JF1916: How This Investor Grew His Portfolio to over 125,000 Units with Jeff Klotz
Jeff is not only an investor, but also a broker who helps others grow their own portfolio. He struggled in the beginning to grow his business, so he focused on that until he was having some success. Now Jeff shares his knowledge with his clients and with us on today’s episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“If you buy right and you have the right business plan and business strategy, you should be able to survive another 2008 crisis” – Jeff Klotz”
Jeff Klotz Real Estate Background:
- Serial entrepreneur, real estate investor and developer
- Klotz’s investments have included 125,000 apartment units, 42 developments, and numerous other real estate projects
- Founder of over 100 companies
- Based in Jacksonville, FL
- Say hi to him at http://theklotzcompanies.com/
- Best Ever Book: 10X Rule
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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, Jeff Klotz. How are you doing, Jeff?
Jeff Klotz: I’m doing great.
Joe Fairless: Well, I’m glad to hear that, and looking forward to our talk and our conversation. A little bit about Jeff – he’s a serial entrepreneur real estate investor and developer. Klotz investments have included 125,000 apartment units, 42 developments and a bunch of other real estate projects. He’s the founder of over 100 companies; based in Jacksonville, Florida. With that being said, Jeff, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jeff Klotz: Okay. Well, my background is interesting – I started out in real estate, literally straight out of high school. I actually bought my first investment property while still in high school. I fell in love with the multifamily business, and I guess the rest is history. For 24 years we’ve been intimately focused on the multifamily industry, and have built a platform called the Klotz Group, which is basically a group of wholly-owned subsidiaries that provide pretty much everything from concept through completion, along the way of both a multifamily value-add strategy, renovation, rehab, modernization, to a ground-up development strategy.
Like you said, that body of work over the last 24 years has been a little over 125,000 units of multifamily throughout the South-East, and just over 40 projects completely full-circle… And then of course the platform itself provides a whole series of services, including brokerage, property management, mortgage banking, construction, development, investment banking, and a handful of other (what we call) ancillary service providers that have probably racked up transaction volume into the billions.
So it’s been an interesting track record and an interesting 24-year stretch in the industry, and I still love it today as much as I loved it when I joined.
Joe Fairless: So you own companies like a mortgage brokerage within your portfolio? Did I hear that right?
Jeff Klotz: That is correct, yes. We are in the mortgage banking business, which is predominantly a commercial mortgage brokerage; I’d say 90% of that body of work is strictly multifamily.
Joe Fairless: So what made you want to be vertically integrated, versus just being focused on development?
Jeff Klotz: Well, for me, early stage I really struggled to grow. As a teenage entrepreneur, my challenge for business and business growth was probably the same as almost everyone else starting out – access to capital, capital constraints. I think experts will tell you the number one reason why most small businesses fail is a lack of capital… So I certainly battled that. As a kid, it’s hard to access capital. I didn’t grow up rich, I didn’t know any rich folks. I was kind of knocking on doors the hard way.
Early on, I really wanted to perfect my portfolio, and I needed to grow my business, and the best way to grow the business was to produce what I’ll call “ancillary revenue” from all these different services. But I started to become more successful, and then later on I began to really understand capital markets, and started to really solve my access to capital problems, it was almost the exact opposite.
We perfected the platform and really broadened the reach and the scope of all the different platform services to really serve our own needs, because that was the best way we found to control the results and to deliver superior results and returns by really controlling your own destiny. We learned along the way that it was next to impossible to rely on third-parties and get the same type of results if you were relying on yourself.
So long story short, I probably don’t desire to be in all these different businesses, but to some extent it’s a necessary evil.
Joe Fairless: Yeah, I get that. So how many companies do you actively oversee right now?
Jeff Klotz: The Klotz Group has as many as 12 subsidiaries that are in the real estate business. I’ve got some other investments, and we’ve got a family office that focuses on some philanthropic efforts and things like that, but probably for the focus of this call there’s 12 wholly-owned subsidiaries under the Klotz Group umbrella that provide all different types of services, pretty much a soup to nuts or an A-to-Z, or a concept through completion strategy in what we’ll call multifamily real estate investment.
Joe Fairless: And the purpose of those businesses is twofold, it sounds like. One is to help you and your team do your deals, but then also you might as well have other customers and clients outside of your company if you’re gonna have a business anyway. Is that the thought process?
Jeff Klotz: That’s exactly correct. The strategy is really a 50/50 strategy. I think that a healthy business is one where you’ve got diversification. About half of our business comes from what we call captive work, which is our own investments, and then the other half comes from the third-party marketplace. So that does a lot for both the industry and the organization. It allows us to have a lot of different touchpoints to the entire industry, and it really helps us grow the business. We meet a lot of really great people, and can help a lot of really great people…
You kind of hinged on the mortgage banking business – a lot of our clients come to us looking for debt, and for whatever reason they’re staking 75% leverage and we might only be able to get them 70%, because that’s what the deal qualifies for, so they might be 5% short on a deal, and we end up stepping in and becoming their partner, owning a piece of the deal and helping them get it across the finish line… And then of course, by that time they’ve figured out they can leverage a lot of our other services and really add value to the deal.
Joe Fairless: What’s the most and what’s the least profitable of those 12?
Jeff Klotz: Oh, boy… I’d say property management is probably the least profitable… And included in those 12 is the investment subsidiary, which is by far — the gain on sale, or the gain on real estate investments is by far the most profitable.
Joe Fairless: Okay.
Jeff Klotz: Many of those businesses are loss-leaders. They really contribute to the overall investment result. I might make X in the construction business, but I’m creating 10x at the property level because of my efforts on the construction side.
Joe Fairless: Yeah, it makes sense. And I imagine over the years you’ve created a business as a result of [unintelligible [00:07:15].09] loss-leader, but even — it wasn’t something that you wanted to be in the business anymore. So you created one, then shut it down because you thought you needed it, or thought you wanted to be in it, but you didn’t… What’s an example of that? If there is an example of that.
Jeff Klotz: Okay. Well, there’s a couple of times… In 2001 we sold the construction business. We were able to stay out of that for a couple of years. In 2006, if you remember, the market was on fire. You couldn’t help but trip and fall and make money in the real estate business… So we thought we didn’t really need to be in the property management business, so I sold the property management company, only to really be forced back into the business a couple years later by my partners and investors, who said “Look, Jeff, this isn’t working. We’re not seeing the same results or returns from the properties and from the projects like we were when you were running it, so… Get back in the business”, basically. He who has to go makes the rules, right?
Joe Fairless: And with where you see your group of companies headed, do you see a new business coming up that you are gonna be creating, or maybe putting more emphasis in a current area that you have?
Jeff Klotz: Well, our business – we really hit a reset button back in 2015 after building a portfolio of (we’ll call it) C-class housing. We were one of the most active operators and groups focused on (what we’ll call) middle market C-class housing throughout the South-East. We’d built a portfolio close to 40,000 units, and that was the goal; so we accomplished our goal, but we really couldn’t celebrate the accomplishment because it was just a really tough struggle. That’s a tough business to scale, and it’s a really tough portfolio to operate… So we really kind of hit the reset button, spent the next couple years exiting that business, and really focused on a cleaner, more quality body of work. So for us it was testing and proving the concept in a much newer, higher-quality asset class [unintelligible [00:09:00].06] create the same type of results and returns.
Over the last couple of years we spent proving that concept out, so today the real focus is just growing that strategy. So we find ourselves doing a lot more luxury ground-up development today. It’s a different type of development than we’ve done previously. Previously we were just looking to get something built, and it was more workforce housing, and what have you. Today we’re able to develop some of what I’ll call best in class in several different markets.
The strategy today is not necessarily get into new business, but it’s just continue to grow the business both vertically and horizontally, so that we can once again — we were once upon a time the largest residential landlord in about 13-15 cities throughout the South-East, and that’s our goal, to do that again, just with a little different quality of assets.
Joe Fairless: And I’m sure you get this question a lot, but I’m gonna ask it anyway… When a correction takes place, what’s your thought about being in ground-up development luxury?
Jeff Klotz: Well, you’ve probably heard this, and I’m sure every one of your listeners have heard that – you make your money on the buy. That can mean a lot of different things, but it’s kind of an old cliché in real estate. It took me a long time to even really figure out what that meant… But being well-protected by your bases on the way in, so that you have what I’ll call “a lot of screw-up room” or a lot of mistake room, is really one of the founding principles that we operate by. So if you buy right and you have the right business plan and the right business strategy, you should be able to withstand another catastrophic event like in 2008.
Joe Fairless: What’s a quantifiable example of buying right? How do you stress-test that?
Jeff Klotz: Well, I think today this concept of value-add – that’s probably one of the bigger buzzwords in the multifamily industry, and a lot of times it’s a lot more complex than just buying a piece of real estate and raising rents. You’ve really gotta understand the asset, the asset class, the market… And I think you’ve gotta buy right. You’ve gotta buy at — I’ll still call it a discount. I’ll tell you what is not lining up through an internationally-marketed brokerage effort and participating in first, second, third round, best and final, and winning an option – the concept of who pays the most wins, I have always had a hard time understanding that. So almost all of the deals that we do are privately negotiated, they’re off-market, they’re situational acquisitions and they’ve got a good story.
Even in today’s very frothy real estate market, you look at the last 12 acquisitions that we’ve made – they’ve all been what I consider below market value. I think there’s good deals out there, you’ve just gotta really know where to find them and where to look. Our platform, which has many touchpoints to the industry, helps to contribute to putting us at the right place, at the right time, and being able to have access to those deals that otherwise might not be available to us.
Joe Fairless: And just maybe one or two more follow-up questions on this, and then I’d love to learn more about the 40,000 units and the scaling challenges with the C-class housing. A lot of people will say when a correction takes place, class A is gonna get hit first, because they’re the ones who are gonna lose their jobs, so those residents are gonna then go down to class B… So you don’t wanna be in class A. And then the people will also say that ground-up development is riskier because there’s no income that’s being generated until you get out of the construction loan and you’re completely leased up in your long-term financing. What are your thoughts on those two points?
Jeff Klotz: Well, I agree with those two points, to some extent. In fact, that was the thesis of some of our early real estate funds, and that was the pitch. And again, we were focused on C-class… And I think, for the most part, that’s a real concern, right? But we always like to shoot for a much shorter strategy. A long-term strategy – you have a greater chance of getting stuck holding the ball, or whenever the music stops, without a seat… So I think the merits of a project are strong. Again, if you buy or build the project plan with a lot of screw-up room, or mistake room, or whatever you wanna call it, it should pass the stress test for a softening in the market, or what have you.
The bottom line is people will always need a place to eat and sleep and call home… But there’s always gonna be a cyclical nature to our business and almost every other business, so I think you have to be afraid of that. You have to plan for that. When we underwrite a deal, when we go to acquire a deal, when we go to build a deal, there’s always a sense of urgency, and we always plan for the worst, but work for the best. So it’s always a concern of ours, which is one of the reasons why we have a short-term strategy.
We were a large multifamily owner going into 2008 in the recession/downturn/crash, and our strategy then was to really just protect the asset; if we were the best operator, with the best service and the best performance in the market, then we were well-protected… So we were fortunate enough to survive the downturn without losing any assets. In fact, we were quickly able to start a growth process.
I think it’s just a quality operator, with a quality project, in a quality location, with a quality credit risk. So the stronger your residents are, the more protected they are from a recession, and things like that. So I think there’s a whole series of merits that you really have to pay close attention to.
Joe Fairless: Let’s talk about the 40,000 units. What were some specific challenges that you had in scaling and executing on that level of collection of units, with that type of classification of property and resident base?
Jeff Klotz: Well, first of all it wasn’t so much the class of asset, but it was. And what I mean by that is to succeed at C-class multifamily operations – it’s a lot more staff, or manpower, or people-intense. You’ve really gotta check the boxes and dot the i’s and cross the t’s. You need a lot more people to succeed in that effort. We built a team of over 1,000 employees, and we went from 100 to over 1,000 really quick. So just that type of scale was really difficult. We were consistently chasing the growth.
And then to top it all off, the business strategy that we had – we were buying and selling quite quickly… For about five years in a row we were buying over 8,000 units/year on average. So to have that type of portfolio churn, you’re always moving. It’s hard to build a team, it’s hard to build consistency… And then of course, the assets themselves – yes, they’re challenging. They were in rougher neighborhoods… So it’s harder to find good people, it requires more training, it’s harder to find good residents, it requires a lot better screening and tenant evaluation or qualification. Even the municipalities started to neglect those types of neighborhoods, where there’s lower income. So it’s a tougher, longer, harder grind or battle or fight, and you almost had to fight for every bit of success, every good resident, and what have you. So all in all, the entire effort is more difficult.
On a personal level, I really underestimated or probably was naive in how difficult it really is to build and scale a business. I’ve found building a real estate portfolio easy. In fact, growing is easy. But actually building a business around all that growth, and building the right type of team, and the right types of policies and procedures and structure – that was probably the most challenging part of it all.
Joe Fairless: Thank you for that. I appreciate that insight. That’s very, very helpful. And one thing that I’d love to learn more about is if you were to have a 300-unit class C apartment building, in a class C area, and a 300-unit new development – picture whatever you’re building now, that 300 units – how many people would it take to staff each of those?
Jeff Klotz: There’s an old rule of thumb in the industry – 2 per 100. So in theory you’d need 6 people. Three in the office, and three in the field, on the maintenance team. I think that in a C-class operating property… Was the A-class a new build, new construction?
Joe Fairless: Yeah, it’s one you’ve just completed. We’ll just say one you just completed.
Jeff Klotz: I think on the property itself there’s probably only a slight difference in the amount of manpower needed. But we’ll call it the corporate oversight, or the regional/district oversight – you definitely need a whole heck of a lot more oversight on the C-class asset than you do the A-class asset.
Joe Fairless: Got it. Taking a giant step back, based on your experience in the industry – you’ve bought your first place while you were in high school; that is pretty close to a record, I think, from the 1,800 guests I’ve interviewed… What is your best real estate investing advice ever?
Jeff Klotz: Oh, boy… That’s a hard one. I think the real estate business is not a get-rich-quick plan/strategy. All these late-night advertisements for “You too can be rich like me” – it doesn’t work that way. I’ve been doing this for 24 years, and it took a long time to create success. It is a get-rich-slow business, by the way. It’s a lot of hard work, it’s a long late-night grind…It’s difficult, and it’s tough to think that yo can create success as a hobby or a part-time business. It’s a lot like the gym – there’s no shortcuts. Nothing takes the place of hard work and effort if you wanna get in shape. You can try all the latest, fad this or fad that, but you’ve gotta do the work.
I see way too many people enter this business thinking that they can do it part-time, or in-between a day job, or after a day job… And I think if you’re gonna be a passive investor – sure, that works. There’s a whole other topic of how do you make good passive investments; probably the least successful deals I’ve ever done were called passive investments… But I think just preparing somebody for the time it takes to learn the business and what have you – it sounds pretty basic, but that’s where I see most people making a mistake; it’s the inability to really truly commit to the time, effort, energy and hard work it takes to be successful in this business.
Joe Fairless: And over the period of time that you’ve done it.
Jeff Klotz: Right.
Joe Fairless: Yeah, it’s a shiny object for some people, and then they find something else… Whereas put in decades – then you can see some results if you do things consistently that are the right thing, right?
Jeff Klotz: Right. And I think whether we’re talking real estate or we’re talking anything else in business, I think that part of our culture today is that of things happening quickly, and there’s almost a sense of lack of patience, and I can go on and on… But I just really think that you’ve gotta really be realistic with the goals, and the time it takes, and of course the effort it takes. There’s an old saying, “If it were easy, everybody would be doing it”, right?
Joe Fairless: Yup. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Jeff Klotz: I’ll give it my best.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, what’s the best ever book you’ve recently read?
Jeff Klotz: Oh, boy… I’m not a big book reader. There’s an interesting story behind it… But I’ve just recently read some of Grant Cardone’s stuff, and I was amazingly shocked with just how relatable it was, and just how great the content was. That was kind of an interesting experience for me.
Joe Fairless: What’s a deal you’ve lost the most money on?
Jeff Klotz: That would have been a passive investment. Once upon a time, prior to really committing to grow the entire platform vertically and horizontally, I thought I could leverage some other operators and other sponsors. I wasn’t in a good pick of a couple different guys. I had no control, and so therefore the outcomes weren’t that good.
Joe Fairless: And knowing what you know now, if you were to passively invest and you were to interview them again about the opportunity, what are some questions you would ask now that you didn’t ask before?
Jeff Klotz: Well, I’d really wanna understand the track record, their true experience in actually controlling outcomes… There’s a lot of sponsors out there that have worked for other folks, or have been alongside other sponsors, or have been on teams with sponsors, but I really wanna see someone who has a solid track record of doing it themselves, signing on the debt, having real skin in the game, and really a solid commitment to the business.
I think nowadays there’s a lot of folks that think it looks a lot easier than it really is, so I think that might be the tone of what I’m saying here… I’d spent a lot more time getting to know the individual and the organization and understanding what their theories and philosophies and their ideas are for how they operate real estate.
Joe Fairless: What’s the best ever deal you’ve done?
Jeff Klotz: Well, the next deal, right? In this business you’re always as good as your last deal, so we continue to get better and better. I think that really my next deal will be the best deal I’ve ever done.
Joe Fairless: Best ever way you like to give back to the community.
Jeff Klotz: Years ago I’ve formed a family office called the Klotz Family Office. We have three main philanthropic efforts, including a faith-based not-for-profit named Save Your Communities, which is focused on creating and preserving, as well as providing sustainable [unintelligible [00:22:10].08] affordable multifamily housing. That’s a big part of our mission. I also have a Central-American-based foundation called [unintelligible [00:22:16].17] which basically serves the needs of those living in poverty, most likely as a result of natural disaster.
Then we have a third effort, which is basically an entrepreneurial scholarship. So once a year we pick a young individual who I think might possess some real serial entrepreneurial traits, and we try to partner with them and mentor with them, and help them get themselves in the door [unintelligible [00:22:35].20]
Joe Fairless: Best ever way the listeners can learn more about what you’re doing?
Jeff Klotz: Well, they can visit our website, TheKlotzCompanies.com. They can email me at firstname.lastname@example.org.
Joe Fairless: Cool. Well, Jeff, thank you so much for being on the show, talking about your experience, talking about your approach, what your focus is now, and the challenges that you came across on the passive investment, as well as when you achieved the goal of 40,000 units… Not really having time to celebrate, and then reconfiguring the structure of your focus. And what you’re doing now, building the luxury ground-up development.
Thanks for being on the show. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.
Jeff Klotz: Thanks, Joe. I enjoyed it.