JF2549: Scaling Vacation Rentals with Kirby Atwell

After realizing flipping properties wasn’t the way to financial freedom, Kirby Atwell switched gears to vacation rentals. Now, his rentals are singlehandedly paying for his 45-acre farm lifestyle. Today, Kirby is breaking down how his one-bedroom rental almost paid for itself in just three months, how to identify a good rental property, and where to start if you’re looking to make the switch.

 

Kirby Atwell Real Estate Background:

  • Recently left his role as the CFO of a national non-profit to go back to investing in real estate full time, with a focus on vacation rentals
  • Recently sold an 11-unit apartment building that he purchased, and fully rehabbed and stabilized it
  • Portfolio consists of 80 flips since 2011 and purchased about 28 long-term rental units (mostly single-family homes) that were recently sold off to focus on short-term rentals  
  • Currently owns 10 Airbnb listings, one long-term rental, one passive investment in a 250-unit apartment, and the 45-acre farm experiential short-term rental
  • Based in Valparaiso, IN
  • Say hi to him at: www.livingoffrentals.com
  • Best Ever Book: Effortless

 

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TRANSCRIPTION

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, Kirby Atwell. Kirby is joining us from Valparaiso, Indiana. Kirby recently left his role as a CFO for a national non-profit to get back into real estate investing full-time with a focus on vacation rentals. He has done 80 flips since 2011, and has numerous long-term holds and invested in the syndication. Kirby currently owns 10 Airbnb listings and a 45-acre farm, which is an experiential short-term rental.

Kirby, thank you for joining us, and how are you today?

Kirby Atwell: Ash, it is great to be here. I’m a huge fan of the show, so I am honored to be on.

Ash Patel: Well, thanks for being with us. Before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Kirby Atwell: Yes, absolutely. So originally born and raised in the Chicago suburbs and decided after high school that I wanted to join the military. And my dad said, “Well, if you’re going to join the military, you might as well try to go to West Point and be an officer, because they have it easy,” because he was enlisted. So I applied to West Point, got in through the backdoor through football, spent four years there, and then was commissioned as a military officer. And while I was in the military, I picked up Rich Dad Poor Dad, which is the start of many people’s real estate investing careers… And it just really resonated with me.

So that book turned into doing a deal right away. I’d just read it, and saw there was a house across the street that was for sale, went across the street and bought it. I didn’t have any clue what I was doing, but I was in El Paso, Texas, which was a very affordable market at the time. So that got me started, and then I just started reading every book I possibly could and doing a lot of self-education around it. And I knew when I got out of the military, this is what I was going to do. So fast-forward to 2011, when I got out, I jumped into real estate investing full-time, and not really having a W-2 now to get conventional financing, I thought, “Well, flipping is the way to go.” So I started a flipping business, and we flipped about 70 properties from 2011 to 2016.

And at that point, I looked up and I kind of reviewed my finances and realized that we’re making millions of dollars in gross revenue, and I have nothing more to show financially than when I started in 2011.

Ash Patel: Except a big tax bill.

Kirby Atwell: Yes, yes, exactly. Exactly. So I was like, “The whole reason I got into this was financial freedom.” And mind you, we were being invited to speak on stages and people were saying, “Oh, you’re so successful. How are you doing all these flips and making all this money?” And we had an office and staff, and all this stuff that looks like success. But from a actual asset standpoint, I was in the same position.

So I realized I needed to switch my strategy from flipping to owning rentals. So I started buying in—basically, the BRRR strategy, buying rental property, single-family houses. And I found out about this veteran program where they give vouchers to homeless veterans, for them to get in the houses. And it’s very similar to Section 8. And being a veteran myself, I felt I had a rapport with the vets and could understand some of the issues that had sent them into homelessness… So I started doing that and scaled that initially, and it was great. It was a great program, it worked really well in the South suburbs of Chicago where it was affordable, and the rent rates were high enough to make it work. And then we moved to Indiana, and the rent got cut by a third of what it was in Illinois, for the program. So it just didn’t work anymore. And that’s when we really shifted gears and discovered the cash flow that can come with vacation rentals. That’s what we did afterwards.

Ash Patel: What year was that?

Kirby Atwell: So that was ended 2017.

Ash Patel: So Kirby, all these years that you’re in real estate, you were working full-time?

Kirby Atwell: No, actually. So in 2011, I jumped in full-time to real estate.

Ash Patel: Okay.

Kirby Atwell: And I did real estate full-time until 2017. So I was just running my own business and then I was involved with the non-profit prior to coming on staff there. And I was asked to come on initially as a CLO and then eventually, CFO. It was a non-profit that helps veterans start businesses. So eventually I did that for several years, and eventually went back to doing real estate full-time now.

Ash Patel: Alright, so you found short-term rentals in 2017, huh?

Kirby Atwell: Yes, exactly. And I have not looked back.

Ash Patel: You know, on the surface, it looks easy; a lot of money, but there’s a lot of challenges as well.

Kirby Atwell: Yes.

Ash Patel: Tell me the whole story. How did you get into it? How do you scale it?

Kirby Atwell: Yes. So I’ve been hearing about short-term rentals and it really intrigued me, especially hearing the numbers. I was like, “I’m always looking for markets or investment opportunities where there’s some sort of disparate — there’s not a perfect alignment of supply and demand. I think that’s where opportunities live.”

So we were moving across to Indiana anyway, we were buying a house on the lake; of course, we’re going to target a nasty house that needed a full rehab. So we’re rehabbing it anyway, and we said, “Let’s just turn the basement into a one-bedroom apartment and see what we can do.” And we did it. In the first three months, we paid three-quarters of our mortgage. It was over the summer, and we just rented it in the summer. The cash flow was crazy.

So I said, “Let’s scale this.” So we started buying single-family homes in the area then, and scaling them. But because it’s such a high cash-flowing strategy, you really don’t have to do as many deals, because my goal is to do the least amount of deals possible and get the highest amount of cash flow. I don’t want to manage 100 deals if I don’t have to. So that’s how I got into it.

Break: [06:23] to [08:25]

Ash Patel: Are all of these properties in a lake community?

Kirby Atwell: They are, they’re—Michigan City, which is—

Ash Patel: Okay.

Kirby Atwell: —the Southern tip of Lake Michigan. And I get that question a lot about the right location for vacation rentals. And I don’t think there’s any Airbnb guru out there who would name Michigan City as the mecca of Airbnb activity. It’s seasonal, it’s a town of 30,000 people, and it’s extremely affordable to working-class area. There are million-dollar houses along the beach, but there’s $50,000 houses downtown, too. So it’s a Midwestern city. So I think, again, there’s a lot of opportunity in there between the million dollar and $50,000 houses to get something, and there’s a lot of draws between the beach and the outlet mall and the casino and wineries and stuff like that. So a lot of people come visit, but there’s just not nearly enough Airbnb as the hotels for them.

Ash Patel: And then off season these houses are just shut down, winterized?

Kirby Atwell: No, they rent all year round, and that’s what I was surprised at, too. I looked at the calendars of other Airbnbs and I looked in the off season, and people were booking; in January, in February, in March… So every weekend is booked up for sure. Most of them are long weekends in the off season. And then we’ll get some weekly rentals as well. But the way we look at is as long as we can at least break even in the winter, in the summer is when we just kill it; we make all our profit in the summer. But we usually do better than breakeven in the winter, actually.

Ash Patel: Can you share some of your numbers and then some of your challenges as well?

Kirby Atwell: Absolutely. So it’s like a typical house that I’ll target in Michigan City – and it has gone up a little bit recently, because all prices have gone up. But I’m looking for something under $100,000. So some of them I bought around the $50,000 to $75,000 mark, and they needed full rehabs. I actually have one property under contract now that’s $24,000, and it is a disaster, but it’s going to be a great short-term rental. So I’ll put in anywhere from $50,000 to $150,000 into these properties, and make them nice, and then refinance out all my capital through the BRRR Strategy. And usually, I can get all of it out with a 75% loan-to-value refinance. And then they rent for—in the summer, I’m grossing usually around anywhere from $4,500 to $6,000 per property; and then in the winter, it’s right around $1,500 to $2,000. So obviously, you have to pay your cleaners out of that, you’ve got to pay the utilities. So there are more expenses than a typical rental. But when you’re making cash flow like that, compared to that same property would rent for $1,100 if I was renting it long term, the one that makes $6,000 in the summer.

Ash Patel: And is that $6,000 a week, or for the summer?

Kirby Atwell: Per month, each.

Ash Patel: Per month, okay.

Kirby Atwell: Yes. For the summer a month. It starts to pick up in March, a little bit more in April. And then May through end of October, it’s pretty much booked out.

Ash Patel: So you’ve got Michigan City cornered. Are you looking at other locations?

Kirby Atwell: I think a lot of investors go through this as they grow. But my mindset has evolved a lot to where I’m more concerned about lifestyle now. And I have two young kids, a one year old and a four year old. And we’re looking at more kids and I want to spend as much time here as possible. So like I said, I want the biggest return for the least amount of properties, the least amount of headaches. Every property has a set of management tasks and you can automate a lot of it. So my intent is to — all my properties are within walking distance; I used to have 26 long-term rentals as well. I’ve sold them all off except for one. So I just have a smaller portfolio, but it’s enough to pay all my bills with all the passive income from these properties. And they’re all right in the same area, so it’s extremely easy for me to manage. And I really have no interest in expanding to a new market. We are, like you mentioned, growing to our own property here, because I think there’s a ton of opportunity around this idea of building a glamping site or experiential short-term rental site.

Ash Patel: Good for you, mission accomplished; you got your financial freedom. You mentioned earlier you bought the nastiest house around. I think somebody should tell people before they get married, “If you marry a real estate investor, you’re going to buy a nasty house.”

Kirby Atwell: Absolutely.

Ash Patel: Speaking of which, what did you tell your wife when you bought a 45-acre farm? And tell me the story behind that.

Kirby Atwell: She wasn’t interested in real estate at all when we got married, but she knew — I was already an investor and everything, so she knew what she was kind of getting into. But she has really picked it up and run with it. So she’s been the driver for a lot of this stuff. So I probably would have stayed in the lake house, but she said, “Let’s move out to more area for the kids and stuff.” And then I started thinking about what’s the opportunity if we’re doing this on a small scale with one rental in our basement, could we do it with 20 rentals on some land? So I started with 10 acres and a house that we rehabbed. Once we were done with the rehab, we bought the 35 acres next door. And now we’re refinancing the entire 45 acres with the house into a VA loan, because there’s a house on it. So you can finance the house and it just happens to come with 45 acres that you can build a whole bunch of tiny houses on.

Ash Patel: So are you renting that out now, or is that your residence?

Kirby Atwell: It is our residence and we rent it out. We post it on Airbnb at kind of make-me-move type price. Like if you want to come stay here, it’s kind of in a super high price point. And we’ve had several bookings for our own personal house. So there’s weekends we’ll mark off where we’re going to travel anyway, and we’ll book our house here and people can stay on the farm.

Ash Patel: What do people do when they come to a 45-acre farm?

Kirby Atwell: They pet our chickens and they ride around on four wheelers. We just had a great family come; it was only a couple and their small child… And they just wanted to get out of the city. It’s working professionals from Chicago, working long hours, and they see a farm with farm animals, and we’ve got a great garden, you can pick your own vegetables outside, and people want that now; I think more than ever, they want that. So it’s going to be a lot more than that. Right now, we’re just renting the house. We’re in the process of building out the property, working with the county on getting a variance for the land to see what we can build on the land, and we’ve restored 100-year-old barn as well. So we’re going to be able to have weddings or events in the old barn as well.

Ash Patel: I love that experience; that makes me want to rent that out. So what’s the challenge on getting tiny houses built? Zoning issues, approval from the county or the city…

Kirby Atwell: Yes. Basically, there’s a variance process and that’s the challenge with doing this, because every county is different. So based on whoever’s elected and sits on the county board that approves these things, is whether you get approved or not. So it’s not like a black and white, check these boxes, and you’ll get approved.

So there’s different levels, and we’ve been doing some exploring of our own, staying at other glamping sites… And really, I think the route that we may go, because a lot of counties don’t want to see permanent structures built really close together, basically violating the planning rules that they’ve set out, or getting around the planning rules… But they will approve a campsite. So if you’re going to set up tents, the glamping canvas, big tents with king-sized beds and all that nice stuff that comes with glamping, you can do that just from May through the end of October, and it’s considered a campground. And then you can also set up campsites for people who bring their RVs or whatever if you want to do that route.

It’s a little bit more difficult, I think, to get permanent structures approved, but we’re working on that because that’s ultimately what we’d like, is to build cabins or tiny houses; and you can sometimes build them on trailers, and then you have them certified as an RV. So even though you could cover up the trailer and make it look like a permanent structure, technically, it’s built on a trailer, so it’s not a permanent structure. So we’re ultimately wanting to get the highest density approved, that they’ll approve, and then also the most permanent structures that we can as well so we could rent year round if they’ll do that.

Ash Patel: So it’d be like a mobile home with a skirt around the bottom of that trailer?

Kirby Atwell: Yes. Exactly.

Ash Patel: Yes.

Kirby Atwell: Exactly.

Ash Patel: And glamping, is that glamorous camping? Is that what it stands for?

Kirby Atwell:  Exactly.

Ash Patel: Okay.

Kirby Atwell: Yes.

Break: [16:45] to [19:48]

Ash Patel: I love how you just find opportunities in just every way, everything you do; that’s great. What are the challenges are you looking at right now in your business?

Kirby Atwell: I’d say the biggest challenge is the county right now; we’re just trying to navigate through that. I don’t think that people should start with this strategy, because it’s been a lot more capital intensive than I initially thought between rehabbing the house, getting all the land. This house was vacant for 15 years before we bought it, so the land was all overgrown, the barn was about to fall down; it needed a lot. And we hadn’t taken on a project like that before. So I would say start with very cookie-cutter Airbnb individual properties if you want to get into vacation homes. Build up enough passive cash flow to where it supports you to where you can jump into more of an experiential project like this.

Ash Patel: What experiential places have you stayed at?

Kirby Atwell: There’s a great one that we just stayed at, which I never would have paid this type of money to stay in a tent… We wrote it off as market research and justified it that way, but it’s $350 a night plus tax. So it ended up being almost $400 a night to stay in a tent. And it’s called The Fields of Michigan, and it is just an absolutely gorgeous glamping site. They have 19 big canvas tents, king-sized bed and a bathroom in the tent. It’s on a blueberry farm; they have this big barn where they serve you this gourmet breakfast, they light your fire for you, they give you a champagne when you show up… Basically, you’re in nature, but not having to deal with one issue that comes with being in nature; they’ve taken it all out basically, so you can just enjoy it while you’re there. And it was just so relaxed. We got massages in the woods… It was amazing. We’d go back, we’d pay it again. So it was a great market research trip for us.

Ash Patel: That is wild. Kirby, what is your best real estate investing advice ever?

Kirby Atwell: I would say, it’s probably not common advice, and there’s a lot of great advice out there that people give, but I would say always look for inconsistencies in the market. Your biggest returns are going to come from areas of the market—and this is in investing or just in life in general– anything that’s not commoditized. So I’m always shying away from — if everyone has the same information, you’re buying properties off of Zillow, or you’re doing anything that’s turned into a commodity, you’re probably going to struggle. Basically, it’s whoever is going to pay the highest price or whoever is just going to hustle the hardest is going to win in that game, and that’s not the game I want to play.

I want to find markets or opportunities like Airbnb, where it’s hard to know — you look at comps on Airbnb, and there’s some listed for 150, some listed for 300. You don’t know how many nights it actually is going to book up, so not a lot of people are willing to do it because it’s hard to run the numbers and hard to know, is this going to work out for me? So there’s a huge supply and demand issue there. There’s not nearly enough supply for the amount of people that want to stay in Airbnb, so your returns are exponentially higher. So if you can find new areas of investing like that, I think it’s the same in relationships or in your day job or whatever, places where it’s not commoditized, I think that’s a great place to be as an investor.

Ash Patel: That is great advice. Kirby, are you ready for the Lightning Round?

Kirby Atwell: I hope so.

Ash Patel: Alright, here we go. Kirby, what’s the best ever book you recently read?

Kirby Atwell: Yes, it’s a newer book, actually, by Greg McKeown. It’s called Effortless. He wrote Essentialism, but his new book is Effortless, and it’s awesome. I read it twice, actually.

Ash Patel: What was your biggest takeaway from that book?

Kirby Atwell: It’s all about the difference between linear work and residual work, basically. Linear work is, “I do X today and I get paid for X today.” Residual work is, “I do X today, and it pays me day after day into the future.” So now I try to think through that lens in everything I do. Airbnbs, or just real estate investing in general, is a great example of exponential or residual type of work. You set up a property once, it pays you forever; so I try to do that with everything I do. I’m trying to set up systems where it’s not like I’m just doing a task that I paid for once, and the payoff is just so much better. So I highly recommend both.

Ash Patel: Thanks for sharing that. What’s the best ever way you like to give back?

Kirby Atwell: My company is called Green Vet Homes, and I set it up in 2016 when I started doing rentals. The intent behind it was either I was going to rent a house to a homeless veteran or I was going to donate 10% of the profit to a veteran-related cause. So now that I’ve gotten away from doing the homes for homeless veterans, since it doesn’t work over where I’m at now, I donate 10% in a lot of different ways. There’s some that align, this program called Vetcation where you can give free vacation rentals to veterans and they vet the veteran as to their need. There’s scholarships that I’ve contributed to… So veteran causes is something that I’m really big into.

Ash Patel: That is great. And Kirby, how can the Best Ever listeners reach out to you?

Kirby Atwell: If you go to livingoffrentals.com, that’s my website where I talk about all the things that I’m doing. I’ve got a YouTube channel there, a podcast, so I think that’s is the best way. I’m also on Facebook. You can just look me up, there’s not too many Kirby Atwells out there.

Ash Patel: Awesome. Kirby, thank you so much for sharing your entire story from West Point of flipping houses, taking care of vets were some of the great causes that you’ve done, and giving us an insight into your short-term rental business, your vacation rentals. So thank you again for joining us.

Best Ever listeners, thanks for joining us, have a best ever day.

Kirby Atwell: Thanks, Ash.

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JF2780: How Empowering Women in Real Estate Benefits Everyone ft. Liz Faircloth

Multifamily syndicator Liz Faircloth began her real estate journey when she and her (now) husband, Matt Faircloth, purchased their first duplex 16 years ago. Since launching the DeRosa Group together in 2005, they now have $130M under control and management. Throughout this process, Liz met her partner, Andresa. As they did deals together, they realized they had a shared passion and need to bring women together in the real estate space — so together, they created the InvestHER community.

 

The Inspiration Behind InvestHER

Since attending graduate school for social work, Liz Faircloth has been passionate about supporting women in living lives on their own terms. Things really clicked, however, when Liz and Andresa began working together. They discussed their mutual desire to bring women in real estate together to form a like-minded community, and soon, InvestHER was born.

 

Why Should Men Care?

Liz was recently asked this question while being interviewed on another podcast, and it caught her by surprise. Her answer? Whenever a shift toward equality occurs, everyone should care to be involved in it. InvestHER wasn’t created to pit women against men, but to give women a space to keep building relationships with anyone on any level. Liz is grateful to the men who support and appreciate this community she and Andresa have created.

 

Her Advice for Female Beginners

For young beginners fresh out of school, Liz suggests finding a mentor. “Meet people in your local community,” she says. “Get to know those local rockstars and start to build a relationship with them.” Once a relationship is established, that’s when you ask: “How can I help you? How can I work for free for you?” Liz says. 

For women interested in starting in real estate who are a bit older, Liz advises evaluating whether you need to be an active or passive investor. Finding an answer to that requires you to know what your short-term and long-term goals are. Assess where you want to be, and then assess how active you want to be.

 

Do Women-Centered Meetups Exclude Men?

While anyone is allowed to attend InvestHER meetups, they are geared toward women. Liz attributes this to the importance of creating a safe space for female investors, particularly if they are new to the game. Entering the real estate space can be intimidating for women, and communities like InvestHER provide them with the support, encouragement, and focused attention they need to succeed.

 

Her Best Ever Advice: Don’t Give Up

Liz says it’s easy in the beginning to wonder if you aren’t cut out for real estate — there have been many times in her 16-year career that she’s wondered that, herself. But because she and her husband didn’t give up, they were able to find their stride, discover their niche, and develop the flourishing business they have today.

 

Liz Faircloth | Real Estate Background

Greatest lesson: I have learned no matter what to never give up and always find a way to make what you want to see happen.

 

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TRANSCRIPT

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, Liz Faircloth. Liz is joining us from Philadelphia, Pennsylvania. She is the co-founder of the DeRosa Group which has $130 million of assets under management. Liz is also co-founder of InvestHER, a community that empowers women in real estate. Liz, thank you for joining us and how are you today?

Liz Faircloth: Great. Thank you so much, Ash, for having me. Thank you for having me on here today. Doing wonderful.

Ash Patel: Good. It’s our pleasure to have you, Liz. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Liz Faircloth: Sure. Long story short, my husband and I, at the time boyfriend and I, read Rich Dad Poor Dad. We were both in two different professional careers. I was going to become a social worker, my husband was an engineer, or my boyfriend at the time was an engineer, both on the tracks of our professional careers. My brother-in-law had read Rich Dad Poor Dad 16 years ago and said, “You have to read this.” I said, “Why?” I did, and I think I forever was changed. I think you probably heard that and I certainly get that on our podcast a lot. But it really did, it changed my whole way of thinking about everything, Ash.

That was 16 years ago, so that really prompted me and Matt at the time to start taking courses at our local REIA meeting. We took courses for a year and then went door to door, knocking on doors, doing like grassroots, finding our first deal, and we found a duplex. That was 16 years ago, we bought our first property. We didn’t have the money, we needed about 30k to buy the property and also renovate it, and didn’t have it. My father loaned us money, so it was our first private money deal. We then since grew our business that way, through private money and doing it that way. But that was our first private money deal, was my father, and that really launched us into investing.

We then launched DeRosa Group in 200, and got involved in a bunch of different aspects of investing, to be honest. From commercial to raw land, to flipping; you name it Ash, we did it early on. We were a little all over the place, until we really went all-in on multifamily and started to grow our portfolio by partnering with other people. We have about 130 million under control and management, and have been growing since in terms of larger multifamily space; value-add, workforce housing, we tend to invest in more workforce housing, up and coming communities where we are right now. Even location-wise, we’ve evolved.

All of our projects are from New Jersey, and then we’ve evolved and come to the South. We do a lot in Kentucky and in North Carolina now. So that’s in terms of our focus for real estate investing. Throughout that process, doing a lot of deals with my partner Andresa and we said, “We had a shared passion and a need to bring women together in this space.” So that’s what we’re up to. We have a community, we have a membership, we have a conference coming up to really empower women to live a financially free and balanced life. I have a lot of different passions, but that’s keeping me very busy these days, because it’s just neat to see women take on their own financial futures and grow their wealth.

Ash Patel: Thank you, Liz, and your boyfriend turned husband, Matt Faircloth, who I had the pleasure of meeting at the Best Ever Conference this year – a wonderful person. So you’ve built this incredible company here; I want to get into that. But I want to ask you what the inspiration was behind trying to get women to be more self-empowered with their financial future?

Liz Faircloth: Yeah. It’s funny, you know when you get into something and then you look back? I was talking to my sister about a year into InvestHER and she goes, “You’ve always had this passion, Liz.” I said, “What are you talking about?” She goes, “Do you remember in graduate school,” and she told me a story. You do a lot in life, you don’t always remember different pieces of what you did. 20 years ago, when I was in graduate school, I actually created a business plan to support women. It wasn’t financial freedom, because at that point, I was just starting my real estate investing tenure, if you will. But it was about supporting women in living their life on their own terms and safety.

So I was in social work school, and all the people that I was working with in my field placements were mostly women. These are women who had mental illness, they were getting physically abused, mentally abused, and they weren’t worried about financial freedom. They were looking to survive, they were looking for safety. My passion to support women was always there. I think that really launched that when I was early in my 20s. For many years, Ash, I was in the corporate world; so as my husband and I decided to build our investing business, he quit his job. I got a job actually in sales, the basis of like Rich Dad Poor Dad, I actually didn’t get a job in social work.

So during that tenure of me really focused on corporate, I was always gravitating toward the coaching, the workshops, and the supporting women in corporate life. I’ve worked with everyone; I’ve worked with presidents of companies, men, and women, and I love to work with both, but I really got a lot of energy from that. When I came together with Andresa, we actually were working in supporting each other, we were doing a number of flips together. About four years ago, we would be together in a Panera and we’d be, “Where are the women in this business?”

We didn’t know a lot of them, to be honest. We knew there was a lot, we had a hunch, we just didn’t know them. We said, “How great it would be to bring them together, a like-minded community, and how about we interview them and see what their secret sauce is?” We looked for it and we couldn’t find it, so we created something that we didn’t find, and then everything kind of launched from there.

Ash Patel: What do you see as something that women in real estate can benefit from, and what’s holding them back?

Liz Faircloth: What’s really interesting is that, in terms of benefits, statistics are interesting. Women statistically outlive men; just straight statistics, six to eight years. Whatever relationship you’re in, whatever your partnership relationship looks like, that’s just something that tends to happen. What’s interesting is my grandmother, she didn’t even have a checkbook and she didn’t know much about the money piece. Then I kind of saw my mother and my father – my mother knew more than my grandmother in that generation, it seemed like, from a role perspective; and every family is different.

So what’s interesting is I think women have such an ability and have such advantages, and the need to become more financially secure, whether through helping their families, whether they’re doing it for legacy; there are so many advantages of women investors, taking control of your own investing world. I think our generation or this generation seems like there’s more of that interest – working on your own terms, living life on your own terms, not just trading time for money; having flexibility with family and all the other things you’re doing in your life. The investing world I think fits perfectly in with what a lot of women want and need.

We just want to live life on our own terms, and so do men. The hats – women wear a lot of hats, and so do men, but I can only speak from this perspective. And we do it alone. We often will do it alone, but we can’t do it alone. That’s where the community comes in. There are tons of advantages of women investing actually, statistically. I’ve done a lot of research and it seems like there are a lot of advantages, too. More conservative, but actually there’s a lot of strong research that shows once women start investing, they do very well.

What’s holding them back – that’s another good question, Ash. That’s something me and Andresa became really curious about. Because that’s what we’re in the business of, trying to support women, empower them, help them, and I would say create the community that they’re going to get their answers and get the support they need. A few things, we often think knowledge holds us back. We polled a lot of men and women, but especially women, what holds you back from investing or taking the leap, or even changing niches. Going from flipping to short-term rentals, or a syndication and doing things on your own to raising money with other people. They say it’s the knowledge, but in reality, it comes back to just confidence.

Yes, women often feel like they need to know everything. We need to know A through Z. “But until I really know it, I don’t want to do it” and that’s a common thread that I see a lot, at least in the women we talk to. But then we start to surround ourselves with other like-minded women and we’re like, “Hold on, we don’t have to know it all. We have to be able to pull a team together and lean on other people. I don’t need to be the expert in this.” That’s the joy of seeing a lot of women closing deals, making things happen, because they’re not going to figure it out all by themselves. It’s very lonely to do that, and it’s very overwhelming, too.

Ash Patel: I’m thinking back to the Best Ever conference which was not too long ago. All the women that I interacted with were just savages; they were killers when it comes to real estate. So it’s great to have that community. I also think back to when I was in the corporate world, and a lot of these nuances that held women back – you don’t see that as much in real estate. It’s kind of a more even playing field. You don’t have to try to play in somebody else’s sandbox; you can kind of carve your own path. From my experience, the women that I’ve partnered with and worked with are more tenacious, and an attribute I think most women have is they don’t take things personally as men do.

Liz Faircloth: That’s interesting. Yeah.

Ash Patel: A good example is in sports; the female racecar drivers. If they get bumped or somebody runs them off the road, they don’t make it a point to go get even; they just want to win. Whereas the men, their mindset changes. NASCAR is a great example, with Danica Patrick. They are determined to get payback; just my observation. Have you read the book Lean In, by Sheryl Sandberg?

Liz Faircloth: I have and I really admire her a lot. I admire thought leaders that are really out there creating these communities, creating the support, creating different ways of looking at it, and just being a stand, for women and men. I was on a podcast, Ash, not very long ago. The first question the gentleman asked me was, he said, “Why Should men care?” Literally, the first question; it was [9:00] A.M. in the morning too, so I’m like “Let me get another drink of my coffee.” No, but that was the first question he started with.

Ash Patel: Coffee? You probably need scotch for that question.

Liz Faircloth: I know. And I said, “Great question.” In hindsight I was like, “Whoa.” But with anything that you’re shifting and their sense of pushing towards equality and shared equality – everyone’s involved in that, or should be involved in it, or should care to be involved in it, to be honest. That’s not always the case, but that’s why I love that there are so many men that support our community, there are so many men that appreciate our community. I’m so grateful for that, and I feel like we have so many allies. I think that it’s not us versus them. I have really great relationships with men, [unintelligible [00:12:49].

We didn’t create this out of this “us versus them” place. Sometimes people create things for different reasons, but it’s all about really creating the space for women, so that they can keep building relationships with whomever, on whatever level. And that’s really what it’s about… Which sometimes can get misconstrued by different women’s communities.

Ash Patel: What’s your advice to our Best Ever listeners that are female? Maybe they’re a little bit older and they’re wanting to get into real estate. The traditional route is you get your real estate license, just become a realtor, and show residential houses… But there’s so much more to real estate. What’s your message to those women?

Liz Faircloth: We do a lot of content, we do a lot of teaching, Ash. What I’ve seen over the years is the need for evaluating, do you need to be an active or passive investor? That question can’t get answered until you know what your short-term and your long-term goals are. So I’d really encourage, to that woman who you just spoke about, to say, “Okay, what truly do I want to achieve with real estate investing? In what time?” In other words, from a financial perspective, from an experience perspective, from all of the different pieces. So if they get clarity – not what I should do or should need, but is this for retirement planning? Do I love my job and I’m just trying to get ready for five years, 10 years down the road? What do I hate with what I’m doing, Ash? I just hate it and I want to move on to something I really love and can jump into.

So I think the need to really evaluate short-term and long-term goals, your “why”, all those clarity big picture questions first. Then you can start to get into “Okay. If I’m trying to achieve retirement and I want to make X dollars in five years, can I achieve that?” We all want to achieve things in the simplest, easiest way, let’s be honest. So if I can achieve that goal by investing with somebody passively – non-accredited or accredited; you can passively invest either way depending on the deal, obviously, in the project, would that serve my needs? Because let’s be honest, some people don’t have the time or the interest to go into that property and go, “I want to renovate this.” They don’t love the smell of lumber or whatever, things that investors really love. They want to just make passive income, period; because of where they are in their life, the time that they have etc., etc.

Often, people think they have to jump into active investing, when in reality, they might be able to just passively invest and achieve the goals they need and want regardless. I’m an active investor and a passive investor. The project we just did, me and my husband, we passively invested in it as an LP a limited partner, and obviously, we’re on the active side, on the general partner side. We want to do more passive things, we’ve been doing this for 16 years, and we were really active at the beginning. We were doing everything; I’m cleaning departments, my husband’s showing apartments, we were doing literally A to Z.

So I guess that’s the message I’d give to the woman you were just speaking about, is to really assess where you want to be, and then assess how active do I want to be? What’s my time? What’s my money investment? Then you could take a step back and go niches and where should I place my “looking to learn and evolve here” versus people just jumping in too fast to learn about short-term rentals, when that might not be the right niche for you [unintelligible [00:15:47].00] your goals.

Break: [00:15:53][00:17:40]

Ash Patel: Liz, let me rephrase that question in another way. What would your advice be to younger women maybe just coming out of school, whether it’s high school or college, wanting to get into real estate, and may think it’s a daunting task, or insurmountable for them?

Liz Faircloth: A totally different strategy. I would suggest to them that they do what my husband I didn’t do, to be honest. You pay for your education one way or the other. So you’re either paying for mistakes, then you learn from them, and you don’t do it again. Or people go get coaching or they learn and mentor under people. It might be a little simpler of a route to do the third. My husband and I didn’t mentor under anyone, Ash. I wish we had mentors early on. We paid for that education; we lost money on the flip, or we did this differently. That’s how we learned, through the school of hard knocks.

I would say if you’re young, and you really like real estate, and you want to get onto the investment side, is to meet people in your local community. As local as you can get would be great, because there’s so much of investing that’s local. That’s what’s great about real estate, it’s brick and mortar; you can see it, you can touch it. Get to know the local players. If the multifamily intrigues you, find the multifamily players; if short-term rentals intrigue you, which everyone wants a vacation rental these days, then get to know the players. Get to know those local rockstars and start to build a relationship with them.

Then, once you start building a relationship with them, say “How can I help you? How can I work for free for you?” People that are growing their portfolios from five to 10 deals to a thousand deals; everyone needs help with something. I can literally give you a list of 20 things that I need help with right now, an investor in DeRosa. We all need help to grow, even if we have a team. My point is saying that I wish we did that early on, Ash. I wish in our 20s, because that’s when we started, to say we found some real rockstar investors and said “How can we help you? How can we work for free?”

Whatever you need, just to be around that and be around really great mentors. That would be my biggest recommendation. Don’t do it alone, learn from people, but you’ve got to add value. And you don’t know what that value is if you don’t build a relationship.

Ash Patel: I love it. Liz, I got to ask you a question. We were at the Best Ever conference and I met somebody who I think was either starting or going to a women’s group meet-up in the morning, the next day. I said, “Hey, can I go? This sounds awesome.” They’re like, “Yeah, sure.” Obviously, it was intimidating, because I was probably going to be the only guy there. It clearly said women’s meetup. But I felt like I was being discluded, almost as if somebody had a meeting for graduate students only; you have to have a graduate degree. It’s like, “Hey, man, I want to play that sandbox too. Maybe I can add value or get something out of it.” What are your thoughts on that, when men are discluded? What is your opinion on that? Should it be solely women only?

Liz Faircloth: That’s a good question. We have meetups across the country, Ash. We have 55 meetups, and we started with one. The idea with these meetups, the meetups are all about creating a safe space for women. Meaning, Ash, the need for a safe space. I’ve had women in meetups; now, our meetups have women and men can come. It’s geared towards women; obviously, our community is geared towards women. But our meetups are open to the public so anyone can come, obviously.

I used to go to a lot of our meetups before COVID, a lot of local ones I would go, and I would speak. There was a meetup that I went to, and there were four men, and there were about 30 women. I welcomed them, I said hello, very nice to everyone. We sat down and started listening to the speaker. When the speaker said, “Do you have any questions to this group?” I’m not kidding, one out of the four men proceeded to ask probably about 15 questions. And all the women – no one asked any of the questions. This gentleman literally just took the meeting over. I’m not saying all men do that, but I’m sharing an experience.

I want to answer your question, but I want to give an example really quickly. What then proceeded to happen was I saw the woman in the back, they kind of looked like they had questions, they just didn’t feel comfortable asking them. This one gentleman literally just had his hand up the whole time. So the meeting ended, we moved on, and I went up to the woman at the back, I said, “Did you guys have some questions? Because I knew the content is about multifamily and I can support you.” They looked newer, too. They’re like, “We did have some questions, but we felt really intimidated; so we didn’t put our hands up, and just felt really intimidated.”

I give that example – now, this gentleman was asking his questions. God bless him, he wants to ask questions; great, not to make him wrong. However, by him kind of taking over the meeting in this women’s group, the women actually didn’t feel comfortable to ask their questions; they either felt stupid, or what have you. I’m just telling you that, not that that’s every experience, but I think what we’re trying to create here, Ash — listen, society should be men and women, there should be events, there should be everything. What we’re up to, and why it’s important, in my opinion, that there are safe places for women to get the support they need, is they don’t feel comfortable in those other meetings where there is a lot of that back and forth; and for whatever reason.

Maybe there will be a need one day that our meetups will not be needed, I don’t know. But right now they are, and women really appreciate the kind of safety of it. You think like safety, what’s the big deal? Just ask your question, what’s the big deal? But there’s something intimidating about other stories they have, or other experiences they’ve had, especially women who are newer to this space, and they feel like morons that they have to ask what NOI means, or what have you.

I say that because I do feel like there is a need that there is a safe space for women to get and give the support they need, because they haven’t always gotten it in their life; and I do think there is a very good need and place for women and men to work together to engage together and to, of course, partner together. It’s not like exclusivity in and of itself, it’s exclusivity, or focus, because women aren’t getting this somewhere else, so they need to get it here. Does that make sense?

Ash Patel: Thank you. Yeah, that actually clears it up tremendously. I probably would have been that bull in a China shop if I went to that women’s meet-up, and would have just asked a bunch of questions and tried to do what I do. Sheryl Sandberg had a great story in her book where she was speaking at a college, and just for our Best Ever listeners, I’ll share the story… She was speaking at a university, or at a corporation, and she said, “Okay, one more question.” Well, after that one question was asked, the men in the audience kept raising their hands. She kept going on and on and answering more questions for several more minutes. Later on, some of the females walked up to her and said, “Hey, I really wanted to ask this question.” She’s like, “Why didn’t you ask it?” “Well, it’s because you said one more question.” So yeah, I get those cultural nuances. And again, thank you, because that clears up a lot.

I’m going to share another story. We were at an aquarium, and my daughter was in the audience. There were a bunch of kids there, there was a penguin trainer who said, “Okay, last question.” I made her keep her hand up until her question was answered.

Liz Faircloth: Good for her.

Ash Patel: I get a lot of what you’re saying, and really, thank you, at least from my perspective, for clearing that up, because I went from feeling excluded to now understanding why and that’s incredible. Thank you again. What is your best real estate investing advice ever?

Liz Faircloth: Don’t give up, and even when you have the moment of, ‘”Am I cut out for this?” things aren’t moving as fast as you want them to, or you’re not making the money you want, or what have you. There were so many times I feel like in 16 years of investing that I asked that question, and my husband did, too. Like, “Are we cut out for this?” We just kept going and not giving up, and finally created a stride in a niche and went all-in on that, and tweaked and really developed a business out of it. So I would just say don’t give up.

Ash Patel: Liz, what is an example of something that happened in real estate that happened because you were a female, negative or positive?

Liz Faircloth: I have to say I was in the building of relationships perspective, and lot of when we were finding deal flow, so we didn’t do a lot of cold calling. As we grew our business, we built relationships with brokers, which is something both me and Matt did early on small multi’s, and what have you. I have to say, I really love building relationships with people; it’s one of my core geniuses or one of my strengths, if you will. And I felt like it was an advantage. I worked with a lot of men who are commercial brokers, and built really good relationships with them.

Would I have if I was a man? I don’t know, maybe; I’m not really sure. All I can speak from is my own experience. I wasn’t competitive with them, I was inclusive, I was supportive; I was very tenacious though, and we wanted to be known as “when you have the next 18-unit you call us” kind of deal. And that’s what happened. I’ve always seen it as an advantage, honestly, Ash, even before InvestHER. I see being a woman in this business as a complete advantage.

Ash Patel: Yeah. A great example, I would much rather talk to you than somebody like me… An abrasive guy from Jersey. I’d rather talk to you. Liz, are you ready for the Best Ever lightning round?

Liz Faircloth: Yes.

Ash Patel: Liz, what’s the Best Ever book you’ve recently read?

Liz Faircloth: The High 5 Habit by Mel Robbins; I’m a big fan of hers. She just came out with that book.

Ash Patel: What was your big takeaway from that?

Liz Faircloth: It’s such a simple book, almost like, “Why do I even need to read this, honestly?” Because a lot of people think like you’ve got to give yourself a high five and that’s going to change your life. I love Mel Robbins, she always gives great statistics, and neuroscience of why appreciating yourself and literally giving yourself a high five in the mirror psychologically impacts your way of looking at yourself, and then thus affects the way you enter your day. Such a simple thing actually is quite deep. I love listening to her, she has great stories and just great statistics too, and science-based stuff.

Ash Patel: Man, that sounds powerful. If I did that every morning – yeah, that would be cool. Liz, what’s the Best Ever way you like to give back?

Liz Faircloth: I actually recently found an organization – they’re national, they’re called Lasagna Love. Really cool. I’m Italian, my parents are from Brooklyn, so making lasagna, meatballs, all those sorts of things was very natural to us. I found this organization, and basically, they pair you up with people who could be coming back from having surgery; it could be there’s a need for some reason. They pair you up with people in your community within a 30-minute radius. You get like little email, “Hey, so and so needs a lasagna.” You connect with them and then you bring the lasagna to the family. It’s just a neat way to give back. It’s not like every week, but I really like making lasagna, and I really love giving back, so it’s a kind of a cool nonprofit that I volunteer for.

Ash Patel: That sounds fun. Liz, how can the Best Ever listeners reach out to you?

Liz Faircloth: We have a lot of things happening in the various businesses I’m involved in… But definitely, in terms of seeing some content from the DeRosa side, derosagroup.com, we always have stuff going on, Matt’s YouTube channel, etc. For the women… And men love our podcast too, Ash, I have to say. Men really do appreciate our podcasts as well.

Our podcast, The Real Estate InvestHER Show, as well as our meetups and our community. InvestHER Con – it’s coming up on June 23rd and 24th. Kim Kiyosaki is our keynote, we have 20 speakers, five keynotes… It’s going to be a really neat transformational experience for women investors in Charlotte, North Carolina. We’re going to have it at the Weston. All that stuff is on our website, therealestateinvesther.com. I’m very engaged in our Facebook community. I’d love to connect with anyone listening; if you want to tag me, ask me a question on our Facebook community… We’re all about helping women.

Ash Patel: Incredible. Just our Best Ever listeners know, it’s InvestHER.

Liz Faircloth: Yes, therealestateinvesther.com. You got it.

Ash Patel: Liz, we didn’t talk a whole lot about real estate, but I feel like the conversation that we had about the mindset with both men and women will do our Best Ever listeners a lot of service. Thank you for your time today.

Liz Faircloth: Thank you so much for having me, Ash. I really appreciate it.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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JF2779: Why Now Is the Time to Break into Industrial Real Estate ft. Chad Griffiths

Industrial real estate broker and investor Chad Griffiths stumbled onto the asset class he now knows and loves by complete accident. When he joined a company as a broker in 2005, his mentors were heavily involved in industrial real estate, so he naturally ended up learning all about it. Today, he is a partner at NAI Commercial Real Estate and invests in properties as well. In this episode, Chad discusses the state of the industrial space across various markets and explains why now is the ideal time to get in on it.

 

Markets with the Highest Industrial Growth and Demand

As e-commerce continues to grow, Chad predicts a considerable demand for industrial real estate — particularly warehousing — in the Rust Belt. He also predicts a resurgence in manufacturing as a result of current supply chain issues. There will likely be more resourcing or on-shoring for manufacturers in order to start making things in North America. “I wouldn’t be surprised if we actually see distribution spaces and manufacturing spaces continue to grow for the foreseeable future,” he says. 

This growth is happening the strongest right now in port markets like Los Angeles, New York, New Jersey, and Vancouver, Canada. These markets, Chad says, have less than 1% vacancy, which means we’ll likely begin to see vertical growth in the form of multistory warehouses. He predicts this growth will spill over to inland markets like Chicago, Dallas, Kansas, Ohio, Pennsylvania, and Tennessee. 

 

The Best Opportunities for New Industrial Investors

If you’re looking to invest in industrial real estate for the first time, Chad recommends focusing on areas experiencing a positive population influx, like the Sun Belt — particularly Florida, Texas, and North and South Carolina. “My number-one area that I’d be invested in right now is Florida,” he says. “I think that there’s so much happening in that area. I don’t see that market declining anytime soon from a population migration standpoint.” 

 

Why Manufacturing Development Indicates Population and Job Growth

Regardless of your chosen asset class, Chad says that watching where manufacturing is being developed is a lead indicator for population and job growth. Because manufacturers often pay relatively high salaries for skilled laborers, they naturally spur this kind of growth wherever they appear. That’s why he expects to see an increase in both population and job growth in the Rust Belt next.

 

Chad Griffiths | Real Estate Background

  • Partner at NAI Commercial Real Estate. He’s an industrial real estate broker and investor, focusing on cash-flowing industrial properties with the goal of incrementally raising rents and values by extension.
  • Portfolio: 
    • GP of five industrial properties ranging from $400,000 to $4,500,000
    • Owns several industrial REITs in the U.S. 
    • LP of one multi-tenant office/retail property
  • Based in: Edmonton, Alberta, CA
  • Say hi to him at:
  • Best Ever Book: The Bomber Mafia by Malcolm Gladwell
  • Greatest lesson: There are asymmetries in real estate knowledge, so the person with the most knowledge has an undeniable advantage.

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Chad Griffiths. Chad is joining us from Alberta, Canada. His business is NAI Commercial Real Estate. He’s an industrial real estate broker and investor. Currently, the GP of five industrial properties ranging from 400,00 to $4.5 million in value. He owns several industrial REITs in the US and he’s an LP of a multi-tenant office and retail property as well. Chad, can you start us off with a little more about your background and what you’re currently focused on?

Chad Griffiths: Yeah. Thanks, Slocomb. I’m really excited to be on the show and talk about all things industrial real estate.

Slocomb Reed: Glad to have you.

Chad Griffiths: Yeah. I love chatting about this stuff, so it’s an honor to be here. I got started in 2005, I joined a company as a broker. I didn’t know much about industrial real estate at the time; it was really this opaque industry that a lot of people just don’t have very much familiarity with. Like, everybody’s familiar with office, retail, and multifamily. But when I started, I knew very little about industrial real estate. The office that I joined was heavily involved in industrial, so the people that I was learning from and mentoring under, that’s just the path that I ended up taking. So it was purely accidental that I really got into industrial.

But fast-forward today, 17 years later, I have partnered with the firm, and then in 2014 I also started investing in properties myself. Trying to add a property every year; a little bit challenging over the past couple of years with all the uncertainty and the pandemic and everything, but we’ve been pretty consistent, closed on another property earlier this year for about $4.5 million dollars, and we’re just completing a major renovation on another property that we have, which the covering’s just about to come off the exterior. So it’s been an interesting ride, I love talking about this, it’s just really a passion of mine beyond working in it full-time and having the majority of my net worth tied into industrial real estate. I just love talking about it.

Slocomb Reed: Yeah, absolutely. I’m in a very similar place apartments-wise. I became a residential real estate agent here several years ago. All of my investing, like real estate, my career – it’s my hobby, it’s what I love talking about, that’s what all my friends do, totally. So as a broker, do you specialize in industrial real estate on what you sell?

Chad Griffiths: I don’t personally, although by nature of the market that I work in, Alberta is very close to Texas. We’ve got a heavy oil and gas exposure so we’ve got a disproportionate amount of manufacturing properties in our market. Whereas the big buzzword of the day in industrial is warehousing or distribution centers, our market has a lot of manufacturing. So by nature of just being in that market, I’ve probably done more manufacturing type of properties than I have warehousing. But we’re also a market of about a million people, and in that range there aren’t a lot of people that specialize in one specific area.

If you go to a market like LA, as an example, there will be somebody that specializes just in warehouses right on the port. It will become that “the more specialized, the bigger the market you get to”. I’m in a market where I’ve done sales and leasing on the full spectrum: warehousing, manufacturing, flex properties.

Slocomb Reed: Gotcha. How much of your industrial investing is there in your local market and how much of it is non-local?

Chad Griffiths: Actually, all of it is local. I can drive to every building that I own, about 20 minutes from my office. Part of that was designed; it’s a market that I’ve worked in extensively for a number of years, so I just know it really well and I’m comfortable with it. I just feel that I’ve got a lot more information about my local market than I do in another market. That’s one of the reasons that I’ve tried diversifying a little bit by owning some REITs. It’s kind of funny, I own a lot of hard assets of industrial real estate and even the stocks that I own are in industrial real estate. So maybe that’s not the best diversification standpoint from a financial high-level look, but I just love industrial real estate. I try to balance out my physical assets with industrial REITs which own property all over the world.

Slocomb Reed: Awesome. Now, you were introduced as a general partner in five industrial properties. What does your partnership structure look like, and are you raising capital from limited partners for your acquisitions?

Chad Griffiths: We’ve actually not done general partnerships, actually. We’ve done more of actually just like an LLC. I’ve got one main partner; him and I have done everything together, and then we’ve strategically brought on other people with some of them. A couple of the properties it’s just him and I and one or two small partners, and on some of the larger stuff we might have eight or nine partners. But we’ve actually done it where we’ve set up a separate company for each one of these. It is on the horizon that I do want to do more syndication. I’m an LP in one project myself, but I would like to sponsor more deals going forward. But I also wanted to establish a track record of showing that we’ve got the capacity and capabilities of doing this on our own.

As of right now, we haven’t raised any money for our small fund, but we might look to roll over some of these properties into a fund down the road, or just set up a new syndication altogether. But our experience has been we wanted to invest in it directly, we wanted to have control, we wanted everybody that participated to know that we’re also involved with our own money. That was important to us right from the beginning.

Slocomb Reed: Awesome. You said that you are involved in or own a handful of REITs in the United States. Those are controlling industrial real estate as well?

Chad Griffiths: Yeah. How it works with most REITs in the US, in particular, the biggest ones… And the biggest one by far is Prologis; that stock ticker’s PLG. They’re actually the biggest property owner in the world. So not even just industrial real estate, they’re the biggest property owner in the world. They’ve got a billion square feet worth of industrial real estate in key markets all over, predominantly in the US, but all over; in major port cities… And I like that from the standpoint that their portfolio is geared to take advantage of that e-commerce boom. I don’t see that slowing down anytime soon, I think that that’s still going to be a trend for the foreseeable future. They’ve got some of the best real estates in the world, in the most strategic markets.

So instead of me trying to compete with an institutional-grade company like that and physically owning the real estate, I can invest in them, make a small dividend, and hopefully participate in some appreciation of the stock. It’s gone up; even from when I’ve bought it, it’s actually done quite well. But I also own STAG and Duke Realty, these are two other ones that I’ve got shares in as well. I like having that consistent dividend, I believe in that market segment, and I like the intelligence that they have as well. I feel that being invested in those companies makes me follow their reports more closely.

I read their quarterly reports, occasionally, we’ll even jump onto their quarterly earnings calls, and just see what type of documents and research that they’re putting out, which I think informs me as an investor myself, just based on all the sheer amount of research that these guys are putting out and producing.

Slocomb Reed: That’s awesome. I really want to dive into that. But before we get too far down the rabbit hole, Chad, if I can ask why is it that you are investing in REITs – is it simply because they are the largest, most powerful, most heavily analytical, and researched industrial real estate owners in the world? Or is it specific to their structure as REITs that makes them appealing to you as an investor?

Chad Griffiths: I would say the main reason that I invest in them is just liquidity. Because the majority of my investments are in physical real estate, which as you know too, it’s hard to actually pull money out of those, at least quickly. You can always refinance, you could sell if you have to, but that’s a long cycle. Whereas REITs – it’s still an industry that I just believe in; I think it’s going to continue doing well. But if I need to access some short-term money to buy another property, or whatever I need it for, I can liquidate those positions on a trading day. That’s probably the main reason that I like it. I love having the access to the research that they produce. You’re dealing with the most sophisticated owners and analysts and people that are thinking of the business from a completely different level than I would in my small local market.

Having access to that type of information just gives me something that I believe others that aren’t following it don’t have. Those will be the two main reasons. The dividends that they pay aren’t great; it can range from 2.5% to 4% so it’s not a huge dividend-paying stock. So you’re sort of relying on some appreciation in that, but I think it’s a very safe investment, liquidity, and access to research. It’s a lot of reasons for me to be favorable of that.

Slocomb Reed: Liquidity and access to research within an industry that you’re already focused on full-time, not to mention some dividend and some appreciation. That makes a lot of sense, Chad, given the amount of research you have access to, and the level and depth of your experience in industrial real estate, both as an investor and as a broker. Let’s talk about what the last couple of years have looked like given the research and your own experience that you have exposure to, but also where you think industrial real estate is headed.

A lot of people are aware naturally that warehouses have become trendy; manufacturing – a less trendy market segment. You referenced e-commerce earlier; given the research that you’ve done, where are we currently seeing the most growth or the most demand and industrial real estate?

Chad Griffiths: Well, incidentally, you’re right in that hotspot where there’s going to be a considerable amount of growth. That’s right that old rust belt area, which somewhat coincidentally, was born on manufacturing. So you guys have really seen a resurgence of industrial real estate, going from manufacturing of North America, so now I think you’re going to actually see a huge boom in warehousing. I’m sure you’ve seen that in Cincinnati already, and all over Ohio and the East Coast, there are warehouses popping up everywhere.

You can’t drive down a major road away from an airport and not see a million square foot distribution center anywhere. I think that that’s actually going to continue because of the East Coast density of population; the vast majority of North America lives within like 5 to 10 hours where you’re at, 5 to 10 hours of a drive. So I think that there’s going to be a considerable amount of distribution space to continue to grow, because e-commerce is continuing to grow, this pandemic has certainly accelerated a lot of changing buyer habits… I know I ordered more stuff online over the past couple of years, and there are people that have never even ordered stuff online that are now doing it regularly. So I think e-commerce is going to continue to grow; that’s probably not a surprise to anybody really, as they see all these warehouses popping up.

Perhaps a different angle on it is I think manufacturing is going to make a bit of a resurgence as well. That’s been historically outsourced to Asia, it’s just been jobs lost in that manufacturing sector. But with all these supply chain issues – and that’s another buzzword; everyone’s talking about supply chain bottlenecks. But it’s a real thing; it can take quite a long time now for something to come via ship from Asia to North America. So I think there’s going to be more resourcing or onshoring for manufacturers that are going to start making things in North America. That might be in Mexico, to take advantage of lower labor costs than US or Canada, or it could just be people making things in the US and Canada again. But oil prices are going to go up, so that’s going to start an increasing demand for manufacturing places all over North America, regardless of whether it’s big oil plays there or not; there are servicing companies that are responsible for this. And then the shift to making things again in North America, so we don’t have these supply chain issues.

I wouldn’t be surprised if we actually see distribution space and manufacturing space continue to grow for the foreseeable future, pending, of course, a recession or third world war. I don’t think anyone’s got a crystal ball on that. But assuming that there’s not something catastrophic, I think industrial real estate as a whole is going to flourish for a few years. still.

Slocomb Reed: That’s incredibly powerful, Chad. You’re using a lot of buzzwords, and for people who are tracking the economy at large, real estate, including industrial real estate, some of the things you’re saying are things that a lot of our listeners have been hearing for a while with regards to COVID, the changes in buying habits, the changes in global supply chains, the demand to be more local, to meet that fast-shipping deadline that we all crave nowadays. The research that you’re currently doing, and reading on the research of the REITs, like Prologis, that you are invested in, where is that growth happening the strongest already?

Chad Griffiths: The easy answer is any port market. If you look at Los Angeles or you look at New York, New Jersey, or Canada if you’re looking at Vancouver – these markets have sub 1% vacancy, which is almost unfathomable to really consider; less than 1% vacancy rate is essentially zero. There might be small pockets here or there, but there’s really no inventory to choose from. The problem with these markets is that they all have impediments to growth. There’s an ocean on one side of either them, the chances are there are mountains or rivers or something that’s blocking them from growing in the other area.

So I think in those markets we’ll start seeing more vertical growth, so you’ll start seeing more multi-story warehouses. But that also introduces a lot more costs to the equation. Those markets are going crazy right now; there’s no other way to describe how hot those markets are. But when you start looking beyond that and say, “Well, these companies can only afford so much rent. And if the rent is going to double because it has to be a multi-story warehouse property and the land costs are that high, well, then you start looking more to inland markets.” That’s why you’re seeing a market like Dallas where there’s 50 million square feet worth of industrial product under development right now, which is a crazy amount; 50 million square feet under development in one single market. That’s because these markets are in dense areas. So no different than you in Ohio. I think Pennsylvania is going to be a crazy market going forward. I think a big hub like Chicago, which already has a billion square feet in its market, they’re going to continue to grow because everything is going to flow through there. So I wouldn’t be surprised if we see growth everywhere.

I know that that sounds almost like an easy blanket statement to make, but there’s so much undersupply of high-quality distribution space, and the demand is outpacing it. And then you add on the fact that to build right now you’re probably looking at 12 to 24 months to get a new product online. So you’ve got a real imbalance in that supply-demand curve, where demand is still ramping up. The supply hasn’t been able to keep up, and it won’t be able to keep up until some of these material backlogs can get resolved; labor is still an issue… So we’re really in this position where developers are trying to get products to market, but it’s just taking a while.

So these companies that need space – if you can’t get warehouse space in New York right now because it’s sub 1% vacancy, well, then you’re going to start looking out to Pennsylvania, you may start looking out to Ohio, or Kansas, or Tennessee. You might start looking at more of these central areas where there is space available and there’s still a great network of rail and highway systems to get to it. So I’m bullish, and you can tell how excited I just get talking about industrial real estate. I’m bullish about it because every market right now is really doing quite well from a landlord’s side. It’s a different story when you’re looking at it from a tenant’s standpoint. But from an investment standpoint, it’s a really good time to be in industrial.

Slocomb Reed: Thank you, Chad. That’s a very good answer to the question, and it helped me realize I asked the wrong question.

Chad Griffiths: Maybe I gave the wrong answer. If I did, I apologize.

Slocomb Reed: No. Your answer was excellent and very informative. Thinking about increasing warehouse space vertically in geographically limited port areas like Los Angeles. My gut tells me that sounds expensive. You talked about Middle America, and at the beginning of this conversation you talked about only being a five or 10-hour drive from where the vast majority of Americans live, here in the Midwest.

I know you only invest in hard assets in your local market there in Alberta. Are there any other markets that you’re considering for yourself, Chad? Also, where do you think the opportunity is right now? It sounds like New York and Los Angeles have intense demand, but the values and the development costs are going to be astronomical. I’m a Best Ever podcast listener. I’m thinking about breaking into industrial real estate. Where is the opportunity for me?

Chad Griffiths: I would be focused on areas that are going to have a positive population influx. If I was looking in the US right now, I would be focusing predominantly on that Sunbelt. That’s not to say that there aren’t opportunities in other markets. I think if you can get a building that has a good quality tenant, vacancy rates are low, and there are still signs of positive growth, I think those markets can still work. But I’m a big believer that industrial real estate follows the population. When people move to Orlando, all of a sudden, there are that many more people that need groceries, they need products.

Everything that they’re buying, whether they’re buying online, or whether they’re even just buying in a grocery store, all that product flows through a warehouse. So you can see that trend line based on population, and I think a lot of people are considering moving to that Sunbelt area. My number one area that I’d be invested in right now is Florida. I think that there’s so much happening in that area. I don’t see that market declining anytime soon from a population migration standpoint.

I think that that’s probably where I’d be most focused on, but I’d still see opportunities in a market like Texas or Houston, which has big exposure to the oil and gas industry. That market has been pretty beaten up, as oil had that dip over the last seven years, now it’s back up to $100 a barrel. I don’t think that that’s been priced into their asset values yet. So I would also consider a market like Houston, where they’ve probably had some downward pressure on prices. If oil stabilizes on this $100 a barrel, there could be a spike there. Plus, you’ve just got the benefit of people moving down to Texas. So I’d probably look at those areas.

The other one that I’d also consider would be the Carolinas, so North or South Carolina. I think that those are going to be pretty attractive areas from a population growth standpoint. But my number one market that I have actually considered is Florida.

Break: [00:22:19][00:24:03]

Slocomb Reed: Gotcha. Talking about the price of a barrel of oil, just to make a note, we’re recording in mid-March 2022. There have been a lot of fluctuations in the cost and the value of oil recently. Best Ever listeners, today is March 18th 2022, and that’s what Chad is quoting you from.

Now, Chad, last question before we transition here. You made mention of multi-million square foot distribution centers and having them put in middle America or the Midwest, just outside of the East Coast, where you have high population density but also high property value, which makes it easier and more affordable to put distribution centers in non-primary markets.

It’s easy to see that industrial development is following population growth. Naturally, the more people in a market, the more stuff they need, the more capacity we have to have to deliver that stuff, and to manufacture that stuff. Are there any examples of industrial development leading to population growth through job growth? Because as we transition to a more e-commerce-driven economy, major companies like Amazon are recognizing that they need to be putting their distribution centers or other industrial facilities in areas where they are attracting jobs, and thereby population. Are we seeing industrial development cause population growth and job growth anywhere right now?

Chad Griffiths: That’s a fascinating topic to explore, because coincidentally, I’m reading a book on the industrial revolution right now. When you start looking at the history of the factory — and this is just very topical for me, because I’m reading it, not as we speak, but tonight I’ll read a few pages, I’m sure; there’s a guy by the name of Richard Arkwright who is known as like the creator of the factory system.

The industrial revolution started in the UK, call it like the 1760s, when the factory started to develop, and Richard Arkwright developed the system for the factory. Incidentally, that’s what he noticed right away, is that he would make a factory, but you need to labor for it. So you’ve got this product, you’ve got the system, and they had the technology to spin cotton in there. But unless you have workers to actually man – or in their case, they used women and children, which is a deplorable topic on its own. But unless you have the people in there to actually work in the factory, the factory itself is useless.

So without question, there are some facets of industrial development which will spawn population growth. I’d say it’d be more on the manufacturing side; Detroit would be a good example. When they decided to start ramping up car production decades ago, that led to Detroit becoming Motor City, a big boomtown, and they flourished off that industrial development. So on the manufacturing side, yes. On the warehousing side, I’ve noticed that they typically tend to go where the population already is.

Without naming any companies by name, a lot of these companies intentionally try to pay as low wages as possible. So it’s not a lucrative job if you’re just someone that’s sorting boxes. You’re pretty much being paid minimum wage or slightly above. So for that business model, you need people there already. You’re not going to attract a whole bunch of people to come work in a warehouse if they’re paying minimum wage jobs. Whereas if it’s a manufacturing job, and they need skilled labor, and there are considerably higher salaries being offered, I think you will see that.

So if you’re trying to look at it as a leading indicator of where there could be population growth, I would look to see where manufacturing is headed. And just a hunch on my part, I think it’s coming to your neck of the woods; that infrastructure is already in place, and there are a lot of manufacturing properties from the last boom that industry had. If I was a betting man, I would think that there’s going to be manufacturing coming to your neck of the woods.

Slocomb Reed: Is it safe to say, then, Chad, for our Best Ever listeners who invest in asset classes outside of industrial, who are tracking population growth, which is directly impacted by job growth, watching where manufacturing is being developed is a lead indicator for population growth and job growth, and you expect to see it come into the rust belt?

Chad Griffiths: I believe that unequivocally; without question I see that happening. Far in anything beyond our control, of course, I do see population growth occurring in that rust belt area. Again, I think that there are a lot of factors at play here as well, so there’s anything that can trump that, but I think that that is going to be a strong, solid place to be. Not just for industrial real estate, but for investors of all kinds. Outside of that New York area, I think that that market hasn’t had the appreciation that some other areas have, and I’d be quite bullish on that rust belt area as a whole for the foreseeable future.

Slocomb Reed: Well, all my real estate investor friends in Cincinnati say “That sounds great.” Chad, are you ready for our Best Ever lightning round?

Chad Griffiths: Love it. Let’s do it.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Chad Griffiths: I don’t have the one that I’m reading right now, but I have read a good one. Give me one second, I actually do have it here. I know it’s probably [unintelligible [00:29:22].19]

Slocomb Reed: Bomber Mafia, Malcolm Gladwell.

Chad Griffiths: Bomber Mafia by Malcolm Gladwell. It was awesome. It had really nothing to do with real estate, I’m just a fan of Malcolm Gladwell. I’ve read a number of his other books. He’s an unbelievable storyteller. He’s talking about World War II, just on how they coordinated some of their attacks and they narrowed in on one topic. I won’t give too much away, but it was one of those books where you know within 20 pages whether it’s going to be one that you’ve got to grapple with to get through, or one…

Slocomb Reed: Malcolm Gladwell is good at hooking you, for sure.

Chad Griffiths: He hooks you in.

Slocomb Reed: I went through a Malcolm Gladwell phase, too.

Chad Griffiths: It’s a very good book, I really enjoyed that one.

Slocomb Reed: Awesome. What is your Best Ever way to give back, Chad?

Chad Griffiths: I like to take as much time as I can to help anybody that wants help. I regularly jump on calls with either brokers or investors across the world, if they just want to ask a question about industrial real estate. I’ve taken dozens and dozens of calls over the years with no expectation of anything in return. I don’t ask for any money, I don’t ask them for anything. I love talking about this. I benefited from it when I was younger, having more experienced people helped me, so I’d love to return that favor whenever I can.

Slocomb Reed: What is the Best Ever skill you’ve developed in commercial real estate investing?

Chad Griffiths: I think speaking confidently is an underrated skill. It sounds pretty easy to say, but it’s a lot harder to do. I’ve found that people that are very successful in business are very good communicators. I did Toastmasters when I was younger, really tried to hone that skill and gain confidence in it. That has gone a long way in my business.

Slocomb Reed: What is your Best Ever advice?

Chad Griffiths: I would say whatever you do, find a way to add value to it. I would equate it to like a waiter at a restaurant. Some waiters will just go in and they’ll just take your order and bring your food. A lot of people in the business world take that mentality and they just take instructions and they just do what they’re asked. I think that to really succeed in the business world, you need to find ways to add value. So however you need to do it and however you think you can help somebody else out… If all you’re bringing to the figurative table is a notepad and a pen, you’re just not contributing anything. So find a way to add more value to people.

Slocomb Reed: Find a way to add value to people. Awesome. Where can people get in touch with you, Chad?

Chad Griffiths: Email’s great, it’s griffithscre@gmail.com. I’ve also got a YouTube page if people just want to hear more about industrial real estate. I’ve actually done over 100 videos on the topic now which is kind of crazy to admit. But the same mentality, I don’t talk about my company or even mentioned where I’m located. My whole idea is just to give as much information as I can. If people get value then it’s a win for me. Just search my name or search industrial real estate and it’ll pop up.

Slocomb Reed: Great. Well, Chad, thank you. Best Ever listeners, thank you as well. If you got value out of this conversation with Chad Griffiths, please do subscribe to our show, leave us a five-star review, and share this with a friend who you know will gain value from the conversation we just had about the growth happening in industrial real estate. Thank you and have a Best Ever day.

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JF2778: Thinking Outside the Box with RV Parks and Storage ft. Sam Wilson

Sam Wilson has always been an entrepreneur. After selling the flooring business he owned, he wasn’t sure where to focus his energy next. That’s when he discovered real estate. Today he’s focused on commercial real estate projects — mainly RV parks and boat/RV storage. He’s an enthusiastic investor with a never-ending stream of creative ideas about how to make the RV park and storage space better for himself, his investors, and his tenants. Highlights from the episode include: 

 

His Introduction to RV Parks & Storage

Sam Wilson feels like he had been involved in almost every type of commercial real estate asset before landing where he is now. It was his curiosity that led him to seize an opportunity to build a boat and RV storage facility. He was especially encouraged to move forward after conducting some research — cap rates for this asset class are trading on a much higher basis than other commercial asset classes, and because the RV and boat industries have been booming since the onset of the pandemic, there’s a high demand for storage.

 

Active vs. Passive Investing

Although Sam is both an active and passive investor right now, his 10-year goal is to transition fully into passive investing. Although he compares owning an RV park to running a business, he’s laying the groundwork for his future by finding talented partners who are passionate about operations. “I want to find people that love to be in that day-to-day and really put the right people in the right seats,” he says. “That’s what we’re really building right now.”

 

Boat & RV Storage Goals

RV deliveries have majorly increased in the past few years, and the largest demographic of buyers are people ages 35 to 55 with families, Sam says. Because most of these people can’t park an RV in their driveway, the demand for storage is skyrocketing — and they’re willing to drive massive distances to find it. Sam is exploring the idea of creating luxury RV storage spaces with 100-amp hookups and possibly even shared ownership, where renters could purchase their storage units. 

 

Education Is Key

The hardest lesson Sam has learned is the importance of fully educating yourself on an asset class before diving in. This is especially important in the RV industry because it’s fragmented and it’s difficult to find information about it. “I think that’s a hurdle that I’m working through,” he says, “and again, I’m looking for excellent partners that can help really come on board the operation side.”

 

Find a Mentor — and Don’t Be Cheap

Sam’s Best Real Estate Investing Advice Ever is to find a mentor. “I always say, ‘Don’t hire the guru-but-no-do,’” he says. In other words, if someone is offering a course on something that they haven’t actually done themselves, don’t walk away. Run. He says anyone seeking a mentor should be prepared to pay well for advice from a true expert — it’ll be worth every penny.

 

Sam Wilson | Real Estate Background

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TRANSCRIPT

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, Sam Wilson. Sam is joining us from Memphis, Tennessee. He is the founder of Bricken Investment Group, which syndicates RV parks and storage facilities across the country. Sam, thank you for joining us and how are you today?

Sam Wilson: Hey, I’m good Ash. How about yourself?

Ash Patel: I’m very well. It’s a pleasure to have you. Sam, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Sam Wilson: Yeah. I’ve always been an entrepreneur, grew up in an entrepreneurial family, owned my own business until I was about 30. I sold that and didn’t know what to do next in life. I accidentally wound up buying a house and got into real estate. Here we are, almost a decade later and I’ve done every iteration of real estate that you can imagine, solely focusing on commercial real estate now; RV parks, boat and RV storage. I still have my hands in some other business interests, but that’s the primary focus.

Ash Patel: Sam, what was the business that you sold when you were 30?

Sam Wilson: It was a flooring company. We were involved in the trades, we weathered the ’08 crisis. I had 30 guys working for me, and then when all the way down to one, which was a very painful experience. From dress clothes back to boots and jeans, and out working in the field for a couple of years. We weathered the storm, built that company back up and sold it in 2012. But yeah, it was in the flooring industry.

Ash Patel: I would imagine all those years you were exposed to a lot of different real estate investments.

Sam Wilson: It’s funny, I’ve thought a lot about that, and maybe I just wasn’t — still not very smart, but just didn’t have the intellectual understanding of all these guys that I’m working for, and gals… I mean, people making huge money doing huge projects, and there was never that consideration of like, “Oh, that could be me.” I was just the guy, just heads down, running flooring crews. I was on the wrong side of the equation, I’ll tell you that. But yeah, a lot of exposure.

Ash Patel: Or on the flip side, you saw some of the headaches and wanted no part of that, and that’s why you’re doing something a little bit more passive.

Sam Wilson: Yeah. Well, that’s true. Certainly my 10-year goal, I’ll be honest Ash, is to be a completely passive investor. I’ve got my hands in a lot of passive investments now, and I love those. As you know, it’s the ultimate form of mailbox money, which is why I think it’s easy to talk to investors. It’s like, I get an ACH every month and I go, “Oh, good. Thanks.” And my phone never rings. I want more of that so that’s exactly where we’re heading for sure.

Ash Patel: How did you get exposed to the RV parks and RV storage industry?

Sam Wilson: Again, like I said, I’ve done a lot of different — it’s almost schizophrenic, the number of different commercial assets I’ve been involved in. But last year, we did a couple of multifamily projects which are going great, and then I had an opportunity brought to me to build a boat and RV storage facility up on a large reservoir. I was like, “Well, that’s really interesting.” I’m always curious, so I couldn’t help but — I say no to most things now, my “no” button is getting bigger…

But this one I just couldn’t pass up on; did the research on it and we said, “Oh, hey, there’s huge opportunity here.” Upon doing the research, I realized that cap rates are trading on a much higher basis than they are for other asset classes. They are operationally complex, which is probably why they trade at a higher rate. But also, there’s just huge runway there. The RV and boat industry – the pandemic fueled it. It already had excellent tailwinds, and then the pandemic just threw gasoline on already raging fire. That’s when I just said, “Hey, wait, there’s opportunity here.” Again, I love multifamily, but we don’t have to duke it out with every other syndicator for the same pool of deals. I can go somewhere where — it’s not blue ocean, but it’s pretty close to it. That’s when I said, “Hey, there’s opportunity here. Let’s move forward and figure this thing out.”

Ash Patel: What were the numbers on your last deal?

Sam Wilson: Well, that’s a great question. On the boat and RV storage facility, or do you want to talk RV parks?

Ash Patel: I want to talk about both of them.

Sam Wilson: Okay. We only did one. It was a small project, a couple million-dollar project, just kind of get your feet wet deal. It was 226 units, a couple million bucks, it was 10 acres… 150 of those were 14-foot high, 12-foot wide, 40-foot-deep bays; it was all gravel, we did not concrete that. To be honest with you, Ash, we never even got the concrete. We got nothing more than the land cleared, the signs up, everything in place to take it down, and somebody else came along and bought it from us.

They’re like, “Hey, we love what you’re doing. We want your project.” And they bought us out. [unintelligible [00:07:20].14] and kept moving. So I never even actually got it completely built. I say we built it, I halfway built it, and then took a paycheck. That also was further confirmation that “Hey, we’re onto something.”

Ash Patel: What was your percentage return on that deal? Did you double your money, and then some?

Sam Wilson: Yeah. I did, personally, invested capital, which is great. That again – I see opportunity there, but I see even coupling that with RV parks to be a really unique opportunity. Because a lot of these RV parks are mom-and-pop run, it’s a very fragmented industry; there’s usually land attached to it where you can add all these ancillary revenue streams, be it boat storage, RV storage, and buying properties.

We’ve got one that’s probably going to go into contract here this week. It’s on a reservoir, it has a marina attached to it, and there’s event centers… We’re looking to build more of the resort style RV park and not necessarily just interstate 70, roadside, pull-off, and stay for the night type place… But that’s where we’re going.

Ash Patel: Sam, mobile home parks versus RV parks, educate us, pros and cons.

Sam Wilson: Yeah. Far more complex. Mobile home parks are great, because they lot-rent. You mow the grass, you make sure the utilities stay working, you make sure your tenants are doing what they’re supposed to do, and you collect your monthly check. As long as, of course, there’s no park-owned homes, which you could have.

RV parks – again, it’s more operationally complex. We’re looking at a deal right now, it has marina attached to it. It’ll have boat rentals, it will have fishing, tackle, guide service, RV park storage… It has a lot of different moving pieces. Included with that, of course, is increased personnel. So it’s more of a business and less of a real estate play, though there is real estate obviously involved.

The cool thing about an RV park is that a lot of these will have the long-term component to it. You’re looking on average of probably 60% of that is on a long-term RV stay. So people will rent the one space for an entire season. It’ll be a 12-month rent, just like a lot rent at a mobile home park… Which is great, because they’re typically better tenants. It’s like the lower middle class, maybe even vacation home for them, because they can drive their RV there, they’ve got the same spot, they’ve even leave their stuff, they might even have a shed out back, something where they can keep all the little fun stuff for their kids to go play… And you get more for the lot.

The cool thing about it is that you’re getting a greater rent with a better tenant, that’s not there very often, which is perfect in my book; and you get the stability of that 12-month lease on that spot. So that’s a cool part of it. Your money is made though on the transient people stay. So say you get 100 bucks, 600 bucks a month, whatever it is. On a long-term person, you’re going to get 50 to 70 bucks a night for somebody that’s just coming in for the weekend. You’ve got to kind of balance that out. But those are some of the major differences.

Ash Patel: Interesting, very similar to short term rentals in residential.

Sam Wilson: Very much.

Ash Patel: Now, we started this conversation with you talking about wanting to be passive. And now I’m hearing that running a RV park is a business.

Sam Wilson: Yeah.

Ash Patel: Come on, what are you doing, man? Help me understand this.

Sam Wilson: That’s a brilliant question, and those are questions I ask myself all the time, like, “What am I doing?” The key to that is finding good partners, so really building out — I’ve got meetings later today with building out the team, with good asset managers, with people that are good operators, or at least that love operations. I’m not an operations guy, I’m just not; it’s not my strong suit.

I’ll go out and buy stuff and probably do things that most people would be like, “Wait, what? What are we doing?” But to get down in the nitty-gritty and actually make the thing go round – I’m just not good at it. So the short answer to your question is, yes, it seems a little bit nutty, but I want to find people that love to be in that day-to-day, and really put the right people in the right seats on the bus. That’s what we’re building out right now.

Ash Patel: Sam, what are you seeing as far as returns?

Sam Wilson: Oh, gosh. Low 20s on an average annual return basis; it’s very, very attractive. On a cash-on-cash basis, we’re in the mid-teens, 15%-17%. Again, as an operating business, they’re going to trade at a higher cap rate. The national average right now is somewhere… Again, not that national averages really mean a whole lot, because local is what matters… But it kind of gives you some ideas about 8.75% on average of what RV parks are trading at right now.

Ash Patel: In terms of your investors returns, is there a pref and a split?

Sam Wilson: Yeah. We’re working our way through that, to be honest with you, Ash. I’ve always done that on our syndications, I’ve done a pref with the split and whatever variation each deal will allow. One of the things that I’ve typically been disappointed with in syndications is that once you get your money back, you’ve got to go find another deal to get into. Again, this is not fully baked yet, but I want to find a way to return investors capital and then hold deals indefinitely.

So I’m trying to work a way where we can do that, have it makes sense, and yet not keep equity tied up for far too long of a time. I know it makes sense at some point to punt the deal, reap your equity, and go do it again. Just working our way through that right now. But yeah, we’ve certainly done it the traditional way in the past.

Ash Patel: Yeah. I love the way you’re thinking. It just seems like everybody, 8% percent pref, 17% IRR… Okay, like, I want something exciting.

Sam Wilson: Yeah. That’s what we’re getting right now. I mean, shoot, the deals we’re looking at right now, if you can collect a 15%-18% cash-on-cash annually, have an annualized return of 25% if we did sell it in five to seven years… But there’s a way to make the numbers work where we can get your money back and hold as long as we want to. I want to go for that. I’ve explained my reasoning behind that, but that’s where I’d love to go.

Break: [00:12:51][00:14:38]

Ash Patel: You also mentioned this being seasonal. Why not buy RV parks in the South?

Sam Wilson: Bingo. You’re onto it. Another reason why we see opportunity here, because a lot of these are mom-and-pop owned and operated. They’re tired come late fall; they’ve been hustling it out from late May or maybe even early April getting the place ready, they’ve been booked up all season long… And come October, man, they want to go sit back somewhere and hide in a corner and recoup for a few months.

That’s where we see opportunities, because we want to bring an institutional approach to this to where they can be open year-round. There’s value add right there. We’re seeing a lot of parks – we haven’t transacted on, but that’s one of the first things they’ve implemented, is a year-round Park. Even in the Mountain West where you go, “Wait, you’re at 9000 feet and somehow you’re figuring out a way to run an RV park in the dead of winter?” People are coming and staying, which is really astounding. It just shows the demand for the outdoor and hospitality space. That’s certainly one of the things that we will be doing in all of our parks, going year-round.

Ash Patel: Again, love the way you think outside of the box. How hard is it to get a loan on an RV park? What does financing look like?

Sam Wilson: It’s not as good as some of your other products. A lot of this is going to be local bank stuff, especially on your sub 10 million stuff. Our intention is not to buy anything North of that mark really, as we get this figured out. I want to buy some smaller four to eight million dollar deals, get a few of those, really get our feet wet, figure out our process on something that’s manageable, and then go for the bigger stuff. On the smaller stuff, it’s all local bank; it’s enough, it’s available. I don’t know what rates are going to be now because of what happened this last few days ago, but it is available. It’s just you’re working with your county banks, you’re not dealing with your big institutional players on the smaller stuff, of course.

Ash Patel: Are you looking at 30% down more?

Sam Wilson: Yeah, about 30, that’s an average. What we’re underwriting is a 30% down so it’s not an astounding hurdle to get over. But I’m happy with that. And we can even go less leverage and still meet some really attractive returns. Obviously, the greater the leverage, the more we can use our investors equity typically. But on these, we can even go less leverage and still get some really healthy returns. For me, the less levered we are, the less risk there is – I’m good with that.

Ash Patel: Alright back to being more passive. What about RV storage?

Sam Wilson: Oh, gosh, I love that space. I think this one has legs for a while, because we’ve seen such an uptick of RV deliveries. We had 600 and some odd thousand deliveries in 2021; we’re already on track for that in 2022. Just for reference, we had roughly 350,000 deliveries in 2020. So you’re seeing 40 something percent increase in deliveries in 21, over 20, and then the same for 22, which is really crazy. But people need places to store these. Where they’re going to put them? What neighborhood association once you park a 35-foot RV in your driveway or on the street? It doesn’t happen anymore. The largest demographic of people buying our RVs now is not north of 60, it’s 35 to 55 with a family. Where do most of those people live? In a city, somewhere where they can’t park them, somewhere where they have to take them somewhere and store them. Once they buy them, they want to protect and they want to take care of them, they want them into a storage. They won’t stick them out in the muddy lot with a fence around it. They’re like, “Oh, hey, I’m going to park this thing somewhere that I know it’s protected from the elements.”

So that’s 1.2 million RVs being delivered in the US within a 24-month period. That’s a lot of vehicles to store. We had a facility built an hour and a half outside of Memphis in the cotton fields in Northern Mississippi. 240 units is full in three months; completely full. An hour and a half outside the city. People are driving massive distances just to find a place to park these.

So yeah, there’s a lot of opportunity there. This is not a new concept, but we’re exploring the idea of what even luxury RV storage could look like, something with 100-amp hookups inside their unit. Maybe even going crazier and thinking along the lines of doing fractional ownership where they actually buy their RV slot. I don’t know, those are things going on down the road, but those are kind of some of the further thinkings in this space.

Ash Patel: You’re thinking crazy again, I love it. Help me understand, if I see an industrial space, a large warehouse, what do I need to turn that into RV storage? A bay door that’s 14-foot tall?

Sam Wilson: 14 feet tall, 12 feet wide. Yeah.

Ash Patel: Okay. It doesn’t matter how high the ceilings are as long as they’re 14 feet or higher, right?

Sam Wilson: I guess. Yeah, that would make sense. Yeah, that makes sense.

Ash Patel: And do they all need at least a 110 hookup?

Sam Wilson: Oh, shoot. No. You get into some of these big 40-foot class A diesel pushers and you might even need 220. I would imagine most of them run off a 110. But no, I don’t own one, so I haven’t done the research on what that would take to convert a facility like that. But yeah, I don’t know.

Ash Patel: In terms of returns, would you rather chase RV storage or RV parks?

Sam Wilson: Good question. It depends on the model. I like RV parks, it just kind of does something for me, I don’t know. I like it. Outside of the returns, it’s just kind of more fun for me to think about owning RV parks across the country than RV storage. I think both of them have a very attractive return profile though.

Ash Patel: Sam, what’s the hardest lesson you’ve learned in transitioning to the RV industry?

Sam Wilson: Tough question here, Ash. I would say really just because it is so fragmented and because there’s just not as much information out there, it’s really getting the education part of that nailed down; that’s probably it. It’s getting what I feel like as thoroughly educated. I feel like I understand multifamily really well, or at least well enough to be dangerous. In this, it’s like, “Okay, I’ve gotta really up my understanding of the space, especially as it becomes more operationally complex.” I think that’s a hurdle that I’m working through. Again, I’m looking for excellent partners that can help really come on board on the operation side.

Ash Patel: Sam, I’m going to paint a picture for you. Imagine you have to start all over, you lose everything, all you have is your knowledge and your network. What’s your 30-day plan?

Sam Wilson: If I need funding, like if I’m dead flat freaking broke, 30-day plan is to get 50 grand from the bank. I’d say “Alright, I need some runway.” If I need to generate cash really, really quickly, I’d go to single-family wholesale, I’d go out, I’d hustle for 30 days, and I think I could generate 50 grand in wholesale fees in 30 days. If I did that, then I’d have some money, and then I’d turn around and start a commercial syndication business all over again.

Ash Patel: Awesome. Sam, what is your best real estate investing advice ever?

Sam Wilson: Find a mentor, that’s it. Find somebody you know, like, and trust. I always say don’t hire the guru but no-do. Run away from courses, at the person selling you a course but doesn’t do it. Don’t talk, just leave. But if you want to accelerate your game, find somebody that’s ahead of you and pay them for their knowledge, and get out your checkbook. That’s it. Be prepared to pay up for somebody that knows what the heck they’re doing and don’t be cheap about it.

Ash Patel: Sam, are you ready for the Best Ever lightning round?

Sam Wilson: Let’s do it.

Ash Patel: Alright. Sam, what’s the Best Ever book you recently read?

Sam Wilson: Oh, shoot, man. That’s a great question. It’s all about leadership, it’s the four success principles. Hang on a second, I’m going to tell you here, it’s on Audible. The 4 Disciplines of Execution; there it is, I was close. The 4 Disciplines of Execution, it’s a great book. I’m halfway through it and love it.

Ash Patel: What’s your big takeaway so far?

Sam Wilson: You’re going to kill me. It’s called focus, that’s the first one. Whatever it is, focus. Which goes back to my point of why I’ve said, “Look, we are going long in the RV park space.” If storage comes along with it, that’ll be a secondary bonus. But for us right now, we’re going long solely in RV parks.

Ash Patel: I need to read that book as well. Sam what’s the Best Ever way you like to give back?

Sam Wilson: I feel like there’s nothing left to give back to be honest, Ash. We took in three foster kids last February, six, three, and eight months old. It’s still a daily grind when you have kids who are from a trauma and abuse background. There’s just no rest for the weary, and I’ll tell you here, 13 months later, we are very, very tired. Right now, that is my give back, just trying to turn kids that have been, like I said, from a severe trauma abuse background into decent humans hopefully someday.

Ash Patel: Amazing. Sam, how can the Best Ever listeners reach out to you?

Sam Wilson: Man, first of all, the How to Scale Commercial Real Estate podcast – it’s a daily show, much like yours. Listen to that. Secondly, you can catch me at our website, brickeninvestmentgroup.com.

Ash Patel: Sam, thank you again for joining us today, telling us your story from being an entrepreneur in the flooring industry, being exposed to real estate, getting into multifamily, and finally getting your niche in RV parks and RV storage. We appreciate you sharing all of your knowledge with us.

Sam Wilson: Thank you, Ash, I appreciate it.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review, share the podcast with someone you think will benefit from it. Please also follow, subscribe, and have a Best Ever day.

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JF2777: The Key to Exceptional Asset Management ft. Brendan Chisholm

Before he became a multifamily syndicator, Brendan Chisholm worked for multiple Fortune 500 companies. His previous roles in program management, lender management, operations, and contract negotiation all helped him cultivate the skills needed to excel in asset management. In this episode, Brendan discusses his firm’s latest value-add deals, what the asset management process has been like, and his advice for syndicators who struggle with organization.

 

Heavy Value-Add in Newnan, GA

Brendan’s firm, BKC Holding, LLC, bought a multifamily property in a blue-collar neighborhood outside the Atlanta metro area in February 2021. The original plan was to rent out the renovated units for $1,000, but one year later, they are renting at $1,350, which is 35%–40% above their original projection. Brendan credits both conservative underwriting and sheer luck. Now, he says, the plan is to continue driving top-line revenue and make sure expenses fall in line once the refinance process begins. 

 

His Approach to Asset Management

Brendan has picked up some valuable skills from working in corporate America. He’s extremely organized, is able to put trackers in place, and “takes the bull by the horns” when it comes to developing and executing a business plan with his team members. He maintains regular contact with the construction and operations teams, as well as the regional property manager.

 

Brendan’s Advice for Syndicators

He recommends establishing a big-picture goal first, then working backward and identifying smaller tasks and completing them one at a time, building momentum to reach your ultimate goal. The most important skill he’s developed is organization — if you’re not an organized person, Brendan recommends writing everything down. If you’re unable to do it yourself, find an executive assistant who can help! 

 

Best Ever Lesson

“This is a team sport and the best part about this is everybody has their own strengths. Just go towards those strengths. Double down on your strengths within apartment syndication and then the team will fill in the rest of the way with you. You don’t have to be a jack of all trades to be able to do this.”

 

Brendan Chisholm | Real Estate Background

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Brendan Chisholm. He’s joining us from Stanford, Connecticut. He is the founder of BKC Holdings LLC. They are the GP of a 53-unit apartment property in Newnan, Georgia, 70 units in Rock Hill, South Carolina, and he’s an LP on 272 doors in Houston, and 64 in Columbia, South Carolina. Brendan, can you start us off with a little more about your background and what you’re currently focused on?

Brendan Chisholm: Sure. Background since graduating from college in the late 2000s, I was working for multiple Fortune 500 companies in program management, vendor management, and operations. Now working full-time for a telecom provider, doing business developments, negotiating right of way and right of entry agreements with multifamily developers in that area; my five to nine, which is my core focus outside of my family. I’m also a general partner, as you mentioned, on 123 units, all acquired within the last 13 months.

My focus within our group is asset management, so really doubling down on that. The deals that we have are pretty heavy value-add deals, so a lot of attention is being paid to making sure that we’re optimizing the performance of those deals.

Slocomb Reed: Gotcha. It sounds like you have a lot of experience with contract negotiation. Outside of your apartment syndication, are you involved in acquisitions at all as well, or primarily just asset management?

Brendan Chisholm: Primarily asset management. One of the partners in both of our deals has more of a focus on the acquisition side. I’m more on the asset management, vendor relationships, property management relationships, as well as lenders and looking over all those fund loan docs.

Slocomb Reed: Awesome. You have a lot of experience negotiating with contractors and vendors, and it sounds like also local regional authorities for your current job, negotiating right of way access… I can see where a lot of that translates well into asset management. So you’ve bought two properties, one of them, the one in Rock Hill, South Carolina was very recent. How long ago did you buy in Newnan, Georgia?

Brendan Chisholm: We bought the deal in Newnan, Georgia on February 23rd, 2021. We bought the deal in Rock Hill, South Carolina on February 11th, 2022.

Slocomb Reed: Gotcha. So you’ve had the one in Georgia for a year now. You said you focus on heavy value-add, so that first year is very involved. Tell us about that deal, tell us about your acquisition of it, what you were looking at, what you were projecting back in February of 2021, and how the last year has gone.

Brendan Chisholm: Sure. Last year — so we purchased the deal for $4.2 million, it’s a 53-unit deal, off-market, put about $800,000 of CapEx into it. At the time of acquisition, the deal was at 78% occupied; there was nine total down units at the property itself. We went in planning to renovate 23 of those units; 30 of those prior were owner renovated. The nine down units plus the 14, we went in, upgraded all of the kitchens, and all of the bathrooms. Did some flooring, and painting, as well as install all-in-one washer-dryers into the units. The total all-in cost is just under $5.3 million with closing costs and all of that.

For those what we consider our owner renovated units, we were underwriting just under $1,000 for what we thought we could get for those renovated units based off of what market comps they’re using, what we saw as benchmarks for the area. A year later, we’re 35%-40% above our underwriting, getting $1,350 for all those two-bed one-baths. Had a lot of success at that property so far, and just making sure we’re driving top-line revenue, and making sure the expenses fall in line for when we start the refinance process in a couple of months.

Slocomb Reed: Awesome. Within Georgia, where is Newnan?

Brendan Chisholm: It’s 40 miles southwest of downtown Atlanta, 30 miles southwest of Hartsfield Airport, right off of I-85.

Slocomb Reed: Gotcha. So not quite Metro Atlanta.

Brendan Chisholm: No, it’s not. It’s about a 50-mile radius outside of Atlanta. Had some good stories happen in the Newnan since we acquired the property. Plans to bring in some industrial distribution centers. It’s more of a blue-collar area in the southwest part of the Atlanta metro.

Slocomb Reed: Blue-collar area in Georgia, outside the Atlanta metro is not the kind of place where you expect a 35% rent growth or a 35% rent increase above projections. What accounts for that?

Brendan Chisholm: What accounted for that? Low inventory; supply was very tight. At the same time as our acquisition, one of our ceiling properties also was acquired. So I think with a moratorium on being able to build properties in Newnan at the time, just a low supply, a low absorption rate, we were able to capture the rent, and a lot of the rent growth that was slanted down in Atlanta, as well as the outskirts areas as well.

Slocomb Reed: Gotcha. You mentioned you guys are headed towards a cash-out refinance; the plan is to hold this long-term. Are you still planning to sell soon, are you refinancing your limited partners out or are you keeping them in the deal?

Brendan Chisholm: We’d like to keep them in the deal. That’s one of the things we’re going back and forth with just based off of the valuation of the property and how high we are with our business plan. But ideally, we’d like to get some long-term debt on this and just hold it for quite a while. The valuation seems good, so we should be able to return the 75%-100% of the LP capital back to them. Then we’ll recalculate distributions at that point, but at least have very little capital at risk for our investors, and being able to send them monthly mailbox money.

Slocomb Reed: Yeah. It helps the IRR a lot when you give them back three-quarters of their money after around 15-18 months, right?

Brendan Chisholm: Yeah, it sure does.

Slocomb Reed: What are you projecting now?

Brendan Chisholm: For an IRR for the deal or for —

Slocomb Reed: Yeah. How soon do you think you’ll sell? What do you think your returns are going to end up being?

Brendan Chisholm: We underwrote this going in for a five to 10-year hold, which is a pretty broad number of years, but… With the plan that if we can manage the execution risk which was the value-add portion of it, it would return a large portion of the capital at the time of refinancing, and then hold it for five years afterward. We’re at a point now where the tailwinds that occurred in this market and at the property, we’re low 20s, 20%-24% IRR on this deal with a good 2+ equity multiple based off of how long we hold the deal for. But as you said, a 0.75 or a 0.1 equity multiple at the time of refinancing is almost like a multifamily BRRRR.

Slocomb Reed: Yeah, it’s awesome. I do have to ask, Brendan, based on the analysis that you were doing leading into the February 2021 closing, analyzing rents at $1,000 a month market and then ending up at $1,350, how much of it was your conservative underwriting and how much of it was luck?

Brendan Chisholm: I would say a combination of both. The luck occurred from just having the tailwinds of the rent growth at our backs. I just did a recent comp analysis for all the surrounding properties and — I’m not saying it gave me a chuckle, but what a difference a year makes, Slocomb. We were looking at the deal and the rents that we’re capturing now are some of the stuff for the class B plus, class A minus properties in that area. Those have gone up $200-$300 plus, and the whole market has shifted where that class B property has assumed those class A rents.

Conservatism is definitely good, but even when we were doing a conservative underwriting, we were still forecasting a 15% IRR. So it’s a lot more with just the tailwinds going in our backs, but I think it’s a combination of the two, I would say. Conservatism as well as luck. And sometimes it’s better to be lucky than good.

Slocomb Reed: Another factor here to your point, Brendan, because it sounds like the cosmetic finishes that you were putting into the units that you renovated were likely low A, high B class comparable, even if your location wasn’t. In an interview like this, a conversation between two people – you have to admit this is anecdotal, but I believe one of the things that we’re experiencing right now across the board is that millennials are less concerned with location and more concerned with cosmetics, updates, and the condition of the apartment itself, in a lot of cases.

This is not the best way to put this, Brendan; this is not directed at you, because I’m doing the same thing. It’s letting investors like us get away with being in a non-optimal location if we are delivering high-quality apartments. As you said, you redid bathrooms and kitchens and that’s stuff that millennial renters care about more than preceding generations. I think that’s part of what’s happening here.

Brendan Chisholm: You’re right. In a recent acquisition that we have in Rock Hill, we’re going to be doing a similar model as well. It’s one of those things – you buy in a certain class that you can keep your purchase price at a lower amount, and then you put in $20,000-$30,000 plus combined between interior and exterior renovations, and you have a superior product to what your comps are. It’s easier to be able to close the gap between where you think your benchmarks are and exceed your underwriting targets to make sure that you’re delivering upon the forecasted projections that you’re putting out there.

Slocomb Reed: Yeah. Let’s transition a bit, but let’s say on this deal, Brendan. You were the asset manager overseeing an $800,000 CapEx budget in a year or less, in the first year of the ownership of the asset. What did that look like at the beginning? How involved were you in that renovation?

Brendan Chisholm: We have six people as general partners on this deal. Everybody was trying to figure out once we got the deal under contract, where is everybody’s fit there. I saw there was an opportunity to apply what I’ve learned in corporate America. Just from being able to be extremely organized, putting trackers in place, and then essentially grabbing the bull by the horns and making sure I was working with the two guys who were on the acquisitions, and helping develop the business plan to carry out the business plan on our end. You start putting more things in place and it just becomes much easier to track for this first deal, and then be able to transition all of your trackers and KPIs over to your next deal as well.

Break: [00:14:31][00:16:18]

Slocomb Reed: Were you the one who was in conversation with the property manager regularly or the general contractors about the work getting done?

Brendan Chisholm: Yes, I was one of the three people who were in constant contact there.

Slocomb Reed: Gotcha. What did that constant contact look like?

Brendan Chisholm: At first, it was trying to make sure that we could have weekly meetings with the construction team as well as the operations team. And then because our construction team is an arm of our property management team, we just combined those two into weekly meetings until we started really seeing the stabilization of the property. Once we started getting into the high 80s and low 90s occupancy rates, that’s where I started to transition into weekly calls with the regional property manager, just to figure out how morale is doing at the property and what is needed to be able to do everything.

At that same time when I transitioned into those weekly meetings, we were able to move our operations call to a monthly basis. So it’s just staying on top of everything… There are still tasks involved with running our large syndication, similar to a business that needs to get done, not just on a property level, but as well as on a general partnership level… And making sure that we’re still delivering upon everything that we need to do on our end.

Slocomb Reed: That makes a lot of sense. Given your Fortune 500 background, Brendan, and how well that has translated into asset management for apartment syndication, Brendan, talk to the Best Ever listeners for a moment who are involved in asset management who don’t have your corporate background. They haven’t been involved in high-powered conversations with government agencies and contractors in their day job. What skills directly carried from your corporate career into asset management that you think people should be developing if they’re involved in asset management?

Brendan Chisholm: It’s a great question. I will say, I haven’t been involved with government contracts. But to your point, a lot of the things that I’ve applied is that in any project that you’re doing, you have an overarching goal of what you need to do. And then you need to be able to reverse-engineer how you’re able to get to that goal. There are sub-tasks that you need to be able to do and check off to make sure that you’re building momentum to that ultimate goal, something 30, 60, 90 days out, to keep yourself as well as your team on track.

With apartment syndication, it’s a team sport, and making sure that everybody’s contributing or everybody’s at least taking on a role… And then making sure that they deliver upon their timelines, to making sure, Slocomb, if one of your tasks is XYZ and we give you a two-week timeline, and I’m the person on the 13th day going, “Slocomb, are you ready to deliver upon this for our next meeting?” or  “Joe, where does this task stand?” So it’s being task-oriented, but having a higher goal in place to make sure that everything is being done in a timely manner, to deliver upon your results.

Slocomb Reed: To make sure I’m on the same page with you, Brendan, you’re talking about beginning with the end in mind, having the bigger picture goal first, and then from there, moving back towards what goals need to be accomplished in order for the big goal to be possible, and then what tasks need to be completed in order to hit each of those goals that play into the bigger picture.

Brendan Chisholm: You’ve put it much more elaborately than I did.

Slocomb Reed: [laughs] I don’t know about that. I got to listen to you explain it and then just have to summarize, so thank you, Brendan. Having the background that you have and now getting into value-add apartment syndication, what’s the most important skill that you have developed now as an apartment indicator over the last year and a half?

Brendan Chisholm: Most important skill… I think it’s organization. Just being organized, more so than anything else. I think that it goes hand in hand with the asset management role, because in an asset management role you are not managing the day-to-day operations of the property, you’re overseeing them; and making sure along those lines, that — as I’ve just mentioned, it’s keeping the wheels turning for the business. It requires me who writes down everything…

If you were to look at my task, it’s just filled with post-it notes, as well as project management trackers I use to make sure I’m staying on top of it, just so I understand where everything is going at that time, or what are the deliverables on the 18th of the month or the 22nd of the month, or is it something on a quarterly basis? Just making sure that the wheels are turning to ensure that the property is still running at full speed ahead.

Slocomb Reed: Brendan, are you familiar with the DISC profile?

Brendan Chisholm: I’m not.

Slocomb Reed: Okay. For our Best Ever listeners who are familiar with the DISC profile, I’m an SI, which is about the least organized personality profile that you can have. Brendan, talk to me directly – and hopefully, our Best Ever listeners get some value out of this. I do a lot to create systems, and most importantly, delegate tasks that require high levels of organization. Being organized does not come naturally to me. There are plenty of things in real estate investing that do; I try to make sure my time is focused on those. But also, I’m an owner-operator, so at the end of the day, everything falls on me. What advice do you have for me, some simple things that I can do that would help me stay more organized, and our Best Ever listeners of course?

Brendan Chisholm: Of course, I write everything down, I always carry my journal around. This isn’t my actual journal, I have a journal where I write my goals down every single day. But this at least, when I have conversations with people, either to be a property manager or a lender, I’m writing down things that are actionable for our entire team to be able to send them out. I’ll put it in here, and then making sure it’s uploaded into our project management system if it’s an action item for another team member. Just what else is there to do.

As I said, I’m a big advocate of just writing stuff down because I’m very forgetful, if it’s not written down and right in front of me, if it’s not scheduled onto my calendar. If you are looking at the calendar that I have for both work and personal, it’s just filled with each task that I have to do throughout the day, and making sure that I’m apportioning time throughout the day to ensure it’s completed. I have stuff throughout the day to make sure I pick up my kids from daycare, but I haven’t forgotten a single child yet. Hopefully, my wife, when she listens, smiles and nods.

Slocomb Reed: Yeah, hopefully so. My wife, she might not be smiling, but she’ll definitely nod when I talk about how disorganized I am. I’ll say, to that point, Brendan, I’m a big fan of alarms and calendar events. But also, and this is for our listeners as well, if you have a personality similar to mine where you’re much more people-oriented than task-oriented… I hired an executive assistant, and she is much more of a task-focused, detail-oriented mind of a steel trap kind of person. So whenever I need to remember something, I don’t write it in a journal, I message it to her. And then every day for at least 30 minutes, she and I have a meeting where she reminds me of all the things I message her and asked her to remind me of. She also helps me review emails and other correspondence. But literally, she is my checklist. I just send her throughout the day, throughout the week, it’s the middle of the night on a Saturday night, I can’t sleep and I think of something that I’m going to need to remember when I wake up in the morning or first thing Monday morning, I just shoot her a message, she clocks on Monday morning, she sees it, and it’s on my itinerary for later. In my experience being organized is critical, it also can be delegatable.

Brendan Chisholm: Yes, it can be. That’s a very good recommendation. One of the people in our general partnership has done something similar as well.

Slocomb Reed: Nice. And I will say, my executive assistant is a virtual assistant in the Philippines. I will also say, we’re recording in March of 2022; I’ve been working with virtual assistants in some capacity in the Philippines since 2014, so I’ve gotten good at it. But it is possible to hire someone affordably virtually to handle a lot of the responsibilities that an executive assistant handles. Brendan, are you ready for our Best Ever lightning round?

Brendan Chisholm: I am, Slocomb.

Slocomb Reed: Awesome. What is the Best Ever book you’ve recently read?

Brendan Chisholm: Zeckendorf. It’s the biography of Bill Zeckendorf, who was a real estate developer, pre-World War II, post-World War II, from New York City. He has his fingerprints on a bunch of office developments throughout all of North America.

Slocomb Reed: Nice. What is your Best Ever way to give back?

Brendan Chisholm: My wife and I both donate to our local food bank every single year, making sure that we can bring Thanksgiving dinner to the locals in our community.

Slocomb Reed: What is the Best Ever lesson you’ve learned in apartment syndication?

Brendan Chisholm: This is a team sport. The best part about this is everybody has their own strengths; just go towards the strength. Double down on your strengths within apartment syndication, and then the team will fill in the rest of the way with you. So you don’t have to be a jack of all trades to be able to do this.

Slocomb Reed: Awesome. Brendan, a related question, what’s your Best Ever advice?

Brendan Chisholm: Best Ever advice – grind with a purpose.

Slocomb Reed: Grind with a purpose. That’s great. Brendan, where can people get in touch with you?

Brendan Chisholm: You could find me at my email address brendan@bkcholding.com. Hopefully, by the time this podcast comes out, I’ll have a refurbished website at brendanchisholm.com. Or you can find me on your social media, LinkedIn, Instagram, or Facebook.

Slocomb Reed: Awesome. Well, thank you, Brendon.

Brendan Chisholm: Thanks, Slocomb.

Slocomb Reed: Best Ever listeners, thank you as well. If you got value from this episode, please do subscribe to our show, leave us a five-star review and share this with a friend who you know is involved in asset management or executing a value-add business plan in commercial real estate so that this conversation with Brendon Chisholm can add value to them too. Thank you and have a Best Ever day.

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JF2776: 7 Things Experienced LPs Look for in a GP ft. Bryan Miller

L.A.-based musical composer Bryan Miller knew he needed a retirement plan, so naturally, he started buying and investing in real estate as both a GP and LP. He was so successful that he now co-owns Capital Stack Investments while still working as a composer for TV and film. After sharing how he got into development and how he develops build-to-rent deals in LA, Bryan took some time to explain in detail what he looks for in potential GPs:

 

1. They’ve been in the business a long time.

Bryan Miller wants to see track records when evaluating a GP. In fact, he prefers to work with those who have been in business since before the economic downturn in 2008 so he can determine how they handle stress and uncertainty.

 

2. They produce consistently high returns.

Bryan advises against chasing asset classes that promise high returns. It’s a better bet to seek out an operator that has produced 10%–20% returns consistently over a long period of time. 

 

3. They’ve been recommended by someone he trusts.

Bryan tries to leverage investment groups and advice from other people to find quality GPs. Ideally, he prefers to know the operator or receive a glowing recommendation from a friend who has had a positive experience with them.

 

4. They have investors they’ve been with for 5+ years.

Bryan recommends talking to these investors to determine how the GP acts when times are tough and how well they stick to their word.

 

5. They have deep pockets.

One multifamily deal Bryan was a part of wasn’t doing well, so the principal lent the project $1 million to keep it going. “If you don’t have a partner that has some deep pockets with the ability to weather some storms … then it’s a really tough position,” he says. 

 

6. They stay out of legal trouble.

With GPs who don’t have a long track record, Bryan examines other aspects of their lives — for example, do they have a lot of litigation in their background between partnerships? Do they have any bankruptcies or divorces? These can be indicators that the GP doesn’t perform well under pressure.  

 

7. They plan for the worst.

It’s a major red flag when the success of a deal relies on the hope that the market will improve in the future. Bryan sticks to GPs who underwrite conservatively. 

 

Bryan Miller | Real Estate Background

Greatest lesson: Be ready when opportunity strikes. Timing can be life-changing. I ran into the burning building of real estate in 2009 when everyone else was running out and was scared and made 1000%+ returns.

 

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TRANSCRIPTION

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, Bryan Miller. Bryan is joining us from Rancho Mission Viejo, California. He is the co-owner of Capital Stack Investments which curates development projects in the LA area. Bryan is a GP on almost 100 units and an LP in over 15 different deals. He also owns a TV commercial and film composition company that works with all the large studios in Hollywood. Bryan, thank you so much for joining us and how are you today?

Bryan Miller: I’m doing great. Nice to be here.

Ash Patel: It’s our pleasure to have you. Bryan, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Bryan Miller: Sure. My background is I’ve been a composer and still am a composer, writing music for film and TV projects. Out of that, I knew I had to build my own retirement plan. There was nobody funding the 401K except for myself, so out of that I started investing in real estate, buying real estate, and getting into it as a long-term strategy, just to have income in the later years… And then it turned out so well that it’s become its own business run.

I’ve been involved with lots of different things from owning a single-family portfolio, investing in lots of syndications, doing flips with partners, and now doing a lot of development deals where it’s basically like a build-to-rent. So how do you acquire assets in this market under value? Well, if you build those assets you can acquire for a six cap, in a market where you could sell for four cap, so that spread is your profit.

Ash Patel: Explain that to me, please.

Bryan Miller: Sure. Basically, it’s hard to go to the market and find a bargain now. Everybody wants premium prices in LA. There are buildings selling in the three caps, and maybe even some below that, there are rumors out. It’s really hard to make money in the short-term on those deals. People buy those deals, it’s a great store of value, they know Los Angeles is a great market, it’s going to appreciate over time. So people park money there, they make a little bit of cash flow, but not that much.

But let’s take a $10 million building – if you can build that building all-in for 8 million bucks, you just made $2 million. Because now you have a $10 million asset, but it cost you 8 million. What it does cost you is maybe a year or two of tying up your capital until you can complete that building and create a $10 million building for $8 million. So that’s how you build your profit. And actually, there’s a lot of downside protection in that, because if you went and bought the $10 million building that was just stabilized and the market drops 20%, now you have an $8 million building, and you just lost 2 million bucks. But if you’re building it during that time and the market corrects, and it comes down to $8 million, you just built an $8 million asset that’s worth 8 million. So there’s more downside protection in that than if you just go in the market and really don’t have any upside, and you’re just hoping that the market is stable and that you can push rents over time.

Ash Patel: So this is a build-to-suit type deal, right?

Bryan Miller: Yes, either build-to-sell or build-to-rent.

Ash Patel: Got it. Okay. So you find the land and then you find the potential tenants, or the other way around?

Bryan Miller: Everything would come from finding the property that you can build on first, then actually building it. We learned a lot in that whole process. The whole plan is be as simple as you can possibly do. We want to go into a buy right situation, which is you have the legal right to build four units or five units on that property, rather than the typical development play, which is an entitlement play, which might say, “Hey, I hope I can build 30 units here and I’m going to take the next three years lobbying the city to get permission to do that.”

The main goal is to go as simple as possible, and just go at an asset where you know you have the right to build that, so you don’t have to go through that normal entitlement process, so you reduce a lot of the risk of normal development.

Ash Patel: And Bryan, what’s a typical tenant? Is it retail, office, industrial?

Bryan Miller: Oh, these would be small multi-families.

Ash Patel: Got it. Okay, interesting.

Bryan Miller: LA has a huge supply demand imbalance. There’s very little new stock, there’s a lot of old stock. But because we have rent control – it’s funny, this is like the unintended consequences, like a politician — like, if we have rent control, we’re going to do good things for a renter. But let’s say you have a million units of rental units; well, 80% of those people are never going to move, because they have under-market value rents. They don’t want to move to market value rents, so they stay there. So instead of a million units, now you just cut out 80% of market, now you only have a sliver of the availability, a sliver of the supply, so you really restrict supply in that scenario. When you have restricted supply what happens? Prices go up.

Ash Patel: Interesting. Right now, I’m assuming you can build for a lot cheaper than you can buy.

Bryan Miller: Typically, yes; the building would cost you 10 million, but you can build it for eight. So yes, there is a spread there.

Ash Patel: What’s the typical return on investment on a deal like this?

Bryan Miller: It really depends, there’s a lot of factors. I tend to offer going for as simple as possible, building duplexes, building wood frame construction; all those things are simpler, faster, easier to build. Your more elaborate construction – it’s a higher degree and higher bar of inspections, a higher degree of scrutiny by the city, more inspections, more complicated fire sprinklers… All of it is more complicated. The simpler is better, but I would say it depends on how the deal performs. A typical deal would be 15%-25%. There are other partners that I deal with, they make 33% on a project level. That’s not net to LPs, but on a project level, they’re averaging out that as a typical return.

Ash Patel: And Bryan, you’re a lifelong composer; how did you get into development?

Bryan Miller: Well, when I was five years old, I got into development. My dad was a school teacher, and every summer we built a house. From June, July, August, I was out swinging hammer, sweeping floors, driving nails, and basically doing that. Every summer, we built a single-family house, and my dad would make almost as much from that one spec house as he did from his teaching salary. So I kind of got the vision of, “Hey, you build it, and if you create value – a wonderful thing; you’ve just figured out a great way to create wealth.”

Ash Patel: The good old days when you could build a house in one summer.

Bryan Miller: Yeah, exactly. Exactly.

Ash Patel: No supply chain issues.

Bryan Miller: Exactly.

Ash Patel: Very cool. So that was kind of implanted in the back of your mind, that no matter what you do, there’s a way that you can supplement your income.

Bryan Miller: Sure. For me, it was really how do I take capital from this business that’s doing really well and make sure that it keeps repeating. You don’t want to be like the typical guy in the music business, blowing through large amounts of cash and then broke in just a few years. I was like, “How do you take that and develop that?” That was part of that long term strategy of let’s take the good years, build it, and put it into assets that are going to continue to produce revenue for forever, until you sell that asset.

Ash Patel: And Bryan, you’ve got a 37 units subdivision in LA. Can you walk us through that deal?

Bryan Miller: Sure. It was actually kind of three different parcels that we put together; those are called small lot ordinances. People don’t typically build condos in LA, because there’s a lot of legal risk, because it’s really easy to do a class action against the condo builder if there’s any problem in the first 10 years; you can get sued. People went away from that, so a small lot is actually they’re single-family houses, but they look like townhouses. They look like they’re adjoined and almost like a row house but they’re actually separate; there’s actually six inches of air in between even though you can’t see the air. You actually have separate walls, so that makes those single-family houses.

And again, people in LA are paying $3500, $4000, $4500 a month in rent so when you give them the option to purchase that, when interest rates were in a really good stat, you could purchase about that same payment so it made a lot of sense for millennials to go and buy that asset, versus continue to rent.

Ash Patel: You took three parcels and develop 37 units. Are there any amenities or do you not have to offer anything, it’s just…?

Bryan Miller: There’s really no amenities.

Ash Patel: They’re just desperate for housing.

Bryan Miller: The amenities are rooftop decks, garages… But again, we’re talking about a millennial buyer; they don’t want a yard, they don’t want maintenance. The rooftop deck is a great place to go hang out, have friends over, get some fresh air in the evening. But there’s no swimming pools or massive infrastructure plays like that.

Ash Patel: What’s your role amongst your team?

Bryan Miller: Well, a little bit changed over time. I helped with the capital raising advising the developer, I’ve stepped in and helped with a lot of project management over the last year and a half, kind of driving the project to the finish line.

Ash Patel: And how do you find time to compose music?

Bryan Miller: That’s a good question. It definitely takes some diligence about trying to do time blocking. During this time, I’m going to push on these things. I try to be super organized, try to use Google Sheets, so people can reply without having to have a lengthy phone call; I try to streamline that, and I try to get really efficient in the writing, too. The process of being really disciplined, get your three or four hours of uninterrupted time, bust it, and then jump on to other things, and then come back to that.

Ash Patel: Bryan, you’re an LP in over 15 deals – mobile home parks, retail, multifamily self-storage, as well as LP and development deals. How do you look at where to invest your LP funds into?

Bryan Miller: Great question. I guess the easiest answer is you look very carefully about where you want to do that. As I’ve done this for a while, I’ve had partners who have just blown it out of the building; have invested 50 grand, and got back to 200 grand two and a half years later. Those are kind of like the home runs. There are other things that have performed at two or three or 8%, so LPs all perform differently.

But if I look about now as to how I evaluate those, I want to look for people that have been in the business a long time, I want to look for long track records, I want to look for if it’s possible that they were in business before the 2008 downturn, that’s a plus because you see how people handle stress and uncertainty. It’s interesting, people – like, LPs that you turn your money over to, it’s very interesting… Some personalities when they’re cornered, are fighters, they’re very creative, they’re scrappy, and they’ll figure out “Well, if I do this, I switch that, and I leverage this, and I give up this in order to gain that, I’ll be able to live and play another day.” There are other guys who basically go in the fetal position, suck their thumb, and basically get really stuck.

You don’t really know until the tough times come, what your partner is going to really do, and that’s the tough thing. So the way you look around that and mitigate that is you look for long track records, you look for a long history, you want to find investors that have been with them for five, seven, 10, 15 years. Because even if a person has success over a five-year period, it doesn’t guarantee that they’re going to be successful in the next five. It depends on what they do, who else was on the team, when they were successful; did they lose any key members, are they growing too quickly? There are still things, but that long track record of really doing what they say they’re going to do and being willing to pony up when the times are tough.

I was just in a multifamily deal in Georgia, it didn’t perform super well, and it had some problems. The principal on that deal lent the project a million bucks to keep it going, and he didn’t charge interest on it. So if you don’t have a partner that has some deep pockets that have the ability to weather some storms, when the storms do come, which they will come, then it’s really a tough position. You want to look for people that can have experience in weathering that emotionally, that they can stay in the fight when things get tough, and the phone calls get really tough, and the conversations get tough, but also, that they have some deep pockets they can write a check to help solve problems.

Ash Patel: Great advice on how to evaluate GPs on your deals. If you have a GP that has not been in business before 2008, what’s a good way to stress-test them? Because they’ve only seen positive economies and upticks and everything’s been great. How do you stress test somebody like that?

Bryan Miller: It’s really a tough question. I don’t know that you can, because the thing is, I think we can get freaked out. We’ve had such tailwinds since 2010. If you bought real estate between 2010 and 2020 and you lost money, something is horribly, horribly wrong. Because the market has been helping you, cap rates have been compressing, and interest rates have been coming down through that period… There’s been so many positive things that a lot of people performed super-well; it may not be a reflection of their skills, the market might have helped them out.

And take it wherever you get it but again, but it’s tough to look at and say, “How is that person going to perform?” I don’t know exactly how to answer that question other than you start to look for other things. Have they been in other businesses? Were they in a different business that happened in 2008? Do they have any bankruptcies? Do they have divorces? Do they have a lot of litigation in their background between partnerships? Any of those things that come up, I’ve found that history tends to repeat itself. So if a person has problems, or difficulty getting along with others, or is involved with multiple lawsuits, that probably means that’s going to happen again in the future. So those should be all serious red flags that you pay attention to.

Ash Patel: Interesting. I love that. Very cool. Bryan, out of all the LP deals that you’ve done, what has the best returns consistently? Mobile home, retail, multifamily, self-storage, development? How about the top two in order?

Bryan Miller: Oh, that’s a great question. I think a lot of this is operator-dependent, not so much asset class-dependent. Because I’ve done some great deals in multifamily where we did serious value-add on 188 units and it turned out great. So some of those have been my outliers on best performance. I’ve had some development deals where it’s 37% IRR, those are great; so probably those are the top two. But again, asset class does not equate to success. People can get their self-storage buildings repossessed and taken back. It’s happened to friends of mine who just had really unfortunate circumstances, like a brand-new class A facility being built right across the street. They had deeper pockets, so they were able to just lower rents, and all the renters from their facility went next door. Overnight, you go from 80% occupancy — not overnight, but after a couple of months, you can go down to 50% and 40%, and now you can’t debt-service. Even a super stable, “Hey, self-storage is great. You can’t lose money in self-storage.” Yes, you can.

All those are still — operator and environmental things go into that, so I just want your listeners to not be chasing asset class. I think it’s more chasing that operator that has produced 10%-20% returns consistently over a long period of time. That’s a much better bet than maybe some guy that got an outlier and hit a home run once, but you’re not sure maybe he’s going to strike out next time.

Break: [00:17:28][00:19:15]

Ash Patel: The GPs that you’ve invested in, have they all been recommended to you? Or have you ever sought out GPs from doing research?

Bryan Miller: A little bit of both. I’ve invested very rarely with the GP that I talked about the outsized return on. He was recommended — I was looking at some multifamily to buy myself in Phoenix, and that broker recommended me to this operator. We had a meeting, we had a long meeting, I pulled the trigger on him, because I liked him, I felt like he was really savvy and he was like a do whatever it takes guy… But it was a bit of a gamble, and I knew it was a bit of a gamble. But mostly, I’ve tried to leverage investment groups and other advice from other people.

I’ve invested with Jeremy Rowell, who – many of your listeners will know who he is; I’ve done a number of syndication deals with him. Again, you want to have the voice of experience and the voice of someone who’s been there, who knows to look for things. When I started out, I didn’t know a lot of the intricate things to look for, and most people don’t. It’s really tough when you first start to really know where all the pitfalls are, or even how the difference of “Is this distribution or return of capital that’s going to reduce your prep, or is it really just your prep and you’re going to keep your same capital account?”

There are so many nuances to this game, so it’s really important that you find people that have been in the business for five or 10 years. I have relied heavily on recommendations. The 506 Group is an amazing group of really smart investors who recommend things… They’ve had experiences, positive or negative, and they’re willing to share those. That really speeds up your learning curve.

Ash Patel: Bryan, if you’re active on LinkedIn, you probably get hit up with a lot of deals. Do any of those get your attention enough for you to follow through and potentially invest with them?

Bryan Miller: As a general sense, no. I get text messages from people, “Hey, I’ve got a brand new deal. We’ve got to invest right now. We’ve got two weeks.” It’s sort of off-putting, honestly. Again, I’m looking for that partner that I’ve either invested with previously, they’re doing more deals in the future, again, they’ve treated me well in the past… It needs like a serious recommendation, because again, even in the best of times that we’ve had that we’ve talked about these last 10 years, there are people that have screwed up deals, and have lost investor principal. It’s like, “How did you mess that up in the best of times?” But it happens.

So it’s really important to look at that track record and the due diligence. I’d be more likely if other friends of mine were in that deal, or I know that operator… Again, this is the trouble. It’s like, everybody when you’re starting up, hey, they’re new, but you don’t really know what’s going to happen when things get tough. You’re taking a real risk if you’re going with somebody that you don’t have a lot of experience with or they don’t have a lot of track record.

There are some other groups that are relatively new, but again, they’re building great reputations. People are saying, “Hey, they’re delivering, they’re doing a great job.” You see what they’re doing in the marketplace, and it’s impressive what they’re doing. Those, I would say, I’m warming to those. But if I can find an operator that’s been in business longer, that has more of a track record, that’s less uncertainty, then I’ll choose that as an option.

Ash Patel: How intense is your due diligence of that group?

Bryan Miller: It sort of depends. I would say I’m almost depending more on people that have had that tenure track record with that group; that’s more the due diligence. Because, again, every proforma looks good, every proforma’s a shiny paper, you know what I mean? Like, you’ve never seen a bad one that you go, “This looks like crap, I’m definitely not investing in this.” They all look good, all the numbers look good. And if you’ve ever tweaked a proforma, you know that you can achieve the kind of outcome that you want by modifying the assumptions.

So you have to look more into the assumptions. If they’re saying, “Well, we’re buying it at a 4.5 cap, but we’re selling it at a 4.0 cap,” meaning that the market is going to help you more on the exit, that’s not a realistic expectation. It might happen, but there’s a greater likelihood that it would get worse and you have to plan for the worst. If you see them making assumptions that are very unlikely to happen, that should be a big red flag, because it means, one, these aren’t conservative underwritings to get to those kinds of returns, and two, they probably haven’t been around the block and they might be trying to sugarcoat this to make it look like a better deal than it actually is.

Ash Patel: Yeah. So the lesson here for the GPs out there, use your existing investors to capture additional investors.

Bryan Miller: That’s a great takeaway point, definitely. Again, I’ve invested with deals because a friend of mine, Joe Feng, “Hey, I’ve invested with these guys, they did great for me, blah, blah, blah.” I take that recommendation way higher than, again, the shiny brochure or the, “Hey, we’ve got a new syndication deal. We’d love to get you involved.” That might be really good, but I’ve heard enough stories and experienced partners not doing what they’re supposed to do or what they promised to do that you really have to vet those deals very, very carefully and realize that 50 grand could go away if you’re not careful.  So it’s like, who are you trusting? Who do you have that kind of level of trust?

I think for the GPs out there, how do you build that kind of trust? What can you do to demonstrate that when the chips are down, or you’re going to do what it takes, or you’re going to be willing to step in, or you’re willing to give up part of your side in order to make LPs more whole or get them to the number that you promised them on the proforma? Some guys are willing to do that, but not everybody is.

Ash Patel: Yeah. Bryan, what is your best real estate investing advice ever?

Bryan Miller: It kind of comes back to that Warren Buffett quote, “Be greedy when others are fearful and be fearful when others are greedy.” That was a life-changing thing for me. I started buying real estate single-family in 2004, 2006, then I saw the market just go crazy and things didn’t make sense to me. I was like, “This doesn’t make sense, I don’t understand.” People were like, “Well, I’m losing 250 bucks a month, but it’s going to double in the next six months. I’m going to make a killing.” Well, the party came to an end.

But during that time, I bought up a lot of single-family for 25 cents on the dollar. I was buying units for $33 a square foot, and I knew the build cost was like $100 a square foot, so eventually, it would come back to there. My Best Ever deal was taking 20 grand buying a $100,000 house in Phoenix around 2010, then 10 years later, it’s worth $500,000. You make $400,000 of profit on a 20 grand investment, so that’s like a 20X return. I did that as many times as I could during that period, and knowing what I know now, I would have done it more.

Ash Patel: Yeah. We all have that hindsight, and we have the luxury of having lived through that time. Do you see any similarities in what’s going on today?

Bryan Miller: You definitely see the euphoria, you see the craziness, you see the “you can’t lose,” you see people paying a lot of money for assets, you see people bidding over ask, you see people putting a million dollars hard day one to try to secure a deal… Now, as the market continues to appreciate, those look like really smart decisions. But if you know the term “Return to the mean,” that’s going to happen. Historically, we don’t know when it’s going to happen. But if you look at any chart, here’s the normal, you can be way up here. But over the course of time, you kind of come down to that line, usually below the line. Because it doesn’t go like this; it’s above and below. I’d say we’re above the line now. At some point, we will revert. That’s going to happen, and I think there will be pain in that. And again, choose your operators carefully. A good operator will also keep you from a bad deal. They’re going to see more of the pitfalls or what would happen if somebody builds a brand-new self-storage building right across the street. They’re going to have more wisdom and life experience, so they’re going to be in a better position to choose that investment.

Not only in evaluating that investment, but that operator is going, “This is a great asset. Even if these market conditions things happen, this is going to be well-positioned because of this.” So good operators are also going to steer you into good deals, where other people may be just looking for an opportunity to get in, they may not be thinking through as many of the critical downside. Everybody tends to look at the upside, and it’s harder to take that discipline to look at what if things didn’t go well, what happens if interest rates do go up 2%, what’s going to happen then? So it’s good to have that foresight of thinking that bad things could happen, to be prepared and make the best choices you could.

Ash Patel: Yeah, a lot of good points in there. I think, from my perspective, if you have an operator that has an exit cap, let’s say 100 basis points lower than their entrance cap, that’s a red flag.

Bryan Miller: Absolutely.

Ash Patel: Exit at the same cap rate or even higher, but don’t anticipate cap rate as your savior.

Bryan Miller: You should plan for that. Maybe if you’re buying at a four or plan to exit at a five, you don’t know where the markets going to be in three to five years or seven years. There’s a lot of uncertainty. Who would have thought in November that there’d be a war going on in Ukraine right now? It’s like, uncertainty happens very, very quickly and it’s hard to anticipate that. Right now, it seems like “Hey, the sun is out. It’s shining. Buy, buy, buy, buy.” With inflation, that may be really good advice, but you have to be prepared for the unexpected to happen.

Ash Patel: Bryan, that self-storage operator – you’ve got me thinking. Did the competitor opened right across the street?

Bryan Miller: Yes.

Ash Patel: Man. So that’s got to be like on your due diligence list from here on out. If you have a mobile home park or RV park or self-storage, you’ve got to make sure within eyesight, there’s no available land for someone else to do the same thing. If there is, beat them to the punch.

Bryan Miller: Yeah, that is one of the downsides of self-storage. The entry cost is relatively low, because you’re using cylinder blocks, some garage doors, and you’re in business. It’s a much lower barrier than to build a multifamily right across the street. Also, absorption rates, how many units can the market really support? In multifamily, if somebody’s built right, you might be okay. The nice thing with mobile homes is it’s very unlikely they’re going to build a new mobile home, because it’s very restricted, and basically, cities are not granting new licenses, so I think there’s better moat of protection around that business than there is the self-storage business.

Ash Patel: Yeah, I agree. But what a crazy thing to do, to crush your competition by building right across the street. That’s not cool. Bryan, are you ready for the Best Ever lightning round?

Bryan Miller: Let’s do it!

Ash Patel: Bryan, what’s the Best Ever book you recently read?

Bryan Miller: The Best Ever is The Art of Possibility, Benjamin Zander. It’s really about thinking and about changing the way you think about outcomes and life. It’s a terrific book, I highly recommend it.

Ash Patel: Bryan, what’s the Best Ever way you like to give back?

Bryan Miller: A friend of mine moved to the Philippines and started an orphanage about 20 years ago, so I know the money is being well spent to give money to kids over there. A kid in a third-world country can go to college for 1000 bucks a year. So for four grand, you can send an orphan to school, for four grand. It’s a great use of capital, it’s a great way to give back, and it’s the ability to change somebody’s life for a very low amount of money.

Ash Patel: Yeah. Is that Will Crozier?

Bryan Miller: No.

Ash Patel: Oh, it’s not. Okay.

Bryan Miller: This is in the Philippines.

Ash Patel: Give that person a shout-out, please.

Bryan Miller: Sure. Lorraine DiGesu is my friend. Faith, Hope and Love Kids Ranch in the Philippines is her organization. Anybody can reach out to me and I can connect you if you’d like to support them.

Ash Patel: Awesome. Bryan, how can the Best Ever listeners reach out to you?

Bryan Miller: Sure. A great way to reach me is the website capitalstackinvestments.com, Bryan E. Miller on LinkedIn, those are two great ways, and I love to be connected. Also, on Capital Stack investments, there’s a resource called Lessons From 50 deals. Those are just lessons that my partner and I have learned from investing in deals. What went right, what didn’t go right, what were our learning lessons… It’s a great way to speed up your education as an investor and learn from people who’ve been doing it. Just go there, sign up, it’s free, it’s a way we give back, and it’s worth doing.

Ash Patel: Bryan, thank you again for sharing your time with us. Your story, always wanting to be a composer and having the inspiration from your dad who built houses in the summer to supplement his income. You followed in his footsteps and have built something incredible. Thank you for sharing your story with us today.

Bryan Miller: Oh, thank you for having me. It was nice to spend time with you, and well done.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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JF2775: Finding Your Edge in the Mobile Home and Self-Storage Spaces ft. Jeremiah Boucher

Young and hungry, Jeremiah Boucher got his start in commercial real estate by sourcing mobile home park deals during the Great Recession. Since then, he’s created his own management company and branched out into the self-storage space. In this episode, Jeremiah tells us how he found his edge as a young investor, what drew him to self-storage, and what advice he has for investors in both asset classes today:

 

Establishing value as a young investor.

After losing some houses in the Great Recession, Jeremiah had no money or credit to work with. One thing he could offer was his ability to source deals, so that’s exactly what he did to get his foot in the door with mobile home parks.

 

What attracted him to mobile home parks.

As a young investor, because Jeremiah didn’t have much capital or credit to work with, he sought deals that didn’t necessarily require either. In 2007, mobile home parks were largely financed through the seller — particularly with the Class C-type properties he worked with — which paved the way for him to begin landing deals.

 

Advice for mobile home park investors today.

Today, Jeremiah sees people overpaying for mobile home parks with potentially problematic business plans and budget expense expectations. Because of this, it might be a good idea to wait to buy until some of these newer owners are forced to sell.

 

Why he shifted to self-storage.

It’s a strong, recession-resistant asset class that’s scalable. Jeremiah has been able to manage, build, and acquire facilities quickly and obtain financing relatively easily.

 

Advice for self-store investors today.

Make sure you buy in a market where it is difficult to add supply in order to put yourself in a position where rent rates can increase as demand increases on a limited supply. Also, buy with a margin of error — make sure you’re conservative when it comes to rent numbers.

 

His Best Ever Advice: Find your edge.

Jeremiah recently wrote a book titled Finding Your Edge about what he has learned in the last 20 years in real estate. The most important thing, he says, is to identify your competitive edge in a space. Once you know what your strengths are, you can pursue opportunities where the deck is stacked in your favor.

 

Jeremiah Boucher | Real Estate Background

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Jeremiah Boucher. Jeremiah is joining us from Las Vegas, Nevada. He is the founder and CEO of Patriot Holdings, an investment firm that focuses on self-storage, mobile home parks, and flex industrial spaces. Patriot also owns all-purpose storage which operates 30 plus self-storage facilities throughout New England, where Jeremiah is from. Their portfolio is currently just over 150 million in assets under management. Jeremiah, can you start us off with a little more about your background and what you’re currently focused on?

Jeremiah Boucher: Yeah. Thanks, Slocomb. Thanks for having me on. I’m glad to share with everybody. I started real estate 20 years ago. I graduated high school in ’99 here in Vegas, jumped into college, quit, and then got into the residential boom. Got tanked in 2007, I lost some houses, and right around that time, I got into manufactured housing. That was kind of my gateway into the commercial real estate world. At that stage, I didn’t have any money, I didn’t have any credit. I actually just wrote a book about it, it’s called Finding Your Edge, if you guys are interested, on Amazon.

That was a tough time, so what I did is, like a lot of the people that I’ve noticed on your podcast, I helped source deals; so I was out there, the guys that own Mobile Home Park Store, Dave Reynolds and Frank Rolfe, I called them up and I said, “I’m a hungry kid. I want to get into business. I don’t know what I’m doing. What can I do to learn?” They said, “Well, go find deals.” So I bought their list and scoured the whole country.

In over 10 years, I sourced almost 100 deals for those guys, took some fees, got some equity, and then broke off on my own back in 2016. I rolled that equity into my own management company, and that’s when I broke into more syndications, acquiring for myself, got into storage at that time, and then just let it run from there. That’s the short and sweet story.

Slocomb Reed: Gotcha. When you say you got into manufactured housing in ’07, what that means is you found some people that you could learn from and you were doing acquisitions, deal hunting for them in the mobile home space?

Jeremiah Boucher: I was. And I was actively involved in capital improvement projects, hiring managers; I was involved in the operations. But yeah, that was the value that I added to that partnership, was going out there and sourcing deals.

Slocomb Reed: Awesome. I don’t know a lot of people who are looking for mobile home parks in 2007, 2008, 2009, and 2010; it got trendy recently. It was three or four years ago now that a lot of people started talking about mobile home parks. What is it that attracted you to that space during the Great Recession? We’ll go from there.

Jeremiah Boucher: Yeah. So I was wiped out; I had no credit, no money. I looked like I was 15 years old. I was just definitely having a challenge at the time. I read Dave and Frank’s book, “How to buy mobile home parks, The 10/20 Rule”, or something like that. But what it opened my eyes to was that, at the time, no banks wanted to finance the asset; I didn’t have any credit. I went out there and went to buy for myself, but at the time I didn’t have any money. So I found them as partners. But what I loved is that I could still find deals throughout that process while sourcing them where I could get the owners to finance. That was really what I was looking to do, was find a mismanaged asset and get owner financing. But more importantly, I wanted to find the land lease community model. So when I heard the idea that you just lease lots, and people lease pieces of land from you for a flat fee, and you don’t maintain any of the bedrooms, bathrooms, or roofs or anything else – that was quite attractive to me, because I had no team, I had no staff, nothing. In Vegas, even during the Great Recession, where I was living at the time, an asset dropped from 2 million or 5 million bucks to a million to 2 million bucks for a small strip center or something, and you still couldn’t get any creative financing. I didn’t see any opportunity here, so that’s why I decided, “Okay, I’ve got to leave my market and I got to go find an asset class that I can actually go acquire.”

Slocomb Reed: I don’t operate in the mobile home space, but one of the things that I hear from the people in that space is that it’s only recently that banks have started lending on mobile home parks. Quick question – how recently did you experience that, since I know you were in the industry before it happened?

Jeremiah Boucher: In terms of banks being more open or liking the asset class?

Slocomb Reed: Yes.

Jeremiah Boucher: Well, now there are quite favorable loans on mobile home parks, especially Freddie and Fannie. But a caveat to that is you have to have somewhat of a quality asset, or even if you don’t own the homes, a quality community with quality homes in it for that to qualify. But I would say the last five years, really, the trajectory has been quite significant compared to what it was in 2007, 2008. KeyBank defaulted in New York on a huge portfolio from what I remember, and they had no appetite for mobile home park loans. And for about the next 10 years up to 2015, it was nice because the buyer pool was limited in that sense. But it was also a challenge, because even on my exit when I was selling at that time,  they were always worried, “Is the guy going to be able to get a loan on the way out?”

Slocomb Reed: That makes sense. Back in ’07, ’08, and into and out of the Great Recession, were you buying these mobile home parks underwriting to a defined hold period, like five to seven years, or were you buying them to hold long term?

Jeremiah Boucher: At that time, I was so green… I knew what a cap rate was, I could open up Excel, I could do the income, expenses, the NOI, and I could calculate the interest-only loan that an owner would give me. That was my underwriting. But I was literally driving around in a van that my buddy lent me in Denver out to Nebraska, Western Nebraska, sitting down with a family, they had about 60 units, and it was 300 grand for that park. I’m sure when they saw me, they were like, “What is he doing out here from Las Vegas?”

But I came in there and I talked to them, I said “I have $30,000 to put down, 10% down own. If you guys could carry the note for five years, I’ll pay it off over that period of time.” I knew on my side that my partners could put up the money for me and we could raise the rents, to a degree. The rents were literally $150 a month at the time and we could get them to maybe $200 a month. I think my main focus at that time was, I guess I would say a five-year underwriting period. But it was really just somehow getting my hands on an asset and learning how to actually operate that asset, really figuring out if this was for me.

That was kind of the first break where I felt more confident, because even though it didn’t cashflow much – a couple thousand a month in the beginning, and it ended up doing a little bit better – it gave me the confidence to know, “Okay, these are the issues. This is a structure that I could maybe build on.” And now I had an asset under my belt, I’m an actual owner.

Slocomb Reed: Nice. Let me connect some dots here for our listeners, Jeremiah. Tell me where I’m wrong. You were looking for an opportunity to get into an asset class that didn’t require you to have a lot of capital or a lot of credit or borrow ability. In mobile home parks, especially because banks just weren’t interested in lending on them at the time, and seller financing was the most predominant way that these properties were purchased, mobile home parks were an opportunity for that 10% down. The seller carries the note, so you’re not having to prove to a bank, underwrite, or your borrower ability, that was your opportunity to get in. Is that fair?

Jeremiah Boucher: Yeah, that’s completely fair. And just make a distinction with that statement – now, the asset class has always been there and there has been an institutional aspect to it, where equity lifestyle communities that Sam Zell owns, high-quality parks that are in Florida,  in Vegas here, out in California… What I’m talking about, like any asset class, was there was such a polarity in the quality of the asset. I’m talking about if you want to call it C class, or one star, the really lower-quality assets. That’s where the opportunity was; no one wanted to lend on that and you could get quite creative.

Slocomb Reed: Okay, gotcha. So no one wanted to lend on what would be compared to class C properties, with regards to location and size and age. That makes a lot of sense.

Jeremiah Boucher: That’s where the opportunity lies. If you have a stabilized quality asset, it’s a lot more challenging to find an owner that wants to exit it or wants to carry the financing for you. But when you’re dealing with 60 to 100 tenants with unique personalities and you have an older infrastructure with a lot of repairs, you’ve got to be out plowing at [6:00] A.M. on a Sunday. A lot of these older owners, or even owners that just don’t have any interest in the business after a period of time – they get tired of it.

I guess the inefficiencies of the management are what creates the opportunity. That really was the other driving factor, that I could actually go in there and strike a decent deal with these people. Because at some stage, if it’s not big enough where they can hire a good management team, and most of them don’t want to – they’re of the old school, if they need to manage it themselves; like my father, he just got to manage everything himself. After a while, it just wears on them and the family.

That was the opportunity. Just to let the listeners know about mobile home parks right now is they’re a hands-on asset. I’ll put myself out there and say there are no good third-party managers that I know of, at least that follows how I would want the asset managed. It’s a little different. I don’t know, Slocomb, about C-class apartments, but I definitely know the apartment world has higher quality management, because you have larger asset class sizes and better fee structures.

But for a mobile home, you are very hands-on. Just so everyone knows, I’m not actively, right now, growing in that space. I’m very picky in the mobile home park space. I’m only buying maybe 2% to 3% of all the deals that I look at. That’s maybe a handful of parks a year, because I believe the asset class is a little overvalued, or maybe a lot overvalued.

So I’m only looking at opportunities that I’ve had my eyes on, that I know, one, that there’s still some upside left, or two, that there is an infrastructure that I can maintain. Because a lot of this stuff was built back in the ’50s and ’60s and it’s an absolute nightmare underneath the ground with clay piping; Orangeburg plastic, sewer lines, and all types of things.

So I just want everyone to know on there that that was a nice strategy, and I’m not saying it’s not today. They need to be prudent in the underwriting, because there are a lot of costs involved in the management and maintenance and repairs that I don’t believe are being factored in, and they’re going to come back and bite some people that are buying with very thin margins.

Slocomb Reed: That makes a lot of sense, Jeremiah. You’re giving me a lot to chew on here. I’ve taken a lot of notes while you were talking there. A few things you’ve brought up that I would like to make note of and talk about – the first is that I’ll say, I’m an apartments guy and I am currently looking for those same owner-operator sellers that you were looking for in mobile home parks 10-15 years ago. I’m still seeing an opportunity with C class properties, sometimes in better than C locations.

But older properties, older owners, the people who have always believed that they need to do everything themselves, have some sort of ethical quandary when it comes to hiring someone else to do what they feel like they could do themselves. There’s an entire generation of people who thought that way, and bought apartments and mobile home parks. Those are the opportunities that I’m working on capturing right now in apartments in Cincinnati, Ohio.

Of course, that’s almost always with smaller properties that institutional money and, frankly, apartment syndication money isn’t interested in, because they don’t have the same scale. It’s a very active boots-on-the-ground asset as well; to your point. I’m a self-manager, because I’m in that same C class space, and Cincinnati has relatively low market rents, which makes it more difficult to find quality third-party managers. I totally get where you’re coming from there.

Jeremiah Boucher: Just to that message to the audience – I’m sure a lot of people listening are very active investors in their portfolio, and I think that no matter in good markets and bad markets, that’s the sweet spot. What you’re in, what I’m in, in terms of finding these asset classes that are big enough, that you have enough income, that you can actually pay your own management company. But they’re not too big where they’re so sizable that they’re efficient in a way that you can hire high, high quality managers and those assets have no operational inefficiencies. So there’s that sweet spot in there where the real small guy that is buying houses, he’s not going to buy a $5 million apartment or mobile home park complex. But yet at the same time, the big guys, they’re looking for $15 million to $20 million deals minimum to even touch, versus them dipping down into your $3 million to $5 million range.

So I think that the inefficiencies are there, so no matter what the market is, that’s where I think… If you’re willing to get your hands dirty, get to know your market, and get out there and talk to people, that’s where the deals are going to be.

Slocomb Reed: Absolutely. There’s definitely a space there in a lot of markets where you can find the right size property, the right class and condition of a property that you still have a lot of owner-operators in the space, and you can get direct-to-seller and find those opportunities. It is time-intensive. There’s a lot of legwork involved, but there are also a lot of opportunity.

A frame of reference, Jeremiah, the last two apartment buildings that I’ve gotten under contract direct-to-seller had been five and six-unit apartment buildings in good parts of Cincinnati. But we’re talking about people who have owned them for 20 and 30 years. My contract prices were 350 and 230. Each of those properties — one of them is still under contract, one of them I release, because either one of them is going to need 100 grand in work, primarily due to deferred maintenance.

But the rent growth, the appreciation potential, and the forced appreciation potential are so great that I could be looking at BRRRR style cash-out refi’s within a year on either one of those… Which puts a lot of cash flow and a lot of equity on my balance sheet with the smaller deals. That’s similar to what you were saying about the mobile home parks that you were trading in before it got really hot a few years ago.

I think it sounded like you were saying, Jeremiah, a couple of things here… It feels like the mobile home space may be overcrowded now. That may have something to do with the asset class being a lot more borrowable. We’re seeing returns and cap rates compress across almost all commercial real estate asset classes. You said you think mobile home parks might be overvalued and your focus has shifted. Before I ask where your focus is now, what is it that makes you say mobile home parks are overvalued?

Jeremiah Boucher: When you asked me how did I underwrite the deal, looking at it now with a much more sophisticated underwriting model, being an operator for the last 15 years, I know the true cost to operate the asset. From the amount of effort it takes on the management side, so your management fees, your payroll, the deferred maintenance, your water, your sewer, your infrastructure, with tree cutting, and with the power lines – all that stuff. I believe, right now, the true cost to improve that infrastructure is not being factored in over the long haul of the asset.

I think when you’re buying at a six cap on an asset that’s built in the 50s or 60s, or even early 70s, and you do have a rent increase most likely, the rents were depressed – but there’s only so much that the renters can pay. We’re serving a low-income housing need, and there’s only so much net operating income. So if your debt is at a 3.5% rate or whatever you’re at now, 4%, with rates creeping up, I just think that the margins there are quite thin. It might not be an expense, but it’s a capital improvement that needs to be factored in that really is going to deplete a lot of the distributions or free cash flow that’s leftover.

Break: [00:20:21][00:22:08]

Slocomb Reed: Jeremiah, I want to make sure I’m understanding you. I will say for our Best Ever listeners, we’re recording in mid-March; the Fed just announced the first increase of the federal funds rate for 2022 earlier this week. When we talk about interest rates, please understand that that’s where we’re coming from, is mid-March 2022.

Now, making sure I understand what you’re saying, Jeremiah, you think that mobile home parks are overvalued because the prices some of the people in the space are willing to pay don’t account for the CapEx that the properties are going to need over time, so they’re putting themselves in a position where their margins are too thin and could be taken over by those capital expenditures?

Jeremiah Boucher: Yes. That, and the true cost of management, where I believe you need a dedicated employee on-site to handle a lot of the issues and to service the tenants in a way that they’re going to need their issues resolved or the attention that they would like. So I think the true cost of management, and then also on our staff, the asset manager that needs to continually check up on the asset, make sure that improvements are done the right way, make sure that the signage, the playgrounds, that roads, everything is taken care of.  All these costs, they’re intense on your operating company.

So I just think unless you’re willing to do that yourself and if you’re trying to scale in this space, there’s a cost involved with that, and I don’t believe it’s being underwritten enough. You look at it and you think you can just run them from Las Vegas. You do need dedicated staff, and that needs to be factored in there. Just like any of the apartment deals that are smaller, C class, where it’s not big enough to hire third-party management; you’ve got to factor in that maintenance and the manager there and that can eat up all your profit if you’re not doing it yourself.

Slocomb Reed: That makes a lot of sense. So right before we transition to your current focus, I’m an owner-operator, and the reason I like more management-intensive properties is because I see higher returns. There are not as many people who are willing to be as boots on the ground as I am willing to be. If I were thinking about getting into mobile home parks right now, it sounds like the advice you gave me would be something like, “People are overpaying with possibly problematic business plans and possibly problematic budget expense expectations. It sounds like I shouldn’t get in right now, I should wait until some of these people who are getting into the mobile homes park space fail, and have to sell, and that would be my opportunity.”

Jeremiah Boucher: I think so. I think the flip side of that is inflation is here so rents will continue to increase. I don’t know how this will shake out, but what I believe is that I’m not allocating a lot of the different funds that I have as investment funds and my personal funds – I’m not allocating a lot of that capital to these deals, because maybe there isn’t a pure failure event, but really, my capital is tied up in an asset class that I’m just getting no return on, that I’m getting no distributions from.

I think that’s most likely the case over time, is that probably a lot of these guys will be able to service their debt, but the actual equity, the return on equity in the asset – it’s just going to stay flat for a long, long period of time.

Slocomb Reed: Thank you for the natural segue, Jeremiah. Where are you focused now? Where is it that you’re looking to put your capital and your investors capital?

Jeremiah Boucher: As a value-add investor – I’m 40 years old and been in the industry here for 15-20 years – the velocity of money if capital is important. Just like you mentioned, Slocomb, you buy the asset, you make the improvements, and then you either refinance to pull your capital out or you sell the asset, you create your returns, and then therefore, buy more assets and do the same thing again. That’s the same focus I have.

Slocomb Reed: Same value add focus. You’ve shifted into self-storage though?

Jeremiah Boucher: Yeah. Different asset class. About seven years ago I started looking at storage as an asset class. Once again, the reasons being, management intensive, a lot of very fragmented industries, where 70%-80%, depending on who tells you this statistic, are owned by one to three-unit owners, small mom-and-pop operators. It’s a strong asset class in the sense of being recession-resistant, I believe. When things are bad, people are condensing their stuff, they’re moving in with their families or friends. They’re still consuming, we live in a consumer culture; Amazon’s making it even easier than ever, and will continue to. And when things are good, people are buying more. They’re buying more, but yet prices are raising for real estate, so it’s harder and harder to figure out where you’re going to put all the stuff that you’re buying.

So in good or down markets, I believe storage is a nice hedge where people are going to need space at an affordable price. So what I did is I started really, really pushing in that space, allocating my team and my resources. One main reason as well is also the scale. I can actually manage it, I can build it, I can acquire it at a much more rapid pace, and I can get it financed easier. And then at that stage, I think I’ll have a bigger pool of buyers that would want to buy it. That’s really what pushed me in that direction.

Slocomb Reed: Gotcha. The vast majority of our listeners are involved in apartment investing, and apartment investing is the largest of the commercial real estate asset classes. It has become very popular in the last few years to transition from apartments into mobile home parks and self-storage, because people feel like returns are too compressed in apartments, there are too many operators, and it’s too hard to get a viable offer accepted. So mobile home parks and self-storage are the two places that people are going. It sounds like you’ve transitioned mostly out of mobile home parks because you see more opportunity in self-storage.

Jeremiah Boucher: Well, I see that trend that you’re talking about in apartments and single-family homes as well. But I think both asset classes work. I was at a conference in Scottsdale a couple of weeks ago. Blackstone, the head of their real estate department was there, and he said, “Our thesis right now for our largest real estate fund is beds and sheds.” So they want short-term leases, they want a month to month or annual leases, because the whole game right now, especially when they’re managing billions of dollars in assets, is to outpace inflation.

They want to be able to continue to raise rents at a pace where they’re not tied up into a 10-year fixed retail or industrial lease. They want real returns, meaning they’re outpacing inflation and being able to raise those rents. So I just wanted to bring up that point, but I think what you might have been alluding to is that a lot of these people that are leaving the apartment space and looking in these alternative spaces has increased the prices of these assets, the storage and manufactured housing.

When I got into storage, I was somewhat contrarian, in the sense of I was looking at suburban or rural markets where the big REITs weren’t that interested, there still wasn’t a lot of national buyers out there. I’m originally from New England, so I looked at markets that I knew growing up in that region out in Western Massachusetts, Vermont, New Hampshire, what I found was that some of these areas were underserved, and I was starting to find that I could actually build or buy these assets at a very fair price. Sometimes it was under $50 a square foot. Now we’re lucky if we can get it for $100 a square foot or less. But it made sense where the rents were enough that we could get a decent return and still be able to grow the asset. But I have to tell you, I looked in a lot of other markets where I bought large storage, 400-500 units up in Winnemucca, Nevada where I actually owned mobile home parks. It’s a small town up near Reno. That was a challenge. So I had that for seven or eight years; there was a fixed amount of population, 20,000 people in this market, and there was maybe four of us that had larger storage facilities.

An older gentleman had land that he could build forever, and he kept building. So every time we filled up the town with more and more demand, he would just add more supply, and he’d never raised his rents. He was about $45 for a 10×10, which equates to $4 or $5 a square foot on your rental income. So no matter how hard I tried to improve the asset, where I paved it, painted it, landscaped it, light it, I did everything, put security, gated it, the whole thing, I’d fill it up, but then every time I wanted to raise rents, this guy would just add another building, and then it would depress all our rents around there.

So I just want to let people know that not every market is great. So the thing for me that I look at is, is there barriers to entry where you can’t just build anywhere. In parts of Texas or parts of Oklahoma where you can buy a piece of land, you don’t need a special use permit, and you can build storage anywhere.

That’s a challenge, because more and more people are entering the space, and with expanded supply, that definitely depresses rates, so you have to be more competitive. I want people to know that, and know also that — right now it’s getting a lot more competitive, so you’ve got to be very careful with the markets that you want to invest in.

Slocomb Reed: Jeremiah, there’s so many nuggets of wisdom in what you just said. There’s one thing that stood out to me in particular that I want to make sure the Best Ever listeners heard with me. It’s also me extrapolating on some other interviews and conversations I’ve had with people in self-storage… Which hedge fund did you say was at the conference with you?

Jeremiah Boucher: Blackstone.

Slocomb Reed: Blackstone. Beds and sheds as a hedge against inflation. Again, it’s March of 2022. Not knowing what the inflation forecast looks like, but knowing what’s happened to us in the last couple of years with inflation… I know a lot of self-storage investors who haven’t explained it unnecessarily this way, Jeremiah, but they say that one of the benefits of self-storage is that it survives rent increases better than almost any other asset class. Mobile home storage rent increases, especially when it’s land-leased – let’s not get into that can of worms… But when it comes to self-storage, rent increases tend to retain your tenant base through rent increases much better in self-storage. There’s a lot to be said there in a high inflationary environment that we’re experiencing right now. That as the cost of everything goes up, self-storage is likely well-positioned or best positioned to ride that storm, because of the nature of the tenant base, and the rent rates that the small incremental increases to the rent that come as a result of inflation are going to be much better weathered at those properties than at other places.

Jeremiah Boucher: That’s right, Slocomb, but there’s a flip side to that equation as well, and why real estate is so market specific. The asset class as a whole is, I believe, very durable. Yes, the elasticity of the rents is great, it’s one of the main features. But the challenge right now is it’s being over-developed in certain markets. There was a period before COVID hit and a few years before where real rents in certain regions were flat. In storage, when I was first starting and I was underwriting rents, there was really no increase. You could see $100 10×10 up in the Northeast stay the same. That rents would stay $100 for like seven years, just because what I said before – yeah, new people would bring on supply, and in markets where you’re not getting heavy population growth, the rents just stayed flat. There are markets like Florida and Texas and out west where there’s tons of population growth and right now, everybody’s building, all the developers are getting into storage, it’s all filling up, it’s all gravy, and everyone’s excited for the asset class.

But there will be a point when we hit critical mass and the thing swings in the other direction too; there’s only so much storage you can rent. Now, who knows how much that is. But at that moment, that’s when rents get flat, and then really, it’s a commodity. Everyone has a box, and there are really not a whole lot of amenities with that box. People are looking at pricing and convenience. So if you’re close to somebody and you have a better price, unless it’s an absolute piece of crap, they’re probably going to go with the better price and the one that’s in their area. So people start a price war. So I just wanted you to–

Slocomb Reed: Jeremiah, to a point that you’ve already made in this conversation – if you want to get into self-storage, focus on barriers to entry in that market; make sure you’re buying in a market where it is difficult to add supply, so that you’re putting yourself in a position that rent rates can increase as demand increases on a limited supply.

Jeremiah Boucher: Spot on.

Slocomb Reed: Jeremiah, that’s excellent.

Jeremiah Boucher: And you have to…

Slocomb Reed: Are you ready for the Best Ever lightning round? No, you’re not, that’s fine. Finish that thought and then we’ll jump in.

Jeremiah Boucher: It’s just making sure you buy it with a margin of error, like what we were talking about with the mobile home parks; so you have that buffer there. If you’re going to over-leverage 80% financing, you better really know where your real rents are in that market and make sure that there’s a little bit of room there to drop those rents. I would recommend not overleveraging right now, and being conservative on your rental numbers, even though it’s crazy. They’ve gone up 20% since COVID across our portfolio. I just don’t want to keep thinking that I’m going to underwrite deals to raise another 20% next year because that’s just not going to happen.

Slocomb Reed: So much good stuff in this interview, Jeremiah. Now, are you ready for the Best Ever lightning round?

Jeremiah Boucher: Sure, sure.

Slocomb Reed: What is the Best Ever book you recently read?

Jeremiah Boucher: I listen to Audible all the time. My favorite audible book –and this isn’t even to do with real estate– it’s about Andre Agassi, it’s called Open. It’s a great listen. Any of the listeners out there, he’s a guy from Vegas, he was a famous tennis player. It’s really well written in the sense of when you’re going out and you’re really working hard, the inner battle with your demons, building a good team around you, people you can trust, just you’re your biggest opponent… I just love the way it’s written. He gives back, he’s such an altruistic guy. If you just want to hear a good story, it’s a great book.

Slocomb Reed: What’s your Best Ever way to give back?

Jeremiah Boucher: I actually opened… It’s not a nonprofit yet, but I have a division of Patriot Holdings, my company, that is exclusively dedicated to land conservation. I’m a big outdoor guy, I love parks and trails. My mom, actually, she’s full-time with me now and she runs this, she has an EPA and BLM background, so she’s an environmentalist and a biologist. And really, our focus is to take land in the North-East, put it into conservation, help build parks and trails, and hopefully intertwine it into some of the towns or into some of the larger park systems that are already there.

Slocomb Reed: Awesome. What is your Best Ever advice?

Jeremiah Boucher: Advice… Oh, Best Ever advice.

Slocomb Reed: I feel like this whole episode has been the Best Ever advice, especially the last 20 minutes.

Jeremiah Boucher: Oh good, man. So I wrote that book and that was a hell of a process, that Finding Your Edge. That really pushed me to figure out, “Okay, what did I learn from this business over the last 20 years?” I came up with six principles, and these are the things that I wanted to give, is what I picked up. What I learned over time is finding your value in the deal. What is it that you contribute? What is your competitive advantage in a space? The book is called Finding Your Edge. Like you, you have an edge in Cincinnati, and you find smaller apartments, and you like working with really rough assets and owners that don’t want to deal with them.

So you’re playing a game, you already have the deck stacked in your favor. That’s what I want to do, too. I have an edge in New England, I know, I grew up paving and doing site work with my dad, I know the market, I know where people are going, I know the storage industry now because I’ve been in it for so long. I don’t want to play on a level playing field with anyone. I grew up wrestling, so I know what I’m good at. I want to play to my strengths, not my weaknesses, just like in a fight.

So I just want people to evaluate what are your strengths in this industry? Is it finding the deal? Is it construction? Is it through operations? Is it in raising capital? Is it knowing your market better than anyone else? Knowing trends where developments going that other people don’t know? That’s the beauty of real estate; it’s an inefficient market, so you’ve got to really know where to play on your strengths and focus on that rather than just doing what everyone else is doing and following what’s fashionable, because you’re always chasing something.

That’s why I got into mobile home parks ahead of time, that’s why I got into storage ahead of time, and I’m pushing and doing certain industrial projects now that I believe are going to be in more demand over the next few years. I believe I’ve got to play to what I’m good at.

Slocomb Reed: Awesome. Jeremiah, where can people get in touch with you?

Jeremiah Boucher: My company is patriotholdings.com and then I have a personal website. If you want to take a look at the book, jeremiahboucher.com. I don’t know if it’ll be in the comments here, but I’d love for your people to reach out to me. We do have real estate funds, so we’re opening our third fund right now that develops storage. Anyone’s welcome to reach out to us; it’s only for accredited investors. Also, I’m happy to share anything I can with people, and hopefully, some people get something good out of the book if they read it.

Slocomb Reed: Jeremiah, thank you. Best Ever listeners, thank you as well. If you’ve gotten as much value out of this conversation as I have, please subscribe to our show, leave us a five-star review, and share this with a friend that you know that this conversation with Jeremiah will add value to. Thank you and have a Best Ever day.

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JF2773: 9 Ways to Acquire Multifamily Deals in a Hyper-Competitive Market ft. Cody Laughlin

Cody Laughlin serves as managing partner and director of acquisitions for his Houston-based multifamily firm, Blue Oak Capital. Since joining forces with his two partners in 2019, Cody has learned a thing or two about navigating the hyper-competitive multifamily market. In this episode, he explains what actions have helped his team to acquire 750+ units across four properties:

1. Prioritize broker relations. Brokers are your gatekeepers to the commercial real estate world, Cody says. All of his deal flow comes through broker relations. He and his partners have a list of about 40 brokers across their markets, and they make an effort to engage with each of them regularly.

2. …But make sure you don’t waste brokers’ time. These are very busy individuals who are going to spend their time where it’s most efficient — on people who are closing deals. Cody focuses on building broker relationships by closing deals and getting transactions done rather than attempting a wine-and-dine approach. 

3. Find ways to add value. Everything right now is coming down to price and risk capital, Cody says, so you have to find ways to be creative and add value when you’re acquiring properties. 

4. Be prepared to pay full market price. You’re also going to have to put up some sizable risk capital to give the sellers confidence that you’re fully bought in and you’re going to make this transaction happen, Cody says.

5. Increase your due diligence and inspection periods. The faster a seller can get to close, the higher your chance of getting the deal awarded. 

6. Leverage the experience of other operators when necessary. Due to the aggression in the marketplace and not having quite the track record as some of their competitors, Cody and his partners began cosponsoring with other operators with more experience and added value to those deals by raising equity. 

7. Build a robust marketing funnel. You’ve got to go out there and build your network, and you do that through thought leadership platforms, Cody says. He and his partners started with a meetup and a podcast, then incorporated email marketing and social media to grow their network even more.

8. Establish trust and relationships to attract investors. Cody believes creating successful investor relationships comes down to focusing on their needs, finding an alignment of interest, and being authentic. That method has worked well for him and his partners. 

9. Take action. Right now is still a phenomenal time to be in commercial real estate, Cody says. Although it is hyper-competitive, you can’t let that deter you or put you in a state of fear. Put yourself out there, take action, and go find opportunities.

 

 

Cody Laughlin | Real Estate Background

 

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TRANSCRIPT

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, Cody Laughlin. Cody is joining us from Houston, Texas. He is the managing partner of Blue Oak Capital, a multifamily acquisition firm focused on existing core multifamily assets across Texas. Cody’s portfolio consists of being a GP on almost 850 units, and he also works part-time as a registered nurse. Cody, thank you so much for joining us, and how are you today?

Cody Laughlin: Ash, I’m doing great, man. I want to thank you so much for having me on. I’ve been a big fan of the Best Ever podcast for many years now. It’s just an honor to be here, not only as a fan, but as a guest.

Ash Patel: Cody, the pleasure is ours. Before we get started, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?

Cody Laughlin: Absolutely. Again, as you mentioned, I’m a managing partner at our company Blue Oak Capital, and I’m also the director of acquisitions for our team. We focus on core, core plus assets across Central Texas, Houston, and San Antonio, primarily. I’ve been a real estate investor since 2010, spent many years in the single-family residential space, pursuing multiple different strategies in residential real estate… But realized after many years and after a lot of expensive lessons along the way that this is just really a hard model to scale.

For me, real estate was a path to financial independence, financial freedom, and entrepreneurship. So after many years of going through a lot of headaches, I decided to make a pivot and pursue multifamily syndication as faster scalability to reach my investment goals and theses. So here we are, met two great partners, we formed Blue Oak Capital in late 2019, early 2020, and we’ve been off to the races since.

Ash Patel: Before multifamily was it just single families?

Cody Laughlin: Yeah. Single-family, and I actually pursued some non-real estate-related business ventures, but that’s another topic for another day.

Ash Patel: That’s a whole different podcast subject. The two partners, how did they come into the mix?

Cody Laughlin: Networking. I was working with a different partnership group on another opportunity. In late 2019 I was introduced to my first partner John through a mutual connection, and we just really had a great synergy and great alignment of interests. We started finding opportunities to work together and really saw a long-term partnership developing, so we decided to formalize our partnership through that opportunity.

Midway through 2020, John met our third partner, Brian, through a virtual networking event, and connected with him offline, started building a little bit of rapport, and introduced him to me as well. Again, just great synergy, great alignment of interests, great complementary skill sets to our partnership. The stars aligned. We added Brian to our team and – just one more pivotal piece to the puzzle, so to speak,

Ash Patel: Is it one of your goals to do real estate full-time?

Cody Laughlin: Absolutely. This is definitely the long-term vision for us, and this is where we see our path to securing that financial independence that we’re all trying to achieve.

Ash Patel: And your role is director of acquisitions. How do you find multifamily units?

Cody Laughlin: That’s a great question. It’s really challenging right now in this market cycle. But all of our deal flow comes through broker relations. Brokers are your gatekeepers to the commercial real estate world, especially in the size of properties that were looking at, the 100-plus unit apartment buildings. All of our deal flow comes through broker relations, just nurturing those, and trying to be involved in looking at any opportunity that comes across that fits our investing thesis.

Ash Patel: What is your investment thesis?

Cody Laughlin: Again, that core, core plus really for us right now is our primary strategy given where we’re at in this market cycle and the execution risk that comes along with the value-add play, especially when you’re paying a premium, like we are right now in today’s market cycle. We really like the newer stabilized product, something that can be a long-term hold, with less deferred maintenance, less cap-ex needed to properly operate. We’ve made that pivot kind of halfway through last year and made that our core thesis moving forward.

Ash Patel: Cody, you’ve mentioned market cycle a few times. Give me your thoughts on that.

Cody Laughlin: Oh, man. It’s an interesting one, for sure. We entered multifamily 2019; a very, very bullish cycle. I think a lot of people at that time thought we were maybe at the top of that expansion cycle. With COVID hitting, again, everybody thought, “Okay, here’s the correction”, and then what would we see after? The market just exploded even more, and just even more aggressively. So I definitely think that we are still in an expansion part of the cycle as of United States. If you look at the supply and demand imbalance, we are in a significant supply shortage for multifamily housing and residential housing. There’s still a lot of tailwinds for supply and development. I think we still have a bright runway here for the next couple of years as far as commercial real estate goes.

Ash Patel: That’s why you guys are buying mostly newer properties?

Cody Laughlin: Yeah. Again, I think, obviously everybody knows right now that we’re entering a rising interest rate environment; how that will impact multifamily I guess it will be dependent on how aggressive the Fed will raise rates this year. But I think with that, if the market does slow down any at all, or even pull back some over the next couple of years – again, we want to be in a position to hold assets longer term, five, seven, even 10 years. When you’re holding that ’60, ’70 product that constantly has deferred maintenance issues or you’re constantly worried about what problems are going to need to be fixed tomorrow – that kind of rustles your feathers a little bit. We’d like to be able to sleep better at night, knowing that we have a quality product that doesn’t have all those deferred maintenance headaches that come along with it.

Ash Patel: Does your business model have value-add, or do you buy fully renovated properties?

Cody Laughlin: We’re typically finding properties, like I I said, that are in great shape and newer products. We are looking for a light value-add component. If you think about the market and how fast expectations are changing, how fast standards are changing, we’re looking for a product, let’s call it 2000-2015, that could use a light cosmetic upgrade. Maybe changing the color scheme, color palette, adding a few modern technologies like prop tech, things like that, that are becoming an expectation for today’s renters and demographic. So we are looking for a light value-add component but we don’t want to get into something that requires a $15,000-$20,000 per door renovation. Something just a few thousand dollars per unit that we can make a quick turn on, and capture upside on that.

Ash Patel: Cody, you mentioned broker relationships. Is it one broker, is it many, is it two or three that feed you most of your deals?

Cody Laughlin: Yeah, it’s many. We have a long list of broker relations across our markets, and we try to engage with each of them. I spend probably more time with those who are capturing most of the market share in our markets. There are several that we probably engage with more often than with the other ones. But yeah, I think you’ve got to be careful with isolating yourself just one or a small list of brokers. We probably have 40 brokers between our two markets.

Ash Patel: When you sell a property, do you just spread the wealth amongst these brokers?

Cody Laughlin: Well, there hasn’t been a circumstance where we’ve gone full cycle yet. But there is a kind of industry courtesy that’s expected that — most often you see when a seller sells an asset to you and you complete that transaction, when you’re ready to bring the deal to market and go full cycle, it’s a common courtesy that you go back to that same broker, barring a negative conflict. But we would expect to extend that same courtesy.

Ash Patel: That’s a good point. How do you get in front of your competition with these brokers?

Cody Laughlin: Now, this is a great question. It’s increasingly harder to stay competitive in this market cycle; even guys that are much more experienced than we are, that have much larger portfolios, are having challenges in today’s marketplace. Everything right now is coming down to price and risk capital. Ultimately, those are the two biggest drivers in today’s marketplace. I don’t think there’s really anything that’s market rate and that’s at a discount anymore. We get price guidance, and that’s kind of your starting point now, it’s no longer your target. So you have to find ways to be creative and find ways to add value when you’re acquiring properties… But you have to go in knowing that you’re going to pay the full market rate and you’re going to have to be putting up some sizable risk capital to give the sellers that confidence that you’re fully bought in, and you’re going to make this transaction happen. And then also looking at ways to increase your due diligence periods, your inspection periods; looking at shorter timelines. The faster a seller can get to close, the higher chance that you have of getting the deal awarded. I think between those three factors, that’s the most effective way to be competitive right now.

Ash Patel: Are there any soft sells? If you think back to like pharmaceutical or medical sales reps, they’re wining and dining the Docs a lot. Do you guys do that with brokers?

Cody Laughlin: I was just speaking on this with another podcast… To me, I don’t really find that to be very effective in the initial engagement. I think after you’ve transacted with a broker and you’ve kind of built that relationship and that trust of knowing that, hey, you can take a deal to close, then that’s an opportunity to make it more personal. But ultimately, these are very busy professionals. Let’s face it, there are a thousand new syndicators every single day that are calling all the same brokers. Their time is becoming more and more limited, which means that it’s becoming more and more valuable. They’re going to spend it where it’s most efficient which is going to be on guys who are closing deals.

Our focus is, “Hey, let’s close deals first, and let’s build a relationship that way. And then I’d be happy to take you to dinner and stuff after that.” But I don’t want to waste the broker’s time. I want to build that relationship by closing deals and getting transactions done.

Ash Patel: Good point. Cody, 850 units – how many properties is that across?

Cody Laughlin: That’s across four properties.

Ash Patel: What markets are you in?

Cody Laughlin: Again, our primary acquisition pipeline is Houston, San Antonio, and Central Texas, but our portfolio as a whole – we have three assets here in Texas, and then one in Columbus, Ohio that we co-sponsored.

Ash Patel: Why Columbus?

Cody Laughlin: The relationship with their lead sponsor; we currently sponsor Chris Jackson of Sharpline Equity; I’ll name drop for him. A great guy; we just wanted a way to build that relationship with them and work with those guys. They’re present in that market, they have assets in that market, so we trusted not only their experience, but their presence in that area. Once we looked at Columbus, we saw that it had really good fundamentals, so it gave us a lot of confidence to participate in that. But it’s just like anything else, it comes down to relationships and experience.

Break: [00:13:26][00:15:13]

Ash Patel: What value did you bring to the table?

Cody Laughlin: Our primary value proposition was being able to raise capital. We’d spent about a year and a half building a framework and infrastructure for our business, building out our database through our marketing funnels, so that way we can position ourselves to go and syndicate and raise capital. Ideally, that was going to be for our own deals. But again, with the aggression in the marketplace and not having quite the track record as some of our competitors, we knew that we had to leverage the experience of other operators to really break-in. So that’s how we started; we started co-sponsoring with other operators that had much more experience and we added that value through raising equity. We also love to participate in the asset management side as well, to be involved in some of the decision making and give input where it’s needed, and help direct the business plan.

Ash Patel: Cody, can you talk about the differences between multifamily in Columbus, Ohio, a typical Midwestern city, versus Texas?

Cody Laughlin: Different demographic. Obviously, the demographic there is a little bit different than it is here. Whether that be lower-income, working-class versus similar demographic here. Houston primarily where we’re based out of, it’s primarily a low-income working-class demographic. But on this core, core plus product, we’re typically focusing on more of your white-collar, young working professionals. I think that’s the biggest thing, is just working demographics. Both states have very similar laws and legislation around business owners that support business owners. We definitely liked that aspect; we want to be in business-friendly states for sure. But I would say the demographic is probably the biggest difference between the two.

Ash Patel: And rent growth, appreciation, cap rates?

Cody Laughlin: Cap rates are a little bit looser there. We’re seeing cap rates at about, call it, maybe five, mid-five cap rate, whereas, versus Texas here, everything’s kind of a sub four cap right now, which is kind of crazy to talk about; two years ago, we’d be gawking at that. But now it’s that’s our standard. It is more of a cash flow market, you’re going to be able to find a little bit better yield in a market like Columbus, versus here in Texas. Again, it’s very, very hyper-competitive; pricing is aggressive. It’s kind of harder to find those yields here in Texas.

Columbus, if you look at it from a fundamental perspective, it’s one of those Steady Eddy markets. It’s not like robust growth, you’re not having this massive net in migratory patterns like you’re seeing here in Texas. But it’s a great community for acquiring assets, operating efficiently, providing a good quality resident experience, and then just holding them for five, seven years for cash flow.

Ash Patel: Cody, you mentioned, you spent the better part of a year setting up your business before you started acquiring properties. One of the things you mentioned was your marketing funnels. Can you give us an example of some of those?

Cody Laughlin: Yeah. We built out a robust marketing funnel, and we started out with different thought leadership platforms, very similar to what we’re doing now. Our podcast, our meetup… And really, I give a lot of credit to Joe because I read his book, the Best Real Estate Investing Advice Ever book. He laid that out in his book, you’ve got to go out there and build your network, and you do that through thought leadership platforms. So we started that, we started a meetup, and started the podcast… And as we started to build our network, then we started putting things like our newsletter in place, our email marketing, and then really leveraging social media. This is a big one – social media is the way that the world is connected today. If you’re not visible on social media, then you’re really missing out on a prime opportunity to grow your database.

So we leverage social media in addition to our thought leadership platforms. And especially through COVID, when everybody was secluded to their homes and not really getting out and doing face-to-face networking, I think we 4X’d our database that year just because of all the virtual networking we were able to do and the outreach that we had from all those different funnels. So thought leadership platforms, social media, and email marketing were the biggest funnels for us.

Ash Patel: You know, I just googled that not too long ago. Best Ever listeners, if you google “Joe Fairless thought leadership platform”, he breaks down, I think it’s a top 10 list of things that you can be doing to increase the size of your network. Awesome. Is there a particular niche that you’re looking for in terms of size of units, purchase price, and cap rate?

Cody Laughlin: For us, we particularly look at value over count. We’d like to be above 100 units just from an operational efficiency perspective. As you go bigger, things get easier to operate, you can have larger teams, your property management teams can have more staff to operate your business plan… So we like to be typically above 100 units, but for us, we focus on value, and this is really from the debt side. Anything over 20 million, kind of the same thing, the debt gets a little bit easier, terms get to be a little bit more flexible; especially with the transactional volume of last year, the bridge, everything was executed on the bridge, so all the debt funds and bridge lenders really kind of exhausted their debt funds. Anything below 20 million, terms are a little bit more rigid, they were going to make you pay heavier spreads on some of those terms… Wo we like to really be above that $20 million thresholds. For us, our buy box is call it 30 to 50 million, 100 to 250 units I would say, and really focusing on that 1990s vintage or newer.

Ash Patel: Cody, what’s your return to investors?

Cody Laughlin: It’s going to be very deal-specific. For us, what we’re seeing in the marketplace right now, especially in our markets in this core, core plus product, we’re looking at a 4%-6% cash-on-cash, call it 12%-13% IRR or higher, and then we always look to achieve a 1.7X multiple. We’re typically modeling all of our business plans on a five-year hold.

Ash Patel: How do you sway investors to your deals when the returns are fairly similar amongst a lot of multifamily syndicators? What separates you guys?

Cody Laughlin: Well, it comes down to trust and relationship. You’re right, there are plenty of other operators out there that are probably equally or much more qualified than we are. But being able to leverage our relationships with investors, we find people that are attracted to us, for whatever reason… We like to think we’re good guys, we’re authentic, we’re transparent, and we’re relatable. We’re everyday people, just like you and me Ash, and I think that’s something that people can relate to. But aside from that, it’s just again, offering something of value, offering people opportunities to get into this direct private real estate, like commercial real estate, and grow their portfolios in a way that suits their thesis. But I think it just comes down to again, focusing on the relationship, finding that alignment of interests, and being authentic is key. It’s worked out very well for us.

Ash Patel: How often do you communicate with people in your database that are not investors?

Cody Laughlin: We send out monthly newsletters, that’s our primary way of communicating. Then we have a weekly, what we call drip mail campaigning that goes out. That’s to share the different content that we’re curating or things that we find valuable, that we can share through our database. Even though somebody is not actively invested with us or maybe not in our database, our direct contact list so to speak, we still try to engage with people, and we look for opportunities to add value to other people. “Hey, you may not want to invest with me and that’s completely fine. But maybe we know somebody that might be better suited for you. Or maybe we can make a referral to a connection, or a professional that may help you grow your business.”

So we try to have as many of those touchpoints as we can. We’re talking to potential investors or partners on a weekly basis. Brian is our second partner, third partner, and he’s our investor relations director. Between his schedule and mine, we’re connecting with 10 to 15 people a week on average, and just looking for ways to add value. It can’t just be about us. We’re not trying to be selfish in how we get value. It’s about how we give value back to others as well.

Ash Patel: Cody, what is your best real estate investing advice ever?

Cody Laughlin: Oh, that’s a good question. I would definitely say, take action. I think right now is still a phenomenal time to be in commercial real estate. It is hyper-competitive, but you can’t let that deter you or can’t let that put you in a state of fear. Put yourself out there, take action, and go find an opportunity.

Ash Patel: Cody, are you ready for the Best Ever lightning round?

Cody Laughlin: Let’s go.

Ash Patel: Let’s do it. Cody, what’s the Best Ever book you recently read?

Cody Laughlin: Think and Grow Rich. I read that book many years ago and I’ve been reading it again. Success is a mindset, so I really love just revisiting that book and its core principle. I highly recommend that one.

Ash Patel: Cody, what’s the Best Ever way you’d like to give back. So

Cody Laughlin: We leverage our platforms to try to give back to our community, for example, in our live in-person meetup events that we host every month. This past Christmas, we actually hosted a toy drive. For attendance, everybody, their admission to attendance was donating a toy to a local toy drive, which we ended up donating, I think over 100 toys to a local charity. That was really special. So we like to leverage our platforms to try to give back to our communities.

Ash Patel: Cody, how can the Best Ever listeners reach out to you?

Cody Laughlin: Well, we’re not hard to find. I like to say we’re all over social media. You can find us on LinkedIn, @codylaughlin. If you want to check us out, you can visit our website at www.blueoakinvestment.com. If you want to reach out to me directly, feel free to email me at cody@blueoakinvestment.com.

Ash Patel: Cody, I’ve got to thank you for your time today and for sharing your advice. You started in 2010, single-families, 2019, going to the multifamilies, assembled a great team, and you’ve got a great niche. Thank you again for sharing your story.

Cody Laughlin: Thank you so much for having me, Ash, I appreciate it.

Ash Patel:  Best Ever listeners, thank you for joining us. If you enjoyed this podcast, please leave us a five-star review and share this episode with anyone who you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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JF2772: 7 Reasons to Focus Your Funds on RV Parks ft. Robert Preston

Marine Corps Veteran Robert Preston began wholesaling and flipping while still on active duty in order to make extra money. He then moved on to value-add Class C apartment buildings, but as cash flow and cap rates have compressed, he decided it was time to find a new niche. Robert began investing in mobile home parks next, and his current focus is on RV parks. In this episode, he shares why he is so passionate about this particular asset class:

1. The variety of tenants. In addition to vacationers, RV parks attract tiny home renters, professional workers who frequently travel, and families living in their RVs long-term out of necessity. His ideal mixture is 50%–60% long-term/traveling professionals, 30%–40% short-term vacationers, and 10% tiny home renters. 

2. He’s able to deliver better returns than with multifamily. Because the multifamily market has become so competitive, Robert has recently been outbid by buyers who are offering much lower returns than his standard of 8% cash-on-cash and 15% IRR. RV parks allow him to stick to and often exceed his targets.

3. Limited supply and consistent demand. If the economy were to take an impact, Robert says, an RV park can be converted into a mobile home park overnight, allowing RV owners to make their homes there long-term, simply by adjusting his marketing. 

4. Fewer expenses compared to multifamily. Robert doesn’t have to worry about toilets, structures, or roofing in his RV parks.

5. Freedom to raise the rent. While raising rent for an apartment complex can often result in pushback from tenants, because RV park tenants typically don’t mind paying a few extra dollars a night, Robert can raise rents as he pleases — sometimes up to 25% overnight — without complaint.

6. He’s seeing a cultural shift in recreation and travel. Since the pandemic, people are beginning to realize that they have more freedom to work remotely and travel — and they’re also realizing flying isn’t the ideal traveling experience. This is causing an increase in professionals hitting the road and working remotely along the way, resulting in an increase in demand for RV parks.

7. He’s an RVer himself. Robert and his family enjoy the RV lifestyle, so he purposely seeks out properties in areas where they would like to vacation.

 

Robert Preston | Real Estate Background

Greatest lesson: Anyone can buy and raise money; operating is where the rubber meets the road in tough times.

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Robert Preston. Robert is joining us from Pensacola, Florida. He’s the co-founder of Climb Capital, an investment firm with commercial real estate operators that specialize in RV parks. Their current portfolio – they’re a GP on 809 units, with 45 million in assets under management. Robert, can you start off by giving us a little more about your background or what you’re currently focused on?

Robert Preston: Hey, thanks, Slocomb. I’m really honored to be on the podcast. I follow you guys a lot and read all the books, so – really cool to be out here today. My background is relatively simple – I graduated from Compton University and went into the Marine Corps as a Marine Corps pilot. I flew the Osprey, the V22, and did a couple of deployments to Afghanistan. Through that process was when I started in real estate, really 2012. I finished out my Marine Corps career in 2020; a great time to leave a full-time paying job to be a full-time real estate investor, the summer of 2020… And since, I started and founded Climb Capital with Jeremy Hans, and here we are today.

Slocomb Reed: Does that mean, Robert, that the 45 million in assets under management have all been acquired in the last two years, since the summer of 2020, or did you start before that?

Robert Preston: No, we started well before that. As an individual, I started investing in real estate really 2012. I started out as a wholesaler, wholesaling and flipping single-family houses, and then needed the residual cash flow income. Bought our first mobile home park, bought an office building, and start buying the class C apartment complexes [unintelligible [00:05:13]. However, I would say, that 45-million asset is probably all properties we purchased in the last two years, because we’ve also sold most of those deals that we bought in the beginning.

Slocomb Reed: Gotcha. So you have experience in a lot of commercial niches, but currently, your focus is RV parks. Tell us about that, why RV parks?

Robert Preston: Great question. Like most of us, I started out looking for a value-add class C. I need something full-time management, just by the book. We did that, and we’ve been very successful through it, but I think everyone would agree that it’s getting really, really difficult to find a great deal. I used to think an expensive deal was like a seven cap, and I’m sure we would all buy that in cash, hard moneym, day one, if we could find a seven cap. So our strategy or thesis has always revolved around the idea of cash flow first, and not the phantom or the market appreciation to make our returns. We’re okay with forced appreciation, I’m not really okay with betting on market appreciation.

So as the competitors and the competition came in and the prices increased, thus the returns have decreased, and so we moved to mobile home parks. Now we’re seeing that similar trickle effect coming down. We bought our first RV park in also 2020. Since then, just really saw a great opportunity there, both from the buy-side and the sell-side, and the excellent cash flow. Basically, just out of necessity getting pushed out, searching for returns has pushed us down to the RV park. I’m also an RV-er, I’ve got four little kids, and I love the lifestyle. It’s a lot nicer to buy somewhere you would go on vacation than a classy apartment complex that I’m not going to go on a vacation to. So  it’s a little bit of a lifestyle as well.

Slocomb Reed:  Yeah, that’s awesome. Let me try to summarize, Robert; please correct me anywhere I need to be corrected. Active-duty Marine Corps, deployed a couple of times, started wholesaling and flipping while active duty in order to make money on the side; you decided you wanted it to be more residual income-based.

Robert Preston: Yup.

Slocomb Reed: And found class C value-add apartments to get great cash flow. As you have seen cash flow and cap rates compress, you’ve moved into a new niche. A lot of people went from apartments to mobile home parks; as you’ve seen, and as you’ve just said, now cash flow and cap rates are compressing with the mobile home parks, so you’ve moved on to RV parks. Added bonus, you’re an RV-er, and you’re buying properties that interest you personally, and in places where you want to take your family.

Let me ask Robert, when was it that you decided with your partners that it was time to shift industries within commercial real estate? Did you have specific target metrics that you just realized you were never going to be able to hit, so as soon as all the deals fell below a certain cap rate, a certain cash-on-cash, you just decided to move on? Was it more of a gut thing? When was it that you made those decisions?

Robert Preston: That’s a really great question. I’ll try to answer it, because I think there’s a couple of components there. First, I’m a bit of a deal junkie, so whatever I think I can make money on it is what I’m going to do. Part of being a naval aviator is that we are very thorough in our planning and we’re very precise in our planning, but we also realize generally about five minutes into the flight, everything we did and worked on it for the last three months’ worth of planning is just out the window, and you’ve got to improvise and make it work. So being adaptive and flexible is one of our core values to what we do.

So through this process, I just randomly came across our first RV park; it was a per acre, per pad, whatever, it was just extremely cheap. I looked at it and was like, “We don’t know anything about RV parks, but it’s got great financials just like anything else. We’re going to make, whatever it is, a 30% IRR return on this. Let’s just figure it out.” So by dumb luck, a little bit, of falling into that first one in 2020… Our metrics for our investors are 8% cash-on-cash and a 15% IRR at a minimum. I think that’s kind of the generic target standard.

So for us, that pivotal moment really was the end of 2021, when we would get outbid by millions of dollars on apartment complexes. I know the numbers, I know there was no way they’re going to meet those metrics, and then I started seeing the other sponsors sending out stuff that was 11% or 12% IRRs on a best-case six cap exit plan, with a very low expense ratio. I was like, “No offense, but there’s no way that’s going to work perfectly. Your plan, if it was executed perfectly, you wouldn’t make that. And even if you did, a 12% IRR is just not sufficient.”

That’s when we realized we’re always going to get outbid by someone who is willing to reduce their underwriting to make the deal work, and lower the returns. So really, at the end of 2021, we’d already bought three RV parks and were operating them, so now we’ve made a hard shift; instead of just letting them come to us piecemeal, now we’re targeting direct to the owners and really pushing hard this year.

Slocomb Reed: You went from apartments to RV parks by way of mobile home parks, correct?

Robert Preston: Correct. Yeah.

Slocomb Reed: So you’ve made this transition twice now?

Robert Preston: Yeah, two pivots. The RV park is a little bit of a natural progression into the RV parks, because some of the lower quality RV parks are really a mixture between a mobile home park and an RV park. So there’ll be some mobile homes in there, and then there’ll be some long-term tenants living in an RV park. So that was our first exposure, it was really a glorified mobile home park with RVs in it. Now we buy more of the resort-type, vacation, your by-the-night rental.

Slocomb Reed:  That’s my understanding – limited experience with RV parks of course, but my understanding is that there are really two business models within RV parks. Similar to apartments in this way, you have long-term tenants and you have short-term guests.

Robert Preston: Yup.

Slocomb Reed: So the people who park their RV there year-round, and the people who come in for the weekend, or the week, or a couple of weeks; are you saying that you focus primarily on the shorter stay, resort location type of deals?

Robert Preston: Yes. Originally, the first couple we bought were purely long-term, by necessity, living. There are also two types of long-term RV-ers. There’s the individual or family that is living there out of necessity because of their inability to afford some other type of housing, or there’s a long-term RV-er who — by their profession, dictates movement. Traveling nurses, construction managers, and even certain engineers working on big projects. They’re highly paid, well compensated, and great residents. They’re just out of necessity going to be gone for six months or eight months from their residence, and so they live in…

Slocomb Reed: Gotcha.

Robert Preston: To answer your question, currently, we like parks that have that latter, so the professional worker, and then also we have the retail. So for us, the ideal mixture of a park is we bring in tiny homes at about 10% of the pads, we rent about 50%-60% of the pads on the monthly rate to the traveling professional, and then that leaves 40%-30%, depending on that ratio, to the retail overnight vacationer traveling person. It’s awesome for us, because it’s just a couple of levers we can tweak and pull, based off the season, based off the demand of the area, to always kind of optimize the cash flow and NOI.

Slocomb Reed: You mentioned 10% for tiny home homes. Now, are you talking about tiny homes on wheels, or are you talking about the thing that people are constructing from the ground up in a location?

Robert Preston: You would also refer to them as park model homes. They’re on wheels, on the frame, they look like a little log cabin, front porch, very cutesy, a lot of exposed wood, loft, that type of stuff.

Slocomb Reed: But you can hitch it to your truck with a tow package and take it somewhere?

Robert Preston: Technically, yes. A very big truck.

Slocomb Reed: Yes.

Robert Preston: Yes, not your normal truck. But technically, yes; they’re still titled as an RV, which helps us to eliminate a lot of zoning setup criteria. So we can pull it right into a lot, plug it in essentially, and be ready to go.

Slocomb Reed: Gotcha. Robert, I would like to play devil’s advocate.

Robert Preston: Sure.

Slocomb Reed: You’re clearly experiencing some success. Actually, before I do that, you are syndicating some of these RV deals, yes?

Robert Preston: Correct.

Slocomb Reed: Have you gone full cycle with an RV deal yet?

Robert Preston: Yep. We’re recording this March timeframe. We sold one a month ago, in February. It was a relatively small deal that we bought for $575,000 and we just sold it for $1.2 million two years later.

Slocomb Reed: Gotcha. How much did you have to put into it after you bought it?

Robert Preston: Nothing. No capital.

Slocomb Reed: Got it. I imagine you offered a pretty juicy return then to your investors. What did that look like?

Robert Preston: They made a three multiple on their money. Per year, it was close to 76% IRR. It’s sort of a ridiculous number.

Slocomb Reed: Yeah, that’s awesome. How long was the hold period on that?

Robert Preston: Right at two years. Exactly two years.

Slocomb Reed: Two years. Okay. Awesome. On the deals that you’ve most recently closed that have not gone full cycle, what kind of return are you projecting for your investors?

Robert Preston: On an IRR perspective, low 20s. The syndication we just closed had a 10% pref on it, and still will come out to be low 20s, mid-20s IRR.

Slocomb Reed: Gotcha. Now that I’ve given you the opportunity to talk about how much better your returns are than apartment investors, I’m going to attempt to knock you down and I want you to have the opportunity to respond.

Robert Preston: Let’s do it.

Slocomb Reed: Good. I’m an apartment investor, because that’s what got me into real estate. I just haven’t gotten to the point in my career yet where I’ve chosen some other asset class. But thinking from the perspective of apartment investors, or from the perspective of LPs who hear what we’re saying right now, and maybe thinking something along these lines, here we go. Robert, the reason to stick with apartments instead of going to mobile homes and then going to RV parks is that first of all, the apartment industry is massive. It’s also much less impacted by major fluctuations in our economy.

We are building a lot more new apartments than we are mobile home parks and RV parks. So yes, returns compress; a lot of people get into the mobile home park space. Inventory is limited if not capped when it comes to mobile home parks in a way that it is not with apartments. It is similarly limited or capped, and probably smaller for RV parks, the industry as a whole, than it is for mobile home parks. I’ll confess, I don’t have the numbers on this, but my gut tells me, Robert, that an RV park is going to fluctuate a lot more with the market cycle and what is happening in our economy than apartments.

So not only is the apartment industry much larger, but it’s also less impacted by where we are in the market cycle, it has opportunity for growth… There will be more apartments this time next year than there are this year, unlike mobile home parks and RV parks. And some people will be willing to take a lesser return for the type of certainty that apartment deals provide. Robert, what do you have to say about all that?

Robert Preston: Dude, that’s like a lot of questions.

Slocomb Reed: We’ve got some time to dissect all of this.

Robert Preston: Alright, so now we got some meat for this podcast.

Slocomb Reed: Yes.

Robert Preston: Let’s break it down. You mentioned the supply chain for apartments; we’re going to build more apartments, they are coming online… And first and foremost, we still buy apartments, we still buy our mobile home parks, and we still buy office buildings. I want to throw it out there, we still do those deals. But to your point though, to me, that would be an advantage of the RV parks side. As you pointed out, most municipalities, counties, cities, etc., RV parks, they’re okay with, if they come and go. But mobile home parks, certainly you’re going to have the struggle to build a new one and develop it up.

So limited supply generally I would associate to a higher price. The demand is either going to stay constant or increase a little bit. So supply-wise, I think that’s a good thing; they’re less likely to be built up. When we talk about the demand from a housing perspective, why do we all like class C apartments, hypothetically? Because there’s always going to be a need. The necessity of life for someone to live – you need food, shelter, and housing. You don’t have to have great housing, it doesn’t have to be class A housing, but you have to have a place to live. That’s why we all started out in a class C apartment avenue.

So I would argue that the same applies particularly to mobile home parks; not so much RV parks, if you think about the RV park on the surface. However, going back to that first RV park that we bought, which was essentially 36 people living in an RV out of necessity, because that was the cheapest way that they could find housing. So my worst-case scenario for a lot of these RV resorts is that if the economy were to change or impact, I’m still insulated, in the fact that I can convert that RV resort to a glorified mobile home park overnight, by just adjusting that marketing, adjusting my criteria, my restrictions, to allow anyone to come in there with whatever type of RV and live there instead of on vacation.

The reality is, I’m getting the same rent as most people are getting for an apartment complex per square foot, and I have no expenses, I have no toilets, I have no structures, roofs etc. I’ve got electrical outlets, I’ve got a water spigot, and I’ve got a hole for stuff to go out. So presently, we’ve got a great economy, people are traveling, and we’re going to do the retail vacation model. If that were to adjust, well, people are going to get pushed out and we would be one of the cheaper places where people live. So I think we will still have plenty in demand there, we’ve seen that in the past.

And then I’m pretty certain there’s a big change in culture, particularly when it comes to recreation and travel. You’ve probably flown recently, I’ve flown recently; it’s just not a pleasant experience. It just isn’t it anymore. So the idea of traveling overseas and going through that harassment, for a lack of better words – it’s not as exciting anymore. 2020 taught us a lot of things, and that was it’s okay to work from home, it’s okay to travel, it’s okay to work on the road. You and I are doing this via Zoom, I’ve got three employees that work remotely… So the idea of work travel and working from the Rocky Mountains on your laptop – why not; from the RV park, instead of wherever you came from.

So more people are working out of the office, and people are enjoying outside more, more space from a safety perspective… So the industry of RV sharing is a whole entire industry; it really popped up in the last three to five years, with basically Uber for RVs. You don’t have to own the RV anymore, or the travel trailer to go on vacation and go camping; you can rent it off your neighbor, for a lack of better words.

That’s a whole new supply of customers that has never existed before in history. Then you just look at the RV sales by unit, it’s just astronomical over the last three years, and so there’s a ton of inventory there from a customer perspective.

Break: [00:21:01][00:22:47]

Slocomb Reed: Robert, that was great, thank you. A few things from that. I should have thought of this before, but it makes so much sense to track RV sales as a metric for RV park investing. Do you have some numbers behind that increase since COVID? To your point, we’ve seen a change in lifestyle over the last couple of years – again, recording in March of 2022. I want to respond and give an apartments argument, but I will concede that the idea of flying to a destination being the only way that people go on vacation is done. The world doesn’t operate that way anymore. My question was, do you have the metrics on the increase in RV sales since COVID?

Robert Preston: I do, but not intelligent enough to speak here in public. One of the metrics would be, I think Jayco, which is one of the leading mid-grade $20,000-$50,000 travel trailer. Not even mid, probably lower mid-grade. They’re back-ordered, with $14 billion in backorders right now. So they will not produce a unit that has not already been accounted for, for the next three years. That’s one metric percentage growth-wise; I think last year was like at a 40% growth for the year. That was a one-time uptick. But think if I remember the metric – don’t quote me on this – between 2010 and 2020, so for the decade,  it was around an 11% growth rate, RV users. That’s correlated to what we’ve seen is about a 12% price increase per year over the last three or four years.

Here’s another thing that’s really cool about what we do. You’ve got your apartment complex and it’s $1,000, a month’s rent. You can raise it to $25 or $50, and probably not get a whole lot of pushback. But if you think about that, percentage-wise, that’s 0.25%. We bought a park in December, and the nightly rate was $37 a night. The next day, I changed the rate to $45 per night. To the customer, that was $8 to them, per night, no one cares. But if you think about that from a percentage perspective, how that extrapolates over the year, basically increase the rent by about 25% overnight, and your customer doesn’t care. They’re happy, I’m happy, it’s great.

Slocomb Reed: No tenant in an apartment building is happy about a 25% rent increase, for sure.

Robert Preston: No.

Slocomb Reed: Points to RV parks. We were talking about your model of breaking down the way that you rent your spaces in your RV parks into three different market segments. When you are projecting the returns for your deals, the returns that you share with investors, for example, are you basing those returns on a divided into three pieces model, or are you basing them on the conservative, have to turn this into a lower-income housing type situation?

Robert Preston: That’s a good question. We underwrite it — I think we’re still conservative, and here’s why. Realistically, with our monthly rentals, we’re using around a 75% occupancy rate for the year. The reality is most of the time we’re in the 90s, just like an apartment complex would in the long term. For the cabin rentals, the tiny homes – again, we’re using something we would pull from like AirDNA, VRBO, and Airbnb. Similar comp, occupancy’s usually running 40%-50%, and then same on the nightly rates. We would, for the year, probably use an occupancy of around 40%-50% for those. So we’re using different rates and different occupancies for each category.

Again, most of the time – we’ve got parks in Florida, they’re just full all the time no matter wha; they just are. So even though we’re underwriting at maybe a 50% occupancy on our overnight stuff, the reality is we’re running about 85% even, nightly rate. We tend to err on conservative; everyone says that, I really think that we are. The exit cap rates we’re using, most of the time, we’re still using nine cap on the exit, which I’ve already seen decompresses a significant amount since we started in RV parks. But that’s how we’re coming up with our returns.

Slocomb Reed: Gotcha. One last piece to the argument. Thinking specifically about prime locations for RV parks versus apartments – we do in apartments have something similar, and you kind of touched on it. We can go short-term, or we can go medium-term. It’s a different business model; it does jack up returns, jacks up gross revenue, net cash flow, and it becomes a different industry. You put yourself in hospitality, instead of landlording, but we can do that in apartments too, if you’re in the right location and if you’re willing to stomach the change of business model from long-term rental to hospitality.

If I can summarize this argument, I do think it’s clear, Robert, that the return that you were able to deliver when you have a full cycle on your first RV park, and the returns that you’re projecting for your deals are higher than the returns that are being projected for the vast majority of apartment syndications. Whether or not there is more risk in other asset classes than apartments is up to our listeners to decide for themselves and their own investing strategies.

Robert Preston: Sure. One final comment – I don’t really want to convince you.

Slocomb Reed: No, totally. This is a good point, Robert. There should be people on both sides of this argument. And frankly, hearing the returns that you’re getting, that’s part of the reason that I knew we could have the argument in the first place. I knew that there should be people who decide going both ways for themselves. This isn’t necessarily about convincing anyone how they should be investing, it’s more about – well, first of all, having fun. We do a lot of these interviews; it’s not often that I get to go at somebody like this.

Robert Preston: I’m okay with not having a lot of competition. I’m okay with that.

Slocomb Reed: Yeah, totally. I get that. As of today, over 30 of my episodes of Best Ever have aired, and I’ve only spoken with one other person who’s in RV parks, and they’re not doing it full-time. It was just their first foray that they closed on a couple of months ago. They were excited, citing some of the similar things that you are now about their first RV deal. So yes, I understand. Not trying to create any more competition for you, but this has been great. Are you ready for the Best Ever lightning round?

Robert Preston: I’m ready.

Slocomb Reed: Great. What is the Best Ever book you’ve recently read?

Robert Preston: One of the ones I love is Pitch Anything, Oren Klaff.

Slocomb Reed: Pitch Anything.

Robert Preston: Yup. Oren Klaff, Pitch Anything.

Slocomb Reed: What is your Best Ever way to give back?

Robert Preston: I thought about this and I want to be careful how I say it, because I don’t really see it as giving back, but me and my wife are foster parents and adoptive parents. And just seeing the difference in a little kid or even a baby coming from a very traumatic — and then being in a good household… And this is not trying to brag on myself or the family. But just seeing how a kid can flourish so quickly and recover so quickly when they’re just loved and cared for. That’s my passion.

Slocomb Reed: That’s awesome. What is, Robert, your Best Ever advice?

Robert Preston: It’s pretty simple. You don’t need permission to get started or to be successful. I think we’re all just waiting for some type of metric, some type of event, some word of advice or confirmation. You’ve got to get going, get moving. Take the first step and figure out the next step after that.

Slocomb Reed: That’s great. Robert, where can our Best Ever listeners get in touch with you?

Robert Preston: Our website is climbcapital.com, info@climbcapital.com would be an email, and my cell phone is 850-712-5139.

Robert Preston: Awesome. Well, Robert, thank you for sharing with us your investment journey, your path from asset class to asset class, as you have been chasing the high returns that you shared with us, and thank you for engaging in some debate with me about various asset classes. I do believe we’ve given some value to our Best Ever listeners here.

Best Ever listeners, thank you for tuning in, I hope you agree with me. If you found value in this episode, please do subscribe to the podcast, please leave us a five-star review, and please share this with a friend who you think will also enjoy and gain value from this conversation here with Robert Preston. Thank you and have a Best Ever day.

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JF2771: 10 Expert Tips on Breaking into Industrial and Retail ft. Todd Nepola

After purchasing his first property in 1998 based on little more than a gut feeling, Todd Nepola has come a long way as a commercial real estate investor. The Current Capital Real Estate Group founder shares his Best Ever advice for anyone who might be considering breaking into the industrial or retail spaces:

1. Follow your gut. Todd’s first property was a warehouse that he purchased, although no one else saw value in the deal. He thought it looked like a good property to buy, and it had a “For Sale” sign, so he bought it. That purchase launched his commercial real estate investing career.

2. Sometimes signs and paper are all you need. When Todd Nepola needed to fill vacancies for his first retail property back in 2003, he relied on a “For Rent” sign in the window and an ad in the newspaper. Today, even with all of the advancements in technology, he says signs and paper have still served him best.

3. Focus on neighborhood retail centers. Although many people are worried about a “retail apocalypse” on the horizon, Todd has found success investing in what he calls resilient retail spaces — those that will house chiropractors, dentists, tax offices, restaurants, etc.

4. When it comes to industrial investing, prepare for competition. Todd says the barrier to entering this asset class really comes down to patience. “You better be willing to pay up, because it’s just not going to make sense going in,” he says. “You’re not going to get a good deal, you’re not going to get a great cap rate, so you have to believe in it for the long haul.”

5. When seeking lenders, local regional banks are your best bet. In Todd’s experience, these banks are better able to focus on your business compared to the larger national banks, and they have a more human touch.  

6. Once you secure a lender, you’ll need to put some money down. Todd recommends putting 30%–35% down on a loan in order to give yourself a nice cushion. “I sleep well at night putting a little bit more money down on my properties and having them leverage comfortably,” he says. Putting down a higher amount than the bank requires also gets him a lower interest rate and lower recourse.

7. It pays to be nice to brokers. Even if they don’t have something that you want at the moment, they may be able to deliver it to you sometime in the future, Todd says. Once they know you and consider you a real buyer, they might just come to you with a deal before it hits the market.

8. Some of the best commercial deals are listed by residential realtors and mom-and-pop brokers. These properties are often not advertised on major websites, and the prices can be shockingly low. Check residential multiple listing services, and be on the alert for “For Rent” window signs. 

9. Take a chance and hire people. Every time Todd has spent money to bring people on board, it has paid off. 

10. You can lose money by failing to compromise. Todd learned from his own personal experience that if a deal is a deal, it can still be a deal, even if someone moves the needle a little bit. Sometimes it pays to be flexible.

 

Todd Nepola | Real Estate Background

  • Founder of Current Capital Real Estate Group, a full-service management and leasing company that specializes in commercial retail and industrial spaces.
  • Portfolio: GP of 25 buildings consisting of retail and industrial.
  • Based in: Hollywood, FL
  • Say hi to him at:

 

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TRANSCRIPT

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, Todd Nepola. Todd is joining us from Hollywood, Florida. He’s the founder of Current Capital Real Estate Group which is a full-service management and leasing company that specializes in commercial, retail, and industrial spaces. Todd, thank you so much for joining us and how are you today?

Todd Nepola: I’m great. Thanks, Ash, for having me. I’ve been looking forward to this conversation for a while now.

Ash Patel: It’s our pleasure to have you. Todd, before we get started, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?

Todd Nepola: Sure. I’ve been in the commercial real estate arena for about 25 years now. Bought my first property in 1998. My path has always been to hold real estate, so I still own that same property today. Seven, eight years after I bought my first property, I decided it was a good idea to start a property management company, so we built a management company, and we do leasing and management, and redevelopment of centers. We’ve been doing it ever since.

Ash Patel: What was that first property?

Todd Nepola: First property was a warehouse. Believe it or not, it goes back to the RTC days, when the banks were selling properties dirt cheap, there was a For Sale sign out front, and nobody wanted to buy properties. It was a seven-unit warehouse, 13,000 feet. When I bought it, it was half empty, I never forget the day I bought it. When I got to the closing table, even the lawyer was laughing at me what a fool I was to buy this property. But I drained all my finances I had to buy the property and it’s worked out pretty good.

Ash Patel: Todd, what made you buy a warehouse instead of the traditional single-family, the duplex, the four-unit, in that progression?

Todd Nepola: It’s a good question. I was driving by this property repeatedly, and it was a good-looking warehouse, so I said, “That looks like a good one to buy.” There was really no rhyme or reason why I went to warehouse over retail, or over residential at that time, other than it had a For Sale sign. So I called.

Ash Patel: Just a gut feeling, right?

Todd Nepola: Yeah.

Ash Patel: Awesome.

Todd Nepola: Just a pretty building.

Ash Patel: From then on, what was your next purchase?

Todd Nepola: Well, from then, I probably made a logical move ,because this was before the days of the Internet, giving you all the good feedback they give you on LoopNet and CoStar and all those guys. I found a property about a mile away, of similar use, and bought that one. All my properties started to pinball on the same street and corridor, because they were all near each other. So I got to know who was selling, who the owners were, and because I started to understand the market, I kept them all nearby. So the second was the same kind, it was another warehouse property, about I guess a little less than a mile away.

Ash Patel: How many properties in were you before you picked up a retail or a different type of property?

Todd Nepola: I was probably three to four properties in. The reason I changed it was that one of the properties I bought was industrial, but we kind of used the front. We got — I remember, it was like a tax guy and whatever, it was out front. I kind of got pushed into retail a little only because they had these small little five, six, seven hundred square foot units. From there, I went and bought a retail unit, 10 units.

Ash Patel: What were the numbers on that? Do you remember?

Todd Nepola: I do. I actually bought the center back then, it was 6600 square feet. I tried to buy it from this seller who didn’t have it on the market for ages. Finally, she called me, it was on Thanksgiving Day, and she said “It’s $100 a foot, and I’m not negotiating.” I said, “I’ll buy it.” It wasn’t a great deal then, but I bought that property – I think it was 2003. Since then I’ve done absolutely nothing to it other than a coat of paint and it’s just been rolling and rolling and cash flowing.

Ash Patel: $100 a square foot in 2003; that does not sound like a great deal.

Todd Nepola: It wasn’t a great deal, but it wasn’t a horrible deal.

Ash Patel: Okay.

Todd Nepola: But I loved it because for me, getting into retail, it was 6,600 square feet total, 10 base. For me, I was more concerned with how much risk I was going to take. I felt with 10 units, if three of them ever went vacant, four, I can still cover my expenses. That’s how I got involved with that guy, and I paid up a little bit for it. I’m glad I did, because today I wouldn’t sell for 300 a foot.

Ash Patel: Was it fully leased when you bought it?

Todd Nepola: No, it had two vacancies, but it was pretty [unintelligible [00:06:49].13]

Ash Patel: Okay, and how do you go about filling vacancies back then?

Todd Nepola: Good old-fashioned way. Back then I used to do my own leasing, so I put up a For Rent sign in the window. Believe it or not, those were the days we actually put things for rent in the local newspapers, we put an ad there and that was it; just off signs and paper.

Ash Patel: Pounding the pavement.

Todd Nepola: That’s it.

Ash Patel: Yeah. How has that changed over the years? What do you do now?

Todd Nepola: Now we have a whole team of leasing guys, so we’ve gotten really good at it. Now the market is very different, but no matter how much technology they come up with, it makes people more accessible, and it allows us to send people site plans and surveys on the properties quickly. But to me, it still rolls back to the sign up by the street and sign on the window. When people are generally looking for a space, they drive around the area they want to look for and they see a sign and they give you a call.

Ash Patel: Yeah. It’s amazing. I had a property where I had everything – giant banners, flyers handed out everywhere, phone calls, bonuses to any realtors that can get me traction… None of that worked, until I put a little for rent sign right by the road. We ended up filling the building through that. So yeah, amazing. What do you say to all of our fellow real estate investors that are in the multifamily space and think retail industrial is too hard, takes too much money, too big of a learning curve?

Todd Nepola: I get that question a lot, because I’ve purchased quite a few properties over the last two and a half decades. Everyone asked me the same thing. Multifamily is the best, everybody needs a place to live. I agree, it’s great. In South Florida multifamily is super, super competitive down here, because you get a lot of guys that will own it and operate it themselves. It’s hard to compete against those guys. I’ve never really gotten into multifamily for the sake of it’s just not for me, in the sense that I’ve always followed the path of the industrial and the retail guys. Now, what I like about the retail guys and industrial guys is that if they’re not doing well for any reason, they generally just leave, “I’ll give you back the keys.”

I find in the residential stories I hear –I have a lot of residential friends, and they’ll tell me, “If someone has no money, they’re not looking for a new apartment, they’ll ride out the eviction.” I could count on my hands how many evictions I’ve had to follow through to the end of the last 10-15 years, because you don’t really come across that problem. I really think it’s a different barrier to getting into the game. I think a lot of people think of a residential unit, in my opinion, that they’re going to buy it kind of like buying a house. And it’s really not; that’s not the way that banks underwrite them anymore. So it’s basically the same rules to get into both.

Ash Patel: I love that you mentioned the evictions. I had an attorney draft just one eviction notice in 10 years. That was really just to slap the tenant around a little bit and get him to straighten up. And they did. Yeah, I love that. You mentioned banks – what’s the difference? When somebody goes to buy a warehouse or strip center, how is that different than multifamily?

Todd Nepola: Well, I’m not an expert in multifamily, so I can only go for what I kind of know… But basically, it’s the same thing nowadays. The deals that we do, we generally go to a local community bank, and whether it’s national or not, that’s not the difference… But they all basically want to seek about 30% down. And I don’t know that that really changes so much for multifamily, because they don’t want to see you have the risk that people used to have going back 10-15 years ago, where you could buy with no money down or walk away with checks closing. You’ve got to have skin in the game. So if they can underwrite your deal, they’re going to carve it up, they’re not ever going to worry about today’s interest rates. When they’re underwriting my deals now, they’re underwriting as if the interest rate is 6% because they’ve got to know I can carry this going forward as rates go up. So it’s the same [unintelligible [00:10:21].12] but ultimately, like I tell everybody, whatever makes you happier. I prefer enjoying dealing with businesses much more than I do with residential tenants. I think it’s easier, it’s nicer, so that’s where I stepped in. But truthfully, as long as you’re in the game, as you very well know, as long as you’re buying real estate, you’re in the right arena.

Ash Patel: Todd, there’s a retail apocalypse coming. Why would you buy retail right now?

Todd Nepola: I’ve heard this quite a few times. I’ve heard that Amazon is going to end everything and kill everybody, and I think the obituaries are a little bit too early. There’s always a repurposing of retail, and for sure, in Florida, in our state, there’s a lot of retail per person. But at the end of the day, I’m already seeing a lot of these older centers getting repurposed, they’re bulldozing some of them, putting up apartment buildings…

The kind of stuff that we move into – I’m not buying the big 50,000 square foot big boxes that can hurt us. I’m buying the stuff that has your chiropractors, your dentists, your pediatrists, your tax office, your florists, your restaurants, and so on and so forth. I’m not saying anything is Amazon-proof or internet-proof, but they’re resilient, and these guys are going to stay. The truth is, we’re a very social society. People don’t want to order everything online. I don’t buy into the apocalypse.

Ash Patel: I totally agree with you. I think COVID really showed us that those neighborhood retail centers are thriving. Because people now want to stay close to home; they’re not driving 30 minutes to go to downtown Miami or Lauderdale, or Cincinnati. They want to go to their suburban downtown, where it’s a cool, walkable vibe, the pizza guy, the deli, the little bar, the watering hole, and like you’ve mentioned, the chiropractor, the insurance guy; those are not going away in my opinion as well. Thank you for sharing that.

Industrial – so what are the barriers to entry on that?

Todd Nepola: I think it’s the same thing. If there’s any sector that’s been almost impossible to buy in the last two years, it has been industrial. We personally bought just over 500,000 square feet of retail space in the last two years since January 2020, and we bought 10,000 square feet of industrial; that’s all you could get. I mean, I’ve got one building. It’s such a competitive market now, and especially the small base stuff. We specialize in the, say, 1,200 square feet to about 10,000 square foot base, and it’s just hot; everybody wants to get into it right now. So the barrier to getting in is a lot of patience. And you’d better be willing to pay up, because it’s just not going to make sense going in. You’re not going to get a good deal, you’re not going to get a great cap rate, so you have to believe in it for the long haul.

Ash Patel: Todd, what kind of cash-on-cash returns do you typically see?

Todd Nepola: It depends on the deal. A lot of times people ask me what the return is when I’m buying a property. The truth is I’m not as interested, because I get packages from every brokerage company known nationwide, and they give me these beautiful proformas. The truth is – I even tell it to the broker so no disrespect – I kind of throw it in the garbage because I’m not interested in what they tell me I could do. I have to know, so I’m looking for properties that have upside potential.

Last year in September I bought one, and it was 85,000 square feet. The truth was, it was probably about a three cap. But a third of the units were vacant at the time, so we had to go lease them up, and we knew what we had to do. It was an out-of-country owner. So the return I get when I buy them isn’t as important as where I think I’ll get. But right now, in this market, we’re still looking for 12%, 13%, 14% cash-on-cash carries… When we have them stabilized, not at purchase.

Ash Patel: Yeah. In terms of financing, is it a challenge to have property finance that has a high vacancy?

Todd Nepola: It gets more challenging for some people. We have the luxury of a big track record, so I always buy all my properties with 30% to 35% down. I’m always putting a lot of skin in the game. A lot of times I’ll work with banks, [unintelligible [00:13:54].27] I’ll put up maybe even another 10%. When I hit a hurdle and I rent out some of these units, they’ll release some money back to me. So I’ve always found that banks will work with you if you have a proven remedy how to solve the problem. For the most part, the number one thing is the market. So if you’re buying a property on one side of the street with 50% vacancies, and across the street everything is full, they know you’re going to get it full. But if the whole area is white, that would probably scare them. But I haven’t had a problem with any banks, knock on wood.

Ash Patel: Todd, somebody that is wanting to start out with a small neighborhood strip center, that has no track record – how should they approach a lender, and what type of lender should they approach?

Todd Nepola: This is a great question, Ash, because that’s probably one of the most common questions that people ask me all the time. I think it’s the greatest thing to get in, but what people have to realize first off that a lot of people deal with say Bank of America, Wells Fargo, or TD Bank, and those banks are just too massive to talk to you and you’re just not important to them. You’ve got to bring it down a notch and you’ve got to go to your local regional bank, the smaller banks. These are the guys that want to lend to you, because they may want your business account, they may want your checking account, but they’re more human. And I’m not insulting Bank of America; I use them, but I have no loans from Bank of America. They’re just massive. They’re designed for the Blackstones of the world. So you’ve got to work with a smaller bank.

The second thing is you’re going to have to put some money down. I’ve read the books and I’ve heard all the stories about buying real estate with no money down. If you do that, you hit one speed bump, it won’t be your property anymore. So you’ve got to put some money down. But I think it’s the greatest thing to get in the game. And go talk to your local banks. As I said, I think you could get in with good credit with about 30% down, [unintelligible [00:15:29].26] in most of these deals and just get started.

Ash Patel: Should they talk to the lenders before they find a property, or after?

Todd Nepola: You could always talk to a bank; there’s really no reason to talk to them until you have a deal. It’s kind of like you have nothing for them, so you may not get the attention you want from the bank officer, because you’re telling what potentially you may have one day down the road and that doesn’t really excite them as much as a deal. What I can tell you is there’s a bank out there, there’s a lender out there for everybody. If it’s your first deal, I tell everybody, you’ve got to do whatever it takes. I drained my accounts down to pennies to buy my first property. People asked me, should they use a credit card? You should use any kind of debt you can get, whether it’s from friends and families, credit lines, or anything to get your first property. Because like anything else, once you own it, it’s a lot easier to refinance it and easier to buy the second, third, and fourth. You’ve just got to get in.

Ash Patel: That’s great advice. Unlike multifamily, relationships with lenders – it’s so important with commercial properties. It’s not a commodity as much as it is. The banks are usually keeping the loans on their books, so they have to believe in you. And when you approach them, having a great narrative helps as well.

Todd Nepola: Absolutely.

Ash Patel: Tell them your turnaround story, tell them what your intentions are, and really get them excited about that. Great advice. So you don’t have to put down 35% on deals; do you choose to do that?

Todd Nepola: Generally speaking, the bank wants 25% down. We like a nice cushion. I’ve lived through everything, from I guess now wars and pandemics and savings and loan crises, so I’ve seen it all. I’m a big fan of studying history, and if you look at the history of real estate, if you can hold on to real estate no matter what the market does, you’ll be fine. You just have to have the staying power. What got a lot of people in a lot of trouble back in ’08 and ’09 was they just didn’t have any staying power, and they were too over-leveraged, and then they quit and walked away.

A lot of people that I know – I wasn’t one of them, but a lot of people just gave the keys back so to speak, and walked away from their properties. Only two years later, this prop was worth a lot more money. So I sleep well at night putting a little bit more money down on my properties and having them leveraged comfortably.

Break: [00:17:37][00:19:23]

Ash Patel: Todd, do you get a lower interest rate by putting down a higher amount?

Todd Nepola: Yes. I get a lower interest rate and lower recourse, yes.

Ash Patel: What are your typical rates right now?

Todd Nepola: I’ve been borrowing for the last six months between 3.5 and 3.75, five years fixed.

Ash Patel: Yeah, that’s incredible. That shows…

Todd Nepola: It’s going to probably change today, thanks to the Fed. But [unintelligible [00:19:44].03]

Ash Patel: Yeah. You said it limits your recourse; are these non-recourse, full-recourse, or something in between?

Todd Nepola: Anytime you deal with a local lender like this, you’re going to get recourse. So what we generally try to do is we buy a property, we’ll get it from a local lender. Like I said, these guys keep their loans on the books. They don’t want you to have recourse just because they don’t trust the property. They just want to make sure they’ve got you if there’s ever a problem that they have a little bit of an angle with you, and that’s the recourse. So you’re always going to sign a recourse; the question is how much. It could be 100% recourse, but we all know the property is never going to zero; but you don’t want that on your balance sheet. So we always negotiate that with the banks that say, “Well, if I put 35% down, let me just carry the next 20% or 30% of the recourse, so my balance sheet isn’t impacted by it,” which doesn’t make a difference.

Ash Patel: I did not know that was an option. Thank you for sharing that. Good to know; everything I have is full-recourse. How do you find deals?

Todd Nepola: I spend hours every single day looking for deals. Whether it’s going on CoStar, or whether it’s just cold calling people, whatever it may be, I’m always hunting for deals. I’ll give you my secret – I find that it pays to be nice to every single broker, especially ones that don’t have what you want, because they’re the ones who may deliver it to you one day. I’m doing a deal right now, we’re closing on two properties from one broker. I never even met the guy; he called me over the phone and tried to buy one of my properties. I talked to him for 20 minutes, and then he caught me with an off-market deal a few weeks later.

So if you’re nice to brokers, they’re going to feed you a lot of deals. It definitely helps when you have some proof that you can close deals, because once they know you’re a real buyer, they’ll go to you before they just go to the market. But ultimately, you’ve got to get out there and search and you’ve got to make offers. I’ll tell you too, we bought a small property in January, and the seller wanted $3.5million for the property and it just wasn’t worth it, so I offered him two. Most people say, “How do you offer $2 million on a $3.5 million property?” Because he countered at $2.5 million, and we settled at $2.275 million. But most people won’t even make the offer; it’s just a piece of paper and LOIs. Send them out, give it a shot.

Ash Patel: Do you always do LOIs, or do you just try to go right under contract?

Todd Nepola: I generally do an LOI first, especially in the commercial arena, because we use the FAR/BAR contracts, which are the easiest ones for the most part. But then you’ve got to start getting into the contract, you have to start getting into estoppel letters and liens and code violations, just to find out if we’re going to make a deal. I have a template for an LOI, I send it out, it’s easy, and you’ll find out if you have some traction, before I go through the whole trouble of putting together a contract or having my lawyer do it. One piece of paper, it’s not binding, but like I said, you’ll find out if a guy’s a player and you’ve got to deal.

Ash Patel: What percentage of your deals come from brokers?

Todd Nepola: 75% to 80% of deals come from brokers. Every now and then we’ll find it off-market on our own.

Ash Patel: How do you find those?

Todd Nepola: From word of mouth, we’ve actually got some properties. We just bought a property last year from a seller that knew we bought it from someone else. He said, “I know you bought a property from my friend, are you interested?” We’ve been in this for a long time, so we do get a lot of calls and we have a big company, so we have the privilege of that coming in now. When I started, that would never have happened of course…

Ash Patel: I’ll share one of my best-kept secrets – I don’t keep it, I share it with everybody… But finding commercial deals listed by residential realtors; or by, I’m going to call them mom-and-pop brokers or unsophisticated commercial brokers. We’ve literally had brokers that had $5 million strip centers that they advertised only on their own website. That was like a homemade website; they didn’t put it on CoStar, LoopNet… And then these residential realtors, it seems – man, they get excited when somebody brings them a commercial deal. They slap it up on the MLS, mispriced often, and you gets some great deals that way. Have you done that?

Todd Nepola: You are 100% right. You just hurt my stomach, because there was a beautiful center, it was a small center right by our office. Someone said, “Hey, do you see, that center’s for sale.” I looked it up while I was at my computer and I said, “That’s not for sale.” He said, “I think I it is.” I drove there, it was a residential realtor, and put up a For Sale sign. He sold the center that should have sold at 200 bucks a foot, asking price was 130 a foot. I was like, “Oh my god.” But just as you said, they didn’t even advertise it.

Ash Patel: So I constantly scour residential MLS-es when they allow you to search by commercial property. A great way to find deals.

Todd Nepola: That’s a great tip.

Ash Patel:  Yeah. Are you slowing down at all in your purchases knowing that we’ve had a long run of a great economy?

Todd Nepola: No. Again, we have a little bit of luxury being in South Florida, the market has been booming down here. But our model – we don’t buy the class A brand new grocery-anchored centers. We buy value-add centers, so we’re just buying centers, and because we don’t sell them, we only look to increase the NOIs and refinance then and we cash out. So because we do that, we keep the real estate forever. I think we have a long horizon ahead of us.

Ash Patel: Todd, you’ve got a big built-out company now. What was your first hire?

Todd Nepola: My first hire – I remember to this day. I started the company by myself, and when I finally got to the point I was going to hire help, I hired a guy. I still remember his name, it was Greg King, he was a fantastic guy. Between Greg and I, we answered the phones, we collected rents, we painted buildings, and we did everything we had to do together. From Greg King, I remember going back, –oh boy, a long time ago– we hired a girl to come be the receptionist. When we got to a receptionist, I thought I made it. I said, “Someone’s actually going to answer the phone for me, this is great.” Let me tell you, it was that small position that makes a huge difference, because not answering the phones, you have a lot more free time. From there, we continued to grow and grow, and bring on leasing agents, managers, and the rest is where we are today.

Ash Patel: What would your advice be to that one-person shop that wants to scale?

Todd Nepola: You’ve got to do it. When I first opened my office – I tell a lot of people this story. I started by myself and I rented – I think it was 700 or 800 square feet. I went and I bought office desks; I went to Dell back then, online, and I bought, I don’t know, it was like six or seven computers. I set everything up with chairs, but it was just me. I always tell the story that a good friend of mine… It’s always your good friends who will give you the really funny advice. He walked in after I signed a three-year lease, I bought all this furniture and computers, and I bought a phone system, I had the office, and he said, “Are you expecting someone to come here?” I was like, “Oh, did I make a big mistake?” I was like, “This is not good.” You know, it makes you work harder. But every time we’d spend the money to bring people on board, it’s always worked out and been a blessing. So you’ve got to take the chance and hire people; they’ll really pay you back.

Ash Patel: I love that story. Most people hire people, they work out of their living room, their kitchen, and then they get the office. I love that you just went all in, got the computers, the desks. What’s a deal that you lost money on and what was your lesson learned?

Todd Nepola: It’s a great question. I’m going to answer it maybe just a tiny bit differently. The deal I learned the most on, that cost me the most money, was probably around 1999 or 2000. There was a seller out of Israel selling an enterprise rent-a-car lot on a corner, a beautiful corner. He wanted 250,000; see how well I remember this deal. We settled to 225,00, and back then, sellers all wanted to finance the deals. They wanted 10% down, and they wanted, I think, back then, like 8% interest, which was a good interest rate back then. And we kind of had a deal.

And at the last minute, the seller got cute, in my opinion, and said, “Nah, I want 235 or no deal.” And because I was young, stupid, and foolish, I said, “We agreed at 225, I’m not paying 235.” So I lost the deal. Now, bear in mind, that would have cost me an additional $1,000, down because they were financing it. A few months later, I realized I might have made a mistake after the property has been sold. I get the luxury of driving by this property almost every day on my way home. Here we are, I don’t think the property is worth a penny less than a million and five, so $1,000 cost me a million-plus.

But when you’re young, you don’t realize; you have your ego and you have your beliefs. But sometimes you’ve got to be flexible and compromise; it’s been the greatest lesson. I’ve told that story a million times to everybody, don’t be stuck. If a deal is a deal, it could still be a deal if someone moves the needle a little bit. But it cost me a lot.

Ash Patel: Are you from New Jersey or New York?

Todd Nepola: Staten Island, New York.

Ash Patel: I grew up in Jersey, so I get that mindset. Awesome. Todd, what is your best real estate investing advice ever?

Todd Nepola: The best advice I could give anybody is you’re going to be afraid to buy your first property, and you should be. If you’re not afraid, don’t do it, because you should be afraid. But do it. Whether it’s multifamily, industrial, or retail, it really doesn’t matter, do it. Be nervous, be scared; what’s the worst that can happen? If you’re so sorry you bought it, you could sell it. You may lose a few dollars. But if you’re right, and you’re following the path that everybody else has been in real estate, [unintelligible [00:28:28].26] very few people that tell you it’s a bad deal, if you’re right, it’ll multiply and give you the best retirement fund of your life. It’ll let you sleep well at night and it’ll certainly put your kids through college and take care of all those burdens of worrying about a day-to-day job. So lListening to guys like you, Ash, is fantastic, because it kind of bridges the gap where they’re nervous, but you’re going to be scared, but you got to do it. That’s what they have people like you to help them for.

Ash Patel: Amazing advice. Thank you. Todd, are you ready for the Best Ever lightning round?

Todd Nepola: I’m ready.

Ash Patel: Alright, let’s do it. Todd, what’s the Best Ever book you recently read?

Todd Nepola: I just finished two books ago, a great book, and it’s similar to what we just said. By Gerald Hines from the Hines Corporation. He’s the founder of Hines. And if you know much about them, they’re the biggest real estate company out there today. It was called Raising the Bar, by Gerald Hines. It’s a story of how this guy, just like you said, how I started with an office, some people started in the house. He started in his house, and one building at a time, one deal at a time, he kept on growing and growing and growing. Now Hines is, I believe, the largest private real estate company in the world.

We’re talking maybe 50-60 billion in assets right now that they own. He started one deal at a time. So what I loved about the book – and I’m a big reader – is it doesn’t just tell you how great it’s been, how successful he was. He tells you how hard it was, and all the nights of losing sleep. When there was a tornado and he had to go out and travel across the country to go to a building. He talks about all the things he does to give back and how he works with people. He talks about his hobbies and his family, and how he had to give this company and hand it off to his son, which is not easy to do. But he did it, and obviously, his son’s doing a great job now too. But hat is by far the best book I’ve read in the last two months.

Ash Patel: That’s going on my list. Thank you for sharing that.

Todd Nepola: You’re going to love it.

Ash Patel: Todd, what’s the Best Ever way you’d like to give back?

Todd Nepola: I’ve learned a lot of lessons in giving back and I’ve come to a point where I really enjoy giving back. I’m less the guy who has [unintelligible [00:30:16].20] my brother’s a massive guy with time. What I like to do is bring people into the office; so I really want to see more people get involved in commercial real estate, again, any sector in it… So we have a pretty good internship program in my office where we bring in a bunch of high school and college kids in the summer and we pay them.

I’m paying them very well, because if they’re going to show up, they should get paid. I don’t use my interns as people to answer the phone, or just run an errand. I take them with me, [unintelligible [00:30:39].26] my property managers; it’s more of a teaching thing. I always have people come in in the office and spend time with them, I’ll always take a phone call from people… And I will plug it now, because people know – I’ve just finished writing a book which is coming out in about two months. My way of giving back is 100% of the proceeds from the book are going to go to charity. I just want people to get anything they can out of me and learn this game. Very rewarding to see people learn.

Ash Patel: Tell me what the book is called.

Todd Nepola: That we’re still working on.

Ash Patel: Okay, that’s the hardest part, right?

Todd Nepola: You know, it actually is the hardest part; that and getting some pictures. But it’s most likely to be called, if we can get [unintelligible [00:31:15].27] Getting Real On Commercial Real Estate by Todd Nepola. We have the book done, it’s in the publishing house, we’re getting that done and getting a lot of work done. It’s my first book, but I felt – here’s the way I could give back.

I have two daughters with teenage daughters. I’d love to see more women get involved in commercial real estate. I know a lot of women I meet, they kind of think that commercial is for men and residential is for women. It’s not, it’s a great business for them. I’m looking to see more minorities get involved, so we’ve got to work with these groups and try and help them as much as we can. That’s why the book is going to be for charity; I won’t make a penny off it. Those are the ways to get back, by seeing others succeed.

Ash Patel: That’s incredible. I’m sure you know Beth Azor.

Todd Nepola: Yes.

Ash Patel: One of the savages in this industry.

Todd Nepola: Beth is great. I know it’s your lightning round, but I’ll just tell you, real funny… Beth was trying to sell a shopping center, and she brought it to me. I said, “Wait, wait, that center?” I said, “I’m not even interested, because Beth has got every penny out of the center.” If Beth is selling it, then it’s no good anymore. She’s that good.

Ash Patel: She’s that good.

Todd Nepola: She’s fantastic.

Ash Patel: Todd, how can the Best Ever listeners reach out to you?

Todd Nepola: Anyone can. I’ll tell you the truth, you could call me, you can email me, we’re at currentcapitalgroup.com. My phone number is 954-966-8181. I’m todd@cc-reg.com. Instagram, @lifeaccordingtotodd; any way you want to get me, get me. But if you have a real question, you have something you want to know, I’m happy to help you. I have people come to the office probably two or three times a month, just come here and ask some questions. If you want to meet a bank or you want to have a question, I’ll sit down, grab a cup of coffee, and help just about anybody.

Ash Patel: You’re an amazing guy, thank you. And thank you for being on the show and sharing your 25-year journey from that first warehouse to what you’ve accomplished today. I can’t thank you enough for sharing all of that with us.

Todd Nepola: And I thank you, Ash. [unintelligible [00:32:59].06] the people, it’s fantastic. The time you devote to this… It’s fantastic. Thank you for having me.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review, share the podcast with someone you think will benefit from it. Also, follow, subscribe, and have a Best Ever day.

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JF2770: Learning to Pivot: From Bankruptcy to 300 Units ft. Jeffrey Holst

Jeffrey Holst doesn’t have bad days. His commercial real estate journey has been an unconventional one, but today he’s focusing on living his best life, which includes pursuing his passion for value-add multifamily deals — and scuba diving! Here are some of the topics Jeffrey touched on in this episode: 

  • His move to Puerto Rico. Jeffrey says Puerto Rico has some challenges, but there are also many positive developments he is excited about. Plus, he wanted to scuba dive more, and there aren’t any oceans near his home in Tennessee.
  • His introduction to commercial real estate investing. A traumatic life event unexpectedly launched Jeffrey into the world of real estate investing. After being diagnosed with leukemia, he began planning for the worst-case scenario by buying assets he could leave to his wife. He saved up his bonuses for a year and bought a condo as his first deal, which he still owns today. 
  • How he structures joint venture apartment deals. Jeffrey explains:Say you and I wanted to buy a deal — I had a deal, you had some money. Rather than build a syndication around a 10-unit building, we’d find a way for us both to be active in the deal, and we’d create an LLC where we each own half. You would loan money to the LLC for the down payment, and then we would pay you interest on your money. You have to be a little careful that you don’t accidentally fall into syndication land … but as long as people stay active, you have a lot of flexibility in how you structure stuff.”
  • Investing in multiple asset classes. After his health scare, Jeffrey decided that he wanted to have more fun in his life — including his real estate investments. In an effort to keep things interesting, he’s branched out to invest in the multifamily, office, retail, industrial, and hospitality asset classes.
  • His favorite kind of deal. Jeffrey’s passion is value-add multifamily. There’s nothing he enjoys more than taking a building in poor condition and breathing life back into it. 
  • The biggest lesson he’s learned. Being willing to pivot. Things don’t always work out how you expect them to, so flexibility is key, Jeffrey says. That means planning — having multiple possible exits and multiple possible holding strategies. 
  • His Best Ever advice. Don’t have bad days. Good and bad things happen every day, Jeffrey says, but he makes a conscious choice each day to focus on the positive. 

 

Jeffrey Holst | Real Estate Background

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed, I’m here with Jeff Holst. Jeff is joining us from Chattanooga, Tennessee. He’s the founder of Old Fashioned Real Estate, they focus on value-add deals, including some deals that they JV. They have over 300 units in JV deals. Jeff is also a GP of an office building, a strip mall, and a 100,000 square foot industrial building. He’s also an LP on two hotel deals. Jeff, can you start us off a little more about your background and what you’re currently focused on?

Jeff Holst: Yeah, sure. The value-add multifamily, like the mid-size multifamily is kind of my sweet spot. I like to buy 20 to 50-unit buildings, mostly in Chattanooga, but I have some stuff in the Midwest as well. My real focus right now though, honestly, is just moving to Puerto Rico. I’m back and forth; I’m like half in Puerto Rico, half of Chattanooga. Happened to catch me in Tennessee right now but I’m itching to get back over to my island home.

Slocomb Reed: Are you spending half of the year plus one day, at least in Puerto Rico right now?

Jeff Holst: People ask me that a lot, and I’m actually the only person I know of in this situation. But I’m actually spending half of the year minus one day in Puerto Rico. I’m counting off my days to make sure I don’t go over half a year, because unlike everyone else in the world, I don’t pay tax. So I’m a real estate investor, I do a lot of bonus depreciation. Even though Puerto Rico has an insanely great tax system for a lot of people, 4% is still more than 0%.

Slocomb Reed: Gotcha. Why moved to Puerto Rico then? You just like the beach?

eff Holst: There’s a lot of really cool stuff going on there. We did really well back in the last recession in Metro Detroit and in some of the more challenging markets. Puerto Rico has some challenges, but there are also a lot of really, really positive developments. Part of it is there’s a lot of new money coming to the island, cryptocurrency folks, and stuff. I think there’s just a ton of opportunity there. But yeah, also, I wanted to scuba dive more. We don’t have any oceans in Tennessee, so… Puerto Rico.

Slocomb Reed: That makes a lot of sense. You said during the recession, you were doing a lot in Detroit. When did you first get into commercial real estate investing?

Jeff Holst: We started out with single families and things like that in Detroit in 2011-ish, and then we transitioned to multifamily in 2017. We started selling off those properties and 1031-ing to bigger deals. Our first one was a 12-unit, then we did a 19, then we did a 32, and then it was just off to the races from there. After we ran out of stuff to 1031, that’s when we started JV-ing stuff.

Slocomb Reed: Gotcha. When you started JV-ing on these apartment deals, how are you structuring those? What was the joint venture?

Jeff Holst: It’s very deal-specific. Sometimes it would be just like a couple of us each had some money and we would just put it in together. Other times it’s this thing we named the sign eight investing, because it’s the infinity symbol. We would do this deal where we basically create a new company. Slocomb, say you and I wanted to buy a deal, I had a deal, and you had some money. Rather than build a syndication around a 10-unit building – it’s possible, but it’s difficult – we figured out a way for us both to be active in the deal. What we’d do is we’d create an LLC, 50/50, I own half, you own half, and then you would loan money to the LLC for the down payment, and that LLC would pay you interest on your money. Generally, interest-only. So it’s kind of like a combined to equity kind of thing. We did a lot of deals like that, where people had various percentages. You have to be a little careful that you don’t accidentally fall into syndication land; you don’t want to be selling securities without filing the proper exemptions, or having a securities license, or any of that kind of stuff. As long as people stay active, you have a lot of flexibility in how you structure stuff.

Slocomb Reed: Jeff, let’s talk about how you stay careful not to fall into syndication land. I have active partners on a couple of apartment deals of the same size that you’re talking about. Effectively, we’re just both GPs, we’re both equity partners; I run all of the operations, because that’s my background, and my partners brought more of the money. Tell me how you’re structuring those things. You’re using some terms that I don’t.

Jeff Holst: The thing about syndication is, it doesn’t matter what you call it, but the securities definition is really clear. I might butcher this, because I’m not a securities attorney, but if you’re investing with an expectation of profit through the efforts of someone else, it’s a security; it doesn’t matter how it’s structured. It’s a security if they’re putting money out there and expecting to make a profit through your efforts exclusively. As long as someone is actively involved – as you said, they’re a GP with you, like a co-GP – you’re probably fine.

But if you took in 20 people, took 50,000 from each of them, went and bought a deal, and none of them really did anything except for put in money, that’s a syndication; it doesn’t matter how you say it is. When I say be careful, what I mean is, I’m not going to take 10 investors into a single deal. I’m going to make sure that that investor is having input into the decision-making. Now, I’m not talking about day-to-day, the decision making; that’s the role of a property manager. If you’re acting as a property manager, that’s fine. I’m not even talking at the asset management level, because you can decide to hire an asset manager. That person can be Slocomb, it can be Jeff Holst, it doesn’t matter. What’s important is that they still have active participation in that deal, in some fashion. That’s going to be different in every deal, what level of involvement there. It can be helping in underwriting, it can be helping to guarantee the loans… Obviously, that has a big part of it. Typically, you’re not going to see that in a syndication. It’s just the things like that. It’s a balancing test. You’ve just got to make sure you’re aware of where that line is and don’t push it too far. By the way, also consult with an attorney; don’t rely on what you heard on a podcast.

Slocomb Reed: Of course, and consult with a CPA.

Jeff Holst: Yeah, consult with all the professionals that you need to, to make sure that you’re doing it correctly. I am an attorney, but I never did securities work. I have my own securities attorneys that I work with when I set this stuff up, real estate attorneys, CPAs, and all that kind of stuff.

Slocomb Reed: Yeah, and we consulted with attorneys when we set up our partnerships as well.

Jeff Holst: Yeah, it’s probably completely fine how you have it set up.

Slocomb Reed: Correct me where I’m wrong, Jeff… This was at least my thinking when I was setting up my partnerships. One of the reasons to avoid syndication is that the deals that we were buying were simply too small to justify the costs involved in the formation of the syndication, the legal fees, the filing with the SEC… When you’re talking about a 10-unit in Detroit or Chattanooga, Tennessee – I don’t know what your values are, but some stuff is being listed by brokers right now at 65,000-70,000 a door in that space; class C buildings, by age and condition. If you’re talking about a $750,000 building, it just doesn’t make any sense to go through the legal hassle and the cost of registering that with the SEC, and doing it the right way through attorneys.

Jeff Holst: Completely agree. And that’s what I said. We make sure that we’re complying with securities law, we’re purposely avoiding the possibility of creating a security inadvertently. Because what you want to do is if you’re going to do it, you want to go through the cost of doing it correctly. You want to have your PPMs and your registrations; really, it’s just notice filings. If you have the right exemptions, it’s just about putting the SEC on notice that that’s what you’re doing, and then making sure your investors have all the proper disclosures and stuff. But that stuff does cost time and money. If you need $200,000 to do a deal, it’s not worth doing. But that’s 700…

Slocomb Reed: [unintelligible [00:10:58].15]

Jeff Holst: Yeah, you need $200,000-$300,000 to do to deal, and some bank financing. That’s never going to work for a syndication. But we have done some where we’ve raised small numbers. One of the first syndications we did went through the whole process. We only raised $350,000, or $340,000, or something like that. And it worked out fine, but that was a very rich deal; it was about creating a model that we could repeat for our investors, so we wanted to start out with a small one intentionally. And it worked out really well, we exited that deal, everyone doubled their money in three years, and everyone’s happy. Those people of course reinvested that money again with us, or most of them did anyway.

Slocomb Reed: I want to stay on this for just a moment longer before we break into any other conversations, Jeff. You said you started in Detroit, did you live in Detroit at the time, or did you live in Chattanooga?

Jeff Holst: No. I actually lived in Grand Rapids, Michigan and then I moved to Chattanooga. Once I’ve moved here is when I started investing in Detroit. I guess I’m weird. In fairness, I went through a pretty traumatic life event. I got diagnosed with leukemia, I was a bankruptcy attorney, and that actually drove me into personal bankruptcy. So in 2010, I filed for bankruptcy and I took a job in Chattanooga. I thought I was going to die, so I was like, “I need to buy some assets to make sure that my wife’s okay if I die.” That was my whole goal. Fortunately, I started at the right time, because pretty much anything you bought in 2010 you did really well with if you held it until now. In fact, the first deal I did, I still owned; it was a $30,000 condo that we bought for cash. I had no credit, so I had to figure out a way to do this, and so I saved up my bonuses for a year and bought a condo. It worked out pretty well, because the thing is probably worth 150,000. I bought it with a partner, so I only had to put in $15,000 or something. We still have it and it rents out consistently so… It could be worse.

Slocomb Reed: Gotcha. Specific to the 20 to 50-unit deals that you’re buying right now, where are they? Are they all in Chattanooga?

Jeff Holst: Yes. We have a few deals in Michigan still. I think I have about 100 units up there in that size.

Slocomb Reed: Are you currently buying up there?

Jeff Holst: I’m looking at deals, I haven’t bought anything in a while. Most of this stuff is within 30 miles of Chattanooga. I am looking at a couple of other markets too, but I haven’t pulled the trigger on those.

Slocomb Reed: When I’m talking to my real estate investor and apartment investor friends here in Cincinnati, Ohio, I’m talking to brokers, and I’m talking to my commercial mortgage broker, one of the things that come up very often in conversation and one of the reasons that a lot of syndicators are not finding a lot of success, are not finding a lot of deals in Cincinnati, is because Cincinnati has an older and smaller apartment inventory by comparison to the metros that are exciting for apartment syndicators. Very few of the buildings here were built in or since the 1990s. More likely to find 1890s than 1990s in Cincinnati, in fact. And you’re more likely to find poor families all over the place. But the 12-unit building where it’s three floors of four apartments, one apartment might be the utility room, laundry room, but it’s the same brick structure everywhere. That’s a lot of our apartments in Cincinnati is those buildings; my 24-unit is two twelves.

So Cincinnati is a great cash flow market, it is a growing market, and most of our apartments are not syndication size. So speaking specifically to the Best Ever listeners who find themselves in markets like ours, where the good apartment deals that will allow them to scale their portfolio will not allow them to syndicate, what are your recommendations for how those people partner with others to take advantage of OPM, other people’s money, and get invested in deals that don’t make sense to syndicate because they’re too small?

Jeff Holst: That’s always a trick. You have to understand what those potential partners are looking for, because you have to skirt that line if you’re not syndicating. You’ve got to know what they want, you’ve got to really get a good understanding of what it is that they’re looking for, and then you’ve got to structure the deal that divides up the debt-equity and cash flow in a way that works for everyone. As I said, the strategy I outlined sort of briefly, where we start a new company and then one person loans money to that company, and the person or partner maybe finds the deal and does a little bit more on the management side – that can work. That’s a strategy that I’ve used in Chattanooga, which we have a similar problem here. There are some big deals here, 150-unit buildings and new construction, because we have a lot of growth, but there are a lot more 20-unit buildings than there are 100-unit buildings. Actually, I kind of like that, because in a way, it creates an opportunity. You said you’re in a cash flow market; well, we are, too. We’re in a cash flow and appreciation market somewhere between probably where you are in say Phoenix or something that’s almost all appreciation now.

When you’re looking at a deal like that, you have an opportunity to do very, very well, and you can structure deals to do value-add things where you can refinance in 18 months and pull your money out. That’s one way to scale too, and that’s what we’ve been doing the last few years. We’re refinancing, pulling out the money, and then just using that as a down payment on the next one. Once you get to a certain scale, it becomes quite a bit easier, but you’ve got to just be flexible and figure out a way to do it. Because 20% of a deal is better than 0% of a deal; if you can make it work and you end up with a chunk of it, it’s worth doing.

Slocomb Reed: I did a deal similar to that this past year, Jeff, where 20% of a deal is better than no deal. It wasn’t necessarily that I bought on one partner and that partner lent all the money to the partnership. The way that we structured it was effectively — I knew his cash flow expectations and I knew that after the value-add process with this 26-unit was complete, the property would far exceed his cash flow needs. What we did was he took 75% ownership, I took 25% ownership, but he brought 85% of the money, and I only brought 15%. So he was hitting his cash flow numbers; my cash flow numbers are much sweeter, though. But to your point, Jeff, I’m the one who found the deal, negotiated the deal, and I’m the one executing the plan.

Jeff Holst: Yeah, we’re doing a deal right now with one of my partners where we had some 1031 money, he had a ,deal and we’re 1031-ing in, and we’re doing a TIC. He’s getting 15% of the deal, he’s putting none of the money in, and we’re getting 85%. I’m fine with that; he’s going to be operating a lot of it. Obviously, we’re going to be paying attention when we own 85% of it, but effectively, it’s a great deal for both of us. He’s getting a nice chunk of a 40-unit building, and not putting any money in; we’ll get our money back at a refinance or sale point out of the capital account. But then we’re dividing everything at 85/15.

Slocomb Reed: Jeff, you said you’re still buying apartments, but it sounds like since you got into the apartment game, you’ve basically touched on every single other commercial asset class with at least one or two deals. You’ve got an office building, a strip mall, a big industrial building, you’re an LP on some hotel deals… What’s got you diving into all of those different niches?

Jeff Holst: Well, listen, I’ve been very fortunate the last few years. And after I went through that health-scare and thought I was going to die – well, I needed to do fun things and I need to craft a life that’s amazing. It’s a big goal of mine, and I’ve done that, I’ve got to climb Kilimanjaro; I went to Antarctica last month.

Slocomb Reed: Wow.

Jeff Holst: Which is amazing, and it’s a great place to go. But I want to do interesting things; I’d rather not just do the same thing over and over again, so I just try different stuff, and see what works. I like making money, and those were good opportunities. In fact, the office deal — this is my second office, but the one that I’m sitting in right now, we bought this building and did almost like a WeWork idea. Renting out individual offices downstairs, and then we took the top floor; it’s like house hacking our own office, so we have our free office space as a result of that. I just love that stuff, it’s just fun.

Break: [00:18:56][00:20:43]

Slocomb Reed: Best Ever listeners, I have to hijack the podcast for a moment, because I’m literally doing the exact same thing. I’m almost done renovating and furnishing, and I’m about to advertise. Let me ask, Jeff, for my own office hack… It’s a 4000 square foot building, it’s going to have six private offices, one of them mine, five of them rented, and then a co-working component outside of that, with shared day desks and shared day offices and lounge space. How did you attract people to lease your private offices and to lease your co-working space?

Jeff Holst: Yeah, it’s been harder than I thought it would be actually, just so you know. We’ve actually just sort of floated it. We put it on Facebook Marketplace and stuff, because you can’t do like the normal, like stick it up on apartments.com, syndicate it out to all the different sites, kind of rental strategy. Facebook Marketplace has actually been really good for it.

Slocomb Reed: That’s good to hear.

Jeff Holst: Yeah. And then also Craigslist, we got a little bit off of that too. But a lot of them have just been like word of mouth. You go to a networking event, and then — of course, we have 14 offices in our building, 14 single offices, then we have one office that’s quite a bit larger that has two units, and that’s the space we took for ourselves, so just myself and my partner. And then we have a little mini-conference room. But we have 1,600 square feet for ourselves and then the other people have whatever space they have, 300-400 square feet per office, something like that. We’ll go to a networking event and I’ll say, “Hey, you need an office? I can rent you a place really cheap and it includes all of your utilities.”

Our price point is cheap. I mean, it’s like $450 a month or something, for an office with all your utilities. We’ve just been trying to fill it up with other real estate investors that just want a home base, and just create almost like a real estate center. We call it the Old Fashioned Real Estate Center, and just think we can all hang out here and synergize and stuff like that.

Slocomb Reed: That’s awesome. My situation is similar. I’m a little behind you operationally, just because I haven’t actually officially launched yet. Again, I’m sure there are Best Ever listeners who are doing this and getting value from this conversation, but also, they all need to know that this kind of thing is available. If you’re active in the real estate space, this is your career, this is a fun thing to do. As a real estate agent, focused on working with investors, I just got sick of how many of my clients bought office hacks, how many I found for them and how I wasn’t doing it personally. I was like “Man, I’ve got to have one of these.” What I found was an old building, it’s in my neighborhood, it’s on the main road, just half a block away from the trendy coffee shops, restaurants, bars, etc offshore parking.

Jeff Holst: Perfect.

Slocomb Reed: Yeah. I bought it as a residential three family, but the zoning was office limited, allowing for all of my needed uses. So I got on a 30-year fixed rate debt as a family building and then converted it. For someone like you and me, like you were saying about needing to enjoy yourself, real estate becomes a hobby as well as a career. It’s fun. But my plan is to use Facebook Marketplace. I live in the neighborhood, I’m in the neighborhood Facebook group as well as the Facebook Marketplace. My clients who do this have told me that Craigslist has actually recently become really viable for finding office tenants, which is good to hear, because I’ll need that. And yeah, I have a toddler at home, so not working from home is very helpful.

Jeff Holst: Yeah, that’s my thought too. Like I’m five minutes from my house in Tennessee here; now I’m moving to Puerto Rico, so the office is less useful. But you know how long you can keep an office you don’t have to pay for? Pretty much forever. I can have a space here when I’m in town; and when I’m not in town, I don’t worry about it, because it doesn’t cost me that much. It pays for itself and it builds equity over time. Actually, we got a really good deal on ours too, we fixed it up, and now we’re getting ready to refinance it, pull some cash out. I watched it be like net positive on it all around, which would be fantastic… But it’s really great.

The other thing I would tell the Best Ever listeners is that if you’re in the market for an office in Cincinnati, it sounds like there might be one available, and you should jump in there, [unintelligible [00:24:39]. But same in Chattanooga, we have a few spaces left, so feel free to reach out. The point is, this stuff exists everywhere, because we’re not the only people doing it. And the reason I found this building that we’re in now, is because I was looking for a single office to work out of my house. Because once COVID hit, I was like, “Okay, cool. Then I can do everything on Zoom.” But I really like to just have my own space that’s not in my basement.

That’s where everyone was working, in their basement, or guest bedroom, or something, for a year and a half. Now that we can get out and about, having not to go back to your traditional job, but having your own little space where you can have a client or a customer come if you want, it’s awesome.

Slocomb Reed: And also taking advantage of the shift in the office market now. Bringing this back to a commercial real estate investing conversation, Jeff, one of the major shifts that we’re seeing in office space is major companies, but also smaller companies, moving away from the central hub downtown large offices to smaller satellite offices. With more people working from home, my office is in my neighborhood. My neighborhood is full of white-collar professionals working from home. A lot of them have kids, and a lot of them just need a place to crash, that’s close to home, that can get them out of the house that’s affordable.

This is a viable business strategy, it’s not just a hobby/office hack thing. There’s some serious cashflow potential in this too if you find the right deal if you’re an active operator, Best Ever listeners, and you’re looking for creative opportunities for cash flow that looking into the zoning in the area where you live or in an area of your city that is redeveloping. Finding the areas of town that are zoned for offices or finding an office building like Jeff is describing or like I’m describing, you can find some hidden gem, serious cash flow doing what we’re doing.

Jeff Holst: Yeah, it’s been great for us.

Slocomb Reed: Question Jeff – out of all of the deals that you’ve done and getting in all the different niches within commercial real estate, which one’s been the funnest, outside of your office?

Jeff Holst: I really love value-add multifamily. I love taking a building that’s in really poor condition… And we might even over improve a little bit, granite, redoing cabinets, and replacing all the appliances and stuff like that. What we’re doing is we’re creating quality housing; we’re moving C to B, and I love doing that. To me, that’s probably the most fun, is taking a building that really needs to be brought back to life and bringing it back to life. But honestly, I love it all. Now I’m thinking about actually building a safari lodge in Tanzania and I’m looking at some Airbnb deals in Puerto Rico. We bought this building last year, that used to be a barracks for World War II generals and stuff. It’s down here in Georgia right off the Civil War battlefield. It’s like a 100-year-old building, and like MacArthur slept in one of the bedrooms… It’s just so cool to be attached to all that stuff, it’s just amazing.

Slocomb Reed: Jeff, before we transition to the last segment of this show, I do want to say that it’s very valuable to be hearing from your perspective. Talking specifically about traumatic life events, leukemia, using your words, thinking that you’re going to die, and knowing that you need to leave assets for your family, but also wanting to have fun while you’re doing it… That’s why I asked that question; it’s great to hear that you’re making a living doing these things. It’s not just a hobby and it’s not just what you do outside of the day job. It is the day job, and you’ve found a way to keep it fun and to keep it profitable. Are you ready for our Best Ever lightning round, Jeff?

Jeff Holst:  I’m ready.

Slocomb Reed: Awesome. What is your Best Ever way to give back?

Jeff Holst: What I really love to do is I love to help people live the best version of their lives. We created a podcast and a Facebook group and all this stuff, where we just lean into that and we just interview people doing exciting things in their life to inspire people and give them ideas about it. I spent a lot of time just doing a lot of social stuff that we don’t monetize. It’s just, we’re out there sharing positivity. I have this life philosophy about not having bad days, so I haven’t had a bad day since I was 17. I love to teach people how to do that, that’s one of my favorite things in the world.

Slocomb Reed: Awesome. What is the Best Ever book you recently read?

Jeff Holst: I read so many books, they’re all great. I love a lot of things. Right now, the one that jumps out to me is actually The Creature from Jekyll Island. I read that a few months ago, and this book is about the Federal Reserve, and it is terrifying and fascinating at the same time. If you haven’t read it, you should check that one out.

Slocomb Reed: That’s a really interesting book, Jeff. Very interesting, especially right now, and especially considering the federal government’s response to the COVID-19 pandemic. For those of you who have read Jekyll Island, and for those of you who are interested in reading Jekyll Island because you’re hearing about it recently and how timely it is to read it right now, I will just say, one political caveat… Keep in mind that both the Trump and Biden administrations have basically had very similar responses to the COVID pandemic. When you realize that, that’s going to further the message of The Creature from Jekyll Island, that this isn’t a Republican or Democrat thing, this is an American federal government thing that you’re reading about. What is the Best Ever lesson you’ve learned from a particular deal, Jeff?

Jeff Holst: Great question. I think it’s just about being willing to pivot. Sometimes you have an idea of how something’s going to work out, and then it’s not working out that way, and then you have to be able to be flexible. It might be — in this market it’s been easy, because the bailout has been [unintelligible [00:30:06].12] But I think there are times when that’s not going to be available, so you want to have multiple possible exits and multiple possible holding strategies, because you just don’t know. You might be building an Airbnb and they might change the regulation, so you want to underwrite it, “Well, what if I can’t Airbnb it? What does that look like?” Things like that.

Slocomb Reed: What is your Best Ever advice?

Jeff Holst: Don’t have bad days; just give them up if they’re bad. And it’s a lot easier if you don’t have them. I know that sounds silly, but it’s really true. Good and bad stuff happens to everyone every day. Just choose to focus on the positive stuff. When I got diagnosed with leukemia, people were like, “Oh, I bet today’s a bad day.” I was like, “Not really. Most of the day was pretty good.” That moment wasn’t my favorite moment of the day. But in retrospect, even though that was maybe a little delusional at the time, it probably was one of the best days of my life, because it got me on this journey that I’m on now, where I get to talk to you. I wouldn’t even be here if it wasn’t for that.

Slocomb Reed: We’re grateful for your perspective, Jeff, for sure. Where can people get in touch with you?

Jeff Holst: I’m all over the place. If they just Google Jeffrey Holst, they’ll find me. But probably the Last Life Ever Facebook group is the best place to reach out to me. Last Life Ever is just about living the best version of your life and I love to hang out there and interact with people.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please do subscribe to the podcast, leave us a five-star review, and share this episode with Jeff Holst with a friend so that we can add value to them too. Thank you and have the Best Ever day.

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JF2769: From Tech Professional to Full-Time GP After Starting from Scratch ft. Kavitha Baratakke

Cherry Street Investments founder Kavitha Baratakke was forced to start over with virtually nothing after a divorce in 2007 followed almost immediately by the stock market crash in 2008. Since then, she transitioned from working full-time in the tech industry to passively investing in multifamily, then crossed over to the GP side where she discovered her passion for talking with and educating other investors. In this episode, she shares some of the following insights into her journey:

  • Her thoughts on money. Investing has taught Kavitha to treat money simply as a resource. It can be made, and it can be lost, she says. It’s important to remember that you are the creator of money and it doesn’t dictate who you become.
  • Her journey to becoming a GP. Kavitha decided she wanted to buy a small apartment complex for cash flow but quickly realized acquisitions wasn’t her strong suit. After three years of struggling and working with her mentoring group, she met the person who would help her realize what she wanted her role as a GP to look like.
  • What her first deal was like. Kavitha played a small role in closing an Atlanta apartment deal, where she learned that talking to investors, raising capital, and educating others were the things that truly brought her joy. “It’s not so much the size of the deal,” she says. “It’s the quality of conversations I’m having with people and feeling like I’m solving a problem for them.”
  • Why she doesn’t stick to one asset class. It’s all about diversification, and Kavitha is strategic about selecting new asset classes for her portfolio. She began investing in land development last year to complement her multifamily projects because of the equity growth it offers. She then chose to invest in senior living — she predicts a considerable upside in the next 20 years due to the number of people that will be reaching age 65+.
  • Her fail-proof mindset. Kavitha no longer spends much time worrying about money, because she knows she has the ability to recreate what she has built. “It doesn’t matter what the market does. It doesn’t matter what my wealth looks like. I know that I have the ability to do this over again,” she says.

 

Kavitha Baratakke | Real Estate Background

  • Founder of Cherry Street Investments, an investment firm focused on creating multiple passive sources of income through investments in various assets such as apartment complexes, mobile home parks, senior assisted living facilities, self-storage, and more.
  • Portfolio:
    • GP of:
      • 2,200 units across Texas
      • 179 beds of senior living new construction in Florida
      • 1 townhome new construction in Austin MSA
      • 2 land development deals in Austin MSA
    • LP of senior living, land development, energy, and ATM investments; also 200+ doors of new multifamily construction
  • Based in: Austin, TX
  • Say hi to her at:
  • Best Ever Book: The Alchemist by Paulo Coelho

 

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TRANSCRIPT

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 Kavitha Baratakke. Kavitha is joining us from Austin, Texas. She’s the founder of Cherry Street Investments which focuses on creating passive income through multifamily, mobile home parks, assisted living, and self-storage. Kavitha is a GP on over 2000 units, 179 beds, a new construction townhome, and two-lane development deals in Austin, Texas. Kavitha, thank you for joining us and how are you today?

Kavitha Baratakke: I’m great, Ash. Thanks for having me on. I’ve heard so much about your podcast, so I was like “I’ve got to be on Best Ever.”

Ash Patel: Well, it’s a pleasure to have you. Thank you. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Kavitha Baratakke: Sure. I am a techie by background, I was in technology for 20 years. I transitioned slowly but surely into single-family homes. A lot of people in the investing world have this journey where we figure out that, “Hey, we’re going to do real estate,” and the only kind of real estate we know is single-family homes. I did that for seven, eight years, and then had some issues with scaling, and started looking at multifamily. Years later, in multifamily investing as a passive investor, then got into the GP side of things, and here I am. I am doing land development, and also dipping my toes into senior living now.

It’s been quite a journey because when I started, I really started from nowhere. I know we were talking before about failures, and I think everybody has a lot of failures before they see success. For me, I got a divorce in 2007 and that’s where I started with nothing, literally. The stock market crash happened in 2008, so my nothing was reduced to half of nothing in the stock market. That was an interesting place to start right after the worst.

The last 12 years have really been focused on growing. Money is one of those things where it’s more of a mindset thing, meaning that what I realized with my failures – I lost a lot of money in the stock market; I used to trade options when I first started, and I lost a lot of money. I made money too, but I lost equally as much. And one of the things I realized early on in my relationship with money is that treat money as a resource – it can be made, it can be lost. If you get too hung up with it, it’s just one of those things… You really cannot let money define you or otherwise shape you, because you are the creator of money and money doesn’t dictate who you become.

Ash Patel: Amazing. So many things I want to dive into. In 2007, you must have thought the universe was against you, and you bounced back. Alright, so you also very nonchalantly said, “I got into becoming a GP.” You don’t just get into becoming a GP. Tell us how you got there.

Kavitha Baratakke: Again, what you see on the surface when people are successful, you see how good they’ve become, or where they are, but you don’t see all the stuff they’ve gone through to get there usually. Like, we all want the good stuff and we don’t want the bad stuff. It took me almost three years to become a GP, but not because — I wasn’t really trying to become a GP. I joined this multifamily mentoring group out of Dallas, and my focus was to buy my own apartment. I had some homes that I wanted to do a 1031 exchange into apartments, because from a scale standpoint, these homes weren’t making sense to me. I invested in them over a period of time, from 2008 or 2009 actually.

Long story short, when I started getting on this understanding of the whole syndication process and all of that, I really didn’t want to be asking people for money, so I focused more on how I can buy my own little apartment complex and run it and have cash flow and retire. A very simple goal. So really looking for a GP wasn’t one of those things, but I did have a lot of issues finding the apartment that I was after. I realized from that experience that I’m not necessarily an acquisitions person.

I know they say a lot in real estate, your first deal is the hardest. It takes the longest time to get the first one, and then after that, somehow the universe conspires, and maybe you believe in yourself and your ability after that point… It’s just things start moving much faster. So my first deal was the hardest in apartments. I did passive, but becoming a GP was like an uphill battle, because I didn’t really know where to start. I had a mentoring group, but I really wasn’t sure what part of the GP role I wanted to play. I knew I wasn’t good at acquisitions; I tried that for three years very unsuccessfully. So it was a coincidence to meet someone who directed me on the path that I would become a GP and do the rest of the stuff.

Ash Patel: Kavitha, what was that first deal?

Kavitha Baratakke: We saw an apartment complex in Atlanta. Honestly, I had such a small role to play in it, but I feel like… At least, this is the way I look at it right now – a lot of people post all these cool deals like “Oh, I closed a 300-unit or 400-unit.” I mean, you and I know it’s meaningless. What’s your role, not the number of units. I cringe a little bit when I hear people say, “Oh, 2,200 doors, 350 AUM.” It’s just all the numbers that we get caught up in. But really, what is your role? What did you learn? What did you have to do in that project? How much do you enjoy yourself at the end of the day? For me, those were more definitions.

For me, that was a very small deal. But now looking back, I’m realizing how small my role was, but I enjoyed it so much. I enjoyed it so much because one, I just realized I had found what I liked doing, which was talk to investors and raise capital. That piece of it, for me, educating people, talking to them, and helping them make a good investment is just super-important. I realized that what drives me now. It’s not so much the size of the deal, it’s the quality of conversations I have with people, and I feel like I’m solving a problem for them.

So I think it started there. I did a deal in Atlanta with a big group, it was like 200-something units. We actually sold that for 44% investor returns; we sold it last year, but I still am in 2021. The bottom line was it was great for me to learn how to talk to investors, it was great to have someone handhold me when I had questions, and I think everybody starts somewhere, and that for me was just the perfect size where I don’t have a whole lot of pressure to deliver something, but at the same time, I got exposure to a great group of people and they really helped me through the initial hiccups of trying to raise capital.

Ash Patel: How did you connect with that group? So you were looking for your own small multifamily, and now you’re part of the GP side of this big group. How did you get to that point?

Kavitha Baratakke: I just want to preface, I don’t really work with that group much anymore. We kind of parted ways; not for any reason, but I just grew into another set of groups and we started working together. So how I met these people was really interesting. I was full-time in tech, I had a work event for that whole week, the week that I met them, and I didn’t really want to go do another event. You know, we real estate people, we are trying to do these events on the weekends, most of them have full-time jobs that they’re trying to do… That was me, and that was a particularly rough week for me at the job. There was something inside me I was like, “I need to go to this event.”

This was in Tampa. I really wanted to go to the event; I have no idea why, there was something calling me I’m like, “I need to make this event happen.” Literally, I’m trying to fly out Friday evening. I missed the day of the event, but I still made it there because I had flight delays on top of that. But anyway, I heard this person, one of the speakers, and I was immediately drawn to talking to him. So I went after the event, in the evening, and I caught up with him and I said, “Hey, I really enjoyed your talk. We have a lot in common and I’d love to connect with you and set up some time to talk to you later.” It just started like that and he became sort of my unofficial mentor. It was just destiny.

Ash Patel: That’s awesome. I also liked what you said about not throwing those numbers out there. “I have 30,000 doors.”  “Well, really, tell me more.” Really, you’re an investor with somebody else as a passive LP and you’re claiming 30,000 doors… So I’m glad you agree with that. I think we should try to change the entire industry and stop throwing those numbers out there. Instead, talk about your role and talk about what value you’re offering your partners or your investors. I love that.

One more thing I want to ask you about is that you said money is just a mindset. To a lot of people, money is the sole reason they’re doing what they’re doing, and you apparently think very differently. Can you elaborate on that?

Kavitha Baratakke: I grew up in — I won’t say poor, but the middle class in India. And middle class in India is not middle class here. You have an Indian background, and I think you understand that.

Ash Patel: Yup.

Kavitha Baratakke: If you visit India, you will be shocked at the middle class living in India. No running water… All these things we take for granted here. I think all of the immigrants who come here really have this special appreciation for things we didn’t have back home. Now that we have it here, I feel like I’m always in awe. Anyway, coming back to the money bit, I didn’t grow up with a lot of money. It was sort of this idea in my head at a very young age that I would never want for anything in my life, that’s how it would be. That would be my relationship with money, because I did feel when I was young that I wanted a lot of things that I couldn’t get. Which, in retrospect, as an adult now, I think maybe that was a good thing, that really created that want in me to go after what I wanted and to know that I would be self-sufficient and fine when I was an adult.

But anyway, I think for me, after the divorce especially, it was my chance to reset and start over. I won’t say I’m devoid of greed and other human emotions, [unintelligible [00:13:19].06] have them, and I realized how much of a human I am when I started trading options, because every day would be a good day until I lost money. I just realized money cannot dictate how I feel about my day, it cannot.

So I got really good at a certain point, I’d say, about isolating myself and worrying about ups and downs with  money and with trading. So I think there were some important lessons there for me when I started trading. It wasn’t about making money; I didn’t get away with making a lot of money at the end of the day. I probably made some and I got into my first home, it helped me buy my first home in real estate. Because the one thing I learned there is I don’t want to deal with the ups and downs, I want something more stable. So it kind of helped me transition away from the stock market really, altogether, even though options are the more riskier part of the stock market, and I got into real estate. But I think that experience changed my perception of money, because today I think… Okay, let’s say the market crashes. People worry so much. You know the one thing I’m not worried about, is that I know I have the ability to create this all over again. That ability counts for something. It doesn’t matter what the market does, it doesn’t matter what my wealth looks like, I know that I have the ability to do this over again. That changed me in 2008, 2009 when I was trading options. I just realized I have the ability and nobody can take that away from me. It’s a resource.

Break: [00:14:51][00:16:38]

Ash Patel: I think it’s a gift when you grow up without a lot of money, because it drives you and it produces that hunger inside of you to want more and to chase what you’re after. A lesson to a lot of these options traders out there right now – it seems like when the market is high and volatile, is when the options traders come out of the woodwork and they’re riding high, until they’re not. You and I have been around long enough to know how that story typically ends for a lot of people.

I’m sure you see it now, there are a lot of people that are learning options, getting into options, and bragging about how much money they made today on this one trade. So just an off the cuff warning to my options traders out there. You also mentioned if you had to do a reset right now, what would you do? Let’s take a 30-day period of time, imagine your money is all tied up, gone, whatever. You’ve just got you and very limited resources. How do you start over?

Kavitha Baratakke: You know what I’ve realized, is that I have a lot of skills that I’ve built up in the last 10 years in real estate… So there are a couple of different ways. Let’s say I have nothing; I could go, one, do commercial real estate as a realtor, I have a real estate license. I think that I’d have to obviously build up a seed capital at least for becoming an investor. Even if I’m a GP, I still need capital. So if I had nothing, I would have to start somewhere and first create that capital to get started.

After that, I’ve found commercial realty pretty lucrative, even wholesaling a couple of commercial land deals that I’ve done recently, along with what I’m doing usually. That’s one thing with multifamily and all these other projects we’re doing, it’s kind of building that long-term wealth. But when you’re starting, you want some sharp, quick wins, I think. If I wanted to start over again, I’d look at some short quick wins and then take that money to do the long haul. “Hey, I’m going to invest in this and. I’m going to grow this capital here.” I think that’s kind of where I would go.

Ash Patel: Got it. I want to get into your land development deals. And I also want to ask you, a lot of people say stick to what you know, stick to one asset class. You’re bouncing around to several different asset classes. What do you say to those people that say “Why are you doing senior living? Why are you doing self-storage? Why are you doing land development?”

Kavitha Baratakke: Sorry, I’m going to correct that, I’m not doing self-storage. Probably need to fix that in my bio wherever that is.

Ash Patel: I stand corrected.

Kavitha Baratakke: I am doing multifamily, I am doing land development, as well as I’m getting into senior living. So there is a method behind the madness. I love multifamily, I think multifamily is great, but I’ve also seen what’s happening with the cap rates in multifamily; it’s getting squeezed down. So I feel, at this point, value-add multifamily is kind of like squeezing from an orange that has already been squeezed way too many times. I do have an abundance mindset, but I do think deals are far and few between the real deals.

At this point, last year, I started thinking, okay, this is great, but the returns are getting squeezed. I’m looking at the numbers and I’m like “Okay, I don’t really see how this could grow. If interest rates go up, this is going to get even tighter.” Which is happening now. So I started getting into land development last year, because I met this person and we started talking about land. My idea of land has always been, “Oh, you buy land, you hold, there’s no cash flow, it sucks, period.” I viewed everything as, “Okay, not a cash flow asset – it’s not a good asset, period.” Then I woke up and I said, “Oh my God, these people have been raking money in by the millions in land, just hoarding land.” But I don’t still feel comfortable with this whole land banking strategy, which is to hold land and pray it appreciates. But then, when I saw the adding value to land strategy, I was convinced. I was like, “Okay, this makes sense to me.” What I heard back then was just this whole entitlement and process of permitting the land, taking the land from raw land to shovel ready land, it doubles or more the cost of the land per foot.

For me, that is a value-add strategy, where I take this piece of land and I’m making it buildable. It’s within my control in the sense of, yes, you have to work within the city, the county, whoever has jurisdiction over that piece of land, but there is a real value you can add to that land. And land purchased in the right location does not really lose value, unless there’s some event that’s going to happen in the future that none of us know about. I don’t know, World War III, what it’s going to do… But I do believe in a growth market like Austin where everything around is growing. We haven’t lost value in land in a very long time.

I saw this growing up in India as well, people banked on land and bought acres of land to sell. So I started looking more into it and it suddenly occurred to me that not every investor I have needs the cash, but they could use the help to grow their equity much faster. So land doesn’t offer cash flow, but it offers huge growth and equity. We’re doing about 25% on our land deals. I can’t do that in multifamily, it’s impossible.

So I felt like from a diversification standpoint, especially as someone who’s taking in investor capital and deploying products, I am not trying to do the land deal myself. I’m on every call with the engineers, I’m learning the process, but I do have people on my team who are actually executing on this and who’ve done it for a while. So while I agree with keeping the focus on one asset class, I don’t agree about it from a capital standpoint, because capital can go into multiple asset classes, and I think it should from a diversification real estate standpoint. So in my personal opinion, my own money is not just in multifamily, I’m a passive in so many deals. The deals which didn’t pay me in 2020 were multifamily, the deals which paid me were outside of multifamily and all these other assets that we popularly invest in. So it really changed my attitude there with land, and also senior living, because I see it as an evolution of multifamily. I see the long-term growth there, and I feel like it’s an asset class that is going to have a big upside in the next 20 years. The fact that there is this huge population of seniors who are turning 65 and over, there is that need in that space.

For me, it’s sort of like a progression of multifamily if you will, because if you take an independent living facility, it’s really not that different from multifamily. You might add some amenities, but it’s an extension of multifamily. When you start getting into assisted living care, that’s a little bit different, I agree. It’s going to be baby steps for me, I want to learn this thing and I want to hopefully transition.

Ash Patel: Yeah, there’s a lot that I want to dive into. We don’t have time for all of it. But I am going to reiterate what you said about cash flow and equity. I think for the Best Ever listeners, it’s really important to understand that not every investor wants cash flow. There are several deals that I’ve invested in and I might be the only investor, one of two or three investors on smaller deals, and the GPs will go out of their way to give me that 8% pref, when in reality, all it is is an accounting headache.

I don’t want it, I’d rather just wait until the end, and maybe give me a little bit higher return. But there are a lot of investors out there that don’t want the cash flow, they want the equity and the high returns at the very end. I’m glad you pointed that out. With land development, do you typically sell the property when it’s shovel-ready, or do you go into the development process as well?

Kavitha Baratakke: It depends on the project, but doing both. Let’s say I take a 130-acre piece of land and I separate it out into single-family, multifamily retail. We might sell the retail section and the single-family section to builders, and we might just keep the multifamily and build on it. I haven’t gotten that far in my projects, because I just started land development. We are building a set of townhomes in one project that I’m a part of, we’re building 98 townhomes.

We’ll give some townhomes away to investors actually, on a first-come, first-serve. The rest will be run as a build-to-rent community, which is literally an apartment complex. So a little bit of both. I’d say when and if we can take the money off the table; after the entitlement process and the horizontal development, we will. My partner and I were just talking, we have something coming up in San Antonio and we’re like, “Should we wait for horizontal? Should we just entitle and do a quick exit?” Sometimes the quick wins are good. One, it gives investors back capital pretty quickly, and two, it provides this high IRR on the capital, and it’s a quick win for us.

Ash Patel: Sorry, what is horizontal development?

Kavitha Baratakke: The horizontal is the second phase. In the first phase we get through the permits and approvals with the city and we figured out what the easement is. The horizontal development is when we lay down the utilities, lay down the roads. Typically, it’s only after that that it’s really shovel-ready. Well, it’s shovel-ready for horizontal development, I’ll take that back. It’s shovel-ready for horizontal development after the first phase, and then it’s really ready for vertical construction after the second phase of horizontal development. When the utilities are there, the roads are laid out, and now we are ready to build the vertical structures.

Ash Patel: I’m the opposite. I would rather sell off the multifamily development land and keep all of the commercial. Why are you selling that off and have you looked at the returns on that?

Kavitha Baratakke: Well, I think we just haven’t been into retail. I know you do retail, maybe I’ll call you.

Ash Patel: Yeah, if you can pre-lease a lot of those retail spots before you even break ground, you could build a suit, get long-term leases, apply ridiculously low cap rates to them, and make a lot of money.

Kavitha Baratakke: Okay, we should talk offline.

Ash Patel: Yeah, I would look into it, for sure. There are higher returns in retail development versus multifamily. My opinion, but I’m biased.

Kavitha Baratakke: I agree with you and I think it’s one of those things we don’t know what we don’t know. When we sell retail at like $1-$20 a foot, for us it’s a quick win. We get the money, we are able to literally keep the multifamily parcel or whatever we want to build; let’s say build-to-rent a parcel for nothing, once we’ve sold off the other pieces of parcels.

Ash Patel: Got it. Kavitha, what is your best real estate investing advice ever?

Kavitha Baratakke: Start small, start today.

Ash Patel: I love it. Kavitha, are you ready for the Best Ever lightning round?

Kavitha Baratakke: Sure, bring it on.

Ash Patel: All right. What is the Best Ever book you recently read?

Kavitha Baratakke: I’d say Alchemist. I didn’t read it recently, but I continue to recently brush on it all the time. I love that book.

Ash Patel: What’s your big takeaway from that book?

Kavitha Baratakke: Just follow your heart. Where your heart leads you, where your intuition leads you, that’s where you’re supposed to be.

Ash Patel: Kavitha, what’s the Best Ever way you like to give back?

Kavitha Baratakke: I’d say I do support some charities in India. Obviously, it’s very important for me having grown up there to support folks that I have back home besides my family also for education and others. But I have some folks that I support back home for education and also other needs like disabled people.

Ash Patel: Kavitha, how can the Best Ever listeners reach out to you?

Kavitha Baratakke: You can go to my website cherrystreet.us. People always somehow remember me as cherry. We have that cherry company because my logo has two cherries in it. I said, “Oh no, Cherry Street, like Wall Street.”

Ash Patel: Awesome. Kavita, thank you so much for joining us today and sharing your story. Starting out in tech, having some big setbacks in your life, and accomplishing so much in the last 12 years. Again, thank you for sharing your story with us.

Kavitha Baratakke: Thank you for having me on Ash. I appreciate it.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share the podcast with anyone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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