JF2665: Tricks of the Trade: Financing, Enticing Investors, and an Indefinite Hold with James Knull
When James Knull first started in real estate, he leveraged his youth by asking experienced investors to critique his business plans. Most people provided him with a lot of feedback, but a few were intrigued by his plans and asked to join him. Flash forward a few years and now James is the founder of his own realty group and a multifamily investor. In this episode, James walks us through how he went from single-family homes to starting his own realty group while investing in commercial real estate.
James Knull Real Estate Background
- Full-time career: Founder of Mogul Realty Group
- Portfolio: 300 rental units
- Organizes and hosts Mogul Mastermind, one of the most popular Real Estate Investing meetup groups in Western Canada.
- Based in Edmonton, Alberta, Canada
- Say hi to him at: email@example.com
- Best Ever Book: Traction: Get a Grip on Your Business by Gino Wickman
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Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, James Knull. James is joining us from Edmonton, Alberta, Canada. He’s the founder of Mogul Realty Group and has over 300 units. James also organizes and hosts a popular investing meetup in Canada. James, thank you for joining us. How are you today?
James Knull: Hey, I’m fantastic, Ash. Thank you so much for having me. It’s a pleasure to be on the show.
Ash Patel: The pleasure is ours. Before we get started, James, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?
James Knull: Yeah, absolutely. I started buying and selling properties just as I was graduating from university. I started with single-family homes, had a really successful initial run at that, and decided to get my real estate license. From there, I was a realtor, grew my real estate practice, hired people and grew a team of real estate agents, and upgraded my portfolio to commercial assets as well. I buy a lot of commercial multifamily. Nowadays in the real estate realm, we’ve got about 25 realtors across Western Canada that are a part of our team, mostly focused on investors. We do everything from selling people single-family income properties, to commercial, to project marketing for condo developments.
On the investor side, I’m choosy. I’m not aggressively acquiring properties, but I see cool deals all the time. My most recent acquisition was a 24-unit building in Edmonton, close to where the metro line is under construction right now. We felt that was a really great location. The building itself had a very, very large lot, with some additional land that could be used for a site for future development, to maybe add an additional building to the property. It all just made sense and that’s what we were targeting.
Ash Patel: James, how many years ago was it that you started this real estate business?
James Knull: I bought my first house in 2006, just as I was graduating.
Ash Patel: How many years has it been since you started the realty firm?
James Knull: I’ve been a licensed realtor since 2007. I started the actual firm, the greater company now, at the beginning of 2017.
Ash Patel: And you’ve got 25 realtors, and they focus on investors. Why focus on investors?
James Knull: That’s just always been our background. I love the real estate investing world. I’m an investor myself. As a result, it was a natural progression to attract investor-oriented clients. It was a conversation that I loved having with people. As we scaled, I wanted to work with people who had that area of focus, because that’s just always been our clientele, based on my love of real estate or personal interest, and just looking at deals, analyzing properties, and helping advise people on what to add to their own portfolios.
Ash Patel: That’s the advice that I give a lot of realtors, focus on the investment community, because you’re dealing with people like us, versus first-time homebuyers. I can imagine my wife and me trying to buy a house and arguing in front of the realtor. That’s not what you want to deal with. You want to deal with professionals, smoother transactions.
James Knull: Yeah. The nice thing about professional investors is they also are in the process of curating a portfolio, so there’s more transactional volume to do with an investor, as they buy more property, sell more properties. You get to build deeper relationships with clients who do business more often, which again, is another perk of it. You get to really know your clients instead of selling somebody one house every six or seven years. We have a lot of clients who buy six or seven houses every single year.
Ash Patel: Yeah, that’s a great point. What percentage of your time goes into the real estate business, versus the realty business?
James Knull: I would say probably about 80% of my time is into the realty business. I’m a big believer in hiring quality property management, so the actual day-to-day management of and focus on managing our tenants – that’s not really my responsibility. I more have a monthly check-in with our property managers to see how the properties at large are performing. Then depending on the property, I’ll either pop by once a quarter or once every six months, just to have a quick peek at it with my own eyes to make sure everything is in order. Other than that, the day-to-day is delegated, which frees up my time to focus on growing the realty business.
When there’s a live deal right in front of me, that gets really time-consuming. All of a sudden, 80% of my time is spent on due diligence, raising capital if necessary, architecting the deal, working towards closing, getting it set up, building the business plan, etc. But that’s very deal-specific. The rest of the time, it’s mostly managed for me.
Ash Patel: James, how did you find the 24-unit building?
James Knull: That one was one of my colleagues, who is a commercial mortgage broker, happened to know that the vendor was thinking about refinancing or was open to sale, and just happen to say, “Hey.” I make sure I share with everybody who’s in the industry what my general criteria are, and remind them — just friendly reminders once in a while, “Hey, if you see something in this area, I’d be interested.” Sure enough, something in my target area came up, and they thought of me, made the introduction, and the deal just kind of moved from there.
Ash Patel: When you say vendor, who does that refer to?
James Knull: The person selling the building.
Ash Patel: Okay, got it. Did you end up raising money for this property?
James Knull: Yeah, we ended up raising a million dollars to buy this one.
Ash Patel: And what was the purchase price of the property?
James Knull: Three and a half million dollars, give or take, a little bit.
Ash Patel: So roughly 25%. Did you have some CapEx built-in as well?
James Knull: Yeah. There were closing costs, contingency funds, a couple of suits needed a refresh… So yeah, there was more than just the down payment, that million dollars.
Ash Patel: What’s the game plan for this unit?
James Knull: Right now, we plan on just renting it and letting it sit stable. It’s a fairly stabilized building. We’re really being patient about the value of the land and the use of the land kind of catching up and growing, because of the new metro line. This particular building is about a 500-yard walk from the metro line. It’s very, very convenient access for people that live in the building to now have access to the rest of the city by way of the train. That infrastructure is just going to drive density and value to the surrounding area. We’ve got a great building, with a lot of land that we can add density to. At some point, it’s going to make sense to either tear the building down and build something really big, or potentially just add a second building to the piece of land in the open lot space that’s part of the property.
Ash Patel: So you have to practice some patience if it’s going to be a teardown. You can’t over-improve the units.
James Knull: Exactly. And the units are in fine shape. They’re middle-level units; they’re not fancy, they’re not luxurious, it’s not a particularly new building. But it’s by no means in rough shape, or anything close to a teardown. The units, on turnover — cleaning carpets, replacing flooring, mending broken things from wear and tear, repainting, that sort of thing will be necessary to keep them in good shape, to attract quality tenants. But in terms of a full overhaul, that’s not really the game plan.
Ash Patel: On the topic of patience, how many years do you plan on holding this asset?
James Knull: I would say indefinitely. We may improve the asset by tearing down and building another building, or adding another building to the lot. But it’s in such a great location that it’s really well situated to be a holding property. The value that will get added will be market appreciation, as well as us building onto the property in one way or another. But even if we tear it down and build a brand-new building, it’ll still make a great holding property, just by virtue of it being in such a great location.
Ash Patel: How do you relay that’s your investors? An indefinite hold.
James Knull: With our investors, in our unanimous shareholders agreement, we break the investment down into five-year terms. At every five-year milestone, each investor has an opportunity to exit. Over time, we’ll probably amalgamate, where an investor will want to exit, so maybe another partner or ourselves will purchase out their shares in the building at whatever the present market value is, and slowly and steadily over time, whoever does want to just have it as a portfolio piece, will stick around, and whoever wants an exit will get an exit.
Ash Patel: That’s a great opportunity. Will you have to get the property appraised every five years?
James Knull: Yeah, that’ll be a part of it if someone wants to exit. If nobody wants to exit, then there’s no need. But we also kind of set those expectations when we’re chatting with people, saying, “Hey, you know what? We know life can change and priorities can change, so we want to make sure everybody has an exit opportunity that’s in writing, in the contract, understood, and agreed upon, every five years. But our intention is to just hold this thing and have it build our net worth in the background, so have a mindset of not being in a rush to dispose of this asset, because it is a really, really good asset to keep in the portfolio.” But again, if people want to exit, we’re happy to let them exit, and have a plan on how to do that.
Ash Patel: That’s a great thing to have in that deal, giving the investors the opportunity to exit if they need to. What’s the return to investors? Projected.
James Knull: The cap rate on the building was about five and a half percent, which is about on par for the area, and then the mortgage that we got was a CIC-insured mortgage, so with interest rates being as low as they are, we got a 1.4% interest. So in terms of principal reduction, we have a 20-year amortization, and with the interest rate being as low as it is, our monthly payment is actually more principal than interest, which is great. So it cash flows quite nicely, the principal paydown is pretty aggressive… And we didn’t really factor equity appreciation in, because that you’re predicting and speculating. So if the market goes up, great; if it doesn’t, great as well. But from just cash flow and mortgage pay down, we’re in for the investors a 15% to 16% range. And then real estate tends to go up in value, that’s what real estate markets do… So we’ve got a pessimistic realistic and optimistic projection for our investors on what equity growth could be. But just the ones that we’re confident we’re going to get, which will be cash flow and principal payout – that’s what we’re looking at.
Ash Patel: That’s great. What’s next for you?
James Knull: The biggest project that we have in 2022 is a city in Edmonton called Kelowna, which is kind of like a larger resort town, about 400,000 people. It’s the heart of our wine country, so it would kind of be like the Napa Valley of Canada. It’s the biggest city in the heart of that area. We’re going to be project-marketing a luxury condominium building in that area. The developers are finalizing the floor plate, but it should be about 300 units. That’s going to be the thing that takes a ton of my time in terms of project-based work in 2022. Then we’re always looking for awesome realtors to work with us, we’re always growing the team. There is a natural lifecycle where sometimes realtors work with us for a bit of time and want to go independent… So growing and attracting quality agents to our organization is a big part of my role as the leader of the organization as well. Then deals come across my desk all the time, so everybody out there knows that I like A assets in great areas of town. I’d rather pay a little bit more for a great location than try to go into a less desirable location to save some money. Those deals will pop up, and hopefully, I buy something for my own portfolio this year.
Ash Patel: The 24-unit deal – was that the first time that you raised money?
James Knull: No, definitely not. I’ve raised several million dollars for several deals over the years. It was a pretty routine process at that point. Our marketing package, the verbiage, how we did the presentation, what our unanimous shareholder’s agreement looks like, etc., etc. That was all pretty dialed. It’s nice to have gone through it, because I was just able to take the work that has been done on previous deals, repurpose it, change the address on the property, change the numbers on the spreadsheet, and away we went.
Ash Patel: How did you get started raising capital? If you can go back to your first deal.
James Knull: I didn’t really know that raising capital was a way to buy real estate when I first started buying real estate, to be honest. I went to a couple of real estate investment clubs, conferences, seminars, and just started learning and educating myself, and reading books. There isn’t really a college or university level program about real estate investing. A lot of it is just talking to investors, learning from the industry, taking courses that are held by private institutions. I stumbled across the strategy of joint venturing, learned about what raising capital meant, and thought, “Hey, you know what? I think I can do this.” I started finding deals and pitching deals to people, and eventually somebody said yes.
Ash Patel: Who were the people that you were pitching the deals to?
James Knull: I was quite young at the time, so any adult that I knew through my previous job, my parent’s friends, my dentist; anybody that would give me the time of day to talk about real estate, I’d asked them if they’d be interested in talking about real estate. I went through a lot of no’s and a lot of disinterest, but there were people that were genuinely curious about the deals I was putting together, and those were the ones that I ended up doing business with.
Ash Patel: So anybody and everybody.
James Knull: Yeah. I kind of leveraged my youth. I knew that if I spun it the right way, it would be an asset. I basically said, “Hey, I’m creating a new business plan and I want to get your feedback on it. I trust your opinion as an adult in my life who I hold in high regard. Can I show you my business plan and get your feedback?” I got all kinds of responses. I got people saying, “This is crazy.” I got people who gave me a lot of constructive feedback, and then I got a couple of people who said, “Hey, wait a second. Are you actually going to do this?” “Yeah. This is what I want to do.” They said, “I’d be interested in doing this.” Sure enough, the feedback turned into interest.
Ash Patel: Awesome. And you run a meetup. Tell me about that.
James Knull: We run a meetup club. Prior to COVID, it was an in-person event for about five years, and then we’ve been broadcasting it live online ever since. We get investors and industry experts together to talk about all things pertaining to real estate investing. We’ll get people that have large portfolios talking about how they put together their portfolio, we’ll get people who own property managers in to talk about how to manage tenants, we’ll get people who do off-market deals to talk about how to do an off-market deal, and all kinds of stuff.
If it’s a topic of interest for real estate investors, we’ll put that topic out there with an industry leader, and then utilizing Zoom and the way that you can kind of have breakout rooms, we still facilitate online networking, but we’re definitely looking forward to online events being feasible again, at some point.
Ash Patel: How has that helped your business, both the realty business and your real estate investing business?
James Knull: That’s a great question. It definitely adds a lot of legitimacy to our operation, just to be in the position where we’re collaborating with experts in the field and educating people in the network and community about real estate. It also attracts a lot of interested individuals. People come to learn about real estate, and we have the opportunity to put our best foot forward and earn the opportunity to work with them. More often than not, people choose to work with us after getting to know us a little bit through what we’re doing in events like the ones that we host.
Ash Patel: What’s a hard lesson that you’ve learned about investors or taking on investment money?
James Knull: I would say, in terms of taking on investors, not every person’s suited to be the right partner. I think a lot of people are just so excited to do a deal when they start down the journey of real estate investing that any partner who has money, they feel is a good partner, let’s go for it. But often, the truth of the situation is that not every partner is qualified for your business plan. It’s just as important to ask a potential partner questions about what their exit strategy goals are, what their timeline is, what their expectations for communication are, what their expectations for return on investment are… Because if that person isn’t a good fit for the way that you want to do business, it might not be a great business partnership, and it’ll turn into more difficulty than benefit very quickly.
Ash Patel: Did you have an experience that taught you that? Was there a tough situation you dealt with?
James Knull: About a tough situation, one of the things that we put into our unanimous shareholder’s agreement is what we call an early exit clause. So we have our five-year exit events, but we have the early exit clause, that basically says if somebody wants to exit at a time that is not on that five-year milestone, they have the ability to sell their shares to another shareholder at a 20% discount to current market value. That’s kind of the cost of the inconvenience for somebody else having to come up with cash on short notice to exit somebody. So you get a bit of a deal for doing that. We’ve had a couple of investors early exit, but to be able to buy out their portion of the property at a 20% discount to current market value – that mitigated the inconvenience of having to come up with that capital on short notice.
Ash Patel: What’s an example of a deal that you lost money on, and what was the lesson learned?
James Knull: The only time we’ve ever really been burned is just taking on too much leverage. I find a lot of people will get excited about buying a property for as little money down as possible, or no money down, or some kind of creative financing in the background so that very little cash actually comes out of pocket. When those deals work out, they’re huge home runs, because you basically create returns out of no cash whatsoever. But the flip side of the coin is, the more money you borrow, the more your monthly payments are. And if things don’t go exactly precisely according to plan, the monthly burn rate can very quickly swallow up a property and all of the investors in it.
We’ve had a couple of deals where we went with some pretty extreme leverage, with the concept of repositioning the property quickly and then refinancing. The market shifted, we weren’t able to reposition in the way that we wanted, and we were caught holding the bag on some very high interest payments for loans that were only ever meant to be short-term. Those were money losers for sure, because the monthly expense just added up and added up.
Ash Patel: That’s a great lesson, because I think a lot of people will do their pro forma, and they’re like, “Awesome. If I can raise the money, these are the returns that I can make.” I don’t know that everybody factors in interest payments to the investors.
James Knull: Yeah. Another example of that would be if you could buy a property at 30% down, 20% down, or 10% down, and you choose to borrow 90 from the bank and raise 10% – it puts those investors with 10% down at a much higher risk than raising 30% and borrowing 70% from the bank. Borrowed money is expensive.
Ash Patel: Explain that to me. It puts those investors at a higher risk. What does that mean?
James Knull: If you’re borrowing 70% from the bank, the servicing cost is lower than if you borrow 90% from the bank. It’s riskier to have a higher cost of debt service. If the investors or equity partner is putting in the 10%, sure, their projected return on investment might be higher because they’re putting in less money as an investment, but the risk is higher, because there’s higher debt servicing, and so there’s less margin for error. So even if a property looks like it might break even or cash flow on paper, more interest payments always mean more risk. If there’s a vacancy, or a suite gets damaged, and so the cost of repairing the suite and the vacancy associated with it or whatever.
Ash Patel: Yeah. Again, a great point to reitarate – when you do your pro forma, make sure you add in those high returns to your limited partners.
James Knull: Exactly.
Ash Patel: James, what is your best real estate investing advice ever?
James Knull: Being patient. Good deals often require fast action, but if you’re in the market and you’re not entirely confident with a deal, another deal will probably come up. It’s important to have a certain degree of confidence. If something doesn’t feel right, and you pass on it, that’s okay. But don’t let that be the reason that you stop investing altogether. There’s always going to be another deal. But if you don’t take action, you’re never going to get any deal.
Ash Patel: James, are you ready for the Best Ever lightning round?
James Knull: Let’s do it. I love the lightning round.
Ash Patel: James, what’s the Best Ever book you’ve recently read?
James Knull: I just read Traction. That was a great book. It’s a book about how to systematize your business more efficiently. I really enjoyed that one.
Ash Patel: What’s the Best Ever way you like to give back?
James Knull: I really like to give back in terms of time. If there are newer investors, young entrepreneurs that want to go grab lunch, have coffee, pick my brain, I’m very open to spending time with people sharing with them whatever I can.
Ash Patel: James, how can the Best Ever listeners reach out to you?
James Knull: The best way to get a hold of me is to just send me a quick email. It’s james@mo gulrg.com.
Ash Patel: James, thank you again for sharing your story from single-family homes to getting your real estate license, building a real estate investing business, growing your realty business, and now syndicating deals. Thank you again.
James Knull: It’s been my distinct pleasure. For everybody listening, I hope 2022 is your best year as well.
Ash Patel: Awesome. Best Ever listeners, thank you for joining us, and have a Best Ever day.
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