JF1962: Finance Major Builds Real Estate Investing Business with Peter Knobloch

January 16, 2020 | Joe Fairless | 00:22:08

JF1962: Finance Major Builds Real Estate Investing Business with Peter Knobloch

Peter joined an investment firm after college, helping them acquire 343 doors and raising $3-4 million to obtain the properties. Now he works on building his own portfolio, with experience in many different assets. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You’ve got to know the numbers, if you’re not good at it, get someone who is” – Peter Knobloch

 

Peter Knobloch Real Estate Background:

  • Third generation real estate investor
  • Experience in many areas of commercial real estate investing, including multifamily, office space, hotels, restaurants, and sporting clubs
  • Based in San Diego, CA
  • Say hi to him at www.pknobloch.com 
  • Best Ever Book: Best Ever Apartment Syndication Book

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. 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, Peter Knobloch. How are you doing, Peter?

Peter Knobloch: I’m doing great. Thanks for having me on your show. I appreciate it.

Joe Fairless: My pleasure, and looking forward to our conversation. A little bit about Peter – he’s a third-generation real estate investor. He’s got an experience in a lot of different areas of commercial real estate including multifamily, office space, hotels, restaurants, and sporting clubs. Based in San Diego, California. With that being said, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Peter Knobloch: Yeah, I’m a New Englander by birth. My parents are both from New York. My dad brought us out here because of the Navy, he was a Navy pilot. I’ve been here in San Diego since I was about four years old, so I could say I was raised here. I really love living here in San Diego, it’s wonderful.

I was very fortunate to marry my high school sweetheart. We have six children, and they’re all absolutely wonderful, and six grandkids. I have an MBA in finance and international business. I started out my career at an investment firm, and the principal asked me to take charge of buying multifamily apartments for syndication. We cater to a high net worth individual; we had a [unintelligible [00:02:28].15] pool of investors. Within about a little over a year, we acquired seven properties at a gross value of about $14 million, 343 doors; we raised somewhere between $3 and $4 million in equity, and I thoroughly enjoyed it.

I did everything, from basically the cradle to the grave – finding the property, all the way to working with our attorneys to do the private placement memorandum and the subscription agreements, and it was a lot of fun.

Then I went into commercial real estate, where I was assistant to the CFO. I worked there for three years, and worked on multimillion-dollar projects. I did cash flow forecasts, investment valuations, business plans… We worked with a lot of international investors, particularly Japanese, at the time, and I thoroughly enjoyed it.

After that period of three years, I went into the serial entrepreneur [phase]. I wrote a lot of business plans, helped raise capital. I did international manufacturing with an Israeli partner. I helped startup companies, I helped start up a high-tech company where we built nuclear portable analyzers, and I was there for six years as a CFO. I’ve helped some companies turn around, and I’ve help companies get ready for sale. And for the last ten years, we had a family business and we’re in the process of selling that. About a year ago or so I decided I was going to get back into real estate, because I really thoroughly enjoy it. It’s a lot of fun. It really suits my personality. [laughs]

Joe Fairless: So what do you focus on now?

Peter Knobloch: In terms of real estate?

Joe Fairless: Yeah.

Peter Knobloch: I’m looking for the value-add, because that’s what I do best. Those are the properties we purchased when I was at the investment firm. We were kind of looking for the cvasi-ugly duckling on the block, the B-, C, C+, if you will, types of properties. I’m not buying anything in California because economically, it just doesn’t make sense. So I’m looking outside of California – Midwest, Arizona, Texas, Tennessee, those areas. And I’ve found some great deals. I made at least three offers in the last 30 days, all of which were rejected, and that’s okay. But you just keep trying. So that’s what I’m focusing on – I’m looking for the value-add opportunity, anything above 30 units, and something that we can go in and do that, as you know, the forced appreciation.

Joe Fairless: What’s the last property you purchased?

Peter Knobloch: Well, that was back in the day. I currently haven’t purchased any property since I just started this year, looking and ramping things up… So I haven’t done anything. I’ve come close, like I said… I put three offers in and came close on one, but it’s a very competitive market out there. But that’s okay, because I look at the real estate market as a multi-story parking garage, in the sense that sometimes during the year it’s gonna be very busy, a lot of people coming in and out, and some years, it’s gonna be slow. But the point is that there’s always people entering and exiting the market, every day. So the key is to continually, consistently look, and keep looking and not give up.

Joe Fairless: I like that analogy. I hadn’t heard that before. Is that an original Peter-ism?

Peter Knobloch: Yes, it is. Because years ago, they’d say “A good deal and real estate comes around every week.” And what I’ve noticed is that frankly, now they’re every other day. There are so many people that are entering, and a lot of people exiting the market, for whatever reason.

Joe Fairless: Let’s talk about some things I mentioned while I was introducing you. I said, based on your bio, that you have experience in a lot of different types of commercial real estate investing, one of them including sporting clubs. Can you elaborate on that?

Peter Knobloch: The gentleman that I worked for in commercial real estate bought a class A building complex. And within the building complex was a gym, if you will, a very high-end gym. And he got the idea that “Why don’t we build some class A sporting clubs attached to office complexes?” And one thing led to another, and he started the concept of freestanding $25 million sporting [unintelligible [00:06:28].01] high, high-end sporting clubs. And at the peak of the business, we had ten high-end sporting clubs, on the West Coast and on the East Coast. So that’s how that idea got started.

Joe Fairless: What is a sporting club, exactly?

Peter Knobloch: It’s like a fitness gym. You know, some of the more popular ones…

Joe Fairless: Yep.

Peter Knobloch: …but they cater to the professional and they’re looking to attract the individuals who are willing to spend a lot of money for an extremely well kept, maintained, full of amenities type sporting club. The amenities in there were sauna, personal trainers, nutritional experts, and class A fitness equipment. It was really quite the luxury gym.

Joe Fairless: And they’re all next to a class A office? Did I hear that correct?

Peter Knobloch: Yeah, they were targeted for those areas.

Joe Fairless: And what happened to those?

Peter Knobloch: Well, during that time, it was the go-go days of real estate, and we were doing investments with a lot of Japanese investors. And towards the end of the third year that I was there, the real estate market started to decline, and the interest in spending $25 million for a sporting club started to decline as well. So they lost interest in that.

The other thing that contributed to it is that we built a $300 million multi-use real estate project here in San Diego. And I was the financial analyst on that project. It started out at a $175 million budget, but it ballooned to $300 million, because the owner of the commercial real estate started to spend more money than the Japanese investors were comfortable with. So he fell out of grace with that, and things spiraled down from there, and so… It kind of went away.

Joe Fairless: But the $175 to $3 million – did that get completed?

Peter Knobloch: Yes. It did get completed. It’s a beautiful project.

Joe Fairless: I bet it is.

Peter Knobloch:  It’s right next to the freeway in San Diego. It looks like a Tuscany village. It has an office; it’s, I think, a ten-story office, with a high-branded hotel; there’s three restaurants on the pad, and of course, the sporting club and the pool. It’s really quite gorgeous.

Joe Fairless: How do you go from 175 to 300?

Peter Knobloch: Change orders. [laughs] You change orders. Seriously, you would go in and look at things and say, “I want to upgrade this, I want to upgrade that”. As an example, he was on a trip to Greece, and he was going through a museum, and he saw a statue and said, “I think that $100,000 statue would look good in the lobby.” If that gives you an idea of–

Joe Fairless: Wow.

Peter Knobloch: Yeah, it just got out of control, so to speak.

Joe Fairless: So it was built as a $300 million facility, so that $100,000 statue is in the lobby currently?

Peter Knobloch: Oh, yes. It is.

Joe Fairless: And you were the chief financial officer. Did I hear that right?

Peter Knobloch: No. I was the senior financial analyst. I worked with the CFO for three years side by side and I did all the number crunching. I did all the underwriting, investment analysis, cash flow forecasts, evaluation, operational, everything.

Joe Fairless: What are some tips you have for developers who are listening or even fix and flippers who are working on a smaller scale, whenever they’re undertaking a development type of project?

Peter Knobloch: Well, the first thing is addressed in your book – which I read and I really enjoyed tremendously, and you did a great job on it – is to qualify the market, make sure the market will sustain what you’re doing. Whether it’s developing, or flipping, or going in and renovating; make sure that you get your money back, so to speak.

But second to that is you’ve got to know the numbers. You’ve got to know them upside, inside, every which way, and you’ve got to feel very, very comfortable. And if you’re not good at it, then by all means, get someone who is.

For example, when I was at the commercial real estate development firm, I was running these numbers and I made a mistake. And it was a $30 million mistake because we’re dealing with a lot of zeros. Now, it didn’t have any impact on anything, but it was very embarrassing, and it could have turned out to be a problem, but fortunately, it didn’t. But the thing is, you’ve got to know the numbers and you’ve got to get really, really good at knowing what the numbers are, what the costs are, and your budget to renovate, what the return is going to be, how long… Everything. It’s really critical.

Joe Fairless: The $30 million mistake, what was it exactly?

Peter Knobloch: It was another multi-use project that we were looking at. We were doing forecasts and evaluations on it. It was just a simple– didn’t double, triple check the numbers, and it just fell in there. Fortunately, one of the guys saw it and said, “Hey, this doesn’t look right.” So I went back and triple-checked, and sure enough. But that’s the way it is.

Over the years I’ve built up a repertoire of saving my spreadsheet every two minutes for a major change, and really taking the time to carefully check analysis. For my real estate investment, I built a spreadsheet a few months ago, and I really, really like it. It does a phenomenal job. But the point being is you can never be complacent with it. You’ve always got to be diligent and double and triple-checking your numbers.

Joe Fairless: When you are building your spreadsheet, what are some aspects of it that you want to make sure it included?

Peter Knobloch: Well, of course, what drives it is the revenue. You can play around with the operating expenses and other components, but really, one of the key components is the revenue. When I looked at a property, I say “What do the rents look right now? I want to know exactly how it sits today and take a picture of it.” And then what I did is I built another spreadsheet within the spreadsheet, if you will, that takes the current rents, plugs in the lease expiration date. And then I have the spreadsheet go out two, three, four years, and I put the months in, and I built in a formula that tracks when the lease expires, and when I can bump that rent up. So I get a real-world timing and magnitude exposure of when I can realistically bump the rents, and what does that revenue look like. And of course, once you get that nailed down, then it affects everything down to the investment return.

A lot of people I see say, “Well, we can go in, we can raise the rents,” and they’ll bump them x percent over a time period. But they never talk about the fact that the leases have different expiration dates on it.

Joe Fairless: Yep. That’s a very important variable, because if a lot of them are on the back end of the year, then you’re missing out on–

Peter Knobloch: A full year.

Joe Fairless: Yeah, exactly. So you have the months that you can plug in on a rolling basis so you can see how the income will be increased in a realistic way, based on the leases. What are some other things that you included?

Peter Knobloch: I take the proforma and use it in the first year. I say, “Okay, what are the operating expenses currently? Are they reasonable?” So I use those in the first year, just to be more realistic in the sense of conservatism, understate revenues, overstate expenses. And then I take averages in terms of operating expenses – what does that look like in terms of per unit? Is it $400 per unit for advertising and marketing? Is it $800 unit make-ready and turnover? Whatever. And then, I plug in what I think I can do in the second year, third year moving forward in terms of the operating expenses.

Of course, I keep a capital reserve, operating reserve, because cash is king… And I plug in the debt and then look over the cashflow as depending upon how the investment structure is in terms of the general partner and the limited partner. And I have some sensitivity analysis where I can do some stress testing – what if the net operating income goes up or down? What if the interest rates go up or down? How does that affect the overall return on the property?

What’s really critical for me is to look at the property as it sits today, but also in the second or third year, when I start implementing the changes, and what do the returns look like, as a project sits, as an investment.

Joe Fairless: I’m sure as an employee in these organizations that you mentioned earlier, you were part of a deal that lost money. If that is the case, what happened with that deal?

Peter Knobloch: Specifically regards to which one?

Joe Fairless: Any of them.

Peter Knobloch: In the terms of the commercial real estate side?

Joe Fairless: Yeah, commercial real estate side.

Peter Knobloch: Well, I’m not sure how to answer that, because I left because I got an offer from another company after the third year, and I imagine that they just walked away from it. That’s what I heard [unintelligible [00:14:53].12] friends that, unfortunately, because of the problems with being over budget, there was no way to recover.

Joe Fairless: Sorry, I was talking about not necessarily that one, the $175 to $300 million one, but just any other deal that you worked on that lost money. Any lessons learned from those deals?

Peter Knobloch: What’s funny is I haven’t worked on a deal that’s lost money. I know that sounds really odd. But as an example, the properties that I bought in the investment firm, because we bought them right the first time – and this is one of the key things about buying any kind of investment, is making money going into the deal. We would buy them below market in many aspects, and we just simply bought them right. We bought them in a very smart way. So I just don’t have any experience in that, in the sense of any bad deals.

Joe Fairless: Well, that’s great. We love to hear that, right?

Peter Knobloch: Yes, yes.

Joe Fairless: When you take a look at your experience working with high net worth individuals at the very first company you worked for, what are some lessons you learned by working with them?

Peter Knobloch: Speak plainly and simply. Sometimes we want to be sophisticated, and we feel that these investors are very smart, because they got where they got because they worked hard and they were very smart. But what’s really critical is just to be very transparent, very open and completely honest, and work hard. And building that trust is the number one important aspect of the entire relationship. You want to do business with people you trust. And when they see that you’re disclosing everything that you possibly can, and you’re answering all of their questions as best as you can, and know that you’re committed to preserving your capital and growing their investment and getting their return on investment, then it gives them a tremendous comfort level, and they’ll want to work with you and continually work with you. So that’s what I observed. They’re great people and they appreciate the honesty.

Joe Fairless: How did you end up working with so many international investors at the commercial real estate firm that you work at on your second job?

Peter Knobloch: The reason why is because we hired a Japanese consultant, because at the time the Japanese banks were very interested in the United States commercial real estate market. We worked with a number of banks like [unintelligible [00:17:18].08], Long-term Credit Bank of Japan, a few of those. And at that time, they were simply investing in it, and they’re offering incredibly low, very favorable interest rates and loan-to-value/loan-to-construction costs, so it was very advantageous.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

Peter Knobloch: Create a vision of what you want to do, put together a plan, write it out, and work on it every day. And don’t give up, don’t give up. Just be consistent and learn from others, find a mentor, but just keep working at it. Your skill level will grow, your experience will grow, your wisdom will grow, and you’ll meet people and opportunities will open up to you… And it will happen, but you’ve gotta stick with it and keep at it.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Peter Knobloch: I am.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:18:15].02] to [00:19:00].00]

Joe Fairless: Best ever book you’ve recently read.

Peter Knobloch: Oh, heavens… I know this is a shameless plug, but I really enjoyed your book. I really did.

Joe Fairless: I’m glad you did.

Peter Knobloch: It was quite good.

Joe Fairless: You’re talking about the syndication book?

Peter Knobloch: Yes. The Best Ever Syndication Book. Excellent book.

Joe Fairless: What’s the best ever way you like to give back to the community?

Peter Knobloch: I have a very unique skillset, and if I can help, in that sense… I’ve been involved as a serial entrepreneur for quite a long time. Just yesterday, I was having a conversation with a gentleman who’s part of a pharmaceutical company and they’re starting up the company and started asking a lot of questions. I was very happy to help answer some of those questions. So if I can help somebody in some way and be a blessing in their life, that’s what I love to do.

Joe Fairless: Best ever deal you’ve participated in.

Peter Knobloch: My wife and I bought a three-bedroom condo about 15 years ago out of foreclosure. We paid $50,000 for it, and it was a mess. You cannot believe how trashed it was. But we saw beyond it, we went in and we purchased it. We put in about $20,000. I went and did 90% of the work myself, because every home that we moved in with my father, we always did construction and remodeling. And then we had a friend come in and do the kitchen, and then a year, a year and a half later, we sold it for $150,000.

Joe Fairless: Best way the Best Ever listeners can learn more about you.

Peter Knobloch: I’m building a website. I formed a holding LLC which we’re gonna use to acquire the properties, but the website I have right now is at pknobloch.com. It gives you some background on what I’ve done, and what I do.

Joe Fairless: Peter, thank you so much for being on the show, talking about your experience in real estate, what you’re focused on now, the $175 to $300 million development that didn’t go according to plan, and we talked about the reasons why.

And also the spreadsheet that you created, putting months in there that reflect when the leases expire, so you can actually see what timeframe exactly that you’re gonna be able to get the rent premiums in. Thanks for being on the show.

Oh, by the way, does that take into account the time it takes you to renovate those units? So it might expire on the 21st of September, but you might not actually get the premium until October the 15th…?

Peter Knobloch: Yes, it does. It does take into consideration that. Thanks for bringing that up.

Joe Fairless: Well, very cool, Peter. I hope you have the best ever day. Talk to you again soon.

Peter Knobloch: Thank you again, Joe. I really appreciate having me on. Thank you.

 

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