls, asking all the questions that I could, just jumping on the phone with people. My mentor now, the people that I work with were in the space and I just jumped on a call with her and she said, “That’s awesome that you want to get in the industry. If you’re ever in Nashville, let us know, we’ll grab a cup of coffee.” I was just jumping around from state to state, and I was like, “Okay, I’m going to go to Nashville tomorrow.”

I packed my stuff up and I just moved to Nashville. I’d never been here before. I thought it was coming into old country, but it’s actually very different than that. I showed up and I was like, “Hey, I’m here for coffee.” I was still working my marketing job, so I had that security on the back end. So I just told myself to take that risk, take that action, see if there’s any value that I can provide for these people. They happened to have an open position and they gave me the opportunity to start working with them, so I quit my W2 job and jumped straight into multifamily. I think through experience, I’ve been able to just grow a lot quicker and educate myself a lot faster by being like, that boots on the ground.

I took action, because if I didn’t, then I would be in the exact same position that I was before. I think that in my mind, I was just like, “Well, the worst that can happen is that I move home, so I might as well just go test it out.” I had really great time driving across the country, so that was a win for me. It has been working out, so I’m just really grateful and excited.

Ash Patel: I love your story. What did you end up buying first?

Alessandra Thompson: We went in on a property in Little Rock, Arkansas. It’s a 36 unit and that was last July. There was a lot to be done; it was a 1935 build and we just went straight in, replaced property management. We ran into some issues and delays with closing, just because of the HUD statements. We also found there’s a huge groundwater stream running under the property, and we had a big mold issue which just delayed closing a lot. I’m actually going there tomorrow, I’m going to drive there and take a look at it. I’ll post it. So yeah, that was the first property that I closed on.

Ash Patel: Hold on, we’re diving into some of this stuff. I’m very curious. When you say we, this is you and the person you had coffee with?

Alessandra Thompson: Yeah, we’re partners.

Ash Patel: Okay. There’s a story there that I need to hear. You had coffee and then you became partners. How did that happen?

Alessandra Thompson: I was able to come in and work with them as their underwriter and just doing day-to-day stuff, and now I’ve grown. Because I didn’t know anything when I first started, so they didn’t have to give me that opportunity. But they saw the hard work and determination, and so I was able to just start small, just doing basic things. Then I started to just keep educating myself, really looked through how the process worked, and now I’m working in asset management and going out to contractors, speaking with contractors, property managers, underwriting the deals still… I’m doing a lot of work on that end, and so I was able to just partner with them on the property.

We got it through our lender relationship. He actually lived in the area in Little Rock, Arkansas, so he thought it was a really good opportunity. It was on the MLS, it’s a 36-unit. No one’s going to go on the MLS to buy their house and be like, “I’m going to buy this 36-unit to be my residence.” We were able to just go in there and get the financials. It’s a great little deal, it’s right off the main street of downtown, so that’s just been so exciting to see. It had a lot of different challenges to it, so I was able to just grasp how to deal with them. I think that’s the way that I’ve learned the most, is just through experience. So that started from coffee, yeah, to answer your question. [laughs]

Ash Patel: Were they blown away that they said, “If you’re ever in town”, and the next day, here you are?

Alessandra Thompson: Yeah. It’s a funny story to always tell but I think it all just comes with taking that action and just showing up. Even if you don’t know what to do, just take that next step because that’s what’s just going to propel you into the next step, and the next step. I wasn’t very educated in it and so it just takes time, but they were blown away.

Ash Patel: I would be as well, that’s incredible. I was going to ask you a question and you just answered it. The question was, what advice would you give somebody that’s in their 20s, or even — I don’t think age matters. Somebody that’s in a W2 job, hates it, realizes they’re sacrificing all of their time, it’s not where they want to be… And what you’ve just said, I think is the answer. Just take the next step; whatever step it is, take a step.

Alessandra Thompson: Take a step, even if that means reading a book about it. I think that just meeting people that are doing what you want to be doing, getting on the phone with people, going to meetups, having conversations, or attending certain webinars, it’s all going to be helpful, because you’re just going to build upon that, it’s always going to take the next step. There’s a lot of fear that’s involved, and I think that’s what people are afraid of is just getting out of their comfort zone.

I’ve been uncomfortable for the last year but I know that every time that I conquer the next step, I can look back and be like, “Well, I did this, so why can I do the next one?” I think it just comes with, “Okay, where am I going to direct my energy to, and what’s going to get me to the next level?” It just all begins with believing in yourself, but also just taking that action and not letting fear guide you.

Ash Patel: I’m sorry, I’m blown away. You have an incredible outlook, a great mindset. Back to the Nashville deal – you also mentioned you found it on the MLS. Something I tell our Best Ever listeners often is to look for mis-marketed or mismanaged deals, and the MLS is a great spot to look, because a lot of people are looking to brokers. I have broker relationships, I look for off-market deals. While all of that is great, we’re missing the low-hanging fruit, that new or inexperienced residential realtor that lists a multifamily or commercial property on the MLS; there’s a ton of that out there. So I’m glad you brought that up as well. You ran into a lot of issues there… What was your role in resolving the mold issues, the HUD issues?

Alessandra Thompson: That was just speaking with our lender and speaking with the previous sellers of just how are we going to handle this mold issue. But it took a lot of just back and forth with the groups. My role I think came mostly with property management. I was just helping the transition of property management groups in the due diligence phases of how are we going to switch over the utilities, or collect the balances, and just working between those groups. We actually ran through the property management group that we hired secondly; they were not doing the job that they said they were doing, so we had to like pick up a lot of work, and so I was on the phone with contractors. I even posted Facebook Marketplace posts to get people into the unit. It was great, to just experience what day-to-day life looks like for a property manager. It’s a lot of work, but it’s just been helpful for me to learn. Really just a lot of communication and the due diligence of just switching over companies.

Break: [00:14:37][00:16:33]

Ash Patel: Alessandra, how much hand-holding have you received, or is this just learn as you go?

Alessandra Thompson: It’s learn as I go. At first, I think the biggest challenge was speaking with contractors, like “What is the standard pricing? Where are we supposed to be? What’s the timeline?” I think that I just had to get accustomed to that. It took a lot of asking a lot of questions and getting a lot of different quotes to compare. I think it’s just been learn as I go. Jason Yarusi, the person that I work with has a great background in construction, so it’s just in his brain. So I could just turn to him and be like, “What is this? What is that?” That’s why I think it’s so important to partner with people that are just doing what you want to be doing, that have that experience. I think that’s the best strategy to just get into the place that you want to be, because you can just learn as you go from experts and people that are experienced.

Ash Patel: What’s an example of a mistake that you’ve made and what would you have done differently?

Alessandra Thompson: Oh, man. I know I’ve made many mistakes, but I don’t know why I can’t think of one right now.

Ash Patel: Think of an embarrassing moment, an “Oh my God” moment, or “I can’t believe I did this.” Something that stood out, something crazy.

Alessandra Thompson: Oh, I can’t even think of one, but I know that speaking of contractors I’ve probably said some dumb stuff, because I just wasn’t accustomed to like, “How does this electrical thing work?” I’m sure I just sounded silly, but I genuinely cannot think of what I’m really…

Ash Patel: No, that’s a good example. What would you have done differently? Because there’s a learning curve, you talk to somebody who’s been doing this for X number of years, and here you are asking a silly question. Is there something that you could have done differently?

Alessandra Thompson: Yeah. During the due diligence phase, there was one point where I was on the property and we were doing the inspection. I was on the property with 12 different contractors, and three of them getting different bids from everyone, so I started to just lose track of what I was supposed to be doing. I think that I could have been better at just writing everything down and recording what I was doing. Also, it’s a space that I wasn’t fully understanding yet at the time, so I think just being more educated and having someone that’s more of an expert on-site would be helpful. Now I can go in there like a breeze and speak to those contractors.

Ash Patel: Like a boss.

Alessandra Thompson: Yeah. So I think it just takes practice. But I’m sure I’ve said some silly stuff.

Ash Patel: We all have. What was your next property?

Alessandra Thompson: We are doing a 20-unit motel conversion up in North Nashville, we’re turning it into a short-term rental community, an Airbnb. This one has just been a full project. It’s been really exciting, because I can just drive over there, it’s like 10 minutes away, and just to really get down into the nitty-gritty of every layer of the process, versus the other property that is in Little Rock. It’s just focusing on that communication with the property management that the business plan is going according to plan, which it wasn’t with them at first, so that’s why we had to also re-hire a new property management company; now it’s going smoothly.

This one we’re just handling on our own and it’s just been getting people onsite, making sure that the schedule is just completely – no holes in it, because there are so many people in and out, like “Okay, the electrical needs to go here but we need to make sure this is done first; then the electrical needs to go back again.” I think it’s been really fun for me. I know it sounds stressful for a lot of people because we have to make sure we’re doing a lot of everything on time, but it’s fun for me to just see it happening before my eyes.

Ash Patel: How did you guys find this deal?

Alessandra Thompson: This one was actually through a broker.

Ash Patel: It was marketed as a hotel?

Alessandra Thompson: It was marketed as a motel. Yeah.

Ash Patel: Okay. The great idea of turning that into short-term rentals – doesn’t Nashville have very strict rules on that?

Alessandra Thompson: They do. So with zoning, you’d want to just contact the zoning department. But here, because it was already set up as a motel, it was perfect because people are just coming in and out anyways. But there are a lot of issues with the zoning department.

Ash Patel: What’s your role on this project?

Alessandra Thompson: I’m doing asset management, so I am always out there just with the contractors. It’s a lot of work and just making sure everything’s going according to plan, according to budget, speaking with the lenders on draws… Just out there.

Ash Patel: Asset Management sounds simple, but you’re doing everything – the renovations, the lease-ups… You’re going to run the asset once it’s up and running as well, right?

Alessandra Thompson: Yeah, we have a third-party short-term rental property management group that’s going to come in as soon as the property is ready. But because there’s such an overhaul of work right now, it’s probably not going to be online until April or May, just because there’s so much to be done. It’s been quite a journey. It’s exciting because Nashville is such a good market for people coming in and out, especially – apparently, there’s more bachelorette parties here than there are in Las Vegas.

Ash Patel: Nash Vegas.

Alessandra Thompson: Yeah. The numbers are great, and it’s super exciting. I’m excited.

Ash Patel: How many hours a week do you work?

Alessandra Thompson: A lot. I feel like I couldn’t tell you, because I wake up so early, like four in the morning. So I’ll be emailing at four in the morning, or when I go home, and I’ll be up on my email at 7pm underwriting a deal… It just doesn’t end, but that’s okay, because I enjoy it.

Ash Patel: The reason I asked that question is I want to contrast that to when you had your W2 job in that office, in traffic. Even though you may have worked less hours back then, the smile on your face now is amazing, because you love what you do and it’s very fulfilling. Congratulations to you. Again, at a young age, having this stuff figured out… What are you doing to inspire other people?

Alessandra Thompson: I just want people  — especially there are not a lot of women in the industry, and I think that a lot of people just are afraid of getting into something like this because there’s a lot to learn. But like we said, it just takes taking those small steps. I think to inspire other people, I love to set up Calendly links and just have phone calls. I like to help with mentoring others, so I’ll just randomly get on a meeting with someone and overlook a deal with them that they’re looking at. Help them point out what they’re missing, how they could improve, who they can talk to, what they can just do to be stronger on their underwriting.

Then also just getting on panels or podcasts like this; I just want people to know that if they want help, I’m happy to just be a resource to them. I love helping others, and I want them to know that they are capable of doing something like this too, because I didn’t use to think that I was, but I also just pushed that out of my mind. I was like, “Okay, well, why can’t I do it?” Just letting other people know that it’s possible to do what you want to do and make the leap.

Ash Patel: You are incredible and very inspirational, and  I’m glad you’re doing that. Where do you see yourself in five years?

Alessandra Thompson: As I said, I want to have that geographical freedom, so I would like to travel a lot, but I also would just like to keep scaling my portfolio with multifamily, possibly get into development at some point. I don’t know what the future holds, but I think I’m on the right track to just leveling up each year, each year just trying to get better. Also just spending more time with family and friends. I love traveling, it’s my main goal. I love eating at restaurants, so I’ll be eating some more. [laughs]

Ash Patel: Do you get to travel right now?

Alessandra Thompson: Right now, a lot of US travel, so I’ve been doing some of that. Like Denver at the conference, that was fun. I’m going to go to New York for my friend’s wedding, which will be good. But I haven’t been out of the country since before COVID, so that’s something that I really want to make sure I’m doing… But I’ve been very busy right now so I’ll make it work, I’ll figure it out.

Ash Patel: Good. What does your team look like right now? Is it just you in that one partner, or is it is a giant company?

Alessandra Thompson: There are three of us. It’s Jason and Pili, they are amazing at what they do, and I’m so grateful to be a part of the team. So yeah we’re just going to continue scaling and growing as a group, and seeing where we’re going to go next.

Ash Patel: I am excited for you. Alessandra, what is your best real estate investing advice ever?

Alessandra Thompson: Just get started. I think that just take action, don’t let fear guide you. I think success lies on the other side of fear. Just know that you’re capable of doing anything that you set your mind to. Just take action.

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

Alessandra Thompson: Oh my gosh, these stress me out, but yeah.

Ash Patel: Well, you’re stressing me out now. All right, listen, let’s take a breath, and let’s get through this. Alessandra, what is the Best Ever book you recently read?

Alessandra Thompson: Oh man. I read the Psycho-Cybernetics book is really good. Just shifting your mindset of the way that you see yourself. I think that once you shift the way that you see yourself, then you can shift the way that you act on daily actions. That’s a great book, everyone should read it.

Ash Patel: Alessandra, what’s the Best Ever way you like to give back?

Alessandra Thompson: Give back? For friends and family, I love cooking a home-cooked meal and sitting down at the table, just being there together and checking in on everyone. That’s why I love to get back to my family and friends.

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

Alessandra Thompson: They can reach out to me at alessandra@yarusiholdings.com. They can find me on LinkedIn, Alessandra Thompson. Send me an email, that would be great.

Ash Patel: Your information will be in our show notes as well. Alessandra, it was actually a very good pleasure meeting you at the Best Ever conference. Glad we got to do this podcast together. Thank you for sharing an inspirational story. Moving from California to Nashville, showing up because somebody invited you for coffee, showing up the very next day. You’re on your way to building a great portfolio. Thank you for sharing that inspiration with us and the Best Ever listeners.

Alessandra Thompson: Thank you so much for having me. I’m looking forward to hearing the episode. It was so great to meet you at the conference.

Ash Patel: Thank you again. Best Ever listeners, thank you for joining us. If you enjoyed this episode as much as I did, please leave us a five-star review and share the podcast with anyone you think can benefit from it. 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.

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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.

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JF2755: How She Used Instagram To Raise $1,000,000 In Private Money ft. Soli Cayetano

Investor Soli Cayetano was able to retire at the age of 23 thanks to her popular Instagram account, Lattes and Leases. In this episode, Soli reveals the social media strategy that helped her connect with private money lenders to fund her deals and how she plans to grow in the future.

Soli Cayetano | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to Cincinnati’s Best Ever Real Estate Investor Mastermind. We meet on the last Tuesday of every month in the Deer Park Community Center and we hope that you listeners have the opportunity to join us. Here with us today we have Soli Cayetano.

Soli is in the process of moving to Cincinnati from the Bay Area in California. She is a 24-year-old real estate investor who in her first 15 months as an investor has bought 25 doors, consisting of a few flips and buy-and-hold properties ranging from one to 10 units. She’s used a combination of conventional financing, commercial private money partnerships, and hard money to finance these projects. She has met some of her private money through social media, which is something I hope we get to talk about. Soli, why don’t you give us a little bit more about your background and what you’re currently focused on?

Soli Cayetano: Sure. Thanks for having me. I’m excited today. I’m originally from California and my background is in commercial real estate. I was a broker for quite a few years and then transitioned into residential investing. I decided to come to Cincinnati to invest because of my background in commercial real estate. We were doing a big deal here in Cincinnati; I saw the market, eat some really good food, met some great people, and was sold. I bought my first house mid-pandemic, it was June of 2020, and was hooked on real estate investing after that; I bought a bunch. Over the last 15 months, I flipped, bought, and held, I’m launching Airbnb next month, which I’m really excited about… And that brings us here today.

Slocomb Reed: That first one that you bought, was that in Cincinnati?

Soli Cayetano: It was, it was in Norwood.

Slocomb Reed: While you were living in the Bay Area.

Soli Cayetano: Off of Zillow, 2500 miles away. I bought it sight unseen, put an offer in sight unseen. I guess it sounds a little bit crazy now, but it wasn’t so bad when I did it.

Slocomb Reed: Gotcha. Well, if I can ask briefly what has come of that single-family bought off of Zillow sight unseen since then?

Soli Cayetano: I put about 15 grand into the renovation. It appraised for $155,000.

Slocomb Reed: What did you buy it for?

Soli Cayetano:  $100,000.  Yeah, I wish I could still find a $100,000 house in Norwood. It appraised for $155,000, six months later, I refinanced all but $7,000 out. It rents for 1,500 bucks a month which makes me about 600 bucks a month. I still self-manage that one.

Slocomb Reed: Yeah, so your return on investment is about 100%.

Soli Cayetano: 80% to be exact.

Slocomb Reed: 80%. So only an 80% cash-on-cash return after the refi, nice. I know a couple of things about you – this isn’t our first time having a conversation, and one of the reasons that I wanted to make sure I got you in front of these people and in front of our Best Ever listeners is because I know that there are things that you’re doing that I need to learn from when it comes to real estate investing. There are a couple of them in particular that I want to ask you about. The first is, your social media presence I know is a big deal for your investing. I was a freshman in college when Facebook was allowed for any university email address. Ever since then, I’ve gotten further and further away from the cutting edge of social media. Tell me what it is that you do with regards to real estate investing and social media.

Soli Cayetano: So it started as just a way to guess vlog my first property. After I bought the first one, I flew out to Cincinnati. I learned how to use a drill, I slept on the floor, I got food poisoning, I had my car broken into, and I vlogged the whole thing. I guess people grabbed on to the authenticity of sharing on social media, some of the really tough things about your first property. So it started to snowball; I didn’t think anyone would follow me but my mom. But I kind of grew an audience and now I raise a lot of private money off of social media.

I’ve had my Instagram for probably, I don’t know, a year and a half maybe by now, and have raised, I don’t know, half a million to a million from people that I met off the internet. It’s surprisingly easy, because I feel like they know me and they follow me every day, because I blog every day. So when we have conversations, the first thing that usually comes out of their mouth is “I feel like I know you.” It’s a lot easier to build credibility that way.

Slocomb Reed: Nice. So you come to Cincinnati because you bought a house in Norwood, you get food poisoning, and now you’re raising capital through Instagram.

Soli Cayetano: It’s easy. [laughs]

Slocomb Reed: Yeah, right? Well, I want to ask, is Instagram the only social media platform that you’re sharing real estate investing on?

Soli Cayetano: Right now, yes. But I hear Twitter’s the next big thing, which is funny, because it’s coming back around. I hear all the biggest real estate investors and crypto traders and all sorts of things are sitting on Twitter right now, so it’s something to consider.

Slocomb Reed: Gotcha. Instagram has been good for you, just an opportunity to share your experience with the world that has turned into garnering interest from people who have capital and are looking for a return. Can you tell us how that progressed? How long you were posting, how frequently you were posting, and when you started to gain traction?

Soli Cayetano: My first private money lender was my mother. I didn’t ask her for private money, but she told me, “I’ve been watching your Instagram for the past three months. I really want to be part of this. Can I invest with you?” I didn’t even know what private money was at that point, and didn’t know how to structure it, how to raise it, anything like that. But because she asked me, I was like, “Mom, okay. Let’s do this thing.” So I have her as a debt investor, and I guess we’ll talk about the difference between debt and equity. That was my first foray into private money-raising, I guess, unintentionally.

After that, people just started to come to me through my DMs, because I talked about how I raised private money unintentionally. So then the question was, “Oh, what is private money? How do I get involved with private lending?” I think through that and sharing more and more and more about how I use private money to fund deals opens up the door to people who have a bunch of money stacked up and don’t know what to do with it.

Slocomb Reed: What I’m hearing is you were just sharing your experience on Instagram; you were approached by your mother about helping you fund future deals. And as you continued to share your experience in real estate investing as it grew, it sounds like what that became was opportunities to educate people who were reaching out to you through Instagram. Some of those people actually looking for opportunities to get into real estate investing that you were educating them on.

Soli Cayetano: Yeah. I hosted a How to Raise Private Money seminar, which was actually great marketing for me, because I taught people how to raise private money. Some people who are on the call are like, “No, I don’t actually want to go do it myself. But since I just heard your presentation, can I invest my money with you?” I think the more you can educate people on what private lending is and the benefits of private lending, the more interested they become in growing their wealth. Because there’s so much money floating out there in the world, and everyone’s looking for a way to get a return on their money. So where people think that raising money is begging people for money, it’s actually providing an opportunity for people to grow their wealth in alternative assets.

Slocomb Reed: Soli, for the record, you put in your bio your age. I was just told that, so I felt like I had permission to say it. I know through my conversations with you that I can see some clear advantages in your investing to being a member of Gen Z, and how quickly — you wanted to share your experience through social media. Not in an exclusively Gen Z way, but how your age and your generation have been a benefit to you – have you come across times when you feel like your age has been a detriment?

Soli Cayetano: I think I carry myself older than a 24-year-old, so I’ve been told. I don’t usually broadcast my age to people who I meet on the street. Most people don’t think I’m 24, so I don’t think so. I think that people who do know and who know me from social media are pretty impressed with what I’ve accomplished and how well I carry myself, that it’s not about age, it’s about the experience, and I racked up a lot of experience pretty quickly.

Break: [00:11:51][00:13:47]

Slocomb Reed:  Our analytics for the podcast show that Best Ever listeners are already fairly sophisticated, so I just give a quick summary when it comes to Capital Partners and debt partners. What a lot of people are familiar with is apartment syndication or a partnership in which partners who are engaged in a limited capacity or limited partners have some equity stake in the deal, that they’re getting as a result of the capital investment. The performance of their capital in the deal ebbs and flows with the performance of the property involved. Debt investing, however, is where someone is effectively making you a loan, having some sort of interest or guaranteed return, if you can say. And the expectation is that their debt will perform whether or not the property performs as well as expected. You’ve decided that you want to focus on bringing on debt partners. Can you give us a couple of examples of how you structured that now and why you choose to raise debt instead of getting capital partners?

Soli Cayetano: So I can keep the equity. But I think a lot of people who want equity stakes want equity stakes when the property’s doing well. They don’t actually want to consider what happens in a worst-case scenario and people lose money. So if you tell them the extreme case, the roof caves, the building burns down, and someone has to come out with $50,000, do you? Usually, the answer is “No, I want a really passive investment and I want my return that’s guaranteed.” So it’s out of security, I think, it’s a lot simpler to go into debt; then the person’s not as nervous about what you’re doing day-to-day and whether or not they’re going to get the return that they were promised. It’s just whether the building burns down or it doesn’t, you’re going to get the return that I promised you, no matter what.

The flip side is I get to keep the equity, which is great, because I get the depreciation, which is very helpful for taxes.

On your question on how to structure it – right now, I’m doing anywhere between 8% to 12%, usually a nine-month term, and no points. It’s either a personal guarantee if they want it, or it’s a mortgage, like a deed to the property, the first position, if they can fund the entire project.

Slocomb Reed: You said 8% to 12%, it’s nine months. Is that…

Soli Cayetano: APR, so it’s annualized.

Slocomb Reed: Yeah, of course, 8% to 12% APR, and it’s a nine-month balloon. That’s a pretty quick turnaround. I know you do some house flipping with debt like this. Are you also structuring it that way when you buy multifamily?

Soli Cayetano: No, that’s for flipping. I would say that people from the internet want to develop some type of trust. I guess they feel like they know me, but they also want to test the markets with their investment. They probably don’t want to put money in for longer than nine months or 12 months; they want to get that return back and then decide whether they want to reinvest it. Friends and family are more willing to keep their money in longer, a lot more patient money. The longest term I have is three years; there’s one at two years. It’s all flexible. That’s the great thing about private money, is you can negotiate literally anything you want, with whoever you want, any structure you want. That’s for the commercial 5 to 10-unit BRRRs that I’m doing. It takes about a year to reposition them and refinance, so in order to get an extra buffer, it’s two years, and I’ll refinance and pay them back.

Slocomb Reed: When you’re looking at a 12 to 18-month turnaround on a multi-unit, are you making interest-only payments? Is it all accruing and paid out when you refinance? How is that structured?

Soli Cayetano: It depends on the project and it depends on the investor. On all flips, I like to pay back on the back-end, because it helps with managing cash flow. For flips, I’ll pay back on the back end. One of the longer-term, bigger loans for multifamily – they kind of that consistent cash flow if they’re going to have it tied up for 18 to 24 months, so oftentimes we’ll pay interest-only payments on the longer term.

Slocomb Reed: Plus, if you’re talking about a 10-unit building – and I think you have a 10 unit right now that you’re doing this on. If you’re talking about a 10 unit, there should be some revenue generated by the property in the meantime as well.

Soli Cayetano: There should be. [laughs]

Slocomb Reed: Should be, yes. Of course, if you are emptying out a building, you’ve got no revenue until you can get tenants back in there. But that segment of the process is not 18 to 24 months, so it makes more sense. How much are you raising for your deals? For a flip or for a 10-unit BRRRR, are you raising 100% of the purchase and rehab?

Soli Cayetano: For the flips, yes. Someone will come in and fund the entire thing. Usually, it’s somewhere between $150,000 and $200,000, something like that. The multifamily – no. So we’ve been raising the down payments and the construction funds. For the 10-unit, we raised $400,000-some for the down payment, had a commercial loan for 75% of it, and then the construction is about $350,000. It’s a big one.

Slocomb Reed: Gotcha. That deal is still pretty early on, isn’t it?

Soli Cayetano: Yes, the construction is starting next week. It’s probably a four to a six-month turnaround time for those units, because they’re pretty large renovations, and it’ll be leased up and refinanced probably by the end of the year.

Slocomb Reed: Gotcha. I know you were brokering commercial real estate deals before you started investing here in Cincinnati; you’ve been here investing for 15 months… I know that you flip houses to build capital to invest in buy-and-hold deals. Have you been doing it long enough yet, or are you intending that the people who reach out to you through social media fund 100% of the cost of flipping a house and get all their money back in six to nine months? Is the plan to convert those private capital partners or lenders into lending on larger buy-and-hold deals in the future after you’ve garnered more trust?

Soli Cayetano: Absolutely. The thought is a smaller amount of private money lenders are better quality, so they’re coming with more money, say half a million to a million dollars. They have more trust in the process, because we work together, we’ve proven that we’ll pay them back their money in the time that we told them we would, and then they feel comfortable keeping their money in long-term.

Slocomb Reed: Awesome. Well, Soli, are you ready for the Best Ever lightning round?

Soli Cayetano: Sure.

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

Soli Cayetano: I knew these were coming and I’m still stumped. I really liked The Comfort Crisis. It’s a book on doing really hard things and some of the benefits of stretching your comfort zone.

Slocomb Reed: I’m going to have to read that, I haven’t heard of that one yet. What is your Best Ever way to give back?

Soli Cayetano: Probably teaching people who want to get into investing, spending time teaching them how to get started. I think I’m pretty new, relatively; I still remember a lot of the feelings that I had and I still have a lot of feelings toward investing. So I think I can relate a lot better to people who are just starting out, because I was in their shoes not too long ago.

Slocomb Reed: What is the biggest challenge you’ve overcome in real estate investing?

Soli Cayetano: Managing hundreds of thousands of dollars of renovations from California.

Slocomb Reed: In Cincinnati.

Soli Cayetano: In Cincinnati. [laughs]  That’s tough.

Slocomb Reed: Do you have any tips or lessons learned for people who are facing similar things, investing remotely with six-figure rehabs that they have to manage?

Soli Cayetano: I really think it comes down to having the right team in place. I did not the best job vetting my contractors prior to hiring them, and then I made the mistake of putting one contractor on four projects, and then having to fire that contractor and pick up the pieces on the back-end, which is why I’m here today. So I think it really comes down to vetting people, talking to multiple people, not giving someone too much too fast, and letting them earn your trust.

Slocomb Reed: Yeah, contractors have been tough the last couple of years. It’s definitely felt like whoever has the labor makes the rules, the rest of us just have to play by them. Soli, what is your Best Ever advice?

Soli Cayetano: I’d say don’t let not knowing stop you from doing it. I think a lot of people wait until they know and they feel comfortable. Even like starting investing, starting raising private money, hiring somebody, hiring VAs, training a team, everyone wants to get really comfy before they jump in. But if you just jump in and figure it out, sometimes you fail fast fail often and you get further faster.

Slocomb Reed: Absolutely. Now, aside from attending Cincinnati’s Best Ever Real Estate Investor Mastermind, how can people get in touch with you?

Soli Cayetano: Probably my Instagram’s the best way. It’s kind of funny, but it’s @lattes.and.leases. I made the name when I thought no one would follow me, and now it’s just stuck.

Slocomb Reed: Lattes and leases.

Soli Cayetano: That’s where you find me.

Slocomb Reed: Nice. Awesome. Well, Best Ever listeners, thank you for listening in to our podcast. If you got some value from this conversation with Soli, please follow and subscribe to our podcast, leave us a five-star review and share this with a friend 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.

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JF2754: RV Resorts: The Growing Asset Class You’re Missing Out On ft. Greg Scully

Are the returns on RV resorts worth the risk? For Greg Scully, an apartment and RV resort syndicator, the numbers don’t lie: with risk comes reward. Greg divulges why the market for RV resorts has high-growth potential, and also shares how he found and value-added his RV resorts.

Greg Scully | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Greg Scully. Greg is joining us from Johnson City, Tennessee. His focus is apartment syndication; he’s currently the GP on 170 units, and 226 pads in RV resorts. Greg, can you start us off with a little more about your background and what you’re currently focused on?

Greg Scully: Yeah, sure. We’re here in Johnson, Tennessee, we were 40 years in Alaska. Transitioned to real estate full-time about two and a half, three years ago. We got started five or six years ago. Ended up in Tennessee to help with a project that needed some extra hands. Most of our investments continue to be in Tennessee. At some point [unintelligible [00:04:13].27] kids are growing up, getting older, we decided to just pull up and relocate down here. Landed in Johnson City, and just continued to grow. Central and Eastern Tennessee, we don’t go too far West.

Slocomb Reed: Nice. That’s where your portfolio is currently, it’s all in Tennessee?

Greg Scully:  Yes, we have one one-off syndication in Mulvane, Kansas; we co-GP’d with some friends and partners over there. We articipated in the asset management side, but they’re handling boots on the ground.

Slocomb Reed: Nice. Tell me about your RV resorts. What got you into that?

Greg Scully: We just heard about it, thought about it in passing a little bit, and then through COVID… We are very close to Sevier County, Tennessee, which is in between Johnson City and Knoxville. The most famous things going on down there are Dollywood, Gatlinburg, and Pigeon Forge. So it’s certainly in the top five, if not the number one most visited national park in the US. We got an opportunity sent to us from a conversation. We have a partner in common that had been in that space a little bit, realized we were both looking at it together, and we decided to collaborate instead of compete. A lot of our interest just came from how good a market Sevier County is, in terms of if you’re going to crack open the window to a new asset class, you might as well do it in one of the most stable and successful markets in the nation.

Slocomb Reed:  Yeah, and take advantage of your backyard.

Greg Scully:  Yeah, exactly. Exactly.

Slocomb Reed:  Hollywood makes a lot of sense as a place to have an RV park. Given your experience with apartments syndications, how do the numbers on an RV Resort compare?

Greg Scully:  Income is income, expenses are expenses; they are chopped up a little bit differently, specific to the RV resorts. You have two models that are happening; you’ve got a daily model where your guests are saying two, three, four days at a time and then they’re leaving. Then you also have a monthly model, which you may see in markets more like Florida, where people are coming down there — they may even be leaving their RV there year-round and they’re basically just paying for the pad, which is very similar to the mobile home park we’re doing. So from the income proforma point of view, you’ve got to figure out your highest and best use within each of those potential models.

Slocomb Reed: I imagine around Dollywood that’s an area economically that’s fairly entertainment driven. Are you on a more day rate model?

Greg Scully: Yeah, absolutely. And that was one of the opportunities that we saw with one of the purchasers, is it was being completely run as a monthly model. And not only that, they were well below the market rate for what that monthly model should be. So we had two possible avenues of upside – just keeping the monthly model, running it more efficiently, and getting close to the market… It has a little bit of a development side to it, so at a minimum, we’re going to take advantage of the development side more on the daily model. But yeah, absolutely, this market is better off doing day rates, because we could be open year-round almost.

Slocomb Reed: Totally. Greg, given that you syndicate through general partnerships, what is your specialization within your partnerships?

Greg Scully: Underwriting and asset management. Those are probably the two things that I spend the most time on. Underwriting — back when we were living in Alaska and investing out of state, there was very little I was going to do, because I was nine hours away by plane. So I cut my teeth on underwriting due diligence side of it. And then moving down here, most of the deals we’re extremely active in, to the point I’m being onsite occasionally. So those two buckets are our focus.

Slocomb Reed: Do you guys manage your own properties?

Greg Scully: We did just start that. Our last two acquisitions, we took management in-house, so we’re currently managing 65 units over two properties here locally. We’re about four months into that.

Slocomb Reed: And what’s your involvement? Are you personally involved in the property management?

Greg Scully: Yup. My wife and our main partner, Darren Light, started a new management company, specifically to vertically-integrate. So we have one syndication that we’re managing, and the other one is a joint venture.

Slocomb Reed: Great. So given your background in underwriting and due diligence with these deals, I’d like to spend a little more time on the RV Resort, Greg. So you had the opportunity to go from a monthly rental model, what feels like a mobile home park, to a day rate model that may feel more like hospitality, I would imagine, except that you’re not having to change the sheets for your guests, given that they’re bringing their own sheets with them; it’s an RV. Financially speaking, explain to us how big the difference is between those two models. Is your entire park at day rate or is it split between the two? How did you make that decision?

Greg Scully: When we bought it, it was entirely monthly. If you have something that is entirely monthly, basically your labor can be significantly less, because there’s just less going on. There are fewer people coming and going, they’re going to have more familiarization with the property to begin with, so there’s less — let’s say hand-holding; that’s kind of what we call it. There’s less handles of the people coming in.

The daily rate – yeah, you’re running a little hospitality business. It’s open seven days a week, sort of 24/7, so the labor component to it is much higher. You’re going to have a lot more payroll, because there’s never a closed sign on the office, if you have an office. That’s one of the most major things, is your labor costs are significantly higher.

Slocomb Reed: I would imagine your revenue is significantly higher too though, right?

Greg Scully:  Daily versus monthly? Oh, yeah, absolutely. Gross potential rent is – yeah, significantly higher.

Slocomb Reed: How are you guys operating the park now? Is it all daily? Is it all monthly still? Is it a mix of the two?

Greg Scully: It’s a fairly new acquisition, so yeah, it’s still mostly monthly. As we’ve gone in and got closer to market, there has been some vacancy created. It’s also very specific to the layout of your park, so whether or not you have concrete pads that are fully drive-thru, and can accommodate a 35 to 40-foot piece of machinery coming in, or if it’s more back-end type pads. So it can be very specific as to even what individual pads are capable of doing on your park. It can be fairly dynamic figuring out exactly what the highest and best use is.

Slocomb Reed: Did you guys raise capital for this purchase?

Greg Scully: Yes.

Slocomb Reed: Okay. Did you underwrite to a five-year hold?

Greg Scully: Yes, we did. Two of them are in a fund, and that was basically done as a five-year hold. The other one — I believe we might have done a seven-year hold. It’s not right in front of me, but we did not go incredibly out into the future.

Slocomb Reed: Tell me, what did the numbers look like when you purchased it? How much did you buy it for? What kind of NOI are we talking about with this property with below market rents and exclusively monthly rentals?

Greg Scully: I can’t pull NOI right out of my head without having it on the spreadsheet. I can tell you that monthly rates were hovering around 200 bucks, which would have been inexpensive for a mobile home park, let alone a destination in one of the most visited tourist markets in the US, that has a pool and access everything that the Smoky Mountains have to offer. So there’s easily 300, 350, maybe even 400 bucks to market just on the lot rent alone. Just that alone, the deal was fine. So getting everything up to market… Cash on cash return are in the high teens, so that’s our anticipation when it’s fully stabilized. Yeah, a significantly different type of return profile compared to multifamily.

Break: [00:12:35][00:14:31]

Slocomb Reed: What is the return that you were projecting for your investors on a five to seven-year hold?

Greg Scully:  Oh, the IRRs were high 20s; like I said, average cash-on-cash returns mid-teens, equity multiple 2+.

Slocomb Reed: Gotcha. All of those numbers are significantly higher than people are going to expect to see with apartment investing. You’re talking about high teens cash-on-cash return to an audience that is most familiar with an eight pref. You’re talking about high 20s IRR for an audience that’s mostly familiar with a 15% to 18% IRR. The first alarm bell in my head, if I can say so, Greg, is that if you’re projecting returns this good, this must be a risky asset. Is that the case?

Greg Scully: I would say there is higher risk relative to multifamily, whereas housing is an absolute need. Dragging a box behind you and hanging out somewhere for three days and going fishing – I wouldn’t put it in the same bucket as primary housing. It’s similar to where storage was in mobile home parks were maybe a decade ago. As the industry is set up, there’s very low supply, there’s essentially not necessarily a finite number of RV parks, but there’s not a lot of them to begin with. It’s very fragmented, a lot of mom-and-pop owners, a lot of generational owners, and there’s a lot of operational efficiencies to be gained through better marketing, dynamic pricing, running it like a business, instead of a lifestyle. That’s the similarities. It wasn’t too long ago, those types of returns were also talked about for mobile home parks and storage. That asset class got found out, and lo and behold, look where we are today.

Slocomb Reed: Yeah, maybe RV parks are the next mobile home parks, or the next self-storage.

Greg Scully: I know. I don’t want to talk about it too much.

Slocomb Reed: Sure, totally. Yeah, I totally get that. But also at the same time, when you’re talking about, at least within our listenership, that is predominantly… The majority of guests that we bring on based on the nature of our podcast are involved in apartment syndication. So they’re typically offering investors projected returns that are more standard to the market and lower than what you’re talking about. You guys could underperform your business plan considerably, and still provide a similar to return to someone who could have put their capital into an apartment deal instead of yours. That’s some pretty exciting prospect. Greg, what is the most important skill you’ve developed with regards to underwriting your investment deals?

Greg Scully: I wouldn’t say it’s a skill that I have even close to mastering… It’s just the critical thinking skill of looking at things holistically and dynamically. It’ll be part of my book recommendation when we get to that. Just making sure that you’re not having too much confirmation bias, or cherry picking, and inviting people to look at your underwriting and asking them to break it, and being happy when they do. So yeah, just not getting married to your proforma, not trying to be right on trying to make good decisions.

Slocomb Reed: What is the biggest challenge you’ve had to overcome specific to a particular deal?

Greg Scully:  To a particular deal… The deal that brought me down to Johnson City was very difficult. Heavy rehab, we went 100% vacant, we had contractor problems, we had bridge debt, went from bridge to bridge debt, which apparently has never been done before… So a lesson of perseverance and just muddling through things, and “Wow, this sucks. Maybe I won’t sleep that well again tonight. But tomorrow we’ll keep plugging away at it.” It’s just that sometimes the process is not what you would like it to be, but you’ve got to get through it.

Slocomb Reed: Did you start out as a general partner on that deal?

Greg Scully: Yeah.

Slocomb Reed: When was this?

Greg Scully: 2017 through March of last year. We had it two and a half years or something like that. We did sell it, we didn’t make money on it; not a ton, but most of the returns are in our head, in the experience pocket.

Slocomb Reed: Sure. Yeah, I know some of the more distressed properties that I’ve taken over it’s been very valuable that I, being the owner operator and also the boots on the ground, being physically present to be overseeing things… But also, for my own stuff, I’m the one who’s showing apartments in some cases, but also creating the standards for our tenant base.

It’s definitely helpful to have boots on the ground on the team when you get into a situation where an asset is considerably distressed. A situation like 100% vacancy while you renovate. Especially with as difficult as it has been to find good contract labor the last several years, for sure. Well, Greg, are you ready for our Best Ever lightning round?

Greg Scully:  Yeah, sure. Absolutely.

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

Greg Scully: You’re About to Make a Terrible Mistake is what it’s called. The byline is how bias is decision making and what you can do to fight them. That’s something that I’m into, is how to make decision making more of a process and less of a feeling.

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

Greg Scully: I just enjoy talking to “newbies”, because I’m not that far. I’m five years into this, and I remember how valuable it was when somebody came down and would spend some time with you talking about the details. A lot of this is good theory that you can learn from books and podcasts like this and everything, but things get very real when you close on one specific property, on one specific tax parcel, with its own set of inherit characteristics, we’ll call it. Just chatting when I can with somebody that’s just getting started.

Slocomb Reed: What is your Best Ever advice?

Greg Scully: Probably network. Post mortem, looking back on where we’ve come, a lot of our deal flow, a lot of our partnerships, a lot of our friendships have come through not only face to face networking, but even just getting on LinkedIn, weekly Zoom calls… If you’re going to be doing business with somebody, it’s not all about the deal, it’s very much part of who you’re working with as well. So just get out there, and put yourself out there. That was a big challenge for me, really. I’m kind of an introvert. It took me a little while to get into chat and networking. So the quicker you get into that, probably the quicker you’ll progress.

Slocomb Reed: Awesome. Greg, where can our Best Ever listeners get in touch with you?

Greg Scully: Everything about us is at www.realwealth.solutions. From there, you can find our newsletter. We host a podcast as well called The Real Wealth Solutions Podcast. It’s got a little bio, our projects… That’s the catch-all for figuring out where to find us.

Slocomb Reed: Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this conversation with Greg Scully, please subscribe to our podcast, leave us a five-star review. If you know someone who would get value for listening to this episode, please share it with them. Thank you and have a Best Ever day.

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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

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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.

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JF2729: 2 Effective Ways to Work with Lenders During a Recession ft. Glenn Kukla

Real estate developer Glenn Kukla had closed one of his biggest deals when the 2008 recession hit. Unable to pay his mortgage, Glenn worked out a strategy to help stay afloat and survive the economic downturn. In this episode, Glenn shares his tips for working with lenders during a recession.

Glenn Kukla | Real Estate Background

  • CEO of Kukla Capital Partners, a real estate development company and investment fund.
  • Portfolio: $4M in net value. Over $50M in real estate projects he has developed and/or financed.
  • Grown and privately held his investment fund over 40% annually since 2009.
  • Based in: Cincinnati, OH
  • Say hi to him at: LinkedIn

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to Cincinnati’s Best Ever Real Estate Investor Mastermind. We are here recording live at our local real estate investor meetup here in Cincinnati, that happens almost always on the last Tuesday of the month from [6:30] to [8:30], at the Deer Park Community Center. We hope you all have the opportunity to visit us in Cincinnati and join us at the meetup.

Our guest for the episode today and for our meetup is Glenn Kukla. Glenn is the owner of Kukla Capital Partners, a boutique real estate development company and alternative investment fund with about four million in net asset value. He has 25 years of real estate development and finance experience, over $50 million in real estate projects developed and or financed. He’s served on several local government boards. Glenn has been investing and developing real estate for over 25 years and has grown and privately held his investment fund over 40% annually since 2009. Glenn, can you give us a bit more about your background and what you’re focused on currently?

Glenn Kukla: Sure. With real estate or my other career?

Slocomb Reed: With the real estate.

Glenn Kukla: Okay, sure.

Slocomb Reed: We’ll get to the other career.

Glenn Kukla: All right. It’s hard to start in the middle without going back, but currently, as I said, I’ve got a fund of essentially self-made money that I use to invest, some in real estate, some in the stock market, some in hard money lending. I believe strongly in diversity asset allocation. One of the things that Slocomb asked me about earlier on in this process was “Talk about how you survived the market crash.” We’ll get to that in a little bit, but if there’s one piece of advice I would give anybody just off the street for two seconds, it’s don’t put all your eggs in one basket. If you’ve got limited capital, or even your time, or whatever skills you have, try to do multiple things with that, not all just on one thing.

So the fund that I have, we’ve got some money in real estate that we’ve purchased, some money in the stock market, and some money, frankly, we’re just holding in cash, because right now is a bit of a risky time. We’ve seen a correction in the stock market, we’ve seen a correction in crypto, there may be a correction in real estate, hopefully not… But it’s always good to have some of your money in cash. That’s essentially what the fund does, it looks for opportunities to grow itself. But generally, I like to make money for myself and other people. Most of the things that I invest in involve bringing in other partners, other investors, finding creative ways to do deals where you’ve got a motivated seller, but they don’t want to leave too much money on the table, so you say “Okay, I’ll pay you something now, but I’ll also pay something later when I make money, so that we make money together.” There’s a lot of deals that when I purchase this real estate, I’m not just buying it and saying, “See you later, I’m never going to talk to you again.” It’s, “Here’s a check now, and I’ll give you a check in about 12 months.”

Slocomb Reed: You said a piece of real estate. Give us some examples of some of your development deals.

Glenn Kukla: Sure. The guy that used to deliver my Christmas trees lives in Lockland, out in Kentucky. Every year he’d drop off a Christmas tree and he would tell me about how he has this little cute garden center he runs out of his big old nasty warehouse in Lockland. And every year, I could just tell he was like a little more depressed and more struggling about what he was doing. He was also a realtor, so he’s doing that full-time; and doing well as a realtor. But running this little garden center was his passion, and he would always drop off the Christmas tree and set it up; it was great. One year he’s like, “I need to get rid of my building. Do you want to buy a building?” I’m like, “Well, I love buying buildings”. As an aside, I assume everyone here is probably a motivated buyer. I mean, we’ve got realtors, we’ve got investors…

Slocomb Reed: If you’re a motivated seller, talk to me first…

Glenn Kukla: No, me, me.

Slocomb Reed: I’ll give you my business card…

Glenn Kukla:  I’m just saying, where’s the motivated seller meetup? Where can I sign in to that one? I don’t think there is a motivated seller meetup.

Slocomb Reed: I don’t advertise that one publicly.

Glenn Kukla: We’re all looking for those motivated sellers. So my Christmas tree delivery guy who ran his little garden center out of this big warehouse in Lockland – it turns out he was a motivated seller one day. And motivated sellers…

Slocomb Reed: How big was the warehouse?

Glenn Kukla: It was 21,000 square feet, and it’s set on two-thirds of an acre. And it’s right there in Lockland.

Slocomb Reed: Tell our listeners what you think of when you think of Lockland and a warehouse there.

Glenn Kukla: Most people would probably say it’s pretty crappy. But there are green shoots in Lockland. There’s a lot of activity going on with the GE plant that is investing a lot of money in itself. ODOT, Ohio Department of Transportation is putting like a billion dollars in the [unintelligible [00:07:46]

Slocomb Reed: And those development things that were happening when you bought the warehouse?

Glenn Kukla: No. They were maybe a mile up the road or a mile down the road, so I saw some potential. But worst-case scenario, I’m like, “I might not make any money on this”, so when he said “I want you to buy my warehouse”, I said “Well, let’s go through it and look at it.” The roof is caving in, he had work orders, he was really distressed, he was really stressed out. His wife was saying, “You’ve got to sell this property. Get rid of it.” The city was threatening to throw him in jail… And he was doing the best he could; he didn’t have the means to maintain the warehouse, and his business was going under.

Slocomb Reed: So a motivated seller, physically distressed property, spousally distressed seller.

Glenn Kukla: Exactly. Now we’re all salivating. That’s what we look for, right?

Slocomb Reed: Well, tell us what happened next. You bought it? Did you pay cash? Did you finance? Was it creative financing?

Glenn Kukla: Well, it was creative financing. So I knew that there was some money on the table he didn’t want to let go, but I knew I didn’t want to overpay for it in the beginning, because it wasn’t worth anything. I didn’t want to overpay and have something that was worth zero. So I said, “I’ll give you $10,000 now for this 21,000 square foot warehouse sitting on two-thirds of an acre. But when I turn it around and sell it –and I have a track record of that– we’ll split the money somewhere between 33% and 50%. So you’ll have thirdsies or halves and half, depending on how long it takes and what kind of brain damage I have to go through.” He said, “Okay.” So I actually PayPal-ed his wife the $10,000 just in earnest, before he even signed a document. Like, “I trust you. Here’s the money.”

Slocomb Reed: And you took title to the property.

Glenn Kukla: I took title of the property.

Slocomb Reed: Okay. Did he remain on title or have a lien or anything like that?

Glenn Kukla: Nope.

Slocomb Reed: It was your word that he’d get paid out?

Glenn Kukla: We did a memo. At that point, he was trusting me, and I did put it right. I think memos are a good tool, because they’re not binding, but at least it’s that we are on the same page. “Wait, did you say this? Did I say that?” If you put it in a memo, it’s not as intimidating as something that’s legally binding, but at least we can trust each other that much more.

Slocomb Reed: Yeah. So you own it now for 10 grand and a memo that you’ll give a third or half of the proceeds to the previous owner. And then what?

Glenn Kukla: Well, there was one more thing that I promised, and it really sealed the deal, and this is what sealed it with his wife. I said, “I will indemnify you from any other liens that come against you. If the city tries to find you for anything else, I’ll indemnify you from any other creditor that’s associated with this building. They’re going to go through me.” That indemnification was just more of a gentleman’s handshake, but it was also in that memo. So it was kind of that peace of mind that it brought him, “You’ve got a crappy piece of property, you need to get rid of it. This thing stressing you out. I’m going to take it off your hands right now. I’m going to give you money now, I’m going to give you money later, and from this moment forward, you’re indemnified. If anyone messes with you, they’re going to mess with me first.”

Slocomb Reed: That’s awesome.

Glenn Kukla: So I bought the building for $10,000. I ended up putting about another 60k or 70k — well, totaled about 100,000 in stabilizing the roof, going to the village of Lockland and asking for a vacant building maintenance license, which they didn’t even know what that was. The city of Cincinnati had that, so I pulled the code from Cincinnati and said, “Okay, Lockland, you want me to do this.”

Slocomb Reed: Act like a big kid now.

Glenn Kukla: Yup, act like a big kid. So we stabilized the building, and then started just putting the word out on the street that it was for sale. Hamilton County Development Corporation contacted me, and they were worried that I was going to be a slumlord. They were pleased when I told them I was a greedy capitalist, looking to do something nice. But the first thing that I told the community was, “I want to do something with this building that is good for the community. I don’t want to sell it to the first offer. I don’t want to sell it to the highest-paying person who’s going to do something crappy…”

Slocomb Reed: Did you market it for sale publicly?

Glenn Kukla: No. It didn’t even get to that point. A realtor came to me. I called about ten of the stakeholders in the community, the city manager, other landlords, different development organizations, putting the word out… And within I think two weeks somebody from JLL, which is a commercial broker, called me saying, “I represent Pepper Construction. We’re looking for a new headquarters.” They were renting in Blue Ash and they wanted a marquee building that has some kind of historic story, and said “We’re interested in your building.” It took about six months to work through the deal with them. They wanted to lowball me, I wanted to highball them, so we kind of met in the middle. I ended up selling the building to them for about 340,000.

Slocomb Reed: You were all-in for 100k.

Glenn Kukla: I was in for about 100k.

Slocomb Reed: So call it 240k. How much did the former seller get out of that?

Glenn Kukla: He got a third of that.

Slocomb Reed: He got a third of it. Nice. I understand as well – I know we’ll talk about the recession more later, but you were in a pretty big building downtown when the recession hit.

Glenn Kukla: Yes. Several buildings.

Slocomb Reed: Several buildings. Tell us about that. Tell us about what you were doing in ’07 and ’08 when that happened, and give us a taste of how you got yourself out of that situation.

Glenn Kukla: I was involved in a partnership. We owned several apartment buildings, and we were developing condos. We were kind of over-leveraged; a lot of people back in 2007 and 2008 were, when the recession hit.

Slocomb Reed: What does kind of overleveraged mean?

Glenn Kukla: It means you owe more than what your stuff is worth.

Slocomb Reed: Gotcha. Was that as the market was crashing that that happened, or…

Glenn Kukla: It was actually before the market crashed. We just weren’t good managers of our portfolio, as we should have been. And then when the market crashed, it just got worse. Rents went down, vacancies went up, some [unintelligible [00:12:55].05] products we had, people stopped selling, buyers were handing back their deposits…

Slocomb Reed: What kinds of buildings were these in downtown?

Glenn Kukla: These were historic multifamily, 25 units, 50 units, with some storefronts in the first floor, and apartments above.

Slocomb Reed: Gotcha. We’re talking about the central business district.

Glenn Kukla: Central business district, yeah. Right by the Paul Brown Stadium.

Slocomb Reed: This would be the most in-demand real estate in the city now.

Glenn Kukla: Oh, yeah. In 2008, Cincinnati was emerging, but it was somewhat in demand. But when the recession happened in 2008, 2009, the money dried up, the rents went down, vacancies went up, so we didn’t have enough money to pay the bank. We had to default on loans.

Slocomb Reed: Gotcha. Defaults on loans, give the properties back, essentially.

Glenn Kukla: Well, we didn’t want to, because once you’re invested emotionally, you don’t want to give them back. So here’s how you negotiate. If you ever find yourself where you have to default on a loan, you don’t have enough money, and it’s finally that D-Day, where you’re like, “Oh, crap. I can’t pay my mortgage. I fought hard to not have to get to this point, but I’m going to have to not pay my mortgage.” The first thing you do is call your bank and say, “I’m not going to pay my mortgage.” You don’t run and hide; you be very transparent and you say, “This is exactly the situation I’m in.” More times than not, the bank will actually view you as the best person to manage that property, because you’re the one that developed it, you own it, you know your tenants, you know where all the bodies are buried, you know where all the keys are; you can actually be an asset and an ally to the bank.

“I can’t pay your mortgage, but I can still protect the asset. Let’s find a way to work it out together.” That’s what we did. We went to all the banks and we said, “We can’t pay our mortgages. But here’s the interesting…”

Slocomb Reed: Did all the banks agree to that?

Glenn Kukla: About a third of them said, “We’ll take the keys”, and took them over. About two-thirds of the banks said, “Okay, you send in whatever you can send in, and demonstrate to us that you’re doing as good a job as you can managing the property. We’ll accept a cash flow mortgage, a partial payment, and the rest we’re going to do a forbearance.” So the part that you don’t pay, they just add to the principal. So your principal balance actually goes up, because you’re not paying it down, and you’re not paying interest.

Slocomb Reed: Forbearance is a term we’re a lot more familiar with now than we were two years ago.

Glenn Kukla: Yeah. And a lot of people were very familiar with it in 2008. So the key to surviving any kind of recession, whether it’s a macro recession that we would all go through if the market ever corrected or crashed, or just something personally you’re going through, just go to your bank and say, “This is exactly what’s happened. Would you please work with me? I’m actually the best person to keep managing the property. I want to own it long-term. I need a forbearance, I need a refinance, I need some kind of help here.”

Slocomb Reed: This is primarily a commercial real estate podcast, but we have a lot of residential investors in the room. Correct me if I’m wrong, expand on this for me, Glenn… We’re really talking about the kind of communication that you want to have with a commercial lender. You’re talking about commercial lending is much more relationally driven, so these are people who know you much better than Wells Fargo does, for example, and these are people who have decided to bet on your success by giving you this loan in a way that a residential mortgage lender who just punches numbers into a computer and gets a yes or no spat out. Those are not the people that we’re talking about going back to and saying, “Hey, my four-family is not working out. Work with me.”

We’re talking about lenders with whom you had taken the time to develop relationships already, who you had demonstrated your track record to so they were much more willing to look out at the broader landscape of commercial real estate during the recession and realize you’re not making your payment, but you’re still probably the best person to help us, the bank, made good on this loan. Is that all correct?

Glenn Kukla: Yeah, it’s very correct. All of the lenders that we negotiate with were local people. Like I said, in commercial lending, these are local people that we’ve developed that relationship with.

Break: [00:16:29][00:18:25]

Slocomb Reed: Your investment fund – did you say that it’s exclusively your capital, or do you raise capital for that?

Glenn Kukla: Right now, it’s my capital. At some point we would raise capital, but then you get SEC regulations and a whole other level of accountability, where if you use someone else’s money and it goes down, how do you deal with telling someone else that you lost it. I can tell my wife I lost money, because she trusts me, but if I had to tell you, you’d probably kick my ass. It’s a whole different level of accountability. I don’t know, someday I might.

Slocomb Reed: If you do lose my money, Glenn, please call me and say “Hey, Slocomb, I’m not going to be making my payment this time.”

Glenn Kukla: Work with me, huh?

Slocomb Reed: Work with me on this.

Glenn Kukla: So yeah, give me more money.

Slocomb Reed: Yeah. And 1/3 of the time I’ll ask for the keys. What has been your largest development deal to date?

Glenn Kukla: So we developed Parker Flats, which is a condo building on the corner of 4th and Central. We broke ground I think in 2005, and started selling the first condos in 2007. Great timing, when the market crashed in 2008. The Parker Flats – you actually see it if you’re in Paul Brown Stadium and you look North-West; sometimes you even see it on TV. It’s the very last building in the skyline of downtown. It’s on the corner of 4th and Central right, across what used to be Tina’s Lounge.

Slocomb Reed: It’s a pretty important part of the skyline now.

Glenn Kukla: Yeah. So that was 51 condominium units on top of a three-story parking garage. It was my idea to buy the land. So we owned the apartment building next door. Again, this is when I was involved with a partnership, equal partners called Middle Earth, back in the 2000s. So we owned an apartment building next door and we were renting the parking lot next door from the city of Cincinnati. We went to them one day and said, “Give us this parking lot and we promise to build condos. We’ll increase the tax base and bring more people downtown.” They fell in love with the idea and the proposal, so they gave us the parking lot for free.

We borrowed money from then LaSalle bank; they’re the ones that also financed that one office building, Office 71, that was rusting for about four years by [unintelligible [00:20:17].05] So they were just throwing money out; LaSalle bank back in 2000 were like “Here, take money, take money, take money.” That’s part of what caused that 2007, 2008 crash. So we only had a 25% presale requirement, which is pretty low on condos. So we built the Parker Flats, which – gosh, I mean, really, it ended up being an 11-story building, but each store was a loft, so it was like five double stories in this thing. The top story was a one-story penthouse of two units.

What was crazy at the time – I think the total construction cost for 55 units was only 11 million. Now it probably costs 30 million to build. We sold about half of the units, and then when the market crashed, that’s one where we wanted the bank to take it back, because it wasn’t cash-flowing, and there was no light at the end of the tunnel for us. We called the bank and said, “Would you please take this off our hands?” They said, “Sure.” They literally just said, “Give us the keys, we’re not going to [unintelligible [00:21:06].00] your credit.”

It’s funny, because that whole time the market crashed, my credit didn’t get [unintelligible [00:21:11].11] except for one little crappy loan that I co-signed with an out-of-town lender, somebody who wasn’t local, and they trashed our credit. My credit went all to hell; my credit got down to like 520 back in 2008-2009, from one loan that I co-signed, even though we’ve defaulted on 10 other loans, that we didn’t mean to default on, we just didn’t have the money. Nobody had money back then, everybody was losing their butts. Banks were working with people, but it’s because we were transparent and worked with those lenders that they gave us that second chance.

Slocomb Reed: What about your largest successful development deal? Partner Flats is pretty well known now, especially with people who live or are familiar with downtown. And if it weren’t for macroeconomic factors, I imagine that would have gone very differently. Tell us about your largest deal that did go well.

Glenn Kukla: So we developed the Marx Cromer Warehouse Lofts, which is 41 apartments and 10,000 square feet of commercial storefront, and a parking lot with about 30 spaces in downtown Newport. And I found that by driving around with an intern and a notepad, looking at buildings. You all know this, if you see long grass or a broken window, you’re like “That guy might be a motivated seller, I better call him.” So it was a building that was all torn up, and I was like, “Okay, but that’s a big building. That’s a big, beautiful warehouse. You can use historic tax credits for things like warehouses, and new market tax credits. With my background in financing, I know where all these extra pots of government money are.

So when we saw that warehouse in Newport, I told the intern, “Pull over and we’ll run in the City of Newport building.” I ran into the City of Newport building, I said, “Who’s your zoning administrator?” They said it’s a guy named Greg Tully. And Greg Tully pops out. You know who Greg Tully is, [unintelligible [00:22:40].07] and he’s also drummer in a band, so we had a musical connection… I said, “Greg, what’s going on with that building?” He said, “Well, the housing authority was trying to develop it, but they can’t get their funding. It’s probably going to go for sale tomorrow. Do you guys want it?” I say, “Hell yeah, we want it.” So we ended up buying it.

Again, when it’s owned by a municipality, you should pick these things up pretty cheap, if you make the pitch that you’re going to increase taxes, eliminate blight, and that kind of thing. So we renovated the Marx Cromer Warehouse, which was formerly a furniture factory, and turned it into 41 apartments, 10,000 square feet of storefront. We put about $5 million in it; Chase was the lender, we used federal historic credits, state historic credits, new market credits.

Slocomb Reed: When was this?

Glenn Kukla: This was 2006 when we renovated it, and it went online right in 2008. Again, terrible timing. We had this $5 million mortgage on this big beautiful building, we just renovated it, we’re starting to rent apartments, they’re starting to fill up, the market takes a crap, and the rentals slow down. And we had to default on the mortgage; the mortgage converted to an amortized mortgage. So the mortgage payment was $12,000 a month. We don’t have $12,000 a month in rent, and none of our rentals are generating money. So again, we went to the bank and said, “Okay, this is really bad timing, but we’re not going to be able to pay the mortgage. We’re going to send in what we got and we’re going to keep 8% for management fees, to pay for the insurance, pay for the leasing agent.”

The bank said, “Okay, that’s fine”, because they’re all doing that. So we dropped the rents and made sure that the whole building was stabilized. We leased it up as well as we could; we just made sure that we want to stabilize this property and get it leased up. Got it leased up, got all storefronts rented, still negatively cash-flowing. Chase bank sells the note to some capital company for about 20 cents on the dollar. Four years later, we buy it back for 40 cents on the dollar. So we ended up owning a $5 million building for about $2.5 million after that whole recession. And what I learned from recessions is that they’re very chaotic, and with chaos brings opportunity. So if you ever find yourself going through anything like that, somehow you might land on your feet, and actually, you might be better off.

Slocomb Reed: That’s a great story.

Glenn Kukla: Yeah. So we ended up developing a $5 million property and only paying $2.5 million for it through that whole nearly going bankrupt process.

Slocomb Reed: That’s exciting. What kinds of projects are you working on right now?

Glenn Kukla: I own a school building over in Arlington Heights, it’s 15,000 square feet, it sits on an acre and a half. It’s in an opportunity zone, which means that there are some advantages to using deferred capital gains. We’re going to market that probably in the spring; we’re kind of taking a slow approach. Commercial property is a much slower process than buying and flipping. Buying a flipping house, you want to buy it, you want to flip it, you want to sell it in four months; commercial properties sometimes take three to five years.

Slocomb Reed: So you bought this for the sake of reselling it.

Glenn Kukla: Yeah.

Slocomb Reed: Okay. You just got a good deal, found an off-market seller? Tell us about it.

Glenn Kukla: So once we sold the Stearns and Foster Warehouse, the one that I bought from the Christmas tree guy, and we sold it to Pepper Construction, they are putting $8 million in the deal and they are bringing in $2.3 million in payroll to Lockland. So Lockland was super-happy, and they said, “We’ve got this school down the street. Could you do the same thing to it?” They said, “We’ll give it to you for $1.” I actually paid $20,000 for the building, so I thought it would be more politically okay. “Why are they giving away buildings for $1 to this guy?” We don’t want that story getting out there. So I voluntarily paid $20,000 for a building that I could have paid $1 for.

Slocomb Reed: $19,999, for good PR.

Glenn Kukla: Exactly, $19,999 for PR. So now we own the building, we’re going to put together a marketing plan with some renderings, and essentially look for the unicorn tenant, which would be a company or maybe another developer who wants either a joint venture or just simply buy it.

Slocomb Reed: Not necessarily an ideal scenario, but what kind of tenant are you expecting? What kind of rent are you expecting? And then, if you’re looking to sell afterward, what are you expected to be able to sell this building for?

Glenn Kukla: It really depends on what the tenant needs. It’s kind of hard to answer, because each tenant is a unicorn. In a commercial property, tenants are like unicorns; each one is different. So for the Arlington school, likely it would be somebody who needs distributions, so we would build a high-bay warehouse attached to the school, or it might be a company like a plumber, an electrician who wants to locate their offices there, or just some local medium-sized business. And they would either buy it from me, I’d probably sell it for a couple hundred thousand dollars. Hopefully, the buyer is not listening to this podcast, because I’d ask for more first.

Slocomb Reed: That’s not a bad return on your $1 purchase and marketing budget.

Glenn Kukla: Sure, that’s opportunity cost. But I can start selling it for a couple hundred thousand dollars, but I really like a joint venture where maybe they would hire me to be the developer, we would renovate the building, we would add on a new warehouse, and then I would lease it back to them. Maybe they would lease it for five years with the option to buy it at some predetermined amount.

Slocomb Reed: Gotcha. What would you say are your top lessons learned from your 25 years of experience?

Glenn Kukla: Oh, gosh. Well, surround yourself with good people, which is why we’re all here. We’re all here to network and meet some good people. Diversify your assets, don’t put all your eggs in one basket. And don’t be afraid of risk, but understand that there are different profiles of risk. Some people think that without risk there’s no reward, and that’s not true. There are some risks that have much more downside potential, and there are other risks that have very little downside potential.

Slocomb Reed: Asymmetric bets.

Glenn Kukla: Asymmetric bets, exactly.

Slocomb Reed: Low downside, lots of upside.

Glenn Kukla: Yep. Heads, I win a lot, tails I lose a little. So I would say look for investment opportunities that have little downside. Warren Buffett’s famous for saying that he only follows two rules. One, don’t lose money, and rule number two, see rule number one; don’t lose money. So think of your capital as something not that you first want to grow, but you don’t want to lose. Look for investment opportunities that have very little downside, before you look for the upside. Real Estate, by the way, is a great place to invest, because even if you overpay for something, eventually it’s probably going to catch up in value. You were just talking about, John, you did a deal where the investor overpaid, then they ended up having to go to closing and putting money into it. But eventually, even if you overpay, you wait, and you wait, and you wait, and time will increase the value of your asset. That’s why I love real estate.

Slocomb Reed: Glenn, your natural storyteller. The common thread that I’m hearing in all of your stories, thinking about what may be the most important skill that you’re sharing with us right now – correct me if I’m wrong, but you’re a natural relationship builder. And the stories that you’re telling about your successes, but also mitigating failure come down to you built a relationship, that relationship resulted in someone who wanted to sell you a building, the guy who delivers your trees, or the city of Lockland, or someone who wanted to give you a loan based on the relationship that you built with them. And those relationships have not only led to your biggest successes, but also those are the things that helped you stay afloat in the recession, when a lot of other investors drowned. Would you say that building relationships with key people is the most important skill that you’ve developed over 25 years in real estate investing?

Glenn Kukla: 100% Well, it’s one of the most important. It’s tied for one of the top. But yeah, every good real estate deal that I’ve ever done was a result of a good connection I made with a person.

Slocomb Reed: What about other skills?

Glenn Kukla: Understanding financing, understanding risk, just understanding the law, how to re-lease, developing some bravery, not being afraid to take a chance.

Slocomb Reed: This is really good stuff. I feel like I could ask you questions for another hour.

Are you ready for the Best Ever lightning round?

Glenn Kukla: Sure. Let’s do it.

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

Glenn Kukla: All I read is children’s books. My son just got a book about every creature has a butt, so probably that one.

Slocomb Reed: Every creature has a butt.

Glenn Kukla: Yeah. I’m paraphrasing the title. But yeah, everybody has a butt.

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

Glenn Kukla: Charity is a good way to give back. I give my wife backrubs at least three times a week, so investing in your family, investing in your friends. Really, the best way to give back is to invest your friends and family, time.

Slocomb Reed: Awesome. And what is your Best Ever advice?

Glenn Kukla: I don’t know. There is no Best Ever advice. There’s so much good advice to give.

Slocomb Reed: You’ve given a lot of advice already.

Glenn Kukla: Okay, my Best Ever advice would be that old-school xerox [unintelligible [00:31:00].18] It’s the frog choking the stork. The frog is about ready to die and gets swallowed by the stork, and it says “Don’t give up.” Never give up what you do. Stay focused and work hard. If you never give up, things will work out.

Slocomb Reed: Awesome. Thank you, Glenn, and thank you Best Ever listeners for tuning in. If you got some value out of this conversation with Glenn, please follow and subscribe to our podcast, leave us a five-star review and share this episode with someone who you think would receive a lot of value from listening to what Glenn has shared with us today. Thank you and have a Best Ever day.

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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

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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.

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JF2685: 5 Worthwhile Benefits to Investing in Affordable Housing with Denis Shapiro

Denis Shapiro has diversified his portfolio ranging from apartment buildings to self-storage to mobile home parks. Now, Denis has branched out into Affordable Housing, a market that few people decide to invest in. In this episode, Denis shares why Affordable Housing can be a lucrative investment, along with five benefits you can gain from this asset type.

Denis Shapiro | Real Estate Background

  • Fund Manager at SIH Capital Group, which has an income fund and allows their investors to invest in specific deals they are GPs on. The income fund mirrors what one would find in a REIT but more consistent and is not publicly traded.
  • Portfolio: LP on multiple syndications in various asset classes such as apartment buildings, mhps, self storage and atm funds. Also has 10 Residential syndications, including Ashcroft deals
  • Has two upcoming GP deals in the works: a 50 unit Affordable Housing community closing in 01/22; and a 9 unit STR community closing in 02/22.
  • Based in: Freehold, NJ
  • Say hi to him at: www.sihcapitalgroup.com | https://www.facebook.com/sihcapitalgroup
  • Best Ever Book: The 5 Love Languages of Children by Gary Chapman

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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, Denis Shapiro. Denis is joining us from Freehold, New Jersey. He’s a fund manager at SIH Capital Group and he is an LP on a number of funds, including apartments, mobile home parks, self-storage, and ATM funds. Denis also has two upcoming GP deals in the works, one of which is an affordable housing community and the other is a short-term rental community. Denis, thank you for joining us and how are you today?

Denis Shapiro: Thank you, Ash, for having me on. It’s awesome to be here again.

Ash Patel: Good. It’s our pleasure, man. 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?

Denis Shapiro: Yeah. I gave a more detailed background last time I was on so I’ll keep it really, really short. I’ve been investing in stocks for 20 years, the last 10 years, I’ve transitioned into alternative, but I’ve never pulled the cord on traditional. I feel that traditional and alternative can complement each other really well if you have stocks and bonds, and then you also invest in private securities like real estate. So for the last 10 years, I’ve gone down the rabbit hole… I went from single-family rentals and I quickly didn’t really want to do anything with that. Then I went to note funds, ATM funds, life insurance policy, but then I feel like I had the gateway moment is when I went towards apartment building syndications. Once I went down that rabbit hole, I feel like everything else opened up to me after that.

Ash Patel: You found the Holy Grail, huh?

Denis Shapiro: Yeah, it was definitely — when I first found it, I was like, “Oh, this is too good to be true. You get all the benefits of investing with a multimillion-dollar property, but you can do it for as little as $50,000.” I started crowdfunding so I was doing as little as like $10,000, but that was a disaster in itself. It was hard to believe that you could literally get all the benefits with a fraction of the investment.

Ash Patel: Yeah, the power of leverage. Denis, when you say traditional alternative investments, what does that mean?

Denis Shapiro: For me, traditional is anything that’s publicly traded, and alternative is anything that’s private. I wrote a book on this, The Alternative Investment Almanac, and I was trying to find a pinpointed definition of what exactly is alternative, because some people don’t consider real estate alternative. So the conclusion I came up with from all these different opinions is that it’s just a matter of is it publicly traded or privately traded, and that’s it.

Ash Patel: When you started investing in multifamily, did you start as an LP in other people’s deals?

Denis Shapiro: Absolutely. Besides my own single-family rental and duplexes, when I got into the commercial real estate space, it was strictly as an LP. My goal was just to become the best possible LP investor. Because, truthfully, if that is the only thing you accomplish, you can be an extremely successful investor. You never really need to go the GP route; but if you just really hone in and become the best possible LP investor that you can be, it’s an extremely powerful wealth creating tool.

Ash Patel: Denis, how does one become the best LP investor?

Denis Shapiro: Probably the easiest answer is investing with the best operators. But the journey — it is a journey. It’s something that people need to understand. My first investment wasn’t a good one; my second one was slightly better, and then after I had a dozen or so under my belt, I got the variables down path. I knew which ones I wanted, I knew which markets I wanted to be in, in which markets I did not want to be in, I knew where I was overexposed, underexposed… So it’s just time, knowledge, and experience. It’s not something that you’re going to wake up and you’re going to be like, “Wow, I’m a great LP investor today.” It takes a while to get to that point.

Ash Patel: What made your first investment not a good one?

Denis Shapiro: So much. And you know what? It’s easy to blame the operator, it’s easy to blame the underwriting, but honestly, it was just me and my lack of experience. I did not know how to evaluate a deal, and it doesn’t really matter who the operator was at that point, or anything else. I should never have made that investment, because I was not at the place where I should have been at that point before sending in that $50,000, or whatever the amount was.

So the second part of that answer, I guess, is what were the key variables that I learned that I kind of applied from the mistakes from that deal is not invest in deals where the overwhelming majority are one-bedrooms. So it might look like a big property, like 100 units or 200 units, but if 80% of those are one bedroom, you’re never going to get high 90s occupancy; it’s always going to be transitional. One bedroom – people leave, they move in with a girlfriend, they need to upsize. One bedroom’s are the most transitionary lifestyle unit composition, so you want to stick to the twos or threes. It’s okay to have a couple sprinkled in, but when you’re buying a complex and its majority are one bedroom, then you’re asking for problems.

Ash Patel: Interesting. I’ve never heard that before, but that sounds like great advice; it makes a lot of sense. I think back to all the one bedroom I rented or the studios that I rented; I was there for a year. I moved in with a roommate, moved in with a girlfriend… Yeah, that’s a neat perspective. What else do you look for in GPs?

Denis Shapiro: Okay, so from an operator’s perspective, a lot of things that I look for, is I like to take the word conservative and I scrape it out, because every deal gets labeled conservative. What I really look at is what is the range that they’re projecting.  I don’t invest in deals that project over 20%. I don’t do many developmental deals, so my sweet spot, what I look for in IRRs is between 13 to 15. What I’ve found is the operators that tend to go for that 13 to 15 sweet spot, they tend to actually perform into the high teens and the 20s. And it’s the operators that — like, when I did that crowdfunding, when I started out with crowdfunding, it was littered with a bunch of people who were projecting the 20s and the Moon. Part of my inexperience was I was attracted to that. These days, I scrape that off the plate, unless it’s an operator that I really, really know. If I get any deals from any operators that I don’t have a relationship with and it starts with a two in front, I usually just delete it.

Ash Patel: Your crowdfunding experience – was that through one of the big platforms out there? We’re you an LP on that deal?

Denis Shapiro: Yeah. I was an LP. The bottom line is it was a technology company disguised as real estate. I feel bad, because I was one of many investors that were basically… I don’t want to use the word defrauded, but it’s pretty close to that, where the advertising — and they were advertising on some of the bigger podcasts, well-established real estate podcasts as well, right before they shut down. As a real estate investor, you never want to hear the company that you invested through, because they didn’t get a VC funding, then they’re shutting down; then there’s a big problem there. It was a huge, huge — honestly, probably the biggest learning experience of my life was investing into crowdfunding where I thought it was better to do 5000, 10,000-dollar investments than to do 150k. Today, that probably cost me 100k to $150k of my net worth, that decision.

So it’s definitely — in the syndication world, in the private securities world, you get what you paid for. Usually when they preach, they advertise, get into these deals that $10,000 or whatever it is, usually it’s kind of a get-what-you-paid-for scenario.

Ash Patel: Yeah. And the way I look at it is if you’re taking on $10,000 investments, that’s a lot of accounting overhead. Why not just market yourself, get the 50k, the 100k investments, right? If you have the track record, it shouldn’t be hard to do.

Denis Shapiro: Yeah. But the problem was a lot of these operators that did get on these platforms didn’t have the track record. They either had a sponsor on the team that had a track record, or whatever the case was. But there’s forums out there where you can clearly see how bad it is. I have a lot of people that reach out to me from an investment perspective and say, “What should I do to get started? Should I go that route?” I say, “Absolutely not.” It’s not that every platform is bad. Yes, my particular experience was really bad, but the bottom line is that when I started taking on that responsibility for myself and doing the vetting, and calling the operators, and learning some underwriting, doing all those skills – that skill and knowledge base transformed my whole career… Versus still being on a platform where I would log in — yeah, I’d have a really nice portal and I would see this beautiful pie chart, but I would have learned nothing in that process. Versus having those calls, having those conversations, building up my network, and having people to actually go to for an opinion that actually means something. All of those things a crowdfunding platform cannot do for you.

Ash Patel: Yeah, and all of those things will help make you the best LP investor.

Denis Shapiro: Exactly.

Break: [00:09:35][00:11:13]

Ash Patel: Denis, how many different deals are you in LP on right now, roughly?

Denis Shapiro: A few just one full circle, but I would probably say high single digits. Probably high single digits, because I have an investment club that I do a lot of deals with; so I would probably say between 10 to 11.

Ash Patel: Do you spread your money out in different asset classes, or is it all multifamily?

Denis Shapiro: No, we do — so my investment club and my fund are two very, very different things. The investment club is a private fund with me and two other individuals, and they have very unique backgrounds. One of them is in crypto and the other one is in startup. So I personally wouldn’t feel too comfortable investing in crypto or startup, because I don’t have that experience. I’m a commercial real estate guy. But when they offer something to the club, I have complete confidence in them. So it allows me to have a more diversified portfolio. But when it comes to the actual fund that I actually administer, all that stuff basically is commercial real estate.

Ash Patel: If you find a really good operator, why not just go all in on that one operator, and keep doing more deals with them?

Denis Shapiro: I think it’s like a lifecycle. At first, when you’re new, I think the first couple of years, it was exciting to get on calls with new operators, and especially well-established operators. I remember the first time I spoke to Joe and some of the other big operators. It was fun, it was an experience, and it was worth those conversations, and it was worth doing a lot of deals with a lot of different operators. Now that the deals went full cycle and now that you have an evolved portfolio, now it does make sense for me to be more selective. And I do go all in on selective operators; like, for our fund that we administer, we only have four operators. But those four operators give us exposure to almost 196 properties out there, so we’re still really well diversified. But if I was earlier on in my career, I wouldn’t advise it. But I feel like after you go to full cycles, then you can kind of apply your 80/20 principles, and then at the end of the day, it becomes okay, as long as those operators are well diversified. If you’re doing a fund to funds or something like that, so you’re not putting all your eggs in one specific property, with one specific operator.

Ash Patel: Got it. Are you doing that now, a fund of funds model?

Denis Shapiro: We do two things. With SIH Capital Group, we have an income fund. The goal is literally just to provide the highest possible income from day one, and for it to be consistent. But those returns are capped. And then for email list, we’ll do the deals that we GP on; those deals we will offer to our investor list and they get access to the full total returns. So I always like to say, if you invest in the fund, you get less potential returns, but you get a well more diversified portfolio to back those returns; and they’re good for those specific goals. Now, if you invest in the individual deals, you will be subject to the performance of that specific deal.

Ash Patel: The deals that you guys’ GP – do you have a team that you work with?

Denis Shapiro: Yeah. I have different partners for the different things. We try to avoid doing the deals everybody else is doing. We’re not doing like value-add deals, we’re not buying in Texas and Florida and the Carolinas. There’s nothing wrong with that model; I’m an LP in many, many of those deals, so this is not me throwing shade at that model. But the GP deals that we’re doing, we’re actually trying to stay local, because we are asset-managing them ourselves.

So we have one deal in Pennsylvania — because I’m in central New Jersey area. We have one deal in Pennsylvania that’s about two hours away. It’s actually an affordable housing community, so this is not what many people associate with when they think of low income. This property looks like a class B, beautiful townhouses, plenty of parking spaces, safe, private area. That’s a 50-unit affordable housing unit, and then we are also doing a short-term rental community on the shore. It’s personally something I really wanted to do with short-term rentals. The shore is one of the only areas in Jersey that I would invest, because it is a blue state. So because it’s a short-term rental, you’re not dealing with the tenant-landlord laws as much, so it’s a little less of a headache. But those are two deals that we’re kind of doing on the general partnership side.

Ash Patel: Affordable housing. What does that mean? Does that mean they get their rent subsidized?

Denis Shapiro: Yes. What happens is — the community was built in 1998 so it was a very fresh property. When it was built, it was mainly built through tax credits. Then it gets into a system where there’s vouchers on it. What I learned in the process is that there’s project-based vouchers and tenant-based vouchers, and then there are just people that are getting utility allowances. So in one shape or form, people are getting assistance, but that assistance varies.

What I’ve learned is there’s a lot of value in the project-based vouchers over tenant-based vouchers, because tenant-based vouchers will go with a tenant, but project-based vouchers actually stay with the property. So what ends up happening is if you get a bad tenant on a project-based voucher, you have a lot of leverage over them… Because if they’re not strictly affirming to the lease, if you evict them, then that voucher still stays behind with the property. So they lose that voucher, and because of that, they usually are some of the best acting tenants that are there. Versus the tenant-based vouchers, usually they feel like the power is in their court, because, “Hey, if I leave, I know people want my voucher.”

So one of our business plans — it’s not the typical value-add, “Hey, we’re going to put granite countertops.” One of the pieces of our business plan is actually to up the amount of project-based vouchers versus the tenant-based vouchers. It’s a very unique business model, where it’s not based on income, it’s about controlling the tenant population there and making sure it’s a safe, great, and affordable community for the tenants.

Ash Patel: How do you up the project-based vouchers?

Denis Shapiro: [unintelligible [00:17:09].10] It’s about relationships with the housing authority. My partner on this deal, he already has affordable housing with this housing agency, so it’s all about relationships. It’s just something we’re going to just apply when we have it. The property also had vouchers that were not being used, and we’re going to be able to go in and use those vouchers right away, because there’s a certain amount allocated to the property. That means the next seven vacancies we could fill in from day one. So there are some cool interesting aspects when you’re dealing with affordable housing that you don’t really see with typical class C and other properties.

Ash Patel: If somebody doesn’t have a voucher and wants to pay full price, can they lease a unit at that property?

Denis Shapiro: They could, but there’s incentives of doing the voucher. It’s a higher market rent, so there’s usually incentive to go to the vouchers. We do have a contract with the housing authority. So we usually would try to stick with the vouchers, but we do have the option to also rent it out.

Ash Patel: You can’t really turn me away though, can you? If I come in and say, “Hey, I’ll pay your full price. I want this unit.”

Denis Shapiro: Actually, there’s already a waiting line. One of the benefits of doing affordable housing is because there are built in waiting lists through the housing agencies. So it’s not like we have to put this on apartments.com to fill it. The average occupancy since we went into contract has hovered between 90% to 100% with a waiting list. That waiting list is the month deep. This is why I really like this space.

‘I think, going forward, SIH Capital Group is going to really try to hone in on the affordable housing space because it’s so much less competitive where it’s not going to get bid by 35 different buyers. Because you need to understand the vouchers, you need to have affordable housing property management background, you also need to have a relationship with the seller where they can feel confident that they will sell this property and will get approved by the state. So there are all these different little nuances where it allows a smaller buyer pool and much more of a relationship transaction than typically what you get when you’re dealing with a commercial broker.

Ash Patel: I grew up about 10 miles from where you are, in Holmdel, Central Jersey, and a lot of my buddies back there are like, “Man, there’s no deals out here. You’re lucky you’re in the Midwest. You can’t find a deal in Jersey.” I don’t buy that; you could find deals anywhere. How did you guys find this deal?

Denis Shapiro: The affordable housing deal – that was directly through… My partner purchased a property from them three years ago. So we’re buying it from one of the largest affordable housing developers in the state and in the country. He has a direct relationship with the disposition manager; that’s how we got that deal. The New Jersey deal that we got, which is the short-term rental community – that deal was also kind of off-market, where the brokers kid goes to school with one of my other partner’s kid. It was a very weird circumstances that we kind of just jumped on. But it was a very unique property. If you’re familiar with the shore, the shore real estate is probably some of the most desirable. It’s almost like the Hamptons situation, but on the Jersey Shore. This is like a mile away from Asbury Park; the location really sells the deal.

It’s a hard business plan to execute because we’re going to be converting these short-term rentals, so there’s going to be heavy renovation. It’s almost the complete opposite of the affordable housing deal, because the affordable housing deal is a very simple, easy to follow business model. The short-term rental community is a little bit more complicated. But that’s kind of what you need to be good at when you’re putting a deal together in New Jersey, because it is a blue state. There are certain complications that don’t allow it to be like a, “Oh, the market rent is $2,500. The rent here $1,700. I’m going to purchase it and bump it up.” When you’re dealing with the state of New Jersey, no, it’s not that simple. Because while there’s no rent control, there’s a term in Jersey where it says if you raise rent over a certain amount, it’s unconscionable. The term unconscionable is completely subjective on how the judge feels that day. So it could be $1 increase or it could be a $600 increase.

So just my point is that it’s not that the deals are not there, it’s just you need to be more creative with the deals to make them work in a blue environment. But you can’t replace a location that’s four blocks away, 40 minutes outside of New York City.

Ash Patel: Yeah. So you got these deals based on your network. It’s that’s simple. All you guys out there that are complaining about no deals – build your network, extend your network; put yourself out there.

Denis Shapiro: Yeah. Both deals were actually offered to me basically day one. My partner, toward the affordable housing community, texted me that day, he said “Are you in?” I was, at the same time, meeting up with the other deal in Jersey. Both deals were presented to me; it’s not like I personally found the deal, but I just jumped on it when I got the opportunity.

Ash Patel: Alright. Let’s dive into the numbers on the affordable housing project. It’s 50 units, is that right?

Denis Shapiro: Yeah. I’ve just got to keep it high level, because we’re closing this month and it’s a 506B, so I’m going to keep it very, very high level for the affordable housing, if you don’t mind.

Ash Patel: Yeah. Tell me what you could tell me.

Denis Shapiro: Okay. It’s 50 units, 100%, occupied, built in 1998. We have five project-based vouchers, but we have up to 12 that we can use; so there’s seven vacancies we could fill, about 18 tenant-based vouchers, the rest have utility allowance. We’re getting Freddie on it. The other big, big advantage when you’re dealing with affordable housing is you get expedited service to the mortgage brokers, so we kind of jumped the line on the mortgage queue.

Ash Patel: Why is that?

Denis Shapiro: Well, we’re going Freddie and they have a mandate for affordable housing. So if two deals go to the brokers at the exact same time, they will expedite the affordable housing over a regular deal every day of the week.

Ash Patel: You’re from Jersey; are you sure you’re not paying off somebody?

Denis Shapiro: No. This was just a benefit that we actually didn’t know about since day one… But when we started finding out about the delays that are going on right now, we definitely were appreciative of this benefit. And we also got a reduction on the mortgage so we got about a half a percent off. We were going to be looking at 3.8, we’re coming down to like 3.3, and potentially a little lower, because the rates kind of dipped down a little bit. We’re going to be locking in about a week or two in that range. We’re getting a nice reduction… but we can’t take any IO. That was a little bit of the downside but we’re going to be paying down principal day one.

Ash Patel:  You can take… What’s IO?

Denis Shapiro: Interest only.

Ash Patel: Okay. And what’s your down payment on this?

Denis Shapiro: I think 25%. I think we’re going to be at 74% LTV on this.

Break: [00:23:54][00:26:51]

Ash Patel: Can you tell us roughly what you’re buying each door for?

Denis Shapiro: Yeah. Total sales price is 5.725, and it’s 50 units, so a little over 100k a door.

Ash Patel: Okay. What are your rents right now?

Denis Shapiro: They’re ranging between $1,100 for the two bedrooms and $1,300 for the threes, and they’re all threes and twos.

Ash Patel: Can you raise these rents over time without the program?

Denis Shapiro: So here’s the interesting place… If you look at 99 out of 100 syndications, the typical business model is geared towards the income. Besides a few little levers that usually operators will use, the focus of every business plan has always been on the income side. Put the nice flooring down, fix up the kitchen, and get an extra 20 bucks a month. Over here, the business plan is so simple because the operating expenses are in the high 70s. So the real opportunity here is to bring it down to a lower level. The industry norm for a 1998 build is probably in the 50s. And just by doing that, we would be successfully execute the business plan.

Ash Patel: How will you cut expenses?

Denis Shapiro: We have a lot of these from day one. We already got the insurance quotes came down, a lot of it is through relationships. One of the GPs on this deal is the property manager on my partner’s other deal. The current property manager is charging the current seller 9%; we’re already at 4%. We’re doing a water conservation program since day one… So we have five or six levers that we’re going in literally day one. We’re going to be getting rid of about $140,000 worth of expenses in year one.

Ash Patel: Denis, is this similar to a section eight deal where if you add a washer and dryer, you get to increase rents, or if you add amenities, rents go up?

Denis Shapiro: You have to be careful… So you got to check on what you could do and what you can’t do. For example, during due diligence, we found out that every single person has a dog, and the lease definitely says you’re not allowed to have a dog. But the good thing is this is five acres, and it’s townhouses, and there’s a lot of families there, so we actually don’t mind the dog situation. But we don’t want to close our eyes and pretend that the dogs are not there, because dogs do cause some damage. So day one, we’re going to put a little pet park there and we’re going to charge pet fees. So we had to check with the housing agency that pet fees are allowed to be charged, because now you’re bringing up their income to a higher amount than normal.

So you can do certain fees, you just have to check with the housing agency that it’s okay. The current seller also has laundry and dryers for every single unit, and that’s not being charged, and they’re also fixing them up when they break. So that’s a really nice amenity; so we just plan on just charging a washer and dryer fee, really just to subsidize when these things start breaking. We’re not really looking to generate much extra revenue from it. But every single one of these things that we’re looking to add, it’s kind of like we’re going to be checking with our property manager who’s checking with the housing authority. So it’s not as simple as other deals where you could just do it and just do it. It’s an extra layer of compliance.

Ash Patel: I’ve got to ask you a question… And this comes from every time I buy a property. When I buy a building, I usually improve the lighting, the landscaping, the signage, to let the tenants know, “Hey, this new landlord is actually going to improve the property.” You guys are going in and you’re going to start charging all these fees; how do you reassure the tenants that they’re in good hands?

Denis Shapiro: We are very fortunate that this place is 100% occupied; this place is already safe, so we don’t have to go in and do a lot neglected — we don’t have to fix a lot of neglected items, I want to say. But we are also going to be fostering a certain culture, where we’re not going to say, “Look, hey, we’re going to pretend that you don’t have pets. But in exchange, we are also going to build a pet park where your dogs can come and run, and there’s going to be places for you to get the dog bags.” So it’s more about explaining to the tenants that we are adding value by doing those kinds of things, and “Now you don’t have to hide your dog anymore.” Because technically, that’s breaking your lease, and you could actually lose your apartment for that. This might not be a day one type situation, this might be when the leases turnover, where we might be doing this as the lease’s turnover for the whole year, we’re going to start implementing it.

So it’s not about we’re going to go in there and just going to be, “Hey, we charging you an extra $200 a month for stuff that you’re already getting.” It’s more about, “Hey, we are going to be providing certain benefits. Here they are.” We expect an open dialogue of communication.

Ash Patel: Got it. You’re an investor with some of Joe Fairless’ deals. You’ve seen that they’ll do ice cream socials, pizza parties… Would you do any of that? And then take it a step further – what if you bring in some financial literacy experts and educate some of these tenants on how to get ahead financially? Is that something you would consider doing?

Denis Shapiro: Yeah. So the first part with Joe and his community – one thing is this town is really cute; it’s like that Hallmark type of downtown.

Ash Patel: What town is it?

Denis Shapiro: Oxford, Pennsylvania. It’s about 20 to 30 minutes south of Lancaster. It’s a smaller town, everybody kind of knows everybody. We went out and we went with a couple of investors to the local downtown, and I had the cheapest meal I had in 33 years of living in New York City/Tri-state area.

Ash Patel: It’s Jersey though, that’s a problem.

Denis Shapiro: [laughs] Yeah. So it’s a very homey thing, but there’s a bunch of these local businesses there on the strip. I went into a comic shop and I got like a bunch of comics for my kids to bring home. They were like literally $1 each. I was like, “How great would it be if we host a comic day?” We’ll literally buy 100 comics and bring it out for the kids. We have a community room in the clubhouse, and we’ll just get the kids to come out, they could pick out one or two comics…

So we already have things like that to do, where we’re going to really try to incorporate as much local businesses as possible to that. Then on the flip side, the financial literacy program – I love that idea. I’ve seen an operator or two — I think the DaRosa group was working to implement something like that. I’ve got to check with them how it actually works, because a problem sometimes with a lot of those free services – a lot of people won’t sign up for them unless they have to pay for them; and you obviously don’t want to charge them. So I think that’s going to be something that we would consider, but I would want to see some feedback on some of the operators that have done that already in the past, see how successful and if it was worth the time.

One thing I will say is that my group SIH Capital Group, one thing we wanted to do is we want to do like a scholarship. We want to do that scholarship where it will be localized to the properties that we are GPs on. For example, for the Oxford Village, because the short-term rental community, obviously, this wouldn’t apply for – for the Oxford Village deal, it won’t be a huge scholarship, but maybe we’ll do something every year that we own the property, and it will just only be for the tenants that are there.

Ash Patel: That’s incredible. I love the comic book idea. Two great ideas, so I commend you on that. Denis, what is your best real estate investing advice ever?

Denis Shapiro: Be 100% okay to fail. I have to say my first mutual fund I ever invested in – complete failure. First individual stock I ever picked – complete failure. First crowdfunding deal I ever did – complete failure. First syndication I did – not a complete failure but not a good deal. Every single time, the second deal was finally better, the second trade was certainly better, and then it was just better and better. That’s the biggest piece of advice. If you’re scared to make that wrong investment, you’re just never going to invest. That’s the biggest mistake you can make… Because 10 years from now, I don’t really remember the $1,000 I lost on that mutual fund; it doesn’t mean anything. But I do remember my whole stock portfolio that I built subsequently because of that mistake. So that my best piece of advice, just be happy to fail.

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

Denis Shapiro: Yeah. Let’s do it.

Ash Patel: Alright. Denis, what’s the Best Ever book you’ve recently read?

Denis Shapiro: Oh my god. Okay. I am actually reading The Five Love Languages of Children. I don’t even know if it’s love languages… But it’s a derivative of Gary Chapman’s book. I have a six-year-old, a four-year-old, and a three-year-old, and it’s given me some interesting perspective on parenting. The best book is always one that you could actually take and just relate right away to. I would recommend that, it’s an interesting book for any parents out there.

Ash Patel:  Thank you. I didn’t know there was a challenge edition of that book. I’ll check that out for sure. Denis, what’s the Best Ever way you like to give back?

Denis Shapiro: It’s definitely going to be more scholarships, more stuff in the communities that we are invested in, and it just feels like a natural extension to give back at the same time.

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

Denis Shapiro: The best way is, if you’re interested in a copy of my book, The Alternative Investment Almanac, that can be found on Amazon. But otherwise, the best way to reach out to me is on sihcapitalgroup.com. What I did is I created two abridged versions of my book. If you sign up to my email list, you can get one of each. And then if you like what you see on the email list, please feel free to reach out there.

Ash Patel: Denis, I got to thank you again for being on the show today, sharing your story from starting out investing in stocks, getting into single-family homes, then becoming an LP investor, starting a fund, and being a GP. I appreciate you sharing all your lessons, stay away from entire communities that are one bedroom, and all the other advice, man. So thank you again.

Denis Shapiro: Ash, it was awesome being here. Thank you so much.

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

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JF2666: Investing in Office Space During the Work From Home Era with Andrea Himmel

Andrea Himmel’s mother went from nothing to a multibillion dollar portfolio of office buildings and warehouses in New York City. Inspired by her mother, Andrea joined the family firm and now acts as Chief Investment Officer, hunting down great opportunities in Manhattan and the boroughs. In this episode, Andrea breaks down why she’s investing in office spaces during the work from home era, and how she’s able to close on these high-profit deals.  

Andrea B. Himmel  | Real Estate Background 

  • Career: Principal and Chief Investment Officer at Himmel + Meringoff Properties
  • Founded in 1978, they own a multibillion dollar portfolio of office buildings in Manhattan and last mile warehouses in the boroughs of NYC. They do not syndicate equity. They own their entire portfolio with their own equity.
  • Portfolio: Multi billion dollar portfolio of ~20 properties in NYC. Over the past 40 years, they have bought and sold over 5MM SF.
  • Based in: NYC, NY.
  • Say hi to her at: http://linkedin.com/in/ah-ny
  • Best Ever Book: A New Earth: Awakening to Your Life’s Purpose by Eckhart Tolle

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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, Andrea Himmel. Andrea is joining us from New York City. She is the principal and chief investment officer at Himmel and Meringoff Properties, which was founded in 1978. It owns a multibillion-dollar portfolio of office buildings in Manhattan and last-mile warehouses in the boroughs of New York. Andrea has 14 years of real estate experience. Andrea, thank you so much for joining us in how are you today?

Andrea Himmel: I’m great. Thank you for having me. I’m honored to be here with you.

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

Andrea Himmel: Sure. I studied real estate undergrad at Wharton and knew I wanted to work in it, because my mother was actually in the industry. She had co-founded the firm I currently work at in 1978, and was really a pioneer in becoming a first-generation owner of a significant portfolio, coming from really not much. So I was very inspired by my mother. During college, I had multiple internships, one at Lubert-Adler, where I was working on real estate from a private equity angle, a lot of Opco/Propco kind of retail investing. I worked in CMBS at Morgan Stanley, and ultimately landed at Brookfield in 2008. I was a little underutilized, so I started interviewing around about two years later, because it had been a slow market, as you recall, that was with the recession.

So I interviewed and my mom said, “You know what? Get out of real estate. Get into a more sophisticated form of investing, so you can differentiate yourself. Because a lot of real estate owners are street smart, but not really financially sophisticated.” So I took a job for a hedge fund and I spent eight years there. I ended up managing their oil and gas portfolio that was about 10% of their 60 billion of assets under management; it was a long-term value fund. I learned how to value cash flow. Basically, businesses should be like lemonade stands – money in, money out, some form of capitalizing the business, and some way to distribute the proceeds. The skills I gained there, focusing on valuation, were 100% applicable to those that I use now today in real estate evaluation work.

Ash Patel: Well, you make all of that sound easy.

Andrea Himmel: I ended up starting a private equity fund. We hit a home run and raised 300 million dollars from Elliott Management, which is Paul Singer’s fund, and had a 96% return on our first fund, and a 3X multiple. Then at the time, since I was a startup, I was working out of one of my mom’s buildings. She had always told me “You can never work for me.” But I had earned her respect over the years, so she invited me to work for the company.

Ash Patel: Amazing. A lot to cover here. Your mom started this business in 1978 – was it investing in real estate in New York City?

Andrea Himmel: It was. A lot of it, however, because she didn’t have the cash to buy much, she was acquiring ground leases in the boroughs, and in emerging neighborhoods, such as Fourth Avenue, which is now Park Avenue South, or Harlem in 1979. They did a lot of ground leases because there’s no major initial upfront capital payment. She went on and purchased options, and ultimately [unintelligible [04:09] She got started doing that. She actually met her business partner at a lecture that Larry Silverstein was giving at NYU, and his guest was Harry Helmsley. Harry said, “Does the audience have any questions?” My mom’s hand went up and she said, “What’s your greatest accomplishment?” Harry Helmsley said, “What are you doing tonight?” Of course, that’s unacceptable today, I think, but it grabbed the attention of Stephen Meringoff, who later approached my mother and said we should team up and be owners together. So they borrowed recourse, which obviously we don’t do anymore, but they borrowed recourse up to 90%, because financing back then was totally different from the RTC days, and built a portfolio over a few decades.

Ash Patel: And Harry Helmsley, the owner of the Empire State Building, and from his wife, Leona Helmsley.

Andrea Himmel: Yeah, we were all family friends, and he became a mentor to my mom. My mom actually very confidently broke her way into real estate by sneaking into REBNY galas, which is the Real Estate Board of New York. She had gone to HBS and she said to many prolific developers at…

Ash Patel: HBS is Harvard Business School?

Andrea Himmel: Yes, it is.

Ash Patel: Got it.

Andrea Himmel: She said, “You know what? I’m putting together a real estate panel for Harvard Business School. Larry Silverstein, do you think you qualify for this? Harry Helmsley, do you qualify? Seymour Durst, do you qualify for my panel?” Instead, what that did was it turned them into her mentors over the years, and ultimately peers. She became a well-respected name, following in the footsteps of giants.

Ash Patel: Incredible. And your mom was a pioneer because in 1978, and even through most of the ’80s, New York was not what it is today. It was a rough place.

Andrea Himmel: But as Harry Helmsley told her, Grand Central is not going to get on rollerblades and go anywhere. There are still certain districts, certain neighborhoods, and we still feel the same today, that are emerging, even though they may be Grand Central, or Penn Station. But we think location, location, location, as well as leaseability and all sorts of things.

Ash Patel: Andrea, I don’t want to make this podcast about your mom, but one last question. You mentioned she did ground leases and then got financing. How does that work?

Andrea Himmel: So she did a lot of ground leases where…

Ash Patel: With no money?

Andrea Himmel: [unintelligible [06:50] back then it may have been a few 100,000 or 100,000 a year in your ground rents. There may be upfront key money, but usually, there wasn’t.

Ash Patel: Also, she was the lessor.

Andrea Himmel: Yes, she was…

Ash Patel: Not the owner.

Andrea Himmel: Not the owner of the fee. So she had run the property, operate it, bear all the CapEx, all that. And through refinancing and stabilizations of properties, she was able to amass a portfolio.

Ash Patel: Alright, so then you had a career in private equity. You were underutilized… Tell me about that.

Andrea Himmel: I just out of college was so overly zealous to have my brain pecked and my energy leveraged.

Ash Patel: And you wanted to rule the world, right?

Andrea Himmel: I wanted to grow, I wanted to make my world larger, and my brain larger… I was at Brookfield, which at the time — right now, they’re an incredibly dynamic and prolific company that’s very nimble. Back then it was a bigger public company, and I think I needed a more nimble environment, so I preferred to find somewhere where I would really be challenged intellectually.

Ash Patel: Yeah, a lot of us have first jobs where we’re under-utilized. Good for you for making the move. You then went to a hedge fund in the oil and gas space – was it a real estate play? Or was it a pure oil and gas business?

Andrea Himmel: At the time, I started with three and a half billion dollars of cash and to manage, and it ultimately is now 60 billion. We were investing in equities, so publicly traded companies such as Schlumberger, or Hess, or Exxon. At the time, it was less environmentally conscious, so we didn’t have a philosophical lean in any direction. But we sought undervalued companies for long-term holds, and based on true distress in the market, or anxiety among investors. I did that on the equity side. Then when oil prices in 2016 collapsed to $26 a barrel, from $125, I saw an arbitrage in the private market to buy assets that were priced as if oil were $26, whereas equities were trading as though oil were at $70. So I moved to the private side, raised a fund, it was rejected by 2000 investors, it took 2001 meetings to actually get a commitment… And our first one we tripled, our second fund is still being deployed. It’s a fascinating industry, it’s also a real asset, as far as it can be 1031’d. I think of it as real estate below grade… So it was applicable.

Ash Patel: Right now, you focus on warehouses and office buildings?

Andrea Himmel: Correct. We’ve been in the industrial space since 1986. We’ve been in the office space even longer than that. And we feel that there’s a tremendous amount of capital froth in the industrial space right now, so we’re focusing our efforts on growing our office portfolio. We like to zig one another’s zag. We’re contrarian investors, and we can do that because we can arbitrage time, because we have a balance sheet. So if we can be long-term holders and buy something that’s in distress, we’re a fortunate buyer. Not to mention we’re very nimble in structuring. So if the seller needs some sort of tax-efficient structure or some legal structure that an institutional buyer wouldn’t be able to accommodate, we’re able to do those sorts of things.

For example, there’s a warehouse in the Bronx that we loved, we bid on it… The owner’s problem was he couldn’t monetize the real estate without monetizing his plastic business first. So we made a bid with a private equity fund to buy both the business and the real estate, and do an Opco/Propco separation of the two, so that we can ultimately get to the real estate.

Ash Patel: And you ended up selling the plastics company?

Andrea Himmel: That did not execute that deal.

Break: [00:11:10][00:12:50]

Ash Patel: So you have the money of a hedge fund, but you have the nimbleness of a small company.

Andrea Himmel: We do always partner on deals with equity partners. So while we’ve done a few deals on our own, for example, we paid 25 million for a 120,000 square foot building in Long Island City, the noodle factory in 2017… We focus on really anything within office and industrial. I can get into like how we approached that.

Ash Patel: Let’s do it.

Andrea Himmel: So because I was trained in research at the hedge fund I worked at, we said that in the industrial space, we wanted a macro supply-demand thesis. We said we don’t even know what supply is in industrial. In New York City in 2003, when Mayor Bloomberg was in charge, 200 square blocks were rezoned from industrial to residential. A lot of factories converted to loft/resi or whatever. So supply, we know, was on the decline. Demand was rising, because the reason that the pandemic has accelerated, people want delivered items, and they want them delivered to them more quickly, so warehouses need to be located more central to the urban core, or to their end customer. That’s called last-mile delivery. We saw demand rising, we saw supply falling, and then set out to decide what are our parameters. Any site that’s between two and 20 acres, let’s call that M zone – we want to know about.

It turned out there were 1,500 of them. 500 of them were owned by government agencies from whom we would not be able to buy. 500 were owned by real estate investors, who are too sophisticated for us to buy from. The final third or 500 sites that remain are owner-occupied. Take the plastic frisbee guy, or a packaging company, someone who actually uses their space, recognizes at some point that the real estate is worth more than business, and decides whether they want to monetize on the real estate. We wanted to focus on that stock of folks, because they seem to be the least able to add value from a real estate perspective, and the most willing to transact. We entrenched ourselves in the world of owner-occupied stock. Whether that’s knowing the tool company really well, spending time with the principals who own the building, and understanding the tax issues they may face having owned it for 40 years under a trust, with six kids, or… We can get down into the gritty details and be pretty nimble with them. So that’s our industrial approach.

Ash Patel: Do these principles continue to operate that location?

Andrea Himmel: Yeah, they operate really because their business cash flow is dependent upon their labor, and their labor would quit if they announced that they were looking to sell the real estate or shut down the company; so they would immediately lose cash. What we’ve seen with a bunch of the owners is the fear that they lose their labor, and these are 3% of all warehouses in the US are actually at all robotized, so everything is a lot of labor.

Ash Patel: I don’t understand how that works. Do you buy the building, or do you get an option on it?

Andrea Himmel: You can structure it however you want, but it’s up to the seller. What does the seller want to do? Do they want a lease back for two years, while they figure out where their company can go and relocate? And then you own it free and clear, in which case you’re buying the fee. We’re not interested in the simple sale-leaseback, because that’s kind of like a poor return. We’re really focused on doubling our money on a deal at least, so we work with the owner and solve for whatever their problems are. So if they want something that’s tax-efficient because of low basis, we can say if it’s 100-million-dollar deal, we’ll give you 50 million as an option payment to buy it in 10 years at 100 million, and the 50 million option payment is nontaxable. So we do structures like that.

Ash Patel: Got it, okay. They can continue to operate their business for years to come, but you have the option to buy the building.

Andrea Himmel: Or we buy the building and they lease it back at some below-market rent for a few years while they try to find their new location, or shrink, or sell, or do whatever they’re going to do their business. Then we have been an empty property that we have to lease.

Ash Patel: Got it. With office buildings, what are you seeing today in New York?

Andrea Himmel: Distress on a vacancy level… But wow, is leasing activity up. The vacancy is about 6% higher than normal, it’s about 18%, and the average is about 12%. So we still have a fair amount of available space, and a large amount of that is sub-leased space. But anecdotally, just from within our firm, we just signed a 100,000 square foot lease with NYPD at 525 West 57th Street, a 70,000 square foot lease with NYU downtown at 411 Lafayette, in addition to maybe 13 to 15 leases in Chelsea, Noma, and Flat Iron area. That compares to zero activity last year at this time, so we’re seeing the market really pick up.

Ash Patel: What is MIPD?

Andrea Himmel: NYPD.

Ash Patel: Oh, NYPD. New York Police Department. Got it. Are you buying these at distressed prices?

Andrea Himmel: We only are willing to buy at distressed prices. We don’t value assets based on IRR or some return metric like that. We always measure return on invested capital as a multiple; we’re really basis-buyers who try to make money on the buy.

Ash Patel: You mentioned when you were with the hedge fund in the oil and gas industry, you learned a lot about cash flow. And I was going to ask the question, do you buy value-add properties if you’re so focused on cash flow?

Andrea Himmel: We’re not focused on cash flow. As an investor, I like to invest in companies that are profitable. That’s why I don’t know how to value venture capital from that angle; I don’t know how to value a company that has negative profits, I just don’t. But my perspective – ordinary income, the current yield, we don’t care about that. We can actually forego that if there’s a path to a reasonable yield. And if that means that it’s an unleased property, whether it’s office or industrial, we have the confidence that being a vertically integrated company, we can lease it up. We’re willing to take that risk, because that’s a business we’re in, and we have 40 years of experience doing the management, too.

Ash Patel: Andrea, when did the company go all-in on office?

Andrea Himmel: It’s a great question. I know that we had a property on 125th and I think Lexar Park, and it’s a major –now fully-developed site. But we were there in the ’70s, we’ve been in all the neighborhoods, we’re in Queens as industrial in 1986, and then office at least around 1986 or 1984.

Ash Patel: So in 2020, you suffered a bit of a hit.

Andrea Himmel: Yeah. We saw our buildings, just like the market, really hit 10% occupancy level. We had a lot of blend and extends, or at least conversations. But our arrearages have caught up; we’ve actually extended tenants to our accretion, to our benefit. We have a building that is highly leased to the entertainment industry and nonprofit for entertainment industry tenants, because it’s in Times Square. That building, I’d say, might have had more tenant requests to get rent abatements and such. But we worked with our tenants, we were very generous and we continue to try to be.

Ash Patel: Blend and extend is when you re-up somebody lease for maybe a discount in rent for a period of time.

Andrea Himmel: Yeah, and you just get more term. It’s great if you want to borrow against the asset, because having term allows you to borrow to a greater percentage of the capital stack. We’re conservative when it comes to debt, but it’s hard, for example, to finance month-to-month leases on one extreme, and it’s easy to finance a 50 or 30-year lease on the other.

Ash Patel: Andrea, was your office vacancy caused by defaults? Or was it caused by tenants just not renewing their lease?

Andrea Himmel: There are a few categories. Upon renewal, a few tenants just did not renew. But honestly, we’ve [unintelligible [21:32] spaces. Then there are tenants who tried to get out of their lease and we said no, and we have big security deposits, so they’re kind of stuck in that position. Then there are tenants who agreed to have a conversation and negotiate some form of an amendment to the lease, where we can both be mutually beneficial.

Ash Patel: And with your research background, what research went into your decision to double down on office?

Andrea Himmel: Great question. I think of our firm and what we’re looking at – it is above normal levels of vacancy. We’re in a cycle where we’re somewhere near a low, although there really has yet to be seen some distress. But we’re looking out to office — we could say, if we were really negative, “Wow, I have a building that’s 30% vacant, or 10% vacant, and it has 30% rollover, and five years of leasing risk, because who knows when people come back to work… And I have to carry the building, its taxes, its insurance, and everything else, the mortgage, for five more years… Screw it, I’m just going to Florida.” And that’s what we’re seeing.

I made a database – going back to database making – of private owners who are similar in size to us… Similar or smaller, like between 10 and 20 properties. So it started as a list of 2000 properties and 65 owners that we focused on, and then narrowed it down to a list of 15 owners each with an average of 10 properties or 150 properties. We are focused on certain neighborhoods, and we are focused on certain asset types. We think there’s great re-use potential in the garment district, which is totally distressed, from the life science perspective. We think that certain neighborhoods that are unsexy will emerge again.

Break: [00:23:38][00:26:36]

Ash Patel: Where do you get your data from?

Andrea Himmel: I use a few subscription apps or softwares. Like I use Reonomy, PropertyShark, and Costar. I also look at public tax records; ACRIS, in New York, is what you use. I sometimes follow court litigation to see if there’s a partnership in trouble. I track weekly transactions of properties to say “Oh, hey. Actually, so and so who we thought was never a seller is starting to sell assets. Maybe that’s a good data point.”

I track a lot of indicators. Obviously, the interest rates, the inversion of the 30-year coming below the 20-year a week ago or two weeks ago was a big trigger for me. Then obviously, all these data points we have on inflation… It changes the cap rates we’ll use to underwrite and discount rates to value.

Ash Patel: So with projected inflation on the horizon, you’re not using the norm for cap rates, you’re actually using a higher cap rate?

Andrea Himmel: Yeah. We’re conservative, but not conservative to the point that we’ll price ourselves out of the deal. For example, if something were today to trade on a four cap or let’s say a five cap, I’m talking 6% then; or five and a half percent. Nothing like on an exit, nothing crazy. If there’s an assumption that there should be cap rate compression, for example, the stabilization of the building offset by the growth in it.

Ash Patel: Andrea, you mentioned that you know the garment district is going to come back. Why?

Andrea Himmel: It’s M-zoned, meaning it’s manufacturing zoned. The buildings – not all of them, but some of them are built structurally so robustly, with [unintelligible [00:28:22].17] to HVAC systems, to ceiling heights, that they can accommodate life sciences clusters. New York City was the number one in the country last year for venture capital funding of life science startups.

Ash Patel: What is life science?

Andrea Himmel: Life sciences, anything from biotech to anything working with living organisms, basically. It’s research, its R&D. We have a building, 525 West 57th Street, it’s a life science-oriented building. It has the premier MS researcher, Dr. Sadiq, and he has a vivarium, which is where living organisms are studied, and requires certain very technical features on a lab level. We also have Genzyme LabCorp, and — I forget who it became later on. But we had a 200,000 square foot vacancy in that property, because CBS left after decades of paying very low rents. We leased half of that already to the NYPD, as I mentioned, and then we have another 100,000 to lease, but we think we’re close on leasing that, too.

Ash Patel: Do you just use leasing brokers?

Andrea Himmel: We have an internal leasing team, because we’re vertically integrated with a management company that’s dedicated just to our buildings. But we will always work with outside brokers if someone brings us a tenant. We aspire to integrity in the brokerage community, because I think brokers are the lifeblood of the industry, and are really undervalued and underappreciated. So we make sure that if someone brings us a deal or a contact, that we reciprocate in kind.

Ash Patel: What does your leasing team do that’s creative to try to get these tenants in?

Andrea Himmel: It’s a great question. We’re amenitizing buildings. Our buildings aren’t that large, they’re not million square foot buildings; they’re small, they’re 200,000 square feet, so we don’t have a great deal of space to dedicate as an amenity. The rooftop isn’t that large, or [unintelligible [00:30:27].01] So for us, it’s more about — we foresaw a strong location, a good building, meaning it has good ceiling heights, good light, good air, good infrastructure, and we’ve been proactively investing in its maintenance and capital over the years.

Ash Patel: Andrea, I read an article this morning that said, “Companies that offer a four-day workweek will have a huge competitive advantage in the future.” So all of this pressure to work from home, work less, what is that going to do to office space?

Andrea Himmel: It’s called a six-billion-dollar question with inflation. But we don’t know yet. We can’t quantify, and I’d be arrogant to say I could, the impact that work from home will have long-term on office demand. It will no doubt take away from office demand. However, there are countervailing forces that may cause some net positive effects, such as the de densification of office places. People want corners, they want windows, they want light, they want to be in their own offices; they don’t necessarily want to be sharing spaces or hoteling like some companies are doing, or hot-desking. We’re seeing a lot of it leasing in our portfolio, because our buildings are such that the windows are operable, which is rare, they often can walk to their floor, because these aren’t 80-foot towers, they’re 12 to 15 story buildings. Maybe not in the 15-story are they walking, but for the most part, tenants like these factors. Also, the floor plates are about 15,000 square feet in general for us, so that allows for one to two tenants per floor, which is good from the perspective of the tenant thinking “I don’t know the COVID policies of my neighbor.”

Ash Patel: Yeah. So my opinion is the work from home will not last because of the lack of collaboration, and at some point, lack of productivity.

Andrea Himmel: I’m most productive at my office. We’re closed down right now because we had a COVID case, but it was resolved and everyone else in the company is negative. But it’s amazing to me that… All week I’ve been out and about at conferences and meetings. You have to see people, this is a tangible business. We would never buy a building that we didn’t kick the tires on.

Ash Patel: Yeah. You’re like me, you think at some point, people are returning to the office and the work from home is going to be short-lived.

Andrea Himmel: Certain industries, it will be more work from home. Like, I foresee law, for example, doing that. Although I think it’s really hard for them to find talent, promote, and create upward mobility. Software, maybe they work from home. But the people that we see remaining working from the office actually require more square feet per person than when we included the ones that are now departing from the office.

Ash Patel: So no more cubicle farms.

Andrea Himmel: Correct. I hope.

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

Andrea Himmel: Be over prepared. If it doesn’t work on the back of an envelope, using Excel to go get into the weeds too much is just going to create too much margin for error.

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

Andrea Himmel: I’m ready.

Ash Patel: Let’s do it! What’s the hardest lesson you’ve learned?

Andrea Himmel: It’s a great question. The hardest lesson is, because I worked for my mother and her business partner, in the beginning years, I didn’t push back often. We had so many properties off-market that today are worth multiples of what they were. I knew, from analysis paralysis, as well as good analysis and gut, that these were deals we should have pursued. I should have pushed harder against their opinion. I’m at the point now where they take it more seriously when I have recommendations, and they often manifest in strategies… But at the time, I wish I had the confidence to push back more.

Ash Patel: Andrea, what’s the Best Ever book you recently read?

Andrea Himmel: A New Earth by Eckhart Tolle; it’s similar to A Power of Now.

Ash Patel: What was your big takeaway from that book?

Andrea Himmel: Be present.

Ash Patel: Andrea, what’s the Best Ever way you like to give back?

Andrea Himmel: I serve on the board of directors of Habitat for Humanity, as well as the Manhattan Chamber of Commerce. I mentor a lot of students, I’m a big sister to a little sister for 18 years now. I also support 10 women in Uganda in Sierra Leone through Child Fund, which is a nonprofit. I plan on starting a village savings and loans association. I really think philanthropy, giving is receiving.

Ash Patel: Andrea, how could the Best Ever listeners reach out to you?

Andrea Himmel: You can email me. My email is ahimmel@hmprop.com.

Ash Patel: Awesome. Andrea, thank you so much for sharing your story, with your mom being a pioneer in the ’70s, to you going a couple of different routes and coming back to real estate, and just dominating New York City real estate. It was a pleasure to have you on the show today.

Andrea Himmel: Thank you. It was my honor.

Ash Patel: Best Ever listeners. Thank you for joining us and have a Best Ever day.

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JF2664: 4 Ways Passive Investors Can Find Better Deals First with Judy Brower Fancher

Judy Brower Fancher knows how to find killer deals before anyone else. From staying on top of market trends, to being a wanted repeat-investor, Judy has developed a strategy for getting exclusive access to competitive deals. In this episode, Judy breaks down her methods into four parts so that you can find better deals first as a passive investor.

Judy Brower Fancher Real Estate Background

 

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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 Judy Brower Fancher with us. How are you doing, Judy?

Judy Brower Fancher: I’m doing well. Thank you for having me.

Slocomb Reed: Great to have you here. Judy is the founder of Brower, Miller, and Cole, a private research firm. Her current portfolio includes 20 senior living multifamily, one industrial, one self-storage, and two multifamily properties. She is a passive commercial real estate investor who just sold the assets of her 27-year commercial real estate marketing firm, where she represented more than 100 commercial real estate companies. She’s based in Newport Beach, California, and you can say hi to her on LinkedIn. She is Judith Brower on LinkedIn.

Judy Brower Fancher: Judy Brower Fancher on everything.

Slocomb Reed: Judy Brower Fancher on everything, great. Judy, tell us about yourself. What got you into marketing for real estate firms?

Judy Brower Fancher: Growing up in Southern California, one has pride in where they live. I think a lot of commercial real estate started here. My dad worked for an architectural firm when I was growing up, then he worked for two large landowners, and he was their public relations person. So I went into my dad’s field, but I like to say that he also has three normal children. That’s how I got started. When I decided to start my own company after working for other firms, commercial real estate was truly what I loved. I like to say I love a building when I’ve known it since it was a hole in the ground.

Slocomb Reed: That’s awesome. Tell us about – you were working in marketing and research for 27 years. Did you have a specialty within that for your clients?

Judy Brower Fancher: Specifically on commercial real estate companies, which is how I got my background, which I hope is helpful as an investor to me now. We’ve done everything from television advertising, to public relations, to putting on investor relations meetings for institutional investor companies, to working with syndicators on getting attention from both the opportunity side and from the investor side… So we’ve worked on every product type, think everything. We’ve done land, we’ve done self-storage, industrial office, multifamily, retail – huge. And the company still exists. I did sell the assets to someone I trained for 10 years. So if anybody wants to reach out to find out about that, I’m just sa