JF1421: Using Passive Investing To Catapult Into Your Own Large Multifamily Deals with Jimmy Edwards
After being a very successful house flipper, Jimmy decided he wanted to pivot into buy and hold. In order to gain experience, knowledge, and credibility, he decided to be a limited partner on some deals first. With everything learned from that experience, Jimmy and his team were able to start acquiring their own multifamily deals. Hear how he did it, and what he learned along the way. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jimmy Edwards Real Estate Background:
- Owner of High Five Group
- Been in real estate space for 12 years, flipped over 100 houses and in 400 multifamily units – both passively and actively
- Has primarily focused on single-family homes, and is aggressively looking to acquire properties in the multifamily space.
- Say hi to him at www.highfivemultifamily.com
- Based in Dallas, TX
- Best Ever Book: Rich Dad Poor Dad
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Joe Fairless: Best Ever listeners, how are you doing? 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 any of that fluffy stuff. With us today, Jimmy Edwards. How are you doing, Jimmy?
Jimmy Edwards: I’m good, how are you?
Joe Fairless: I’m good as well, nice to have you on the show. A little bit about Jimmy – he is the owner of High Five Group, and has been in real estate for 12 years, flipped over 100 homes, is an investor in 400 multifamily doors, both passively and actively, and he’s based in Dallas, Texas. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jimmy Edwards: Yeah, absolutely. Thanks, Joe. I’ve been in real estate for 12 years, like you said, and I’ve done a little bit of it all. I was a real estate agent, mortgage broker, and about five years ago I’ve started flipping houses, accumulating rentals, and within the past 12 months started to transition into multifamily in order to scale and go bigger, faster.
Joe Fairless: Over the last 12 months you’ve started transitioning to multifamily, but I mentioned in your bio that you’re an investor in 400 doors – has that been only within the last 12 months?
Jimmy Edwards: Yeah, and probably within the last six, actually. So yeah, in the last six months I got into 400 doors. I got into two passive deals, and then bought a 16-unit apartment complex with three other partners, and then about a month later I syndicated a 103-unit project.
Joe Fairless: Wow, that is quick! How did you get up and running so quickly?
Jimmy Edwards: I got a mentor and I got coaches, I joined some programs, and just started networking, and set some goals, and decided that’s the space I wanted to be in. It actually kind of all falls into place once you set your mind to something; I had a friend of a friend call me on a 26-unit deal, and while doing the due diligence on that we met up with some other folks that we’d had previous relationships with, and ended up buying a deal together, and then that just turned into bigger and better things.
Joe Fairless: The 26-unit – is that part of the passive investment?
Jimmy Edwards: It’s not. That was kind of the deal that was the spur of everything. That deal didn’t work out, but it was an off-market deal, the seller was one of my neighbors; he knew I had rental property, and he came to me with that deal. We started underwriting it, and I didn’t know what I was doing, got help, got a coach, and it kind of kick-started everything else. It was a blessing in disguise. It didn’t work out for us, but it opened the door for a whole lot of other opportunity.
Once we had underwritten that deal, that’s when I got into the passive opportunities, knowing that those would look good on my resume, and that sort of thing.
Joe Fairless: Why didn’t the 26-unit work out?
Jimmy Edwards: It was overpriced, basically. It was a good deal. It came to me as an off-market deal; I knew the seller. He’d been getting calls from brokers, so we worked on it, we really tried to make it work… We sent him an LOI, and of course, the same weekend we sent the LOI he got an offer for 200k more… Which I understand. So it wasn’t the right deal, but the timing of it was perfect to get us moving in the right direction.
Joe Fairless: What about that deal allowed you to get moving in the right direction?
Jimmy Edwards: Understanding how to underwrite multifamily. I’ve been flipping houses for five years, and I can look at a wholesale deal or an off-market house in 20 seconds and know if it’s a deal or not. I’ve gotten good at walking into seller appointments and being able to make an offer on the spot… But multifamily was a completely different animal.
I was excited — I’ve got a finance background, and multifamily really excited me. I didn’t know much… I thought I owned a business, but when you get into multifamily and understanding decreasing expenses and increasing the NOI in order to trade the deal, it was just a new concept to me… So I learned about underwriting deals, and the 26-unit was definitely a catalyst to doing so.
Joe Fairless: What have you learned as a passive investor that you’ve applied to the deals that you’re doing as an active investor, if anything?
Jimmy Edwards: Yeah, a lot of stuff. I’ve learned a lot of things over the past six months. The passive deals – it allowed me to underwrite a deal separately, and a lot of the passive opportunities that I see and that I believe in are definitely people-driven. I think the sponsor is one of the most important parts [unintelligible [00:05:32].16] but just having the ability to underwrite a passive deal… I probably underwrote six or seven before I jumped on one, and just being able to kind of watch from the sidelines and being comfortable doing that, and then it adding to your resume, while you’re underwriting deals that you wanna take down (you’re kind of watching from the sidelines), and then having a little bit of stake in the deal and being able to bounce questions off people… It just opens up more conversation, if anything, talking with other passives and other sponsors.
Joe Fairless: Did the passive investments help you with the lender approval on your active deals?
Jimmy Edwards: Absolutely, 100%. That was probably why the 26-unit deal was a blessing in disguise, because we went to lenders and said “Hey, we have this deal” and they said “What does your resume look like?” So far it was “I’m a Texas real estate broker, I own rental properties, I’ve flipped 100 houses”, and none of that really matters. So immediately, the next step was “Let’s turn over some rental properties, do some flips and get into some passive deals.” Being a limited partner in 2-3 deals gives you some street credibility, really; it helps you build your resume and it allows you to get some experience without really having to do a whole bunch of legwork… So I’d say absolutely that was monumental in allowing us to take down our own deal.
Joe Fairless: Why are you transferring to multifamily when you’ve flipped over 100 homes, and I imagine you have that process down pretty good?
Jimmy Edwards: For me, scalability… I guess the natural progression of a real estate investor in my mind is going from single-family into multifamily. The ability to scale, having more of a team in place… And I also think that it’s a little bit more — I hate to use the word “recession-proof”, but I don’t know… Five, seven years ago I had a lot of money in Apple, and Steve Jobs died and my shares cut in half. So I kind of went through the recession as a loan officer and as a lender. Rates were low, and I was refying people that were underwater.
Single-family, especially being here in Texas and Dallas-Fort Worth, the rental portfolio that I’ve built has a lot of trapped equity… And on top of the scalability with the multifamily, I think that for me, I’m just currently pulling my chips off the table, so to speak, in single-family, and redeploying them in multi-family. I think that you have the ability to 10x your money much faster in apartment complexes if you’re buying the right deals, and underwriting them correctly, and being conservative and increasing the NOI, whereas single-family homes – you’re riding the cashflow, but you’re waiting on appreciation most of the time… Even if you’re buying them at a discount, you’re still kind of riding the appreciation wave.
I think the market is still strong for the next couple of years, but one thing I learned, like I said, from that Apple experience, is I doubled my money and I didn’t pull it out when I probably should have, and something happened that was out of my control, and it sucked. So I’m kind of hedging a little bit by taking those chips out and putting them into a vehicle that I think is a little more sustainable in a down economy.
Joe Fairless: You are a lead partner on two deals, right? A 16 and a 103-unit.
Jimmy Edwards: Correct. There’s four partners on the 16-unit deal, and then the same four partners on the 103-unit deal. We did a one million-dollars equity raise, so we have 23 limited partners on that deal.
Joe Fairless: What’s something that’s gone wrong on one of those deals, and what did you do to address it?
Jimmy Edwards: They’re both heavy value-adds, which is coming from a flipper mindset… Heavy value-add seems like more opportunity, obviously… Which is not always the case, but most of the times it can be. Heavy value-add – the 16-unit was probably an F when we got it, and we’re getting it to a C status, so we knew there were gonna be a lot of challenges there. The challenges came, and they’ve passed.
The 103-unit deal was a little bit different. It was also 50% occupied. I was painted a picture that I believe everybody thought to be true.
Joe Fairless: What was that picture?
Jimmy Edwards: The chiller went out last summer. This is in Lubbock, Texas, and the chiller went out, and the owner didn’t get it repaired for 60 days, and caused a lot of people to move out… So we’ve looked at the financials and came up with an offer that we thought made sense. Once we got into due diligence, we kind of realized that that — although that may have been a true story, it was probably just the tip of the iceberg. We began to uncover more and more issues, indications of a distressed property.
Joe Fairless: Like what?
Jimmy Edwards: There were people coming in and turning in their keys while we were doing due diligence… It was really bad. You’re doing due diligence, and all of the tenants are standing there talking to you, and you wanna sit there and listen to them, because they’re giving great information… So they just start telling the story of their experience the past 3-4 years, and there’s been 5 or 6 property management companies, and we’re there on-site and the manager has been there for two weeks and the maintenance, it was his third week, and nobody knows anything… It’s a little bit more deeper than just a chiller being out. So it was just a surprise.
We ended up negotiating close to 500k off the price. There were surprises in due diligence, and the financials weren’t there, and we all got together and said “Hey, we’re still willing to do this deal, but we know that there’s gonna be more surprises after closing, based on our home flipping experience and dealing with distressed sellers.” So we negotiated the price down, got the deal, closed it, and here we are, six weeks into the deal, and the surprises keep coming.
Joe Fairless: Like what?
Jimmy Edwards: The pool hasn’t been opened… When we showed up for take-over two days after closing, there was a cardboard sign on the gate, written with [unintelligible [00:11:31].01] that said “Pool closed because residents can’t follow instructions. If you’re gonna swim…”
Joe Fairless: [laughs] Wait, what did it say? If you’re gonna swim…?
Jimmy Edwards: “If you’re gonna swim, swim at your own risk. Chemicals may not be adjusted, so swim at your own risk of your eyes burning up”, or something ridiculous. A responsible and a responsible property management company – they’re blaming it on the tenants.
So we took the sign down, went and grabbed one from Home Depot, put up a proper Pool Closed and started investing.
In Lubbock, you have to have a permit to have the pool open; the city has got to inspect it. The name on the last permit was three or four names ago, so the property has changed names in the past quite a few years… So we put in a form to get the named changed to the new name, and we did an inspection, and obviously it had been closed for more than just the last several years…
So we start digging into that, and it’s typical of what’s a distressed property and a distressed seller. We made sure that we had enough budget in the cap-ex, and we were able to keep moving forward, but… It’s stuff like that that we couldn’t see in due diligence, but we were lucky that our experience dealing with those types of transactions put up a red flag and said “Hey, you can do this deal, but it needs to trade at a value indicative of what you’re feeling.”
Joe Fairless: The 100+ flips that you’ve done, and you’ve indicated some things that you’ve applied from that experience to multifamily – but can you elaborate more on some things that you learned through those flips that you apply to multifamily?
Jimmy Edwards: Yeah, definitely. There’s a lot of things in the single-family business that I think can be translated. I think a lot of it relationships, understanding situations, listening to what people are saying… And I think a lot of it was trial and error, but just seeing the right indications… The single-family business was great, but you’d go in and you’d buy these houses and feel that you got them at a good discount, and then you start digging into the project and realize why they were so quick to sell sometimes, because there’s a lot of underlying issues that couldn’t be seen on the surface…
I think that helps. I think having a pretty good understanding of the construction management aspects, and walking the property, having been through so many issues, and rehab, going through the rehab process and just being able to walk a property and see the issues… Walking the apartment complex, we were able to just kind of put our eyes on it and [unintelligible [00:14:02].11]
That was the thing with this deal – we did the property tour, and to the eye, it seemed to be in pretty good shape on the exterior. Granted, it was in the winter, so they had the pull winterized, which may have been coincidental timing, but… We walked all 103 units, and they were just in much rougher shape than we had expected.
So I think there’s a lot of overlapping things. I think that people could get into multifamily without single-family experience, but for me, my comfort level is much higher, my confidence level is much higher… And then I think for our limited partners and our passives that invest in our deals, there’s some sort of comfort level there as well, knowing that we’ve been in high-distress situations, so it’s not that different.
Joe Fairless: Based on your experience as a real estate investor, so incorporating your single-family and your multifamily experience, what is your best real estate investing advice ever?
Jimmy Edwards: That’s a good question. I would say probably do your due diligence and make sure that you have a team. If you don’t have the experience, have a partner or a mentor or a coach that can guide you in the right direction.
I think you can save a lot of time and headaches by having good partners and good teammates. Multifamily is definitely a team sport. Single-family – I think you can do it on your own; you can learn from your mistakes, and most of them won’t be life-debilitating, but getting into multifamily I think you’ve gotta have the right team players in order to make solid investments.
Joe Fairless: The 103 units that you are partnering with three other people – four of you total, is that correct?
Jimmy Edwards: Correct.
Joe Fairless: Okay, so you’ve got three other partners on the 16-unit, and then also the same three other partners on the 103 units… How do you structure that on the GP side?
Jimmy Edwards: On the 103-unit it was just an equal split, because we all brought equal pieces to the puzzle…
Joe Fairless: Who brought what? You don’t have to name names, but just what were each person’s role?
Jimmy Edwards: Kind of 50/50, we brought — me and my partner from the single-family business brought kind of the sweat equity component, the day-to-day grind, the boots on the ground… We brought that component, and our other two partners – they have experience in multifamily and they have a really deep resume, and they were able to bring net worth and liquidity… So we kind of put the deal together. We split it up equally. They’re there to guide us and to help us answer any questions, but we’ve been really kind of boots on the ground, day-to-day grind, which was something we’re excited to do, and still are excited to do, and I think that’s what we can continue to bring to the table on other deals, and maybe a few years down the road we’ll be able to be on the other side of the table and help somebody else get into the business.
Joe Fairless: You’re based in Dallas, the property is in Lubbock – that’s about a 4,5-hour drive, so what does day-to-day grind, boots on the ground look like?
Jimmy Edwards: We go up there about every two weeks, but earlier I talked about having the right team, and one of the reasons we felt really comfortable on this deal was having a property management team in place, in the area, with 4-5 other properties, and lease up some value-add projects like this. We really felt good about their presence in the market, and the regional manager… So we communicate with the property management company pretty much on a daily basis.
If we’re able to fly out there — it’s a short flight, it’s an hour… So we fly out there and we go and put our eyes on everything, but the property management company has been monumental in communicating problems and resolving them, and just the day-to-day operations, more so than just getting leases written. They’ve helped a lot with facilitating a lot of the distress that we’re still working through.
Joe Fairless: What do you do there whenever you go every two weeks or so?
Jimmy Edwards: We’ll walk the property… We’re still at this point meeting with constructions teams and landscapers, and we’re implementing a water conservation program, we’re changing all of the lights from the property to LED lights, we’re rebranding it, so it’s getting new signage, and then of course, we have 40-some-odd units that need to be turned, and it wouldn’t be practical to have our maintenance guy and our porter doing that…
So really just going up and checking the status. I think we owe it to our team and owe it to our investors to keep our eyes on it and just make sure that everybody’s on the same page. I feel like it’s been good and it’s been beneficial, and so far it’s been running really smoothly. We feel good about the progress.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Jimmy Edwards: Let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Jimmy Edwards: Best ever book – Rich Dad, Poor Dad. It’s pretty cliché, but I read that book in my senior year of college and it changed my life. Any time I mention it and someone hasn’t heard it, I pull one of many copies out of my bookshelf and give it to them for free. I think it can be life-changing if you’ve never been exposed to that material.
Joe Fairless: This is actually a new question based on a request from the Best Ever listeners… If someone were to do a 103-unit syndication, on the general partnership side, what type of income should they expect to receive from that?
Jimmy Edwards: I think it depends on the deal. Depending on the deal side, you could have 40k/door to 120k/door. So based on the NOI, I think that could really vary. On our particular deal, the sponsorship deal had a 20% override, and then I think it was 1.5% asset management fee… The deal was about a 5 million dollar deal, so…
I think the more deals you can get into, and the more bigger deals that you can do is really where you can start seeing that paying more of your lifestyle, I guess.
Joe Fairless: Best ever deal you’ve done that we haven’t talked about already.
Jimmy Edwards: That’s a tricky one. I don’t know, there’s been a lot of memories… [laughter] That’s a tricky question. My mind first went to the biggest paycheck, but then I stepped back and said–
Joe Fairless: What’s been the biggest paycheck? Let’s do biggest paycheck.
Jimmy Edwards: About 70k on a wholesale deal… So I don’t do a lot of assignments; we’ll close on most of our deals… Because a lot of times we’ll get inheritances, or a family member will still be living in the property… I’ve done quite a few deals where the family member came to me and said “Hey, this is in my name. It was my father’s house, but my brother is still living there. We’re not on speaking terms… You can buy the house for X, but you’ve gotta deal with the brother.” So I said, “Okay…” So we’ll get it under contract and we’ll start talking to them and figure out some sort of situation, and then once we close, we decide if we wanna rehab it or wholesale it. A lot of times, those usually end up being really good candidates for wholesale.
But that particular deal we did like that, everyone was really grateful. We ended up giving the brother some money to move out, and he was satisfied. But I’d say my favorite deal I think I made 500 bucks on, but it was the sweetest little old lady, and she was in a reverse mortgage, it was going into foreclosure, and it was underwater, and couldn’t shortsale it…
It was one of those deals where we stopped the foreclosure two days before auction, and I ended up renting her a U-Haul truck so that she can move out of state to be with a family member. The buyer market was thin, because the margins were small, but we sold it to an institutional buyer. We made a couple bucks, but she was super grateful, and that’s probably my most memorable deal, just being able to help somebody out.
Joe Fairless: Best ever way you like to give back?
Jimmy Edwards: It’s funny you ask that, I was having this conversation last night… For me, in my career, relationships have been important. I feel like I’m a good listener, and I like to talk a lot, that’s not unknown… But bringing other people up and helping other people get there, because I couldn’t have done it by myself, and along the way there was people that were willing to help me, so… That’s really one of the things that I really believe in – helping other people along the way and being a mentor, if you can. I get a lot of satisfaction out of that component.
Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?
Jimmy Edwards: They can go to my website – it’s highfivemultifamily.com. You can e-mail me, call me, I’m on Facebook, LinkedIn, Jimmy Edwards everywhere. I think those links are on the website, too.
Joe Fairless: Awesome. Highfivemultifamily.com, we’ll have that on the show notes page. Jimmy, thanks for being on the show and talking about your career in real estate, how you were in apartments now, what you’ve applied from the 100+ fix and flips that you’ve done to apartment investing, and the benefits of investing passively first to help get credibility with lenders, as well as just being able to underwrite deals and look at deals faster and more effectively, and have some people who have experience to ask questions to along the way, and then now how you structure it with your partners on the general partnership side, and how you make money on the general partnership side… As well as the due diligence, sneaky things that might come up, and the stories that you mentioned along the way.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Jimmy Edwards: Thanks, Joe. It was a pleasure, thanks for having me.