JF993: How to Build a Fund and Buy BIG Deals in Many Markets
He started with the capital and then grabbed the deals…in multiple markets! Follow our guest to hear his offering to his investors including a preferred return.
Best Ever Tweet:
Joel Sherlock Real Estate Background:
– Founder of the “Match Method” and HouseHarmony.com, realtor and investor
– Team is in the top 1% of our market, built and sold a brokerage and a few other endeavors
– Put together $30 million dollar fund to buy real estate in America
– Based in Vancouver, BC
– Say hi to him at www.househarmony.com
– Best Ever Book: The Saint, The Surfer and the CEO
Made Possible Because of Our Best Ever Sponsors:
Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.
Go to adwordsnerds.com/joe to schedule the appointment.
Joe Fairless: Best Ever listeners, 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. We only talk about the best advice ever, we don’t get into any fluff.
With us today, Joel Sherlock. How are you doing, Joel?
Joel Sherlock: Fantastic, my friend. Thanks for having me.
Joe Fairless: My pleasure, and nice to have you on the show. A little bit about Joel – he put together a 30 million dollar fund to buy real estate in the United States. He is also the founder of Match Method and HouseHarmony.com. He is both a realtor, as well as an investor. His team is in the top 1% in his market, which is Vancouver, and he has built and sold a brokerage and he’s done a couple other endeavors. With that being said, Joel, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Joel Sherlock: Absolutely. Our real estate team is based in [unintelligible [00:03:09].00] and our fund is based out of the Vancouver area. Basically, the [unintelligible [00:03:13].10] is right between Vancouver and Calgary, it’s kind of like Canada’s Napa region. Lots of wineries, fresh water lake… It’s a beautiful place to be.
I started very simply, I bought a terrible little condo, fixed it up while I was in college, sold it at a profit because the guy I had bought it with fell in love and wanted to move in with her, so I sort of stumbled into flipping real estate, and it’s been a beautiful love affair ever since.
Joe Fairless: Well, I’m curious… I wanna jump right into the 30 million dollar fund where you put that together to buy real estate in the U.S. Tell us about that.
Joel Sherlock: You bet. My background’s in finance, so I was always a numbers guy. That first accidental flip, I ran the numbers, I was going to school to Canadian Securities, which is like a stock broker. My father was in the financial services… I’ve always been a numbers guy. And for me, always in my career I was looking for patterns, deals, systems automation… I was always a big fan of that.
There was a time in our market where the Canadian market had slowed down and a lot of the Canadian investors were looking down South. I’m from Winnipeg originally on the East Coast, and all the East Coast guys are talking about Florida, all the West Coast guys were talking about Arizona. So there were a couple of doctors that I had done a lot of deals with in our market here, and some of them had gotten down, they’d gotten deals in Arizona, some of them had gotten down and not gotten deals… And I was asked by a couple of them to come down, and I thought, “Hey, it’d be good to get away and play a little golf, hang out in the sun, and I can throw my 2 cents in wherever it’s needed.” But that first trip we went down, we went into 75 homes… It was at one of the lower points of the Arizona market, and it was mind-boggling to me… As we were going through these homes, people were talking about “The last sale was 750k, loan balance was 695k, and it’s listed at 350k and we’re talking about an offer of 210k.” In the Canadian system, that was absolutely just mind-boggling, so I think for the first 20 homes I was just purely in shock.
Then the next 20 I’m going, “Hold on… What’s it cost to rebuild this? Okay, well, what’s happening to the rental market?” We had a checklist. I always love to invest in markets that have great demand, reasonable job growth or reasonable second home markets, and vacancy rates that are very low. They were talking about phenomenal prices, and we’re buying less than replacement cost in a market that has an exceptionally strong rental market. So I thought, “Well hold on, this is a great opportunity!”
So we came back to Canada, and the thesis was simple – we were gonna buy property… At the peak, that market was taken at 35,000 starts, so there’s great demand… We’re gonna buy property cheaper than replacement value, and we’re gonna rent it, hold on to it until the market comes back, and the only variable was when that would be; we had no idea.
The demand was much larger than I expected, so we put that fund together, a traditional GP/LP structure. I had some help on that one from a mortgage company and a couple of investment guys, so there was a group of us, and then off we went. It was a brilliant experience. I definitely wish I had sold everything I had in Canada and bought more real estate down there, but my hindsight portfolio is almost perfect.
Joe Fairless: Yeah, exactly. You brought in 30 million dollars… Can you tell us some numbers about how it performed and any details on it?
Joel Sherlock: You bet. So the interesting part for us – when we brought that money across, we secured 214 doors; we’ve got 10-11 now, and then a couple under contract. So we are liquidating everything we have down there. Looking back at the numbers, we brought the majority of that money across at par, and that’s important as a little bonus.
Joe Fairless: And for anyone who’s not familiar with that terminology, can you elaborate?
Joel Sherlock: The money came across dollar-for-dollar, which was very unique at that time – Canadian dollar to American dollar. We started with a 10% cash-on-cash yield [unintelligible [00:07:43].16] rentals, and then as that market really picked up, we had crazy units in downtown Scottsfield that were $85,000-$90,000, and then our rehab costs — and they were just simple two-bedroom one-bath, townhome units… Our rehab costs were 8k-12k. We started out getting $1,100/month, then we got $1,200… By the end of it we were getting $1,400-$1,450/door. So the returns were fantastic on those.
Some of the things we had a little bit further outside of town in [unintelligible [00:08:18].01] stayed in that sort of 10-11 range.
Then we saw incredible appreciation in the latter three years, and then about 18 months ago we started having a conversation… With the way the dollar was — the Canadian dollar at that time was like 1,27 for every U.S. dollar, and we thought “We could hold this another year and we could see another 10% appreciation, but if the currency corrects 10%, then we’ve held it a year for nothing.” So the decision was made to sell it, and then the dollar got a little weaker, so we got 1,30-1,32 were some of the peaks that we saw. So that was another 32% bonus on top. All in all, it was a phenomenal investment for us.
Joe Fairless: What was your role? You said you had some team members that went in on the GP side with you… What was your specific responsibility?
Joel Sherlock: A lot of the team management, definitely capital raising in the beginning, and then a lot of watching the market fundamentals and deciding when should we really exit some of these things. I learned a lot about the structure of those funds and sort of that GP/LP relationships from my two partners, and now I’ve been very active reinvesting some of that capital into markets that we’re working in now.
Joe Fairless: What are those markets?
Joel Sherlock: Again, it’s a little bit dependent on the investor. Funny enough, we had a couple buildings that financed the legal cannabis industry, so just a real estate play into that market… We’ve got a group of investors who are really focused on investing into commercial assets, looking at mixed use buildings – three levels of retail, one level of residential on top. Two of the guys are getting into some small development… So really it’s kind of investor-specific, and then I’ve just been helping and investing on the side in some of those deals.
Joe Fairless: And as far as the actual cities that those are in, do you have any cities that you’re focused on right now?
Joel Sherlock: Definitely Vancouver, Kelowna, Calgary… Still active in Scottsdale, we did do a couple deals in Nevada, we’ve been looking at Oregon, Washington; [unintelligible [00:10:38].15] surprisingly enough is a beautiful commercial market if you can get your hands on any commercial property, because they put a boundary around [unintelligible [00:10:48].11] and there’s been a really large demand for commercial growth there.
Joe Fairless: I’d like to learn a little bit more about the GP/LP structure on the 30 million dollar fund. How was that structured?
Joel Sherlock: So traditional GP/LP (General Partner/Limited Partner), like the investors are limited partners and then the general partner is kind of the guy who manages the operations. The 2 and 20 refers to 2% management fee for capital under management, and then we take a 20% yield, so we participate in the lift, if you will. After we’ve made an 8% yield for the investors, we participate in 20% of the rest. So they get 80% of the upside, we take 20%.
Joe Fairless: After they receive their 8% preferred return…
Joel Sherlock: You bet.
Joe Fairless: And that 2% management fee – it’s basically 2% of capital under management, so that’d be 30 million… 2% of 30 million – is that paid annually?
Joel Sherlock: That’s paid annually, correct.
Joe Fairless: And then as far as distributions to your team, did you receive that monthly, or is that paid every 12 months?
Joel Sherlock: It was actually a European waterfall, which is a little bit unique. It meant that we didn’t participate as the GP until everyone had gotten their full investment back, and their 8%.
Joe Fairless: Okay, so you didn’t get the management fee until they got their money back and their 8%?
Joel Sherlock: Management fee, we did. The 20%, if you will… In traditional private equity there’s the two models: there’s the European waterfall where you get paid once everyone’s got their money back, and there’s the American waterfall where every time there’s a disbursement or every time there’s a profit made, the GP takes a piece.
Joe Fairless: You’ve gotta create a Canadian model.
Joel Sherlock: [laughs] Exactly!
Joe Fairless: So the 2% management fee for capital under management – you said that’s 2% annually, but as far as distributions go for that 2%, did you all receive it monthly, or was that quarterly, or was it every 12 months?
Joel Sherlock: Quarterly.
Joe Fairless: And when your team submits distributions on this fund, was it quarterly as well to your investors?
Joel Sherlock: No, so it was upon exits.
Joe Fairless: Oh, upon exits. Okay.
Joel Sherlock: Yeah, and then the rental revenues were distributed quarterly.
Joe Fairless: Okay, I’m with you. And the rental revenues would go towards their 8% preferred return?
Joel Sherlock: Correct, it goes towards the total return.
Joe Fairless: That makes sense.
Joel Sherlock: So yeah, all in all it was certainly a home run and we’re actively hunting for the next market, the next opportunity. I’ve been down into Mexico, we’ve looked at a project in Belize… Those ones all have significant downside risk, which is one thing we always like to manage. It’s good to make a return, but we wanna protect that initial capital the most.
Joe Fairless: So the last question (I think) on the GP/LP – how much of the 30 million did the general partnership invest alongside the LP?
Joel Sherlock: The GP would have made up I believe seven and a quarter, seven and a half million. That’s always one thing that’s always been very important, and if someone’s looking at investing into a fund, make sure those general partners do have some skin in the game.
Joe Fairless: So that’s 25% of the 30 million the general partnership put in… And then on top of that 25% there was basically a 20% fee that the general partnership received after the 8% preferred return was paid and the money was paid back?
Joel Sherlock: Not a 20% fee, a 20% share of upside.
Joe Fairless: Share, yeah, sorry.
Joel Sherlock: So they get 80% of the return, and of course [unintelligible [00:14:42].13] we participated in our percentage of that.
Joe Fairless: The overall raise from outside investors then would be roughly 22.5 million, because the general partnership put in 7.5 of the 30, right?
Joel Sherlock: So the GP – we owned LP shares for that.
Joe Fairless: Yup.
Joel Sherlock: So we were investors in the fund and we got our 8% preferred return and our 80% of the return above that for our LP shares.
Joe Fairless: I get that, I’m just saying, besides the general partnership people, when you co-invest, the 7.5 turns in the limited partnership, but besides that, it’s 22.5 million that you’ve basically brought in outside of what the general partnership invested as LP.
Joel Sherlock: You bet.
Joe Fairless: Got it, okay. So since your role initially was capital raising, what can you tell us about how to raise capital, 22.5 million dollars? How do we do that?
Joel Sherlock: I have a very strong thesis, and something that is completely defensible because everyone looks at risk differently. Number one, make sure you’ve got all of your numbers together, make sure you’ve got all of your research done, and make sure your thesis is completely defensible from every angle.
Joe Fairless: And then when someone asks you “What type of risk is involved? What’s the downside?”, knowing that you have looked at it from different angles, how do you answer that question?
Joel Sherlock: I don’t try and hide from risk… I don’t believe that when you’re selling an investment trying to hide that risk or minimize that risk — I actually wanna balloon it up. We would tell people that the Arizona market’s taking an absolute beating, and it may be years for it to come back, and there’s no guarantee it ever will. So for us, not that you wanna talk people out of investing, but the last thing you want and the most stressful part of working with investors is when an investor is worried about their capital and checking in with you on a very frequent basis.
We didn’t wanna talk anyone into investing, especially Canadians investing in a market they’re not in and don’t totally understand, because that whole scenario down there was so foreign to what has ever happened in Canada. You know, the number of defaults…
Joe Fairless: That’s a great quote…
Joel Sherlock: Yeah…
Joe Fairless: “Don’t talk anyone into investing” – I really like that quote; that’s a great philosophy.
Joel Sherlock: Absolutely. Especially when it’s real estate, the investor pool is massive, and there’s some incredible resources out there, and different websites, and you can put your deck out there, your thesis, and it’ll draw great people in. But just sift through those people and take only the best ones, because you are essentially going to be partners and married to that person, especially with a long yield like that, for quite some time. It’s different than taking an investor for a flip deal and you’re together for three months… It’s a little bit different.
Joe Fairless: The fund was about like eight years or so?
Joel Sherlock: You bet. Just under.
Joe Fairless: You’re the founder of Match Method and HouseHarmony.com. What are those businesses?
Joel Sherlock: As I’ve said before, I’ve always been looking for patterns, and so many people were talking about going to Arizona, so “Okay, we’ve gotta figure that one out.” In a real estate practice, and also in my own investing practice, I noticed that the majority of people were selling homes to buy something else. Unless you’re a first-time home buyer or selling your home to buy Apple stock (and now Google stock), most people would be selling their condo to get a townhouse, selling their three-bedroom home to get a five-bedroom home; selling their 10-bedroom home to downsize into a 5, or selling in Kelowna to go to Vancouver, or selling in Arizona to go to San Diego… Whatever that would be, they’re selling a piece of real estate to make a move, either up, down, lateral, different town, something.
So we trained all of our guys and we developed great dialogues to get information, and then “What do you have and what do you want?” In a hot market, people would say “Oh, I’d love to buy a penthouse in that really exclusive building. If anything ever comes up, let me know.” Both agents would just scribble that info down and “I’ll set up a search for you, and I’ll call you if anything comes up.” But you’re missing 50% of that equation. So we would let people know that “Hey, [unintelligible [00:19:04].20] let me know what you have to sell if I find you this penthouse, and what I might have is somehow who has the penthouse and wants to get on the waterfront.” That person has the waterfront, and going to the penthouse.
Those were great dialogues, because people would always say, “Oh, that’s interesting… I have a home on the waterfront. It’s half an acre, 4,000 square feet, and I want this much money for it”, and our agent would furiously scribble notes down… And then once a month we would sit down – we started once a quarter and we brought it forward to once a month – and play a big game of go fish, essentially. We would share that list with other agents in the office, and it was so successful that we brought in agents from other brokerages.
I had always thought, “Wow, scale gives this thing so much power, because the more listings we can bring in, the more matches we can essentially find.”
Joe Fairless: It’s really smart, and it’s an obvious need, and you solved it. That’s great, thanks for telling that story about it.
Joel Sherlock: And then it gets really interesting, so when I would finish a flip, I would attend our open houses, I would list it with one of our brokers, and people would come around from the area, and people always come in to get “ideas”, and I would always ask “Oh, where are you?” and a lot of times they’re like “Oh, I’m just down the street and I need to rent on my house.” And there were times when it was like, “Oh, well why don’t you buy this one and I’ll buy your house?” So I would sell my rental and get my next project with that strategy – you buy mine, I buy yours.
HouseHarmony is essentially the evolution of that. What we did was we built a dating site for house deals. Now agents can come in and put that list in, what your client has, what your client wants, and it’s private unless your client has what I want. Unless there’s a match between you and me, I’d never be able to search that inventory. But once there’s a match, it [unintelligible [00:21:06].06] both the brokers and say “Hey, you guys should talk, because Joel has the penthouse and wants to go to waterfront, and you have the waterfront and want to go to the penthouse.”
Joe Fairless: Joel, what is your best real estate investing advice ever?
Joel Sherlock: That’s on fundamentals. We look at job growth in the city, vacancy rates historical, I always look at pricing, and then there’s supply and demand cycles, so look at what drives demand and how much supply is coming on the market.
Joe Fairless: I wanna make sure I have written down the things you look for: job growth, historical vacancies, pricing, and where the market is in the cycle.
Joel Sherlock: And new starts.
Joe Fairless: New starts, supply and demand.
Joel Sherlock: You bet. And actually, we want unemployment as well.
Joe Fairless: Any specific metrics that come to mind in terms of — okay, job growth, what percent are you looking at? Or you’re just looking at an uptick, or looking at a three-year, five-year projection?
Joel Sherlock: In job growth we also look at job diversity, and the reason for that is you look at a market like Fort McMurray, Alberta – a huge percentage of their employment is in oil and gas. So when oil and gas is strong, their market is red hot, and incredibly strong. Double wide trailers are renting for $4,000/month. But oil is cyclical. It’s guaranteed to be cyclical, it has been for decades. So when oil low, not many people wanna be paying $4,000/month to be in Fort McMurray. So for me, I just don’t like that kind of risk, because sure, when it’s hot you can make a solid cap rate, but when it’s slow, you make a very round number as a cap rate, like perfectly round in a circle, and those frighten me.
Joe Fairless: Let’s talk about new starts real quick. Is there a percentage or a number that you look at, or how do you quantify if it’s a good or bad thing with new starts?
Joel Sherlock: Again, that’s just more new starts adds to the supply number, and so big supply is not a problem if you have massive demand. Big supply is a problem if there’s huge amounts of supply coming on. We look at months of inventory, so like “How much is the market eating every month? If everyone stopped listing today, how many months of inventory are on the market right now?” If it’s less than six months, that’s a seller’s market. But if there’s 14 months of inventory coming down the pipe, that’s something that would certainly slow me down on that market.
Joe Fairless: Are you ready for the Best Ever lightning round?
Joel Sherlock: Hit me!
Joe Fairless: Alright, let’s do it! First, a quick word from our best ever partners.
Joe Fairless: Best ever book you’ve read?
Joel Sherlock: The Saint, the Surfer and the CEO. I thought I would pick one that’s not like “The Millionaire Real Estate Agent”. Gary Keller’s stuff is amazing, but so many people talk about it.
Joe Fairless: [laughs] Yeah, I like it. Okay, I got that written down, I’ll check it out. Best ever deal you’ve done?
Joel Sherlock: I would say that the first time I ever sold my rental and bought my next flip with that match method… I thought I was a genius.
Joe Fairless: What’s the best ever way to find people who have 22.5 million dollars?
Joel Sherlock: Best way to find people who have 22.5 million dollars? Just be open for every conversation and be passionate about what you’re talking about. I could talk about real estate every day all day, because I love it. It’s not work to me. If somebody said, “Hey, let’s go and raise some money for a lumber mill”, it’s like, “Oh, gosh… Okay…” I would be terrible at it. I cannot sell anything I’m not passionate about, and I’m passionate about real estate.
Joe Fairless: Best ever way you like to give back?
Joel Sherlock: Great question. I sat on the board of a children’s charity in Vancouver, and we have a medical needs, disabilities children’s camps, it’s called the Zajac Ranch – amazing work, incredible. I love to be involved in that, I love giving back.
Joe Fairless: Thinking back on the deals you’ve done, what’s a tactical mistake you’ve made on a deal?
Joel Sherlock: Not enough due diligence. Blinded by excitement.
Joe Fairless: What aspect of the due diligence was not enough?
Joel Sherlock: Taking pressure from — there was another agent on the other side, and on the surface it’s like “Hey, that’s a great deal. You’ve gotta make your mind up quick, because we’ve got a bunch of people looking at it.” So we just ripped through the due diligence really fast, and it was a big house, there was a lot of value to it – it was a flip that we did – and luckily we got our money back, but it was just a far larger project than we initially thought and our traditional due diligence scenario would have found out.
Joe Fairless: Where can the best ever listeners get in touch with you?
Joel Sherlock: SherlockAndAssociates.ca is our real estate site. I’m far more active on HouseHarmony.com. Facebook, Twitter is @Joel.Sherlock, Instagram – same… So really any of those sources, we’re active on all of them.
Joe Fairless: I thoroughly enjoyed our conversation, Joel… Holy cow, this was like taking an MBA class in real estate investing, raising money, as well as just as you said, investing on the fundamentals and talking about what you look for in markets: job growth, job diversity, historical vacancies, market cycle, pricing, the new starts and unemployment. The majority of the time we talked about the 30 million dollar fund, where you and your team raised 22.5 million dollars from outside investors, and the types of fees that you charge within that structure, as well as the type of returns and how you approach the overall business plan, why you saw what you saw, and then how it turned out. It sounds like you’re pretty much wound out of that, so congrats on that fund. I’m really grateful that we had our conversation, and I know the Best Ever listeners are, as well. I hope you have a best ever day, and we’ll talk to you soon.
Joel Sherlock: Thanks so much!