JF1706: Transitioning From 100% Passive Real Estate Investing To 100% Active #SkillSetSunday with Lennon Lee
Today we’ll hear a case study from our guest Lennon, about how and why he started as a passive investor, and transitioned into active investing. Lennon actually started out with the intention to be active, but used the passive route to learn the business a little while getting returns on his money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“I wanted to be active but learned the business by being passive” – Lennon Lee
Lennon Lee Real Estate Background:
- Founder of BLD Capital Group
- Has been involved in the acquisition of over 1,500 units of multifamily real estate with an approximate market value of $150 million
- Based in Miami, FL
- Say hi to him at https://www.bldcapitalgroup.com/
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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Lennon Lee.
First off, Best Ever listeners, and Lennon, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment for you called Skillset Sunday. Today’s guest, Lennon, has gone from being 100% passive to 100% active, and he’s gonna talk about how he did that, so that if you choose to take that path, well, you’ve got a roadmap. Hello, Lennon.
Lennon Lee: Hello! How’s it going, man? Thank you for having me on the show. It’s my pleasure… It’s been a couple of years I’ve been on the other side as a Best Ever listener, and now I’m glad to be on this side, sharing some tips and knowledge and lessons learned.
Joe Fairless: Yeah, I’m looking forward to it. I’ve known Lennon for 3-4 years or so, and I consider him a friend of mine. And yeah, you’ve been a listener to this show as well, but then a little bit more about Lennon – he’s the founder of Build Capital Group. He’s been involved in the acquisition of over 1,500 units of multifamily real estate, with an approximate value of 150 million, both as a limited partner, as well as a general partner, in varying degrees. He is based in Miami, Florida.
So you started out as a passive investor 100%, and now you are an active investor 100%. The outcome for our conversation ideally would be for the listeners who are looking to be more active, but are currently passive, to give them some tips along the way, based on lessons you learned from going passive to active. What’s the best way to start out our conversation?
Lennon Lee: Well, I would say that in order to really understand not only the path of going from passive to active in multifamily, but I guess in life in general, if you wanna start a journey, I would have to say start with a goal in mind, and the dissect it, know what actions you need to take along the way, and then try to follow that map, even though it’s gonna change along the way… But if the goal is very defined, I think you’ll get there, one way or the other.
Joe Fairless: When you start out, you had the intention of being active, even though you were a passive investor.
Lennon Lee: Yes. When I started investing as a limited partner/passive investor in multifamily real estate, I did so with an operator that I essentially set out to meet and build a relationship with before I invested… But even before actually investing, I took the time to look at the asset class, understand all the trends and everything related to how it worked and how it was gonna be a good investment for me and my family… And I immediately said, “Well, I not only wanna be a passive investor here, but I wanna start my journey into actually doing the deals myself.” So yes, it was very clear from the beginning that I wanted to end up syndicating and sponsoring a big multifamily deal, and the first step that I took — and obviously there’s no right or wrong, but for me it definitely was the right step to take starting off.
Joe Fairless: And the first deal that you did passively – was that the one that you invested in one of Ashcroft’s deals?
Lennon Lee: Yes, correct.
Joe Fairless: Alright. I wanted to make sure [unintelligible [00:05:08].23] That’s cool, because I can think about it from my perspective when I was talking to you about that deal… So you were wanting to be active, but you wanted to first learn the ropes from a passive standpoint… So what are some things that you learned while investing passively, that you then used to transition into more active investing?
Lennon Lee: Well, initially, the main thing would be understanding how I wanted to be treated as a passive investor, because I knew eventually I would have limited partners or passive investors on the other side, that I would have to build a relationship with, communicate with, and provide education and everything in between… So I wanted to have that experience from that side of the business, of being totally passive; I wanted to understand as an investor first, because I did have some capital that I needed to move, and I decided to move it into multifamily… So I obviously wanted to get good returns, and I wanted to know my numbers, and everything.
So I would have to say that going as a passive investor first allowed me to not only start building a little bit of confidence in the asset class, more so beyond the educational part. I think that was the whole idea I wanted to understand first, before starting to get a little bit more active.
Joe Fairless: Did you choose the asset class and then find the operator, or did you find the operator, and then I was in multifamily, so then you decided “Okay, I’m gonna passively invest there”?
Lennon Lee: I chose the asset class first. I studied the asset class on itself, and I then actually started looking at the different strategies within the asset class, strategies that people use to invest, meaning actively buying a duplex, to syndicating 100, 200 or 300-unit deals. So I chose the asset class, then I started looking at the strategies, and I was trying to find the right fit for me and for my family’s capital, which was the passive investing side. Then I found out about syndication and how we had the opportunity to actually partner out with some proven operators that know the market and have done this, have done that, been successful at this… And I decided to go take that route.
Joe Fairless: So you invested passively in — how many deals did you invest passively in?
Lennon Lee: I invested passively, or as a limited — well, now I can’t say it is passively, but as a limited partner, I invested (I would say) on 90% of the deal that I’ve done, and I’ve done seven deals that I’ve been involved in… And I would definitely say at least six of them I’m a passive or limited partner in.
Joe Fairless: Okay. So you were a passive LP in six of them… And there’s a big difference from passively investing in a deal and learning things along the way, to actually putting an entire deal together and bringing your own investors. It’s an A to Z leap, so help us see how you went from A, B, C, D, E, F, G, H, I, J… All the way to Z. Because those are the two extremes, and a lot of people would love to learn about what you did to get there.
Lennon Lee: Yeah, definitely. The first thing I did was to get a mentor. In my case, it was [unintelligible [00:08:38].12] and in my particular case it was you and your consulting program… But in general I would say that’s a very, very important step to take. A lot of people are afraid to pay for mentorship, and sometimes they don’t believe it’s fair, but I do think there’s a lot of value in it, and it accelerates the learning curve on this business, which is a very sophisticated business, with all the moving parts that are going on… So that helped me.
So again, that intentionality of “Okay, I’m gonna start passive, but I wanna get there as fast as possible, to the other side”, and the step that I took was to actually get a paid mentor that was gonna show me the ropes and that was actually doing what I wanted to do at a higher level… And combined with that, two things. The key to the whole thing is based on the relationship-building, so focus on really building a trust-based relationship, because that focus allowed me to open the doors to actually starting becoming an active investor, joining the general partnership side of these deals, and bringing my investors, and then eventually building more and more partnerships, building a network, ending up choosing last month a 138-unit that we syndicated – that’s me and a couple partners.
Joe Fairless: So let’s dig into the trust-based relationships, because I think from a mentorship standpoint — well, alright, let’s dig into both of those components, but I wanna focus more on the trust-based relationships and learn exactly what you did there… But from a mentorship standpoint, what should people look for in a mentorship program, and what are maybe some things to watch out for?
Lennon Lee: The angle that I wanna tag this, I would say, is a little bit higher level… Because a lot of people have good practical advice on what to look for in a mentor, and that’s “Make sure you do a background check, and then get referrals, or a couple of phone numbers of people that have worked with that person that you wanna potentially work with… And not only talk to them, but then ask them who they know that has worked with this other guy, so take it a little bit further”, and I think this is something that actually — I listen to Tim Ferriss a lot, and it’s something that he recommends, just to take it one or two steps further from that first referral that they gave you, to further your due diligence on the person. Check for their track record, understand their business model in terms of the numbers and the systems they have in place…
All that I think is fair and obviously it’s required – or should be anyway – but at the end of the day I believe that it boils down to trust for the relationship at a little bit more of a personal level that you end up building with that person… Because ultimately, there’s a lot of people out there teaching, or mentoring, or with coaching or consulting programs, that are very well prepared, they have a good track record, they have good systems in place, they differentiate themselves, they may be focused on different aspects of the business a little bit more… But ultimately, they’re all good people or good consultants or coaches. What you wanna do and identify is who you identify with in terms of “Okay, I understand this person has the integrity, and I trust this person more than I trust this other guy”, just because maybe you get along better.
I think that in my particular case that was very important… So that personal touch and personal feel to me was paramount, especially getting started. If you remember, Joe, I’m in Miami, and I actually flew to San Francisco, all the way there to meet with you in person, spend a couple days with you and understand who you were…
Joe Fairless: That’s right! I forgot about that. At Jay Martin’s conference.
Lennon Lee: Yeah, correct. Exactly.
Joe Fairless: Right! I totally forgot about that. Yeah, you did…
Lennon Lee: Yeah. So I look at it that way, and I identify with you as a person first… And then I got into the details, “Okay, let’s see what you guys have done. Show me your track record, how you do deals”, and all that. But only after I actually knew I liked you, and knew you had integrity, and everything else fell into place there.
Joe Fairless: So 100% passive to 100% active, what specific relationships — and I’m not looking for people’s names, but I’m looking for more roles… What roles do you need to fill in order to have the right team in place to be 100% active?
Lennon Lee: First of all, you need to understand what values you can bring to the table. In my particular case, luckily I had — like I said before, I was moving a small portfolio of properties that we had here in Miami, and I started to move the capital (or I had plans to move the capital) into multifamily… So I said, “Well, I have a little bit of capital that I can leverage”, so I built a relationship with local operators in Texas, Ashcroft Capital being one of them, the first one. Then some other partners in San Antonio; in that particular case, for example, they were needing someone to provide earnest money to get the deal to the closing table, or under contract, really… And they were able to offer me a partnership under that structure, where I bought the earnest money, I was helping them basically control the deal, and I actually joined the general partnership with them.
I also started raising capital from my investors network for that deal, and I started marketing the project, and working on all my ongoing investor relations on all those deals.
So there’s different aspects for the deal… Like, if you don’t have the capital, maybe some people come in and say “Well, I have the deal, but I don’t have the experience”, so you can join forces with a more experienced group.
For example, marketing – there’s a lot of groups out there that they’re very good operators, but they may be a little bit lacking in terms of their marketing strategies, not only for their company, but for certain materials, for sending the investments, and the PPM, and all this… I’ve known people that are actually very good at marketing, and design, and all that, and they bring this value to the table and say “Well, if I can get on the partnership side, even if it’s with a small share, I can actually take care of all your investor presentations, to make sure or to try to guarantee that you’re gonna have a better result when it comes to capital raising.”
Joe Fairless: I never thought about that. Thanks for bringing it up. I’ve never thought of a passive investor using their marketing skills to get in on a GP side to help an operator who’s already got some track record, but they need to maybe shift their focus from institutional money to private, high net worth individuals, or they just wanna scale their network. That’s interesting.
Lennon Lee: Yeah, exactly. So I think the key is to really understand at what level the operator or the syndicator that you’re trying to partner with is at in terms of “Okay, do they really need capital? Because I can raise a little bit of capital… But maybe they’re not looking for that.” Maybe they’re an old-school company, they have all the money they need, but they probably need a little bit of help with the marketing aspect. If you do the deal right, you might be able to get a share of the general partnership and get involved through that avenue. So again, there’s different avenues; in my particular case it was raising capital from my network, and providing some earnest money deposits, and all that, for these deals.
Joe Fairless: So you leveraged what you could bring to the table, and then you used that as a way – which was money for earnest money – to then get in the general partnership. But in order to come across that opportunity, you met them through the mentorship program, right? Those guys…
Lennon Lee: Yeah.
Joe Fairless: Okay. So you joined the mentorship program, then you networked and built relationships with people, and then people in that program had a need, you had a way to fill that need, so you got in a deal… So now you’re from 100% passive to — okay, now you’re getting more active; you got in a deal, through selling some properties to bring that earnest money… And also, now that you’re in the deal, you can bring your investors into the deal, because you’re a general partner in the deal, so then you became even more active, because you’re now bringing investors into the deal…
So at this point in time you’re partnering up with a group on a deal… And then how do you make the evolution from being invited into a deal, versus now you’ll want to have the deal yourself, and put all the pieces in place? How did you get to that point, make that jump?
Lennon Lee: Well, it’s all relationship-based, and obviously, as you get more active in the industry, you’re gonna start building relationships and networking with people that are at your same level, and that have similar goals and a similar vision for their company. So if you have the intention, you’re gonna eventually end up finding the right partners.
And the beauty of our business model, if you will, meaning the way we acquire properties via syndication, is that the structure is very flexible. You can do a deal with a few partners, and then the next deal – you can do it with different partners, until you actually maybe find a partner or a group of partners that you wanna stick with for more years… But even then, you always have that flexibility.
In my particular case, I first didn’t have the want of actually being an operator myself, but instead I liked the part of being on the investor relations side and equity raising. So I said, “Well, for now I’m gonna continue to do deals on a somewhat-active…”, meaning that I’m active because I’m raising capital, doing marketing, investor relations and all that, but I’m not talking to brokers, and finding deals, and underwriting myself. So I’m gonna stick to that, because I always look at everything that I do from a passive investor perspective first, because that’s what I am first… So I wanna set out to build what I like to call “a curated network of operating partners”, with whom I could under the same structure and flexibility partner up with on the GP side, and do more deals, and offer my investors the opportunity to actually not get stuck with just me as an operator… When I have my deal – okay, we’ll get it done, but we also have these other partners that we work with.
So the way I ended up actually doing and pursuing a deal and syndicating a deal was by sheer luck. I started talking with a friend out of Dallas, actually… We started talking about marketing, how to put together a thought leadership platform for immigrant investors, or for the millennial-type investors… That was the first conversation. And we actually ended up understanding that we had different skillsets; he was more on the financial and underwriting, and he was very active on building broker relationships and all that, and I was more active on the other aspect of the business… So we understood “Okay, we might have something here.”
We later started talking with our third partner. He was actually one of my first investors on the first deal that I participated in as a general partner.
Joe Fairless: What did you need him for?
Lennon Lee: Well, basically my first partner and I, younger guys, very active and oriented more (me personally) on the marketing side, in that aspects, and my other partner was on the financial side… So we needed someone to bring, first of all, the grey hair to the table, that obviously provided credibility to our team… Because he has a very, very good track record of being involved in businesses and in the corporate world as well. So he brought the balance to the table, and a lot of the processes and systems building knowledge that is very important in our business. So he complemented what we were lacking, and that partnership came to fruition and we were able to start focusing on a particular market that we liked, then we built a broker relationship, built a team, until we found the right deal, and then we were able to get it under contract.
Joe Fairless: So that is how you went from 100% passive to 100% active. Lennon, how can the Best Ever listeners learn more about what you’ve got going on?
Lennon Lee: Well, I’m really active on Instagram. The handle is @themultifamilyinvestor. But I actually also wrote an eBook recently that I would like to share with the audience. If you go to bldcapitalgroup.com, you’re gonna be able to download the free eBook. It’s specifically written more for the passive investor, that’s starting; it’s gonna save them a bunch of learning time. And not only will they get the eBook, but we’re doing actually bi-weekly newsletters that basically take the concepts that we learn in the eBook and we talk about how we’re either applying them on our active deals, but also lessons learned from that. Basically, it peels the lid back on all the concepts that we share in the book. Again, that’s bldcapitalgroup.com/join.
Joe Fairless: Awesome. Well, Lennon, thank you for being on the show, talking to us about the importance of trust-based relationships, as well as getting yourself in a community. So first, knowing what you want; start with the goal in mind, as you said. Then get yourself connected with a community of people who are doing what you wanna do, build trust-based relationships with them, identify what value you can bring to the table, then bring it, and continue to build those relationships and put the pieces in place.
Thank you so much for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.