JF2679: 5 Tips for Transitioning from LP to GP with Matt Picheny
Over the past 16 years, Matt Picheny has learned a lot about active and passive investing. In this episode, Matt shares how he scaled as an investor, starting with his first deal as a limited partner and what lessons he’s learned along the way.
Matt Picheny | Real Estate Background
- Founder of Picheny, which syndicates multifamily investments.
- Portfolio: Over 8,000 units total: 2,337 as a GP, approx. 6,000 as an LP.
- 16 years of real estate experience
- Based in: Brooklyn, NY
- Say hi to him at: https://picheny.com | www.linkedin.com/in/picheny
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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. 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 fluffy stuff. With us today, Matt Picheny. How are you doing, Matt?
Matt Picheny: I’m great, Joe.
Joe Fairless: Well, I’m glad to hear that. I’m looking forward to our conversation. Matt is the founder of Picheny, which syndicates multifamily investments. He’s got a portfolio of over 8000 units, about 2400 or so as a general partner, and about 6000 as a limited partner. He’s got 16 years of real estate experience, he’s based in Brooklyn, his website is picheny.com… And, just published a book, congrats on that. I know that it can be a labor of love; or just labor. [laughter] Either way, the way the book is published, it’s called Backstage Guide to Real Estate. With that being said, Matt, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Matt Picheny: Sure. For me, it all started back in 2001. I was in digital marketing and I had my own boutique agency in New York City, doing website projects, website development, that sort of thing. The dot-com bubble burst, a lot of my clients were either going out of business or just scaling back any digital marketing budgets that they had, and my business was basically imploding. And it just so happened that at that time, my landlord came to me and said, “You’ve got 90 days to get out.” That really threw me for a loop, to say the least. I needed to figure out what I was going to do and trying to find an apartment…
Joe Fairless: Your company landlord, or where you were–
Matt Picheny: No, sorry. The landlord of my home where I was living, my residence.
Joe Fairless: Why? Were you not paying rent?
Matt Picheny: No, I was paying rent. So this property was owned by a relative of mine, and he let me move in there. I used to be an actor, and he let me move in there when I was an actor. The year that I moved in there, I made just a little under $8,000 for the entire year. So out of the kindness of his heart, he was letting me stay there, but I was paying the maintenance fee. And I don’t know exactly his whole financial situation, but he needed to sell the place. The whole financial markets were in turmoil, so I’m sure he had some sort of situation where he needed to get rid of the place. It was a co-op in New York. So I needed to find a new place to live and I needed to do that with — and I’m sure you’re aware of this, Joe, having your own business, especially the first few years of your business, you don’t have really wonderful books, you don’t have a huge balance sheet, and it’s hard to substantiate that income, and especially when your business is imploding because everyone’s going out of business, all your clients.
So for me, I was like, “How am I going to find a new place to live?” I might as well have been climbing Mount Everest; it seemed an impossible task. What ended up happening was a client of mine in Showtime, the cable television channel, hired me to come in-house. They asked me to come in-house, so I did. I was getting a steady paycheck and was looking to rent an apartment. I wanted to live on the Upper West Side of Manhattan, which is where I had lived when I first moved to the city and was my favorite part of New York City, it still is to this day… Well, except for Brooklyn where I live now, but Manhattan is my favorite part. I was looking, and the prices were just unbelievable. I couldn’t afford really anything; maybe I could squeak out something to rent. But what I found was up in Washington Heights, which as you know, Joe, because I know you live in the city, all the way on the tip of Manhattan way, way, way North, I was able to find a place. My sister was living there at the time, and actually, she found a place on Bulletin Board that I could buy. So I bought an apartment. And within two years, I sold that apartment, and I quadrupled the equity that I had put down for the down payment.
Joe Fairless: What did you buy it for and what do you sell it for?
Matt Picheny: I bought it for 150k and I sold it for around 250k. I put $30,000 down and I walked away with 130k in my pocket; it was like 160,000. So it was 30k down and 130k profit afterwards, which was amazing. I said, “Wow, I’ve got to do this again.” This is amazing. So I used that money, the profits from that to buy a new place, this time in the Upper West Side, so I was able to live where I wanted to, and I started wanting to invest in real estate. I was trying to figure my way around. And back then, I don’t even think podcasts existed at all, or…
Joe Fairless: What year was this when you bought the place on Upper West Side?
Matt Picheny: This was 2005. So I don’t think podcasts existed, or at least that I was unaware of them. I remember buying an iPhone, but that was much later; that was a few years later. iPods existed, but I don’t think podcasts were really a thing at that time.
So anyway, I bought that place, and then about a year later, I found a property in Northwest Connecticut that I wanted to buy. It was a piece of land, and I thought “Oh, this will be a great investment. I’ll buy this land, and then sell the land in the future. Or I could build a house there and have a little place to get away from Manhattan, a little country home.” So a few years later, I went ahead and built that house. What ended up happening was I met my wife just as I was finishing up building the house. I met the woman who would, in the future, become my wife. She had her parent’s house on the other side of Connecticut which we could go to from time to time, but there was this incredible demand to rent my property, this house that I built.
So I was renting it as a vacation home, and never ever ended up really spending a lot of time there. But through that process, I learned a lot about renting homes and I learned a lot about things like depreciation, accounting, that kind of boring stuff, looking at leases, and all those types of things. That’s what really set me on the path to where I am today.
Fast-forward a few years, we ended up selling the place on the Upper West Side and moving to Brooklyn. Then about a year after we moved to Brooklyn, out of the blue, my wife got an unbelievable job opportunity, but it was in Miami, Florida. So we moved to Miami. I quit my job, I was working in advertising. Actually, Joe, you and I both worked at the same agency, but at different times. So I quit that job, and I moved to Miami with my wife. And I was trying to figure out what did I want to do. I was looking at some agencies down there, but the agency world is much smaller down there, much smaller teams; it didn’t really make sense.
I was kind of burned out. I had been working in the advertising world for about 18 years at this point, working at a bunch of different agencies, and working my way up the corporate ladder, and it was fun, but I was kind of burned out. I loved the real estate that I had been doing on the side as a little hobby, and it was a passion of mine. So with that move, I decided to go ahead and see if I could make real estate a full-time job. That was a little over six and a half years ago, and that’s when I found out about real estate syndication, where investors could pool their capital together, their balance sheets together, their experience together, and take down these otherwise unobtainable assets. That’s when I started down that path, and started off as a limited partner. I always wanted to be a general partner. It took me a few years to get my first deal as a general partner, but it’s been a very fantastic and fruitful ride. That’s what that book that you mentioned earlier is about, it’s about that journey.
Joe Fairless: The first deal that you invested as an LP, how did you come across the general partner, and what made you feel confident in the general partner that you invested?
Matt Picheny: I met this gentleman at the first seminar that I went to. I went to a live seminar about syndication. This one was more like a 30,000 foot, it wasn’t really the details of what the syndication you could do…
Joe Fairless: Which one? What’s the name of it?
Matt Picheny: It was the Secrets of Successful Syndication, The Real Estate Guys.
Joe Fairless: The Real Estate Guys. Yup.
Matt Picheny: Yeah, they’re awesome. I love those guys. So I went there, I learned about syndication in general, and I met a gentleman there. He’s awesome, and he’s become one of my closest friends; but I became friendly with him. He had syndicated the deal before, he had done one deal before. And what ended up happening, he was part of another group and I joined this other group…
Joe Fairless: What’s the group you joined?
Matt Picheny: Brad Sumrok’s group.
Joe Fairless: Okay, got it.
Matt Picheny: So I joined that group, and this gentleman was doing a deal, and he asked me if I’d be interested and I was overjoyed, very excited to do it, so I joined that deal as a limited partner. And the deal didn’t really do great. But look, the bottom line is, I didn’t lose money on the deal, and I learned a ton from being a limited partner in it. I spoke with the general partners about it, I learned so much from that deal, it was fantastic. It didn’t go as planned but… I mentioned this in the book, the most important thing, I talk about this specific deal, and the biggest lesson for me from that deal is the deal matters and the market matters, but the most important thing is the sponsor. And I had faith in the sponsor. This guy – he’s an airplane pilot, and I was sure this guy would be able to land the plane, that it wasn’t going to crash and burn. And honestly, it probably should have, had it been anybody else. But this guy just stuck with it through thick and thin and got that plane to a safe landing. Maybe the flight was delayed quite a bit, but it landed safely.
Joe Fairless: What specifically happened with the deal that it didn’t perform?
Matt Picheny: There were a number of different things, Joe, but we had a much higher than expected vacancy… I think in hindsight, the general partners realized that they were renovating the units, they were doing interior renovations maybe to a finish level that was above what the market really wanted or demanded… I think there were a number of miscalculations, little ones, throughout the whole thing, that just when added together in totality just made the deal problematic.
Joe Fairless: Got it. Well, I have been there on my first deal as a general partner and continue to learn as well, so understood. You said you learned a ton from that first deal. What are some other lessons that you learned from that deal, besides the sponsors being the most important?
Matt Picheny: Right. So there was that – really being able to understand the market and the trends that are going on in the market, making sure that we’re not over-renovating. That was a big mistake that they made, there was a miscalculation. They were putting in granite countertops, which was complete overkill for that particular market. Some markets is great for that, but it wasn’t great for that one.
I think that also, property management was a big, big problem. They had a big problem with property management, they ended up switching managers. The property manager can really make or break the deal and you have to very, very carefully vet. Look, I have a deal that I did and we had a problem with property management, and we had to switch it over. Once we got a good property manager in there, it was like night and day. But those people who are in there day-to-day dealing with tenants, the toilets, and the termites – they need to be top-notch, or your deals going to fail no matter what. Those are some of the important things that I learned to look at.
The other thing was I started to dig into the financials of the deal and going through that General Ledger, that P&L, and understanding what all those different things are, what they mean, how they affect the business. So part of it was when I invested that money in that deal, which for me — look, I put $50,000 into that deal, and for me, that was a very large chunk of change to put into an investment. I mean, besides buying a home that I controlled, putting it into something that someone else controlled just as one investment – that was a large thing for me. I spoke with them about it and said, “Listen, I do want to sponsor these deals,” which they knew, and I said, “I want to be able to talk with you and learn from this experience.” I made sure that I wasn’t obnoxious about it, that I wasn’t calling them every day or every week. But every few months or so I would set up a call and just learn from that experience, talk with them and find out what was going on, what were the challenges. It made that a great learning experience for me.
Joe Fairless: You mentioned that you had to fire a property management company as a general partner. I’d like to get to that in a moment. But before we do, how many limited partner deals did you do until you did your first general partner deal?
Matt Picheny: Five limited partner deals.
Joe Fairless: Why five? Why not one, or why not 15?
Matt Picheny: Joe, I probably would have been okay with maybe even zero, in my mind, at that time. But I wanted to invest as a limited partner to gain some experience and see what other investors are doing. Joe, I’ve invested in one of your deals, so I know how you communicate with your investors. That’s something important for me to learn and see how other people are doing things. I think you can learn a lot just through that process. But for me, I was looking for my first deal while I was doing these limited partner investments. For me, the experience I got from the limited partnership was great; it was nothing compared to what I learned, actually, while I was doing the deals. But it takes a while as a new person in this business to sort of break in and break into a market. I looked in a couple of different markets before I ended up in the market where I found my first deal, and it took me a while to develop a rapport with the brokers.
The first deal that I bought –besides the duplex I had in Brooklyn and some other single family, smaller single-family things that I had done– was a $10 million 132-unit development. And for a broker to have the faith that I can actually come up with the equity and the debt and close that deal – it takes a while to build that rapport and get the trust of a broker who’s presenting your offers to the seller and say, “Yeah, I actually think Matt’s going to be able to close on this deal.”
Joe Fairless: Did you say $10 million deal and it was 132 units?
Matt Picheny: Yeah. It was the $9.9 million purchase price.
Joe Fairless: Did you say it was in Brooklyn?
Matt Picheny: No, sorry if I was confusing — no, the duplex is what I own in Brooklyn. The property that I’m talking about was in Lawrence, Kansas, which is outside of Kansas City. It was 132-units, 9.9 million.
Joe Fairless: KU, Rock Chalk, Jayhawk.
Matt Picheny: That’s right, Rock Chalk, Jayhawk. I went to one of those games, it was amazing to watch them play basketball. It was incredible.
Joe Fairless: That’s on my bucket list, to go see the Jayhawks play.
Matt Picheny: Joe, you can’t buy tickets. Give me a call if you want to go. I have connections. They don’t sell them.
Joe Fairless: I’m going to be wearing red and black whenever Texas Tech comes in to play them, and I’ll be a fan of one for Texas Tech there… But I would love to experience that. Okay, so that was 75,000 a unit, I heard Brooklyn, I heard that amount, and I was wanting to…
Matt Picheny: I was a little confused. Sorry.
Joe Fairless: Okay. So the property management company on one of your deals didn’t work out. How do you know when you should fire the property management company and bring another one on, versus trying to work through whatever the issues are?
Matt Picheny: It’s a really hard thing to figure out. The transition is always going to be rough. It sounds like you have had the experience so you know as well – as a limited partner, I’ve seen it a number of times and it’s a difficult thing. This was a couple of deals in for me, so it wasn’t on my first deal. I was trying to avoid it. What happens is the first three to four months that you’re in a deal, it’s really hard to know how things are going. There’s a lot of transition that’s happening with the books and with the billing. You don’t even get the first month’s bills really until the second or third month. It just takes a few months to really get things going and see how things are going, really get that baseline, see where occupancy is, see how expenses are going, income, all of that kind of stuff; collections…
With this property manager, about three to four months in, I was starting to get a little nervous about them. I had a conversation with them, we had multiple conversations over time. Eventually, I think we were about eight to nine months in on the deal when we actually had the transition. Obviously, prior to the transition, I was talking with people, interviewing people, finding a new property management company, and then there’s also a whole thing that you have to do with your lender, to get approval from the lender… So I wanted to wait sort of until the last minute to tell the existing property manager, because obviously if you tell them, it’s quite likely that they would take their foot off the gas at that point in time. So I wanted to have all my ducks lined up in a row. When I called to tell them, they were like, “Yeah, we kind of knew this was going to happen.” So we did the transition, and it’s not easy…
Joe Fairless: Just going back to my question though. Respectfully, sorry, but my question was, how do you know when you should change. What happens where it’s like, “Alright, enough’s enough. XYZ is happening. I have to make the change.”
Matt Picheny: Sure. Well, our occupancy was tanking in this particular instance; occupancy was going low, make-readies were not getting done in time, there were problems with bills not being paid on time or even at all… So it wasn’t just one little thing, there were a number of different things that were all happening at once.
Joe Fairless: Knowing what you know now about having worked with that property management company, what are some questions you would ask a future property management company that you perhaps didn’t ask that one, before engaging with them?
Matt Picheny: The most important thing for me is getting referrals from other operators that I know are working with them. So the first question would be “Who else in this market are you working with? What other ownership groups?” Then I ask to try to understand what does their back-office look like? What is their process for accounts payable? How do they deal with occupancy? What are their marketing plans? One of the big things is retention. So how do we retain the residents that we have? Because the largest cost really is turnover. A lot of times we’re doing a value-add so if someone moves out, it’s not so bad because we can then renovate the units. But we don’t want our occupancy to go down the toilet while that’s happening, so it’s really a question of how are you communicating with the residents? What are you doing? What is your plan? How do you go about that retention? That’s super important.
Then also I like to understand what sort of bench they have. A lot of times you may have a maintenance person or a manager who, for whatever reason, decides not to stay at the property, at the company, whatever, if something happens; that can be a really tumultuous time for a property. I want to make sure that the company that I’m working with has some sort of support on the back end, some sort of bench; maybe they have floaters. A lot of times a company might have maintenance people that float from property to property, just people that they can bring on so that a property doesn’t suffer if there is a personnel change.
Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?
Matt Picheny: I think leverage is the most underutilized thing by a lot of beginning investors. I have a friend named Aaron who likes to just pay everything off. But if you refinance properly, you can use that equity and grow your wealth exponentially. So that would probably be my best advice, is to really look at the current assets that you hold… Because a lot of people talk about cash-on-cash or return on investment, but what is your return on equity? And looking at that, recapturing that stored equity can be phenomenal for you.
Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?
Matt Picheny: I’m ready.
Joe Fairless: Alright. What deal have you lost the most amount of money on?
Matt Picheny: A flip that I did.
Joe Fairless: How much did you lose?
Matt Picheny: I lost $10,000, which was huge for me back then.
Joe Fairless: And if you had to do it over again, what would you do?
Matt Picheny: I wouldn’t have bought that property.
Joe Fairless: Well, I know —
Matt Picheny: [inaudible [25:00] We had to buy it without an inspection. So what happened was, once we got in there, it was a lot worse than we had anticipated.
Joe Fairless: Got it. So you wouldn’t buy a property without having an inspection.
Matt Picheny: At this point, yeah.
Joe Fairless: Fair enough. That’s a good approach.
Matt Picheny: I mean, unless it was like a ridiculous bargain basement kind of situation… But yeah, I wouldn’t. There are too many unknowns.
Joe Fairless: Agree. There are always exceptions to generalities. But generally speaking, that’s a good approach. What deal have you made the most amount of money on?
Matt Picheny: The townhome in Brooklyn. We were able to sell air rights to this property and basically take all of our equity out, so we don’t really have any equity in it, number one. Number two, it’s gone up in value dramatically.
Joe Fairless: Where’d you get the idea for air rights and, and high level, how do you go about selling them?
Matt Picheny: Well, I wrote a whole chapter about that in my book. I had heard about it, and when we bought this property, we knew there was additional development rights. Essentially what happens is, depending on the size of the property, you can build a building of a certain square footage. If you haven’t used all of that square footage, you can sell that square footage to the adjacent property. That’s essentially what it is. It does not mean that they can build on top of your property or cantilever their building over yours. But it gives them additional square footage if they have availability on their lot to actually build if they meet the setback and height requirements.
Joe Fairless: Best Ever way you like to give back to the community.
Matt Picheny: I like to support charities that deal specifically with either the arts –I have a whole background in the arts and that’s a whole other story– but also homelessness. When I was in Boston, I was an ambassador for a company called Caritas, a nonprofit that provided permanent housing for people. I’m looking for something like that in New York, if I can find something. I just moved back a few months ago.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Matt Picheny: They can go to picheny.com. There you can get the book, you can sign up for my free newsletter, which has lots of great information, and you can just learn more about me. Check out the blog.
Joe Fairless: picheny.com is also listed in the show notes. Matt, thank you for being on the show, talking about your experience leading up to this point, lessons learned, and also sharing a little bit about the book that was just published, Backstage Guide to Real Estate. Congrats again on that book, and grateful for the conversation. Hope you have the Best Ever day. Talk to you again soon.
Matt Picheny: Thanks, Joe.
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