JF1118: Helping Out-of-Country Investors Grow a Real Estate Portfolio in America #SkillSetSunday with John Carney
John always wanted to be a real estate developer. He succeeded in that goal, and now he also helps Australians invest in the USA and grow real estate portfolios. He has a lot of great advice in many area of real estate to share with us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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John Carney Real Estate Background:
-Real estate entrepreneur, author and speaker
-Founded America Property Source in Melbourne, Australia to enable Aussie investors grow USA real estate portfolios
-Wrote the book Real Estate Is A Team Sport. The 9 Players You Need To Profit.
-Host of the Real Estate Locker Room
-Based in Cleveland, Ohio
-Say hi to him at johncarneyonline.com
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into that fluffy stuff. With us today, John Carney. How are you doing, my friend?
John Carney: I’m doing great, Joe. Thanks for having me back on your show.
Joe Fairless: My pleasure. Best Ever listeners, John is a returning guest, so you can go search his name at BestEverShow.com and you’ll hear his episode where he gave his best ever advice. Because today is Sunday, we’ve got a special segment called Skillset Sunday where we’re gonna talk about a specific skill; that way, by the end of the conversation, Best Ever listeners, you will be able to implement the skill or perhaps hone a current skill that you have, and that is how to build the right team.
John has gone from a five million dollar project to a 23 million dollar project, and his team building along the way has gotten him to that point.
A little bit more about John – he is a real estate entrepreneur, author and speaker. He founded America Property Source in Melbourne, Australia, to enable Aussie investors to grow US real estate portfolios. He wrote the book “Real Estate Is A Team Sport. The 9 Players You Need To Profit”, so clearly there’s a theme here. Now he’s based in Cleveland, Ohio, and he’s the host of Real Estate Locker Room.
Before we dive into building the team, John – or maybe you can naturally segue, because I know you are a smooth operator – do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
John Carney: Sure, that was a great segue into it. I was living in “Melbourne” is how they would say it…
Joe Fairless: Did I mispronounce it? Is it Melbourne [Melbehn]?
John Carney: They say Melbourne [Melbin], like throwing it in the bin… But anyways, I might start speaking in Australian and I have to correct myself when I get into real estate vocabulary. But anyway, this is a love story. A lady brought me over to Australia in 2009 due to the economic differences between Australia and America at that time – strong currency, high property. I saw an opportunity to put what I’d learned in my real estate investing career to date to use, and I started enabling Australian property investors to invest in the United States and increase their cashflow, and it was all about safety and minimizing risk.
What I learned from that, really briefly, was that you have to have the right team; we put a lot of time and effort into making sure we have the best operators possible for every step along the way, and I also learned that just because we provide someone with a great team and a great property in a good location, it comes down to operation. So our real estate investors really do have to build the relationships with their team players and keep those active, and be an active participant in your investments, whether it’s one single-family home or a hundred, it doesn’t matter; each one is a business, and we really promote having investors understand that the team comes first and the property comes second.
Joe Fairless: Okay, I like it. So let’s talk about how you’ve built the team, so that the Best Ever listeners can implement some of the tactics that you’ve implemented in your business. I mentioned earlier the five million and 23 million dollar project – let’s talk about that, maybe talking about what those projects are and how you scaled your team, that way we’re using a real example.
John Carney: Sure. When I was in Australia I was out on my own. I met some people, I had my wife’s network and built a small business team, but my long-term goal was always to be in real estate development, and I tapped into those relationships three or four years down the line and asked for help. I wanted to be a property developer, and I started with something small and manageable, which was finding a lot that we could subdivide and build two new houses on.
The key players on that team were my business partner and my mentor in Australia, Brad, who was a large scale developer in Melbourne. He had a finance company, he had a real estate company… He was a great operator, and I learned a lot. The other component was having a builder; we brought a builder into the partnership, a custom home builder that could design, build and manage these projects.
Joe Fairless: And what was your role?
John Carney: My role was the developer. I was the person that put this together; I found the sites, I negotiated the purchase and sourced the team. With the help of the builder we vetted, for example, what company was gonna sell the property.
Joe Fairless: So you shared the role with your mentor, who was a large-scale developer.
John Carney: I like to look at it — he was a sounding board, that if I had a question and before I made a decision that would impact this partnership, if I had a question, he was on hand to answer that and give me guidance. So at the end of the day, it was running that, from the accountants, to contracts, to lawyers… I did pretty much everything.
Joe Fairless: Had you done any development previously?
John Carney: Not on my own, no.
Joe Fairless: Okay, not on your own. And what did you develop in this example?
John Carney: We found a vacant lot and we subdivided that and built two single-family homes. A gross sale price was about 1.1 million on this deal, and we got out with an acceptable margin. But right after we had made a deal on that lot, we had found another opportunity that we ended up getting in a bidding war. It was a quarter-acre block on a corner, and it was a $980,000 acquisition, and that was the project that we ended up selling for just under three million dollars to another developer because I was already in motion to move back to Australia. But had we continued the buildout, it would have been close to a six million dollar total project.
Joe Fairless: How much did you have to put into it, if anything, to sell it to the other developer for a little under three million?
John Carney: We had a lot of money into it, with all the planning and engineering.
Joe Fairless: How much?
John Carney: You know, if you take a 20% deposit, we probably each had over $100,000 of our own cash in there. So I was using my own cash; I was leveraging assets in the United States on a HELOC, and loaning myself money. Obviously, having your own skin in the game makes you pay attention to every penny spent.
Joe Fairless: But you sold it to a developer for a little over under three million – how much in total did the project have in it when you sold it for a little under three million/
John Carney: I don’t have that right at the tip of my tongue.
Joe Fairless: Roughly…
John Carney: We got out of this with pocket change.
Joe Fairless: Okay, so you basically broke even.
John Carney: We broke even. We got our money back and we broke even. The reason why we decided as a partnership that this needed to be solved — so we did all the development: we did all the subdivision, we did all the engineering, we got the plans approved of council… We had a shovel-ready site. The reason that we decided to sell that to someone who could just basically come in with our drawings and our plans, whole permits and build it — so we basically sold it to an engineering company/builder/developer because I was moving back to the US and I was the driving force behind this partnership, so there was no project manager taking care of the whole big picture with my absence.
Joe Fairless: What did your partner say about you moving back, knowing that they’ve spent all this time on the project, but they’re basically breaking even because you have to move back to the United States?
John Carney: Well, we’d exited our first deal together just ahead of the second deal… We were behind on some timeframes – that was true, and then that was, without getting into it, a long story… I won’t say we weren’t all getting along, but it would have been —
Joe Fairless: It was time to break up?
John Carney: It was in everybody’s best interest, without the team leader there, that this just wasn’t gonna fall [unintelligible [00:09:05].03]
Joe Fairless: Makes sense.
John Carney: Nobody lost money, that’s the number one key in my opinion. And when I say we made pocket change, that’s subjective, Joe. It wasn’t horrible, but it wasn’t what we projected. But when you’re in a real estate deal and there’s a lot of moving parts and you’re managing two deals like this, and it’s all new, it really was the team player. Take me out of the equation; I got a lot of help from our accountant, we got a lot of help from our lawyer… There was a lot of different sounding boards, and at the end of the day, when you’ve got a difference in personalities, skillsets and expectations in something that’s complex like this, when a lot of real money is on the line, and your capital is on the line – that was a collective decision.
We talked about that well in advance of the move; I was very upfront when the opportunity that was gonna bring me back to Cleveland came up. I notified my partners that this is what I was doing, and it wasn’t’ taken as something that was bad; there’s always an opportunity to work with people again in the future, and we left that open.
Joe Fairless: Cool, alright. Now the 5 million to 23 million dollar project – I think you’ve set the state perfectly to talk about that now.
John Carney: Sure. The project that my father and his business partners are working on in downtown Cleveland is in Public Square, and it’s setting the stage, because three years down the track we still don’t have a contract. So the project that I moved over here a year ago is still in limbo, but other opportunities have come and gone.
The deal that I’m talking about right now is a class A waterfront asset in Cleveland. It’s 160 units, with an opportunity of value-add to build another 29; that’s why we’re attracted to it. The landmark companies, which is the downtown development and property management company that my father, John Carney, and his partner, Bob Reines, started in the ’90s – that’s their niche in the market. They develop and manage historic buildings in Cleveland and Indianapolis, and then they manage that. These are complex — that’s what the Public Square building will eventually turn out to. We’re always positive that that’s a different story.
This building came to us in September. We looked at it, it was on the market, and we were working with investment bankers; they’re a big component of the team, which is new to us, on the capital stack. But we went through our due diligence, we made our bid and it wasn’t accepted… Just after the new year’s. So let’s go back to January – we’re mid-April right now – this building was back on the market and the broker called us because we were in the second position. So we made some decisions, we got the team back together – at least the big decision-makers – and we went back in with a new offer. It was slightly different based on conditions in the financial market at that time.
Joe Fairless: Was it higher?
John Carney: Well, interest rates were slightly higher, so we came in a little bit lower. That’s the condition I’m talking about. So here we are – this was the learning curve for me, because this was my first time involved in a project of this size.
Joe Fairless: And is this the 5 million or the 23 million?
John Carney: 23 million.
Joe Fairless: Which one was the 5 million? The one you described earlier, in Australia?
John Carney: Correct.
Joe Fairless: Okay, I’m with you. Cool.
John Carney: Yeah, so now we’re over in the States; the project I moved over here for is still not happening, but we’re working towards that. And by the way, we’re about to take over in the year three of working towards a deal on this. We’ve got this class A asset on the lakefront just East of downtown Cleveland, and it’s ticking a lot of boxes.
Just to get from “Yeah, we’re gonna take it. You don’t have to go back on the market. Here’s our offer” to getting to a PSA (purchase and sales agreement) – that took the better part of five weeks. Then we got into our due diligence period and we’ve had to ask for an extension, so there’s a lot of action happening this week, because the pointing end of the negotiation is happening today, tomorrow, and decisions have to be made by Friday.
In a perfect world, we’ll end up owning this property, but we’re prepared to walk away. The important part is the team… To circle back to that, if you take the numbers out of the equation, I’m working with people who are very familiar with these numbers, and to some degree they consider these small numbers. So we’re learning about different ways of financing with private debt and private equity to cover the gap, to stretch investors – you can call it what you want.
Basically, I’ve been astute of this project since September. I have my limited experience that I can bring to the table, but making sure that we have the right team members, from the accountants, to the lawyers, to the insurance agents, to the property management, to the builders, to the people that are doing the inspection that needs assessment – it’s all a critical part about making a good decision. So there’s not one decision being made lightly or that isn’t on an e-mail that’s copied in to every team member. And because we’re at the pointing end of this transaction right now, the sink or swim part, there’s daily phone calls with multiple team members, and everybody’s opinion is taken on board.
Joe Fairless: On those daily phone calls – who’s on those calls and what are the roles? You mentioned some team members, but I know not all those team members, like insurance agents etc. are on those calls, so who are the main players?
John Carney: We have the representatives from our property management company, which most of the time is my brother, who works hand-in-hand with our director of operations, because they know what it will cost us based on current leases to operate this building. They’ve been doing this for 20 years, they know what it costs to operate this type of asset in this market. So those numbers are fixed.
We have our builder, who will be doing the new unit buildout and who will be fixing up the immediate needs on this building… And there are some – there’s some deferred maintenance that wasn’t in the budget for the current owner. That’s not their business model, by the way.
So we have to make sure that this isn’t a class C asset, this isn’t something where you can fix things on the cheap. It has to be done right. We’ve got a 20-year-old roof; it’s a brick building, a 1920-built building. It’s a fortress, but it’s got brickwork and deferred [unintelligible [00:15:15].23]
Joe Fairless: If it’s a 1920 building what about it is class A?
John Carney: The interior fit out is class A, the tenants are class A, the amenities are class A, the views are class A, and the price point is class A. Back in the day, this was where the cargo ships would bring cars in from Detroit, along the Great Lakes; they would pull up here. It was a concrete-floored bunker house to receive cars… So it’s neat when you see those photos.
A little less than 20 years ago it went through a historic renovation, and we would potentially represent the third owner since then.
Joe Fairless: So on the daily phone calls you’ve got your brother, who represents the property management company, the builder who’s gonna do the building of the new unit, the 29 additional units, plus fix up the 160 units with whatever they need. Anyone else on those daily calls?
John Carney: We generally have my father, who’s running the partnership side of things, and his partner, who he’s worked hand-in-hand with his whole life. They started out as attorneys together, and then they went into real estate development… So a 40-year relationship working together. They work well together, it’s a good team, and a proven team. They represent the ownership and the majority shareholders in this building.
Then we have our investment banker group – the money people. We’re representing two different types of money here – the first three-year loan is a private loan. Then we don’t have enough of a down payment to cover their criteria, which I believe is 85%… When this went out to the market, the private money wanted to put more money in. Maybe you can explain that to your audience better than I can… So we had to come up with a group to fill the debt. So one of the investment bankers is generally working with the big money lender, and the second is the smaller equity partner. And the company that we’re working with, they also happen to have a real estate division that owns 9,000 doors.
Joe Fairless: The company that is providing the equity, or debt, or…?
John Carney: No, the investment bankers.
Joe Fairless: Right. The investment bankers have 9,000 doors?
John Carney: Yeah, they have a real estate division, and their director and his partners structure deals, and they generally buy class C assets where they can make improvements and raise rents. So this is a little bit new to them too, because they’re tweaking their models and their capital stacks slightly differently. So when you look at my role in this, I’ll say I’m a student and I understand who all the team players are, but like I said, this is at the tip of everyone’s radar right now… So anyone can be on a call within 30 minutes with a text message or an e-mail.
So that is right now the team we’re working with – our in-house property management, and right now we’re just trying to make where we are now and the negotiations work. Does that make sense?
Joe Fairless: It makes a lot of sense, and I’m glad that you talked us through that… Basically, you’ve just outlined the key team members for a 23 million dollar development, a mix — I don’t know what you call it, but it’s an established property plus development opportunity (additional development opportunity). That’s something that’s useful for everyone to know… Especially you didn’t just outline the people, but you outlined the responsibilities as well.
Where can the Best Ever listeners get in touch with you?
John Carney: The Best Ever listeners can find me at my website, which is JohnCarneyOnline.com, or shoot an e-mail directly to me at John@JohnCarneyOnline.com. I’m on Facebook and Twitter, and I have a new podcast out – The Real Estate Locker Room Show with John Carney, which is on iTunes and Stitcher. I’m still learning the podcasting game, but it’s a great way to learn more about the craft of being a real estate professional.
Joe Fairless: Some of the takeaways I got from our conversation on the Australia stuff – know when to exit, know when it’s time to break up the team that you’ve established and focus on other opportunities that are of interest… And the Cleveland deal – as you said, it’s been a three-year work in progress. We have a 30-minute or so podcast episode and people talk about their experiences, so frequently it can be assumed that it all happened very quickly, but when we actually dig in deep to timelines, you’ve been working on this one project [unintelligible [00:19:50].20] for three years, and… It takes time, in some cases, especially development deals.
But on this other one, the 23 million dollar project, you all put a bid in, it didn’t get accepted, and then they come back to you later and you lower the price – because of interest rates, that’s what your reason was, but I’m sure there is a little bit more meat on the bone for you all, as a result of them coming back to you… And then the team members that you have on these daily calls for the 23 million dollar project – that is 160 units plus the opportunity to build 29 additional ones – and that is a representative from the property management company, the builder, your dad and his business partner, and the people who are supplying the debt and the equity, which are the investment banker group, and yourself.
Thanks so much for being on the show, John. I hope you have a best ever weekend, and we’ll talk to you soon.
John Carney: Alright, thanks for having me, Joe, and I look forward to tuning in and learning more from your podcast, too.