JF2762: An Airbnb Speakeasy? How To Make Short-Term Rentals Standout ft. Rich Somers

How do you create a unique short-term rental that will attract renters? Rich Somers, founder of FortuneCribs, reveals his strategy for creating “Instagrammable” STRs, selecting the right market, and pitching to investors.

Rich Somers | Real Estate Background

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Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Rich Somers. Rich is joining us from San Diego, California. He is the founder of FortuneCribs which helps clients buy short-term rentals that they design and manage. Rich is also the managing partner at Pac 3 Capital, a multifamily and short-term rental syndication company. Rich, thank you for joining us and how are you today?

Rich Somers: Ash, doing well. Thank you so much for having me on the show. I’m excited about this conversation and I’m doing very well. How are you doing today, my man?

Ash Patel: I’m doing great and I’m glad you’re here, Rich. Let’s get into it. But before we do, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Rich Somers: Yeah. I grew up middle class. My mom was an immigrant from Taiwan. My parents both know the value of working hard and saving your money. I was always taught from a young age to go to school, get good grades, go to college, and get a job. For the most part, that’s what I did. I have a background in sales. While I was going to college, I started selling cell phones and then cars, and that was the first time I realized that I could impact how much I made. I really wanted to sell commercial real estate when I got out of school.

In 2008 I graduated, I interviewed with a couple of commercial brokerages, CB Richard Ellis and Grubb & Ellis. They were both like, “Hey, we love your hustle but this is not a good time to get into the industry.” Everything was starting to come down, they pulled these internship positions that I had interviewed for… And I had found myself on a car lot selling cars, in 2008, not a lot of job opportunities out there, figuring out what the heck I’m going to do with my life, and I act into a career as an air traffic controller, working airplanes for a living. I ended up doing that for 11 years, but along the way, I remember real estate, I read the book Rich Dad Poor Dad, and just figured out a way to restructure my life and jump into the real estate investing realm.

I did, at the time, what a lot of people told me not to do; they said it was too risky. I cashed out my 401K, I pulled out a home equity line of credit against my primary residence here in San Diego, and I started buying some cash-producing real estate. The first deal was an 11-unit building in Cincinnati. Shortly after that, I partnered with a couple of my partners who I syndicate with today, and we joint-ventured on a 32-unit building in Indianapolis. We launched a podcast, we learned how to raise money, and last year, we took down a couple of larger syndicated deals. The Arbors 150-units in Greensboro, North Carolina with our investors, and Timber Creek Apartments, 145 units, also out in Greensboro with our investors.

Along the way, we started buying some short-term rentals. This year realized, man, it’s been hard to find multifamily to pencil when we underwrite. There’s a lot of competition out there, yields have come down, cap rates have compressed, and it’s very competitive out there. Along the way, realize, man, these short-term rentals are cash flowing so great, the tax benefits are awesome. So I thought, “Hey, man. This year 2022, let’s focus on building the short-term rental side of the portfolio.” My partners and I, we’re going to launch a fund to go buy short-term rentals with our investors.

Also, we recently launched a company which you alluded to, FortuneCribs, where we help investors buy short-term rentals in select markets around the country, that we help them close on; they own 100% of the property, but our team will do all the work. We’ll design, furnish, and manage all the day to day operations, making the experience truly hands-off to the investor. That’s really my story in a nutshell.

Ash Patel: Rich, that first property in Cincinnati – were you in San Diego at the time?

Rich Somers: I was in San Diego.

Ash Patel: How did you buy a property in Cincinnati as your first property?

Rich Somers: I was looking for cash flow, and I was looking for a property that was going to be a good first property to get into, something that didn’t have a ton of risk, good cash flow, buy at a high cap rate, and I could add a little bit of value. So I was looking in select markets, my research took me to Cincinnati, and that’s how I was able to get it done, man. There were a lot of mistakes made with that one, hired the wrong property manager, the rents were low, had a lot of deferred maintenance… As soon as we closed on it, a bunch of people moved out… But we got in there, we started turning the units. Fast-forward to today, I actually closed on a refi not too long ago and was able to pull all my initial capital out, plus a little bit on top, and we’ve been able to almost double the gross income on that property over the last two and a half years.

Ash Patel: Did you have partners in that first property?

Rich Somers: No, it was just me.

Ash Patel: What were some of the challenges in terms of remotely managing this property?

Rich Somers: I think the biggest challenge was finding the right property manager; like I alluded to, I hired the wrong one initially. She said all the right things. That’s another tip for your listeners, is that a lot of these property managers, the third-party ones, especially with these smaller buildings, are a little bit more mom-and-pop, but a lot of them tend to say the right things in these interviews. But I quickly realized after closing within six weeks that she was not the right fit. I pivoted to property manager number two, who I should have gone with from the jump. That one I met through the listing broker who had sold the deal to me. Since then, I’ve been using them and it’s been a night and day, a much better transition. They’ve done a great job and, yeah, it’s been fun.

Ash Patel: How are you exposed to the world of short-term rentals?

Rich Somers: Man, it’s funny you asked that. Actually, I backed into a short-term rental. A couple of years ago I had a pre-approval from a local credit union here in San Diego for a highly leveraged loan, and I thought, wow, why not take advantage of it and see how it does. I’ve always heard San Diego was a good short-term rental market, let’s try it. I bought a two-bedroom condo, brand new construction here in San Diego, furnished it, threw it up on Airbnb, and this thing has just been full ever since, it’s just been cash flowing like crazy.

Ash Patel: Have you taken any of your multifamily properties and converted a portion or all of them to short-term rentals?

Rich Somers: No, I have yet to do that. I’ve definitely made a couple of runs at some smaller multifamily properties in hopes to transition them to short-term rentals, but haven’t been able to find anything that really fit that mold. I have yet to do that.

Ash Patel: Is it all single families that you’re converting to STRs?

Rich Somers: Yeah, mostly single families. Some of the client properties that we’re bringing on are smaller multifamilies, duplexes, and up to four units. My partner, Mike, actually has a fourplex in Cleveland. That was all long-term when he bought them; operated it that way for a couple of years, and recently converted them all to short-term. The cash flow is just so much better, from what he’s mentioned, at least.

Ash Patel: Rich, what do you tell somebody who wants to dip their toes into short-term rentals? What advice would you give them?

Rich Somers: Well, I’d say this… If you’re an investor out there and you can only afford to do one deal in the next couple of years, and maybe it’s your first deal, whatever it is, I always suggest to investors all the time, you probably want to consider going the short-term rental route. People all the time are like “Man, I just closed on my long-term. I’m making 150 bucks a door.” I’m like “Dude, that doesn’t even get me out of bed.” If you’re looking for cash flow and passive income, and you only have the ability to do one deal every couple of years, I would highly suggest going the short-term rental route. Do your research, reach out to someone that’s already done it before, make sure you go into the right market, and you understand the fundamentals but you also understand the projected revenue, the seasonality, and the occupancy in any given market that you go into.

Ash Patel: Rich, the fund that you’re starting, what are the anticipated returns?

Rich Somers: The fund that we are starting, we are looking at cash on cash returns in the 20% range for the investors. Overall returns are a little bit more challenging to measure because this is not a value-add multifamily where we’re forcing our appreciation. We never want to bank on long-term appreciation, but cash-on-cash returns in the low 20% range.

Ash Patel: Is that available immediately or is there a hold period or waiting period?

Rich Somers: It is not available at this very moment. We are putting together the fund now. We’re probably looking at sometime around May of 2022 before we launched this fund.

Ash Patel: Let me rephrase the question. Once somebody invests their capital into this fund, do they immediately start getting returns or is there a lockout period, a hold period?

Rich Somers: Yeah. It won’t be immediately but it’d be pretty quickly. Because it’s not like multifamily where we’re going to start a fund and then we got to go find these deals where it could take potentially a long time to find the right deal. With the short-term rentals, it’s a lot easier to find deals that actually pencil. The hold period or the wait period might only be six weeks before you actually start making some money versus multifamily where it might be a little bit longer.

Ash Patel: Got it. You mentioned that you help clients design and set up their short-term rentals. What is that?

Rich Somers: We have an awesome design team with our company FortuneCribs. They will actually fly out to whatever market that we purchased the short-term rental for the client. They’ll fly out, design, furnish, come up with a house manual, set up the cleaning, the maintenance, and all that sort of thing. The furnishing and the design for any short-term rental is one of the most crucial pieces to this investment vehicle because you want to bring something that’s unique to the marketplace.

A lot of guests that travel and stay in short-term rentals are millennial demographic or younger and everyone is looking for that property with that Instagrammable feature. We try to include an Instagrammable feature on the property whether it’s inside or out. We like to use unique styling and concepts that do well in that particular market. We’ll do market research and see what the top-performing properties in that market, what they look like from a furnishing standpoint, and we’ll try to match that so we’re not guessing.

Break: [00:12:43][00:14:40]

Ash Patel: What are examples of Instagrammable experiences?

Rich Somers: I’ll give you an example. I just closed, about a month ago, it’s a luxury home in Scottsdale. It’s a $2.5 million project, going to put about $500,000 into a full renovation. Right now, it’s like six-bedroom, seven-bath, we’re going to convert it into eight-bedroom, eight-bath. It’s a 7600 square foot property. Our Instagrammable feature is that we’re going to include a speakeasy on the property. We’re going to have this library-looking wall with like a secret door that pivots into the speakeasy. We’re going to have a cool bar, a tiki-style looking bar in there, like a lounge area. That’s going to be our Instagrammable feature for this particular property.

To give you an idea of what these things make, this particular property in Scottsdale, the comps out there in the neighborhood are bringing in anywhere from $500,000 to $800,000 a year in gross revenue. In this short-term rental asset class, about 50% of your gross revenue will drop to your bottom line and be your net cash flow after all expenses and after debt service.

Ash Patel: That is insane and I want to stay there. I want a speakeasy in my short-term rental. That is awesome.

Rich Somers: You’re welcome to come out anytime, man. You’re more than welcome.

Ash Patel: Do you still look for multifamily deals? Is it on your radar?

Rich Somers: Yeah, we’re still operating the ones that we have but we focused our attention, at least for this year, away from searching for multifamily. We’re just pivoting over to short-term rentals. We might get back in multifamily maybe next year, maybe the year after, I don’t know. But for this year, where it’s solely focusing on short-term rentals.

Ash Patel: Let’s play devil’s advocate for a minute. A lot of cities are cracking down on short-term rentals, hotels have incredible lobbying power, where do you see the future of short-term rentals going? What are some of the headwinds you’re going to encounter?

Rich Somers: That is the biggest risk to this asset class, in investment vehicle is the regulatory environment changing. As you know, there are a lot of markets around the country that have already cracked down on short-term rentals. There are ways to mitigate that. One of the things we do is we like to go into markets that are a little bit more short-term rental friendly. These tend to be markets that are a little bit more landlord-friendly conservative states. There are some states out there that took the opposite approach, Arizona is one of them, where the governor actually signed something into a contract that says it is highly discouraged and illegal for cities and municipalities within the state of Arizona to highly regulate short-term rentals.

Their stance is like “Hey, we want to encourage tourism. It helps stimulate our local economy, our local businesses, etc.” You want to start to focus on markets like that or go into vacation towns that have had vacation rentals for decades and decades before Airbnb and Vrbo was ever a thing. Those are other areas that are safe bets. But the ways to mitigate the risk if the regulations were to change, one, you can always fall back to midterm stays. Short-term rentals are defined in most cities around the country as anything less than 30 days. If the regulations do change, you can always fall back to 30-day or greater stays in furnish, which is a growing demand as this whole work from home notion becomes more and more prevalent.

I’ve heard a lot of different numbers out there but we had Neal Bawa on our show not too long ago. He threw out the number 22 million Americans roughly. 22 million Americans are adopting this new way of life to where they are no longer going back to the office, they prefer to work remotely and do the whole digital nomad thing. They’re bouncing around and living in different cities around the world, and they’re not moving their furniture with them. I think there’s a growing demand for that, should the regulations change? Brian Chesky, the CEO of Airbnb, recently in an interview said, “People are no longer staying in short-term rentals, they’re living in short-term rentals.” I feel very bullish on this asset class, I feel like it’s still the first setting of short-term rentals.

Ash Patel: I would also imagine in downtown Phoenix, city centers where you can find cheaper housing, there’s a lot of short-term rentals and they would be the first to regulate. $3 million homes in Scottsdale are probably not going to get regulated.

Rich Somers: Yeah, because you’re not really taking a lot of housing off of the market for a potential renter in that price point. Is that why you’re alluding to that?

Ash Patel: Yeah. How many people are going to crowd million-dollar-plus homes and how many millionaires are going to complain, “Hey, we can’t find a deal because all these short-term rental guys are driving up prices.”

Rich Somers: Right. That’s a good point and that’s another reason why this housing market has been on fire over the last couple of years, that a lot of people don’t even mention, it’s the short-term rental industry.

Ash Patel: Rich is that a negated community, the $3 million property?

Rich Somers: It is not. It’s a community without an HOA so we typically want to stay away from properties that have HOAs.

Ash Patel: Yeah, that’s a challenge. You are going to draw a lot of attention there. Awesome. What’s the biggest lesson you’ve learned or the hardest lesson you’ve learned with short-term rentals?

Rich Somers: I think it was early on when I got into my first few short-term rentals. I didn’t have the same tools my disposable that we use today such as AirDNA. Today we use AirDNA, we have a national subscription so we can pull up any zip code in the world that has short-term rentals and we can see exactly what those properties are making. We can see the seasonality, we can see the occupancy, and we can see a lot of different stuff. But when I first got into it, I was really just guessing and I was taking a risk, I was speculating a little bit. But sometimes without risk, there’s no growth. I think that was the biggest challenge for me early on is not having all the available information to my disposal. Now we do.

Ash Patel: Rich, getting investors on multifamily versus short-term rentals. Can you dive into that a little bit?

Rich Somers: Yeah. I think there are a lot of similarities and then there are some differences. Some of the similarities are networking to meet investors, that’s all really going to be the same. An investor that has the capacity to invest as a limited partner in a syndication typically has the capacity and wherewithal to be able to buy a short-term rental under FortuneCribs, and get a loan and that sort of thing. Some of the differences are, as a limited partner in a syndication, you’re investing in an LLC, typically, that owns a property or maybe owns a few different properties. Now, with this model under FortuneCribs, the investors actually own 100% of the deal, they get 100% of the tax benefits, they get 100% of the loan pay down, they get 100% of the long-term appreciation, and they get 100% of the cash flow after all the expense. That’s really the main difference.

Ash Patel: They get 100% of the cash flow after expenses. How do you guys make money?

Rich Somers: We take a split on the gross monthly revenue. Typically, it’s about 25% of all gross monthly revenue that comes in. The design furnish and all that sort of stuff, we don’t make any money on that. It’s really just on the gross revenue and on the operational side is where we make our money. Essentially, we’re kind of partners with the investor, although they own 100% of the deal so we don’t get the benefit in the long-term upside, just on the monthly cash flow upside.

Ash Patel: I get it, man. I could see how that can be very attractive to investors. What is your best real estate investing advice ever?

Rich Somers: Don’t run out of money with any project that you get into, especially these value-add deals where you’re going to have a dip in occupancy, you never want to run out of money. In our first 32-unit deal, we made a lot of mistakes, we ran very, very low on money. The pandemic drops shortly after that, we had a lot of vacant units, and we had some serious heart-to-heart talks. But just know, if you do run out of money, there are always outs and always solutions that you can arrive at. In that deal, we actually just went full cycle on, we sold it about a month ago and we 3X the value of the property in just 25 months.

Ash Patel: What was your solution when you guys ran out of money?

Rich Somers: That’s a great question. We were able to secure a non-secured private second mortgage on the property which gave us the funds to complete our business plan really.

Ash Patel: This was during the pandemic?

Rich Somers: Right when the pandemic dropped.

Ash Patel: Good for you guys for being resourceful. That’s incredible.

Rich Somers: Absolutely. There’s always a solution for everything. I think success is never a straight line.

Ash Patel: Yeah. Rich, are you ready for the Best Ever lightning round?

Rich Somers: Let’s do it.

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

Rich Somers: The E-Myth Revisited by Michael Gerber. I just read it recently. Wow, that book has changed a lot of stuff in my life. For the listeners out there, it talks about working on your business and not being a worker bee in your business, knowing the value of your time.

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

Rich Somers: One of the things I’d like to do here in San Diego is volunteer with a program called Big Brothers Big Sisters, they have them in big cities across the country. I was matched, a few years ago, with a nine-year-old boy named Isaac. He comes from a little bit rougher background, his father’s not in the picture, and we get to hang out one or two times a month and go do fun stuff. He’s almost 12 now, a good kid.

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

Rich Somers: You can find me on social, Instagram handle is @rich_somers, I’m pretty active on social media. Fun check out our podcast, it’s The Multifamily Takeoff. If you want to learn more about FortuneCribs and buy a short-term rental, it’s fortunecribs.com. If you want to check out our syndication company and our fund that we’ll be launching in a couple of months, you can check us out on pac3capital.com.

Ash Patel: Rich, I got to thank you for sharing your story with us today. Mark Cuban recently said, “You can try a lot of different things, you can move on if you don’t enjoy something because you only have to be right one time.” I’m glad you found your one right time, coming from the immigrant upbringing, selling cars, air traffic controller, and now you’re killing it in real estate, man. Thank you for sharing your story with us.

Rich Somers: Ash thank you so much for the kind words, man. I enjoyed this conversation. It’s been a pleasure.

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

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JF2761: The Key to Underwriting Retail Deals ft. Philip Block

What are the advantages of investing in retail over multifamily? Philip Block, Managing Partner for LBX Investments, made the shift from investing in apartments to shopping centers almost four years ago, and currently has $284.5M in AUM. In this episode, Philip details his underwriting process that has helped him close multiple deals.

Phil Block | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Phil Block. Phil is joining us from Los Angeles. He has a multifamily background, but his company LBX Investments is primarily syndicating shopping centers right now, and they are fully vertically integrated with over 284 million in assets under management. Phil, can you start us off with a little more about your background and tell us more about what you’re currently focused on?

Phil Block: Sure. Thanks for having me, it’s great to be here. I founded the company with Rob Levy, my partner; he and I have worked together for a really long time. We had a large company in New York called Centerline Capital, which is a public company; he was a CFO and then CEO and I ran corporate finance, after doing some investment banking in New York prior to that. We’re value guys, so when we sold the company in various kinds of iterations, we were looking for something for our own account and looking for value. Multifamily was expensive, felt expensive to us six years ago, so we were wrong, because it continues to appreciate… But really saw an opportunity in the retail space. We both have retail backgrounds in prior lives, so we started buying shopping centers, largely in the Southeast, and now all around the country.

Slocomb Reed: Yeah. The seven-year real estate cycle has been ending for like the last five years.

Phil Block: Exactly.

Slocomb Reed: Everybody thought apartments were overpriced back in 2015, 2016 and here we are. So you’re value guys; that’s one of those terms, I use it. Many people, they do the value play or they do value-add; what does that mean for you guys specifically?

Phil Block: In general, what it means is we are looking for yield that we feel is mispriced, where the risk is mispriced. That typically means buying when other people are selling, particularly institutions, and selling maybe when other people are buying. It’s still true today, but we started this, as I said, we had a prior partnership six years ago and we started LBX four years aago… And when you bid on a multifamily deal, you know how many guys are you competing against. It was 40 guys; it’s hard to say — I really found value when I beat 40 guys in the deal. You may end up making money and doing well but that is a pretty competitive landscape. We’re bidding against four or five folks typically and we’re buying larger institutional assets, and trying to hit an in-place yield with some upside where we think the market is not understanding what the real risks are there. Anyway, that’s our focus.

Slocomb Reed: So you’re looking for mispriced yield or mispriced deals, which means you have to get out of multifamily, because multifamily is so picked over. Even if something is mispriced, as you said, there are 39 other people who are going to bid on it. So that has moved you into shopping centers; and Phil, feel free to correct me where I’m wrong. What you’ve found in shopping centers is an asset class where you could become an expert, if you weren’t already one, and you’re finding more deals where there’s potential for value that other people are missing. You have more of an analytical advantage, we could say, in shopping centers over all of the competition that you’re facing to buy multifamily, is that fair?

Phil Block: I think that’s right. I think you have to think about how we think about things. There’s macro and there’s micro. From a macro standpoint, especially four years ago, but still true today, there’s a narrative in the media that retail is dying, everything’s e-commerce, Amazon’s going to take everybody’s lunch. What we said is that doesn’t make a lot of sense for a lot of the retail today. Now, are class C malls in the middle of America, where the population is declining, a good investment? Probably not. We’re not at all interested in that; we’re not going into enclosed malls with a Sears, a JC Penney, and a Dillard’s, or whoever your anchors might be, where you have 500,000 square feet of vacancy.

What we thought is grocer-anchored centers, Target anchored centers, and Walmart anchored centers in the best locations, in the best markets, from a macro standpoint; that felt and feels great and sustainable. Especially, we were focused on just fundamentally great real estate, so growth markets in the Southeast, where you saw population and demo growth, that felt fantastic. And just in terms of we’re buying on main and main. If you think about retail, you’re normally main and main; if you’re buying office, you might be in some office park way out off the road. If that goes away, how are you replacing that? Same with industrial.

Retail, you’re right out on the road. You have 50,000 cars going by every day, especially when you buy the best stuff. So that’s macro, and we felt this way makes a lot of sense, and we both were and are experts in this sector. And it’s hard, there aren’t that many people that understand it. Everybody understands apartments, it’s why there’s so much capital that floods it; it’s not that hard to understand or to underwrite basically what your rental growth is going to be, and what your vacancy, and you can underwrite multifamily. With retail, we’re looking at the credit of the tenants, we’re looking at the long-term trends in that submarket, and we’re thinking about how much does it cost to replace those tenants, because we have large TI dollars and leasing commissions…

We’ve become, we think, probably better than anybody in the market at underwriting that risk, which is why we’ve beaten our underwriting on every deal we’ve ever done. So macro, thinking about this… And then micro, what’s the best specific asset? What’s the grocer that’s doing the best in that sub-market? What are the rents on a tenant-by-tenant? How much is it going to cost me to replace — maybe there’s a 20,000 square foot box tenant; pick one, Bed Bath & Beyond… But is their rent well below market? Can I improve that over time? Are they paying too much? Really, understanding the nuances.

Slocomb Reed: Speaking of one of those nuances, Phil, do you guys do single-tenant properties? Do you have a preference there for single-tenant or multi-tenant? Does it matter to you?

Phil Block: Yeah. We don’t do single-tenant; we often sell single-tenant. One of the strategies that we employ is we will buy an entire center, and it’s like buying wholesale and selling retail. So you buy a whole center, maybe it has a Publix grocery store, a nail salon, a pizza shop, etc, and then you have Chick-fil-A or McDonald’s out on the road. So if we can buy the whole center at a seven cap or an eight cap, and then sell off those outparcels at, as you know, three cap, four cap, five cap, we can really reduce our basis and enhance our yield.

Slocomb Reed: Awesome. A couple of other questions for you… I have an apartments background, and I’m conversational in shopping center investing through my associations and through my work at this podcast. I want to ask you a couple of quick questions about the way that you analyze properties, and then I want to dive into the numbers and hopefully get into the specifics of one of your deals. First, Phil, I want to ask – this is a term that we hear often… What counts to you as main and main?

Phil Block: Sure. They’re typically arteries running out from whatever major city you’re talking about. We are not buying urban core retail or real estate, but kind of first and second ring where you see the suburban population growth. We’re talking about major intersections, and there are normally just a few in those submarkets. We’re typically thinking 30k, 40k, 50k car per day type vehicle counts on both roads.

Slocomb Reed: I’m imagining Phil, you get off of the interstate at an exit, you end up on a road that also has a state route number, and then you hit a red light where another road also has a state route number. That probably sounds like the kind of main and main you’re looking for, right?

Phil Block: That’s right. Yeah, I’m sure all your listeners are familiar with where the Targets are, the Walmarts, etc. Home Depot.

Slocomb Reed: Yeah, absolutely. I’m using the apartment terminology here. Tell us more about how you underwrite for the cost of vacancy?

Phil Block: Sure. We’re talking about the cost to replace the tenants. Typically, what we found is that the best retail is pretty well occupied. There are very few — I wish I could tell you and your listeners that were buying 80% or 70% occupied shopping centers that you can come in and immediately lease that space up; it’s mostly going the other direction. When there’s a vacancy — not 100%; we have maybe one or two examples of deals we bought where there was an obvious vacancy. Two that I can think of off the top of my head. But in general, that’s the type of very clear value-add that you do end up with a lot of competition. What’s more typical is if you drive just in your neighborhood, my guess is the better shopping centers you go to are full. Maybe there’s a small shop space or one of the anchors left, but it was immediately replaced, that kind of stuff.

But the key to underwriting is what’s your current cost, what are they paying, what’s your current rent, and use an anchor space; 20,000 square foot, the guy like a TJ Max, Marshalls – they’re probably paying somewhere around $10 a foot a year; maybe it’s 12, maybe it’s eight, it’s just depending on the market. And how much the TI, the tenant improvement dollars was. If they’re going to go out, they’re leaving or maybe you already have that vacancy, you’re going to have to spend tenant improvement dollars to get somebody else in, you might have to white-box the space, it’s called, to bring it to very plain, vanilla space.

Slocomb Reed: Do you have an average cost per foot metric for your white boxing?

Phil Block: You can’t exactly… The white box we do, the TI dollars can vary considerably. Some tenants are on an as-is basis, so you underwrite a range of outcomes, thinking about who do you want and what does that look like. The more dollars you have to spend — obviously, you can buy up rents, but that can cost you in the long term.

So the typical TI, if it’s expensive — like, splitting a box could cost you 70 bucks a foot, $80 a foot, something like that. What does the HVAC look like, because that’s always one of your major costs; what does the roof look like, do you have to redo the roof for your new tenant… That’s why the variables within retail are pretty dramatic. From, “Hey, we’re going to do an as-is deal”, to  “You need to give me $100 a foot for a medical use, and white-box it, and get new HVAC.” Doing a new grocery store probably costs you $100 a foot, something like that, to build out.

Slocomb Reed: Yeah, dramatic variables; to your point though, they create the opportunity to find value. How much it costs to turn a two-bedroom apartment with one bathroom is fairly uniform in a market, much more uniform than the kind of stuff that you’re talking about. Especially if you’re subdividing a space, or you have to put new air handlers in because it used to be one-tenant and now you’re going to have two in that same space. That makes a lot of sense. Do you have a rule of thumb for anticipating how long a space will remain empty after a tenant moves out?

Phil Block: Yeah, you probably started 12 months for a shop-type vacancy, just like that 1,000, 2,000 square foot from an underwriting convention; and then in an extremely hot market, you may shrink that. Just the time it takes to go out and lease it, sign a new lease, get somebody in, get the space renovated for them, and have maybe some free rent periods before they start somewhere – call it a year, and we typically beat that.

Slocomb Reed: Gotcha. So you estimate conservatively, conservatively meaning a longer time. You’re estimating a 12-month vacancy when someone moves out of a 2,000 square foot space.

Phil Block: The honest answer is we go space by space for every new deal, and it varies. But if you’re asking for a very general rule, that’s pretty safe. The larger spaces that anchor 5,000 to 50,000 square foot spaces are certainly more uniquely done, tenant by tenant, but always longer than a year. Those leases take much longer and the timeline to get somebody in takes much longer.

Slocomb Reed: Phil, just a couple more general questions and then I want to different direction. Let’s say, you’re going to have an anchor tenant vacate and let’s say you’re going to have a 1,000-2,000 square foot tenant vacate; in those two scenarios, how often are you courting new tenants for the space before the space is actually vacated? Like, come see this actual operating restaurant in the space where you’re considering putting your own restaurant, as opposed to getting the tenant out, white box it, and show it as a fresh new clean space to a prospective tenant? Where’s the balance there? Are you trying to get people in beforehand, or are you waiting?

Phil Block: Always before. Especially in commercial leases, we have sometimes a year notice, sometimes nine months. It’s never like tomorrow they’re out; that’s just not how it works, or even 30 days. We have a long lead time, and our head of leasing is just fantastic. He’s out of Charlotte, and he’s been doing this for 30 years, and he’s as good as it gets in the industry. And then we work with the best local leasing teams depending on where our shopping centers are, and he’s managing them, and we’re having calls weekly between them and they’re showing that space and pushing it long in advance of a vacancy.

Slocomb Reed: Gotcha. Let’s turn the conversation for our Best Ever listeners. Phil, have you gone full cycle on a shopping center?

Phil Block: We have refinanced, we haven’t sold anything on purpose. If you think about our timeline, we started LBX four years ago almost exactly, and started buying shortly after that. In our first shopping center, we bought all the equities out; we have another two deals now out of our 11, three out of the 11, I think, that all the equity is out or with a refi happening now, it’ll be out.

Slocomb Reed: All the equity is out meaning that with the cash-out refinance you bought out your limited partners.

Phil Block: They stay in the deal, but meaning that as unlimited partners, as a limited investor, you have all of your money back, and you’re still getting a pretty significant distribution quarterly.

Break: [00:18:22][00:20:18]

Slocomb Reed: If you could, for us, Phil, pick one of those deals… I want to go through it from start to finish in the next few minutes here. Treat me like one of your LPs and tell me a couple of things. Keeping in mind that I could put my money in apartments any day of the week, that there are plenty of opportunities at 8% pref, 15% IRR, underwritten on the five-year hold, get my money back in three to seven years – that’s out there. And I’m considering you instead of that. One of these deals is obviously already worked because, in reality, you’ve gotten the LPs all their money back and they’re still in the deal, and still receiving returns. Start with how you pitch this to me as your limited partner, and then move me through the steps of executing your business plan until you got to that cash-out refi. What did that look like?

Phil Block: Sure. I’ll use the first deal we bought. A deal called Alafaya Commons, which you can see on our website. It’s in Orlando, it’s right by UCF, University of Central Florida, which is I think either the largest or second-largest school in the country now by total student population. And as we talked about before – main and main; so there’s an artery running from downtown Orlando east which is where UCF is, and once you run East then there’s another one main road and it’s Alafaya Trail and Colonial Drive. Colonial Drive runs East out of downtown, then Alafaya Trail runs North-South, and it’s on the corner of this main intersection. It couldn’t be more dense in growing faster, it’s just absolutely tremendous real estate. As a shopping center, we bought at a nine cap going in. For today, it’s pretty small for us, but call it $20 million, just under $20 million.

Slocomb Reed: Day one, nine cap.

Phil Block: Day one, nine cap.

Slocomb Reed: Is that fully occupied?

Phil Block: I don’t have it in front of me, call it 95% occupied; right around 95.

Slocomb Reed: 95% occupied. Okay, that’s the first number that jumps out on an apartment investor Phil. Ain’t nobody buying nothing at a nine cap right now.

Phil Block: Well, you’re not buying retail at a nine cap anymore, but this–

Slocomb Reed: Sure. Well, yeah. To your point. When was this?

Phil Block: This was three and a half years ago.

Slocomb Reed: Pre-COVID. Gotcha. What does that cap rate look like?

Phil Block: For what’s left in the center, it’s probably a seven; but call it right around a seven cap.

Slocomb Reed: So 95%-ish percent occupancy, you’re opening at a seven cap, you bought it at a nine three years ago; today it would be a seven cap. How much of a value play did you have when you bought this three years ago at a nine cap?

Phil Block: Significant. One of the things, as we talked about, you were asking me about single-tenant, do we ever buy single-tenant, and I said we sell it. So here, there was a Taco Bell, a thing called Amscot, which is like a check-cashing place, but right out on the corner, paying a huge rent, and they had a 10% rent bump coming with a 10-year option that they had to exercise within six months of our buying it or a yar of our buying it, and we knew they were going to do that, or we felt strongly that they would. And there was a local Chinese restaurant out on this main road that made no sense to us really, again; kind of a single parcel. And Academy Sports was one of our anchors; it was on the end and could easily have been parcel. If you’re not familiar with Academy sports, it’s like Dick’s Sporting Goods.

So what we felt was we were buying this wholesale — and frankly, a number of the rents in place were significantly below market, and the shock… While it’s 95% occupied, a large chunk of that is because of Academy Sports; they were 50,000 something square feet. So we did have a decent amount of shop space, and the truth is, the kind of the secret sauce, that’s where you make your rent, that’s where you make your money, because shop space goes for three times the cost of your box space. And a lot of the time, the institutions are great; the institutions that we buy from. We were buying from Regency centers, which were the large public REIT. They’re great at leasing your big national anchors, they’re not very good at your local shop space, because they do what you did, which is say, “95% occupied, that’s great. It checks thei report and nobody’s really paying attention.”

If I leased that last 6000 square feet at $35-$40 a foot, that’s four times what you’re leasing your anchor space at, and it’s adding significant value; you’re tapping that. So what we did is we said we can parcel all of these individual single-tenants, sell them, and reduce our basis. So as I said, we bought it a nine cap, we sold Amscot, first we let it bump by 10%, and then we sold it on the new income for a 6.5 cap. We sold the Taco Bell for, at the time, I believe a five cap, either a 4.5 or a five cap, it was a low market rent. We kicked out the Chinese restaurant because he was struggling and we brought in Jollibee. Are you familiar with Jollibee?

Slocomb Reed: I’m not.

Phil Block: It’s like the McDonald’s of the Philippines, they’re absolutely massive. We just did that deal and sold it at a 4.5 cap. Then we went to Academy, we created a tax parcel for the giant Academy box, and we sold that at an eight cap, which was a good deal for the buyer, to be honest… But because of our basis, we now have all of our money out just from selling all those, and then we effectively own the rest of the shopping center for free. We’re pretty close to that.

Slocomb Reed: How much of the shopping center is left?

Phil Block: There’s a gym [unintelligible [00:25:49].05] shop space, call it 55,000 square feet, 60,000 square

feet, something like that.

Slocomb Reed: How long did it take you to create and sell off all the outparcels?

Phil Block: There was a timing issue for just waiting on the last, the Jollibee, because we had to kick out that Chinese restaurant and deal with that. But it was all done within two and a half years.

Slocomb Reed: Wow. That’s pretty impressive.

Phil Block: We haven’t refinanced yet, and the investors already have all their money back.

Slocomb Reed: Gotcha. What kind of a return were you proposing to investors when you were first acquiring this, and what does it look like now?

Phil Block: I think we had modeled and said… Again, I don’t have it in front of me, so you’ve got to give me a little leeway. But call it a 16 or 17 net return IRR over a five-year hold, and we’re certainly well into the 20s. We’ll see ultimately — how long you hold, etc, but we have a lot of very, very happy investors in that deal.

Slocomb Reed: Yeah, I believe it. Fast-forward to 2022, are you putting together any deals right now?

Phil Block: Always. Yeah. We have one in Atlanta that we are signing the contract on today or first thing Monday morning, we’re finally in agreement on it, and we have a large public steel in Florida that we are in interviewing for on Tuesday; that’s like best and final submitted. We’re one of a few groups being interviewed and we’ll see.

Slocomb Reed: Gotcha. Last question – with the deals that you’re looking at right now, how do the returns that you’re offering to limited partners compare to the typical B class value-add apartment, eight pref, 15% IRR over five years?

Phil Block: To be honest, the biggest difference is that our underwriting’s correct and believable, if we’re being honest. Most of our returns are driven by cash flow, not by the idea that we’re going to get 5% annual rent growth and sell it at a four cap in a rising interest rate inflationary environment. I feel much better about our projected returns, because it’s not speculative. We’re paying typically double-digit cash flow out of the gate, or it’s an eight or a nine, and there are pretty simple things like selling outparcels, a little bit of lease-up, that generates the added yield, it gets us to a high teen; it’s why we continue to look at multi. And I understand why people like it, because I love the multifamily business. But buying things at two caps or three caps saying “We’re going to have 5% or 10% rental growth forever and that’s how I’m getting to a 15 or a 16” is dicey. Maybe that continues, I’ve been wrong for the last few years… But that is, to me, much less achievable than buying a great shopping center, paying an eight, or a nine, or a 10 day one, and just doing little bits around the edges to achieve your enhanced return.

Slocomb Reed: Phil, let me put what I think you just said in my own words, tell me if I’m wrong. The biggest difference between the underwriting you’re doing and the underwriting most multifamily syndicators are doing is that the projected growth of the apartment market is predicated upon the current position of the market cycle perpetuating itself for at least a few more years. All the rent growth we’re seeing, the cap rates remaining low, probably not going to compress anymore. I don’t know that anyone is projecting a compressed cap rate five years from now.

But the returns that we’re seeing underwritten in the apartment market are predicated upon the ability to do the things we’ve been able to do for the past few years, due to COVID and due to where we are in the market cycle. With shopping center deals like yours, the value play is already in the paper, the rent growth potential is effectively step-ups that may already be in place, or specific to the micro factors of the property and that individual market. Specific to the factors affecting that property and that market, the value that you’re finding and seeing the spaces are underutilized.

Phil Block: I think that’s right.

Slocomb Reed: And you also have opportunities for additional exit strategies and value plays in that… If you find properties with outparcels that could individually be sold at a lower cap rate, based on effectively changing the asset class to something single-tenant with a lease that’s corporate-backed, you’re taking something that you can buy at a higher cap and sell off a smaller portion of it at a lower cap.

Phil Block: Yeah, that’s right. Everything we do is about protecting our downside first. What I struggle with, what we struggle with in the multifamily space – to compare that, since that’s what you’re asking about – is most of those guys today, as you know, Fannie and Freddie are not getting to the leverage that most of those syndicators need to get their deals done today. So they’re getting debt fund type borrowing, which is SOFR based; so if you run it on a forward SOFR curve, you buy something at a three cap; that’s what you’re seeing on a value-add multifamily today. So you buy a tertiary, I don’t know, 3.5, somewhere around there, and you finance SOFR-based bridge debt that’s going to cost 5%. SOFR at 300 is today 3%, and it’s going to be 5% in six months if you use the forward curve. You need a lot of rental growth to cover you. If things go slightly in the wrong direction, your cap rates widen, which I think they have to. Not a ton, but they probably have to a bit, because you have to have some positive leverage… And your equity is actually underwater. Not just “Hey, I’m not going to hit a 15”, you’re going to lose your principal.

That’s what scares me. It’s worked well — if you put on low leverage long-term financing on multi and hold long term, you’re fine. But a lot of the debt fund, “Hey, I’m going to get you this return in a three to five-year hold,” is much riskier to me, I think, objectively, than what we’re doing.

Slocomb Reed: Phil, I’m based in Cincinnati; no one here is buying a three cap. Our multifamily cap rates are higher than that, because they have to be; our deals are smaller. But to your point, the opening cap rates on deals like yours – I have friends who are operating in that space and getting day one cap rates that you just don’t see in multifamily. So to your point, there’s more cash flow in that right now even in Cincinnati. Phil, are you ready for our Best Ever lightning round?

Phil Block: Let’s do it.

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

Phil Block: I just read Shoe Dog by Phil Knight, which was a great book.

Slocomb Reed: Shoe Dog by Phil Knight. Nice. What is your Best Ever way to give back?

Phil Block: Well, giving great investment opportunities to the retail community.

Slocomb Reed: What is the Best Ever skill you’ve developed as a commercial real estate investor?

Phil Block:  That’s a good question. I think, honestly, capital structure and protecting our downside.

Slocomb Reed: Structuring your deals to protect your downside is the best for you.

Phil Block: Absolutely, yeah. Not over-leveraging, using the right kind of debt, relationship-type borrowing. We cannot lose principal; I will not lose investors a dollar, that’s our number one goal.

Slocomb Reed: Phil, what is your Best Ever advice?

Phil Block: For real estate investing?

Slocomb Reed: Yes.

Phil Block: I think it goes back to what I just said. The market has been tremendous, as we were talking about at the beginning of this podcast, for how long has this cycle been going. It’s easy to forget that things can go the other way. I came out — we own the largest special servicer; C3 was part of Centerline, and you can see… When things go wrong – I don’t think we’re going to have a GFC again, but what happens when you’re over-levered and you don’t have the type of relationship with your lender that enables you to have the time to weather that cycle… So protect yourself, make sure you don’t have leverage that things go wrong and your time it badly, they take your investment. That’s the number one thing, protect yourself.

Slocomb Reed: Phil, thank you. Where can our Best Ever listeners get in touch with you?

Phil Block: Our website is lbxinvestments.com. Easy to sign up as an investor on that. I think my cellphone is probably on the site, and my email is phil@lbxinvestments.com. Would love to hear from you.

Slocomb Reed: Great. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please do subscribe to our podcast, leave us a five-star review, and share this episode with a friend who you think can gain value from this conversation we’ve had with Phil Block. Thank you, and have a Best Ever day.

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JF2721: How This New Multifamily Investor Closed 4 Deals in First 6 Months ft. Amy Sylvis

How do you gain credibility as a new investor? Amy Sylvis, an active investor in multifamily, developed a strategy that helped her close four deals within the first six months of her entering the commercial real estate space. In this episode, Amy shares how she sourced these deals and the methods she uses to build trust with investors and partners.

Amy Sylvis | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Amy Sylvis with us. How are you doing Amy?

Amy Sylvis: I’m amazing. How are you?

Slocomb Reed: Doing great, excited for this conversation we’re going to have. Amy is the founder of Sylvis Capital, which buys large multifamily complexes in emerging markets throughout the US with her investors. They focus on Class B properties with a value-add component. She is currently the GP of 276 units in Evansville, Indiana, 20 units in Huntsville, Alabama, 58 units in Clarksville, Tennessee, and 80 units in Augusta, Georgia. It took her close to 10 years to enter the commercial real estate multifamily space due to her cystic fibrosis. She’s now been on the GP side for seven months. Seven months and she’s already got four deals under her belt. Amy is based in Los Angeles. So you’ve had a pretty busy seven months, haven’t you?

Amy Sylvis: It helps to have partners, right? They say it’s a team sport, so – I don’t want no illusion that I’ve done this all on my own, but it’s been great.

Slocomb Reed: Well, tell us, Amy, what got you into commercial real estate?

Amy Sylvis: This is my favorite question. As you mentioned briefly in my bio, I’m not shy about some of the health challenges I grew up with. For those who don’t know what cystic fibrosis is, it’s a genetic illness, or essentially, the lungs kind of give out over time. From a very young age… This story is good, I promise. It’s not going to end up being a downer.

Slocomb Reed: Please continue. There is nothing about you right now that is telling me you’re a downer.

Amy Sylvis: I appreciate it. From a very young age, I kind of understood my mortality, but also had this really strong drive to be self-sufficient. So I searched and searched for ways to become independent, kind of a bigger, badder W2, that kind of thinking. I eventually stumbled on to multifamily real estate as a way to really decouple my ability to trade my time for money. As you can imagine, as it ties into health, knowing that perhaps one day my health might not be so great, this was a really exciting solution to support myself. So that’s a kind of a quick rundown.

Slocomb Reed: I think you said accidentally stumbled. I’d like to unpack that. How did that actually happen?

Amy Sylvis: On my journey — I used to work in biotech — I was excited to be able to find an industry where I could give back to others, especially having health challenges, knowing how important it is to be able to help others in their time of need, when they have bad health. I was always looking for the bigger badder job, as I mentioned, with a higher income. I went and I got my MBA, I took two years off to be able to do that… And wouldn’t you know, right after I graduated, I stumbled upon that purple book that we all know of called Rich Dad Poor Dad, randomly, at the Santa Monica library. My head popped off; I just couldn’t believe that there was such a thing as passive income and that was attainable.

Slocomb Reed: I have to give a shout-out to the Best Ever podcast really quick. I got my dad listening, and it wasn’t until he realized how many times I referenced Rich Dad Poor Dad on this podcast that he finally read it for himself. I’m so excited to be able to talk to him about it.

Amy Sylvis: Slocomb’s dad, good job!

Slocomb Reed: Yes. He’s already retired and has a great retirement and a great lifestyle that he thoroughly enjoys, so it’s going to be a different kind of conversation, but I’m looking forward to it, because it is a really important book. It’s been really important to me for the last nine years at least. You said it took you 10 years to enter the space, due to cystic fibrosis. Why 10 years? What was the reason for the delay?

Amy Sylvis: Thank you for that. Part of cystic fibrosis is chronic lung infections that require hospitalizations for two weeks at a time, often several times a year. Despite the energetic person that you see me as today, holding down a W2 while trying to do a side hustle of real estate, it just really ran my health down. It was even someone like myself, who thought I had superwoman powers, struggled to overcome. Thankfully, around two years ago, right before the beginning of the pandemic, a miracle medication came to the market for cystic fibrosis and really unlocked my ability to finally enter into the space. So it took a while but the persistence paid off for sure.

Slocomb Reed: So that’s 10 years before you participated in the general partnership of a deal, but I imagine that’s 10 years of studying, research, networking. Am I wrong?

Amy Sylvis: You’re spot on.  It’s all about laying the groundwork. Yeah.

Slocomb Reed: And then all of a sudden, you pop off, four deals in your first six months. How did that happen chronologically? Correct me where I’m wrong. It’s like a miracle drug, some sort of time-lapse, and then all of a sudden, all four of these deals at once. Were these all in the works at the same time? How did you come across all four so quickly?

Amy Sylvis: To your point about the timeline, the big exponential growth factor there was finding like-minded partners with similar values. I am an only child, and I learned very quickly that working with others, finding others, and that’s where Quattro Capital came in. I found Maurice Philogene; many probably recognize his name in this space. Our values aligned firmly that real estate is great for the money, money is not a bad thing, but really, it’s a vehicle to be able to buy ourselves time, own geographic freedom, and of course, be able to give to others. So once I was able to sync up with him with a deal that I had found, things just rolled as the other parts of Quattro Capital were able to surround me, and we would partner to be able to take down many of these deals.

Slocomb Reed: Nice. Evansville, Indiana, Huntsville, Alabama, Clarksville, Tennessee, Augusta, Georgia – so the South and the Midwest. How many different emerging markets were you looking in to end up in those four?

Amy Sylvis: Well, I’m sure many people can agree, it is a seller’s market, to say the least. So we looked very heavily at emerging markets. Obviously, it’s a little bit easier in the Southeast, and it’s just really a matter of understanding those demographics, but also understanding where perhaps not everyone was looking for deals. We were competing with institutional money… So it is, to answer your question, several emerging markets combined with great opportunity.

Slocomb Reed: Gotcha. In all of this so far, Amy, what has been your steepest learning curve? Whether that be an experience you’ve had, or a hurdle that you had to get over, or something that you had to sort out. What’s your biggest learning curve?

Amy Sylvis: I think the biggest learning curve was getting my first deal and finding my first deal. I’m sure many of the listeners can relate. When you’re the brand-new kid on the block, getting credibility, making brokers believe that you’re going to be able to take the deal across the finish line was something I really struggled with before I had the a-ha moment of how I could leverage a team and develop a mutually beneficial relationship with folks that already had experience.

Slocomb Reed: You bring up something that a lot of people, if not all people who get into this space, feel. I’m new, no one’s going to take me seriously, I don’t have any experience, and I need to convince different kinds of people, investors, lenders, brokers that I’m going to be able to perform in a space where I’ve never operated before. Give us some of the specifics of what that looked like for you putting your first deals together, with the understanding that all of our guts turn hearing you say that, because we’ve all had that same feeling. Give us some specifics about getting it done for your first deal.

Amy Sylvis: Happy to. So the biggest pieces I alluded to was finding partners. The way I found Quattro Capital and partners was by figuring out what their needs were. I think all of us have the thought process of “This is what I need, this is where I want to go”, but I really tried to flip it on its head and figure out what do these folks, who I think are amazing, have a great experience, and great knowledge, what do they need that I could possibly provide, and give freely with an abundance mentality, and knowing that that would eventually lead to them knowing, liking, and trusting me, because I was able to put them first and provide value there. I don’t know if that’s specific enough, but I’m happy to keep going if you’d like to learn more.

Slocomb Reed: If I were trying to give that answer a punch line, Amy, it would be that you networked your way out of the newbie dilemma.

Amy Sylvis: Perfectly said.

Slocomb Reed: Cool. Why Evansville, Huntsville, Clarksville, and Augusta?

Amy Sylvis: All emerging markets, all at various kinds of stages of emergence. But we love looking at job growth, first and foremost. I know that of all of those that you mentioned, Evansville probably doesn’t pop up as the sexiest market everyone’s thought of right now… [laughs] But we see it as being likely growing on the scale of Chattanooga. I think Chattanooga [unintelligible [00:13:04].07] came in, and Toyota set up a big plant. It’s kind of a similar size there and the state of Indiana is investing massively. So that brings me to my next point, is the state, our local governments investing in infrastructure? Are they on top lists where folks want to live? Is it affordable? So we look really heavily… And b we, it’s a little bit of an obsession that I leave with the folks I work with, just because we know the power of what an emerging market can do to appreciation. So that’s what they all have in common. They’re all within our chosen property managers’ sphere of operation as well, which was an important piece.

Slocomb Reed: Gotcha. Amy, within your partnership, what do you specialize in? You said you really like analyzing what’s happening in the job market in these areas. What is your steak and potatoes?

Amy Sylvis: I would definitely say good market research, as you mentioned. Also, I do bring deals, I find deals, I build relationships with brokers and sellers, and I dabble in capital raising. I’m out here in Los Angeles; as you could imagine, not a ton of people are interested in investing here, which I get, I’m not either… So providing opportunities for folks that are looking to diversify outside of the stock market and paper assets. So I do a little bit of everything, to answer your question. I know that’s not the straightforward bread and butter maybe answer you’re looking for, but I’m a little bit of a generalist in that sense.

Break: [00:14:32][00:16:41]

Slocomb Reed: Market analysis and capital raising. In your backyard, you’ve got a great opportunity for capital raising, I would imagine. I don’t know where your literal backyard is, but being in Los Angeles should put you in a good opportunity for capital raising. I’m in Cincinnati, Ohio; you’re in a better spot for it than I am at least.

Amy Sylvis: I used to live there. It’s a great city.

Slocomb Reed: Oh nice, cool. So these emerging markets in the South and in the Midwest… Amy, we’re talking about markets where you’re projecting job growth. Are you underwriting to the five-year hold? Is the plan to hold these for about that amount of time and then sell?

Amy Sylvis: I love that question. It is. We really go by what our investors demand, so the five year hold is kind of the industry standard in that respect. That being said, as probably others have seen that are invested in emerging markets, we’re reaching some of our five-year proforma’s in 18 months. We’ve got a portfolio in Knoxville, Tennessee that we have on the market, we think that markets tapped out, and we think it best serves our investors to sell at this point, even though it’s a little bit of a shorter turnaround, and go find the next emerging market. So the plan is five years, we don’t ever promise anything short of that. But sometimes circumstances arrive, like in Knoxville, where we go ahead and have a disposition early.

Slocomb Reed: Gotcha. Underwriting to the five-year hold. I am a buy and long-term hold investor, Warren Buffett style, buy and don’t sell. I’m happy to trade up, but I’m not underwriting personally to a five-year hold, I am underwriting to what my grandkids will inherit. So Amy, you said Evansville, Indiana feels like Chattanooga, Tennessee 20 years ago. When I hear that, that makes me want to buy in Evansville, Indiana and hold it for 20 years. I have a feeling I know your answer already, but I’d still like your opinion on this, because you’re in this deal. Why not buy something in a market like Evansville and just continue to see that long-term appreciation, rent growth, increase in cash flow? Is it simply that you need to provide an IRR to your LPs and the sale is going to be what does that?

Amy Sylvis: I love this, because it shows the nuances of how you can customize these deals based on what the GPs want and what the LPS want. And your point is well taken. I think all of us want that long-term, multi-generational wealth. There are several strategies. We say in our PPM and we let our investors know that they may be refinanced out of the deal, as opposed to us selling; that’s one option. As you mentioned, some folks need liquidity; LPs aren’t happy with a 10-year hold.

The other thought process is as you think of an emerging market and kind of the slope there, without getting too mathematically in depth, you really have kind of a little bit of an S-curve. So you have appreciation and rents that are increasing at an increasing rate, and then you have them kind of roll-over and they’re increasing at maybe a decreasing rate. That doesn’t mean that they’re decreasing, it just means that the rate of change is decreasing.

We love to hit these markets when they’re increasing at an increasing rate. So if we can be in the market during that cycle, or that part of the cycle, and then find the next emerging market, and keep hitting that, we find that our investors appreciate that market identification and being in the emerging market at the most lucrative point. That doesn’t mean that there will continually be growth in Evansville and we won’t stay there in some sort of capacity, but at five years, we want to find the next Evansville that’s taking off and that is really emerging like that.

Slocomb Reed: That’s a really helpful explanation, Amy; thank you. The trajectory, the acceleration rate of rent growth; is the rent growth accelerating or decelerating while still growing. That makes a lot of sense to hit that point, where you see the top of the bell curve coming even if rents aren’t going to go down, you see that the rent growth is slowing, and that’s a good time to get out. Because it also means with rent growth and with projected future rent growth, it’s still going to be an easily saleable asset, because somebody else is going to want that growth.

You said it’s in your agreement that you may refinance LPs out. Talk me through the logistics of that. You as the GPs decide you want to hold on to an asset and go ahead and deliver the ultimate return to the LPs that they were looking for. Walk me through the step by step of how you make that decision, that that’s what you want to do, and you decide this is an asset you want to hold longer, and what is it that you’ve agreed to disperse to your LPs in the event that you make that decision?

Amy Sylvis: Candidly, we’ve never done it before. It is something we have on the table, we like to be able to be fully transparent about what can go on… But what I just mentioned to you about the emerging market equation – we want to participate in that, too. We know full well that the market can go where it goes, and sometimes scenarios are difficult to think of five years in advance, so we give ourselves that option. Above and beyond that, I wish I could provide you with some experience in that respect, but we just haven’t reached that point. We’ve always decided to sell up until this point.

Slocomb Reed: So let’s talk about it hypothetically then. Again, Best Ever listeners, I’m asking the question that I want the answer to, and bringing you along to hopefully get some value. Thinking like a long-term hold person myself, if I were engaging in deals, underwriting to the five-year hold the way that you are, I would be excited at the opportunity of being able to deliver the promised return and retain the asset. Speaking hypothetically, what are the hypothetical conditions, Amy, in which you see that happening with one of your assets? Not necessarily one of the current ones, but forecasting into the future? Under what circumstances do you refi, deliver on your promises to your LPs, and keep the asset?

Amy Sylvis: So I think the biggest scenario, of course, is serving LPs. We’re in constant communication with them. If they want liquidity, if they want five years is up for them, everyone has individual circumstances. So if that’s kind of the general thought process and theme that we get from our investors, then that’s the number one priority. We in the GP team felt like it would be good idea to hold, but our investors are telling us that they want money back – we can have that conversation.

Something else to keep in mind is we’re all kind of looking at these cap rates going, “Holy moly, how much lower can they go? What’s going on in the market?” Hypothetically, I think we’ve all had the issue of “Yeah, it’s great to sell. We’d be able to realize a lot of appreciation, but where are we going to put the money? Where else are we going to put it?” Ideally, finding the next emerging market is great, but I think if we are unable to find something that makes business sense to redeploy, 1031 into, or something like that, holding the asset while also giving our investors back their return I think could hypothetically make a lot of sense in that scenario.

Slocomb Reed: Got you. One last thing before we move to the last section of this interview, Amy… The more distressed the asset is when you purchase it, the more opportunity you have to force appreciation. So you focus on B-class value-add in these emerging markets, and you said you have been able to reach your five-year expectations in 18 months. Have you considered purchasing more distressed assets that require more activity on the front end in order to produce a higher return? Or possibly produce appreciation so much that you could refinance out your LPs, deliver their return, and still leave some equity on the table for yourselves to get a loan instead of having to sell?

Amy Sylvis: Absolutely. The asset I mentioned in Augusta is just that. It is a full gut… A heavy-lift is a light term for what’s going on there. The previous owner was put in jail for fraud, there was some interesting element that we’ve had to work through to kind of turn over the tenant base, and we’re pouring in quite a bit of money. So yes, we do occasionally dabble in that type, exactly what you mentioned. There is some great appreciation we can force there, but the flip side of it is we’re in inflation, we’re in the highest inflation we’ve seen in 40 years. That’s a wild thing to be able to project, control costs, and still be able to do all that. So it can be done, but even though I dye my hair, I’d still like to not be fully gray with all the stress there… [laughs] So we’ll do it every once in a while.

Slocomb Reed: Alright. Amy, are you ready for our Best Ever lightning round?

Amy Sylvis: Let’s go.

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

Amy Sylvis: I love an organization called Emily’s Entourage. I mentioned how life-changing the new cystic fibrosis drug has been for me over the past two years. Unfortunately, there are about 10% of people with cystic fibrosis that do not benefit from this medication. As you can imagine, the devastation that we all feel for those folks who are “left behind.” We are determined and we focus every day to making sure that we find something for them. Emily’s Entourage is who I dedicate my time to, giving back to make sure my dear friend Emily Kramer-Golinkoff and the other folks in that part of the cystic fibrosis community get to enjoy the health that I do.

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

Amy Sylvis: I just reread the Creature from Jekyll Island for the fifth time. It’s amazing how things play out in what I read five years ago, now fast forward five years ahead, how poignant it is. I can’t read that book enough, I can’t recommend it enough, it is eye opening, and I recommend it to everybody.

Slocomb Reed: It’s a long book, though. Make sure you have an extended weekend or some long amount of time that you can dedicate to reading it, but there is high-quality information in there, I assure you. Definitely, it’s a powerfully opinionated book, but it is also very eye-opening as to how our federal monetary system works. Very helpful. What, Amy, is your Best Ever advice.

Amy Sylvis: Best Ever advice is to have the Go-Giver mentality. I don’t know if anyone’s read that book by Mr. Burg.

Slocomb Reed: Another good one.

Amy Sylvis: Another incredible one. It is such a powerful way to live. Obviously, it involves empathy, but you’re really unstoppable when you think about others before yourself, how you can serve others. Whether it’s in business or in your personal life, there’s just a limit to what can be done and what good will come to you when you care about the needs and wants of others. That’s my Best Ever advice.

Slocomb Reed: Amy, where can people get in touch with you?

Amy Sylvis: Sure. I love LinkedIn and I’m very active there. Please get in touch with me over on LinkedIn. Of course, my website, sylviscapital.com. That’s it.

Slocomb Reed: Awesome. Well, Amy, thank you, this has been a great conversation. Best Ever listeners, thank you for tuning in. If you enjoyed listening in on this conversation, please do follow and subscribe to the podcast. Leave us a five-star review and share this with someone who could benefit from what Amy has shared with us today. Thank you and have a Best Ever day.

Amy Sylvis: Thanks so much.

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JF2720: 4 Things to Know Before Your First Development Deal ft. John McNellis #SituationSaturday

Are you interested in entering the commercial real estate development space but have no idea what to expect on your first deal? Return guest John McNellis walks us through different financial scenarios you might encounter on your first deal, their outcomes, and how to best set yourself up for financial success.

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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, John McNellis. John is joining us from Palo Alto, California. He was a previous guest on a number of episodes. If you Google Joe Fairless and John McNellis, those episodes will pop up. John, we’re glad to have you back. Thanks for joining us and how are you today?

John McNellis: Ash, I’m great. I’m absolutely great.

Ash Patel: Thank you.

John McNellis: Omicron here in Palo Alto seems to finally be going away. It turns out it didn’t seem like it was that big a deal. Life seems to be returning to normal.

Ash Patel: Glad to hear that. Today is Saturday. Best Ever listeners, I hope you’re having a great weekend so far. Because it is Saturday, we are going to do a Situation Saturday show, where we discuss a specific situation our guest has encountered. The goal is to give you the knowledge should you encounter a similar situation. John is a principal at McNellis Partners and has been involved in over 80 development projects. John, before we get into your particular skill set, can you give us a little bit more about your background and what you’re focused on now?

John McNellis: Sure. I went to school here in the Bay Area, I went to Berkeley, I went to a fancy law firm in San Francisco in the mid-70s, and quickly decided that I needed to practice law. I was in a real estate commercial practice and managed, with let’s say a lot of effort, to gradually shift out of law into business. I teamed up with an older partner who was a shopping center developer. For the last 40 years, we have been primarily shopping center developers. Our focus has been in Northern California; basically, it’s like a two-hour drive from San Francisco in all directions, except maybe West. The centers tend to be, give or take 100,000 feet, give or take 10 acres, supermarket anchored, Walmart anchored, all single stories, surface part… And I didn’t realize how brilliant that was, and it certainly wasn’t a strategy until two years ago when COVID hit. Then I learned somehow that we were essential retail. Unlike the big boxes that you see and the enclosed malls, our portfolio and that of all my competitors in the same niche, that is supermarket anchored neighborhood centers, came out essentially unscathed. We had to give up rent for our small tenants in 2020 and continuing to 2021, and even still today a little bit… But a vast bulk of our tenants, 75% to 80% of the supermarkets, drive-throughs in particular, did fine. Also, just to round it out, we had to do a little bit of investing in Silicon Valley, office buildings, and sort of high-end small residential projects.

Ash Patel: What do you want to talk about today, John? We’ve covered so much in our past conversations… What would give our audience some value today?

John McNellis: Okay, I’m assuming, Ash, that our audience are young guys like you that want to get into the development business… So what I want to talk about is that first deal, for the first couple of deals where let’s say you’re a broker, let’s say your attorney, a banker, whatever it is, but you hanker to become a developer. You find a deal, and oh my God, it is so good. And I’m going to give you, slightly disguised, a specific deal that good friends were involved in, so this is a real thing.

You find a deal, let’s say it’s $15 million dollars – it was – and let’s just say you’re absolutely certain Ash that in a year you can make it worth 20. It’s an existing project, it doesn’t matter whether it’s an office building or a shopping center, but single tenant. The lease is coming up, the sellers are old, they’re nervous, they decided to sell it at a discount. You know that if you can extend that lease for 10 years, you can turn around and have a value of $20 million. So you want to keep as much of that as possible.

Then just this background, and… It’s in my book. But typically, this is what I call a paint and petunias deal, where the project is leased or unleased, there’s no construction risk, there’s no entitlement risk; essentially, there’s a leasing risk. On a deal like that, in my experience, the best you could hope for as the equity partner, or the young developer, is maybe an 80/20 split, sometimes even 90/10. Sometimes, if you don’t have enough control, the financial partner kind of muscles you aside and says, “Okay, kid, we’ll give you an extra point or two on the commission, but you’re out of the deal.” Let’s say 80/20. But you think this is such a great deal that you want to get a better deal than that, and you want to get 60/40. And it’s a good enough deal, so you go to your financial partner and you say, “This is a killer deal. There’s $5 million on the table. All we have to do is buy it, lease it, sell it or refinance it.” The natural partner agrees and he says, “Whoa, you’re right. This is a good deal. The chance of getting this thing leased – 100%.” He says, “Here’s the deal, kid. 80/20, 8% preferred return on the money.” You guys all know how this works. First, there’s the 8%, then there’s the repayment of the capital, and then it’s the 80/20 split. You counter and say “No, this is such a good deal. I want 60/40.” The money guy says, “60/40 – you’re really pushing it. I tell you what, if you’re that convinced that you can get in and out in a year, I’ll do it. But I want the high end of the financial partner preferred returns, I want an 18% preferred return.” So that’s your dilemma as a young developer, do you take 60/40 after an 18% return, or 80/20 after an 8% return? With me so far?

Ash Patel: I am.

John McNellis: Okay. Any questions so far?

Ash Patel: No. I have a deal that’s very similar to this. We’re doing an 18% preferred return and a 70/30 split. So I’m really intrigued to learn more.

John McNellis: Oh, so you should have watched this episode…

Ash Patel: Before I did the deal. Yes. [laughs]

John McNellis: That’s one of my favorite lines, experience is something you acquire just after you need it. Anyway, so 80/20, 8%, 60/40, 18%. So let’s just walk through the numbers, and I think I can do this in my head. Let’s first do it. And then you tentatively say to the guy, “I think I want to go the 60/40 route.” He says, “Well, work through the math.” So a year out, 18% on 15 million, and let’s assume this is a last-minute deal; you’re going to sell or refinance it, so there’s no debt, it’s just all equity. So 18% on 15 million is 2.7 million. So a year out, 2.7 million; that leaves 2.3 million in profit. What’s 40% of 2.3 million Ash, tell me that?

Ash Patel: Roughly a million.

John McNellis: I actually wrote it down. It’s more roughly 920,000 on your deal if you hit your marks. Now let’s go the other route. In the 80/20 deal with the 8% return. 8% on 15 million is 1.2 million, which leaves a $3.8 million profit. 20% of that is how much? 760,000. So if you can get in and get out on that one year, you’re 160,000 to the good on the aggressive 60/40 after 18% deal; you’re 100% to the good. I was actually thinking about this… I know you’re well versed in IRR or internal rate of return, and I’m guessing most of your audiences is as well, if they’re going to listen to this technical real estate stuff. And as I was thinking about our talk, I think you know already, we have zero faith in the IRR. It’s a silly metric, but it’s one that all the financial guys use. So they say “We want an 18% IRR and then you get your money.” But it occurred to me that IRR could stand for “I ruin rookies.” [laughs] Keep that in mind. In fact, I think I’ll put that in a newsletter.

Ash Patel: It’s a t-shirt.

John McNellis: It’s a t-shirt, I Ruin Rookies. Alright, so we just walked through the math. At one year, the aggressive approach works great. But this is real estate folks – let’s just say there’s a delay. What happens on that same deal at 18 months? It looks like there’s a six-month delay; you can work through the math, but add another six months at 18%. Suddenly, you’re at 4,050,000 of preferred return; there’s only 950,000 left to split. 40% of that is 380,000. If you’ve gone the other way, if you’ve taken the 80/20 deal, the 8% is, again, at 18 months, that’s up to 1,800,000, there’s 3,200,000 left to split, so suddenly you’re at 600,000. So that’s the point – let me underscore that, folks. If you hit your marks exactly and you’re in and out one year, you’re way ahead. If you only have a six-month delay, you’re behind. You’d net 600,000 on the more conservative way, 380k on the 60/40; you’re up 220,000. If you carry this out to the next level, a one-year delay – at a one-year delay, the developer’s out of money. 2,700,000 times two is 5,400,000; that’s all the profit in the deal goes to the financial partner.

Ash, you may say, “Well, John, has that ever happened to you?” I’d say “Yes. It has.” Not quite so dramatically and not where I had a choice. But simply where, in the early days we would do a deal at a 10% preferred return, a development deal. It would turn out well, but not perfect, and we’d be producing a 9% return on the investment. The preferred return was 10%, so each year we’d fall behind 1%, and then next year 1.2%, and so on. Have we done deals that only benefited the financial partner? Yes, about three or four. I think we’ve talked about this before, it’s kind of off the topic, but that’s one of the reasons we decided once we were able to, to no longer have financial partners; to just do small deals on our own and not get ourselves behind this snowball.

Now, the situation that I’m personally aware of – the young developers chose the 60/40, 18%, and here’s what happens. They were really smart guys, really competent; everything that they had said that was going to happen actually did happen. But delays occurred in getting the lease extended, and then COVID occurred. Suddenly, things were jammed and, sure enough, they ended up out of the money entirely. Had they gone with the more conservative approach, they would have made at least a couple hundred thousand dollars. So you can draw from that what you want. You can say, “Gee, I think I’ll take the conservative approach and make a little less money maybe if everything goes great, but I’ll cover my bets.”

Break: [00:14:47][00:16:56]

Ash Patel: That makes a lot of sense, and we’re doing the exact same thing. You don’t know this, but our story is exactly what you said. It’s 18% preferred return to our investors, and it’s a 70/30 split, 30% goes to the LPs, 70 to the GPs. And it’s the same thing, it’s a $5 million strip center, that we have two LOIs on leases to lease up the remaining vacancy. If all goes well, it should be a huge win.

John McNellis: I hope it will.

Ash Patel: If all goes well. [laughs]

John McNellis: If all goes well. California is the home of delays. Is that in Ohio?

Ash Patel: It’s in Ohio. One of the delays is one of the tenants coming in is Ace Hardware. They have a six-month delay in getting shelving for new stores. We knew that going in. The other reason we’re confident about this deal is the operating capital is enough to pay the investors preferred return. Sorry, the operating income and the profit.

John McNellis: You bought it at a current 18%? return?

Ash Patel: Correct.

John McNellis: Okay; then you’re not going to suffer the same way. As long as you can keep it current, that’s great. In this case, the one that I mentioned, that wasn’t the case.

Ash Patel: Okay. This is pretty conservatively underwritten. We won’t make any money if we just maintain the center as it is. But the upside will add a tremendous amount of value.

John McNellis: Well, that’s great. And there’s a bigger picture – as a young guy starting out, even if you don’t make money, if the financial partner does and the financial partner likes you, it’s on your portfolio; it’s another stripe or another battle ribbon. For your next deal, you can say “Yeah, we did this shopping center. We bought it for four and sold it for five.” It adds to your credibility, and of course, it adds to your experience.

I guarantee you’re not going to make money, to listeners out there, on every single deal. We have certainly lost money more than once. But even on the losers, you gain something, you gain a lot of valuable experience. And again, what I used to call “kiss sisters,” but it’s no longer a happy term, I guess… It’s where you’re absolutely breakeven; again, that works out okay in the long run.

Ash Patel: I agree. If the investors make a killing on this, awesome. Have you ever done deals where it’s a combination of development and buying existing, standing structures, so expanding a shopping center?

John McNellis: Oh, sure.

Ash Patel: The underwriting for that, how was that? How do you underwrite that for investors?

John McNellis: Well, again, we don’t use investors anymore, but we underwrite it for ourselves. I’ll give you an example – two recessions ago, if we say that COVID caused a small one… So in 2010, we bought a little shopping center, a 50,000-foot center in Modesto, California, out of foreclosure. Let me think about this. It was 70% vacant, and 30% leased. What was vacant was the anchor, the 30,000-foot-anchor, just to simplify things, and there were 20,000 feet of shops. Ash, what we liked about what we saw was the shops have been there forever and they were paying for Modesto with very low rent. We bought it on a 5% immediate cash on cash return. So kind of like what you just described, I said to myself — and remember, banks then were just like banks today, they were paying thumb and forefinger interest. It wasn’t that much, it was a couple of million dollars. So I said, “Guys, we can buy this, we have an immediate 5% return, which is okay. Cap rates weren’t that far, they were maybe six or seven then. And we have 70% of vacant spaces upside.” So if you go in where you’re at breakeven and there’s a big upside, I love doing deals like that.

Ash Patel: So those scare me, because if I see a vacant anchor, my assumption is one by one the rest of the tenants are going to leave when their leases are up. Is that not the case?

John McNellis: Good point. As a general rule, yes. But what intrigued us about this site was the little tenants, the coffee shop, the insurance, the pizza place, the nail salon, and so on – they had been there for years and years, and the anchor had been vacant for years. So they had survived just fine without the anchor. So we were pretty sure we weren’t going to lose them. Also, it was such a strong location.

One of my friends likes to say the two-word key to success in real estate is supply constrained; you want to be in an area where the competition can’t come in and build a better mousetrap. But in this particular location, a mile in all directions was totally built out, so we knew there wasn’t going to be another shopping center coming in.

And the other thing – I don’t know how many people have pools in Ohio, but pools in California are a good indicator of nice solid income, at least middle income, maybe a little better. And what indicates pools in a neighborhood? Leslie’s Pools, or one of the pool supply companies. We had Leslie’s in some of our other centers, so I called them and I said, “How are you doing here?” They said, “We do just fine.” So I liked that as kind of a bellwether or canary in the coal mine telling us, “Yeah, this is a good location.”

Ash Patel: Can I pick your brain on a couple of deals that I’m working on?

John McNellis: Sure.

Ash Patel: If you go back to that one example, would you subdivide that giant, vacant space from the previous anchor? Or would you just try to find another big-box anchor?

John McNellis: Actually, I simplified it a little bit; I went the other way. I had 25,000 feet vacant, and as it turned out, it was 25,000 feet of one space that was vacant, and there were another 5000 feet in line that was vacant. So Walmart came along, and we have worked a lot with Walmart in the last 30 years. Walmart’s been great, by the way; they’re a great business partner. They came along and said, “We need 30,000 feet.” It was complicated. I’d move one tenant, build him a new space, and then when he moved, we had to move another tenant into that space; when that tenant moved out, then we could build out the 30,000 feet for Walmart.

Ash Patel:  That’s a huge win.

John McNellis: Yeah, it turned out. We still own it 10 years later and it’s a good property for us.

Ash Patel: Best Ever listeners, forgive me for asking this question. It’s on a property that I own, but hopefully, you get some value out of this as well. John, that $5 million strip center, 100,000 square feet, it has a giant parking lot that we don’t need all of. Building an out-lot, in a conversation with a broker right now, he’s convincing me to just sell the out-lot, versus trying to build something and collect rent on it. What are your thoughts on that? Across the street, there’s McDonald’s, Burger King, Taco Bell, everyone’s there.

John McNellis: Did you pay 5 million all cash?

Ash Patel: No, a million cash, it was 20% down.

John McNellis: 20% down. So it’s just a million that’s getting the 18% return, correct?

Ash Patel: That’s correct.

John McNellis: And then you’ve got a $4 million loan at three, four, or five percent?

Ash Patel: Four and a quarter.

John McNellis: Four and a quarter. Okay. We do that a lot, actually. We’ll buy a shopping center — because, again, that’s our primary business, or a piece of land, we’ll subdivide it, and then we’ll sell off almost immediately one or two parcels in order to bring our basis down on the balance, and then we’ll keep that. We like having very little debt. So what that would enable you to do — a pad here in California, like what you’re talking about, would probably sell for close to a million dollars. Let’s just say you could sell for a million dollars; in all good conscience and honesty, you can allocate. Because you just bought the center for five, this year, [unintelligible [00:25:01].05] months, you can immediately turn around and sell that one pad for a million and you can allocate a million dollars as a basis to that. You can say to the IRS, “Look, guys. We didn’t do anything. We just bought this and we sold this for a million. Clearly, that part was worth a million.” Then you allocate that, so you can pull that million out, essentially, without attacks, you hand the million to your financial partner, no more 18% return on your end for 70/30 on all the cash flow. I love that idea.

Ash Patel: Okay. So sell it, versus trying to become a developer and build on it.

John McNellis: You can go either way. They’re a little tricky. We did a Super Walmart in another town and we ended up with four pads, after we did the 18-acre Super Walmart. We developed one for 711, we’re selling another to a Starbucks developer, and we’re ground leasing a third to an oil changer. So basically, all three options – build a [unintelligible [00:26:02], ground lease, sale. Usually, you don’t have the luxury of choices. Do you guys have In-N-Out Burger?

Ash Patel: No, unfortunately.

John McNellis: Okay. In-N-Out Burger always says, “We’re buying. Otherwise, we’re out.” They’re the flavor of the month, everybody loves In-N-Out Burger. In-N-Out Burger always insists on buying. Chick-fil-A, another darling in fast food, is happy to ground lease. So it all depends. Chances are that the tenants will dictate, but all three options work fine.

Ash Patel: Okay. That helps a lot. Awesome. John, thank you so much for being on our podcast again. It’s been a pleasure. I learn a lot every time we have you on here. How can the Best Ever listeners reach out to you?

John McNellis: Probably the easiest way is on LinkedIn. I’m there, John McNellis; you’ll find me there.

Ash Patel: You’re not going to plug your book but I am. This is the most gifted product I’ve ever purchased. I’ve bought dozens of these. It’s called Making it in Real Estate: Starting Out as a Developer by John McNellis. A phenomenal book; in my opinion, and one of the few incredible commercial real estate books. Thank you for that, it’s been a great resource.

John McNellis: Thank you, delighted you like 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 who you think will benefit from it, follow, subscribe, and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2680: How He 10x His Portfolio in Just One Year with Shawn DiMartile

Shawn DiMartile stepped away from a six-figure salary as an air traffic controller to focus on commercial real estate full-time, and the risk has paid off. In 2021, he was able to 10x his portfolio with multifamily syndications, and currently has $27,000,000 in AUM. In this episode, Shawn shares how he found the deals that 10x his portfolio and the strategies he’s using to raise cash flow.

Shawn DiMartile | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Shawn DiMartile with us. How are you doing Shawn?

Shawn DiMartile: I’m doing good. How are you doing man?

Slocomb Reed:  Doing great. It’s good to be here. Good to have you on the show. Shawn is the managing partner at Pac 3 Capital where they syndicate multifamily value-add properties. He is a GP in $27 million assets under management across 327 units. He quit his job earlier this month, December 2021, as an air traffic controller to focus on building his real estate portfolio. He is based in San Diego. Air traffic control to real estate is a fair leap. What got you into real estate?

Shawn DiMartile:  That’s a great question. It was kind of a long road that started a long time ago from a great friend of mine, Anthony Espinosa. Anthony, if you’re hearing this, thanks, brother. But basically, with my air traffic control job, I was making a high six-figure income, and I wanted to invest, and I just didn’t know what. A good friend of mine that’s in real estate recommended real estate, and then recommended the Bigger Pockets Podcast. This was like five years ago. Really that was just a catalyst of a long journey down the rabbit hole of starting to read a lot of books and literature on real estate investing. Then eventually I started learning about multifamily and how much more powerful and scalable multifamily was. Eventually, my first ever purchase for a real estate investment was a 32-unit apartment complex, which we might get into. But that’s the short version of how I got into it.

Slocomb Reed: You started with a 32-unit; did you self-manage?

Shawn DiMartile: I did not self-manage. I split that with a couple of partners as a joint venture and we did pay a third-party property management company, which when you’re in the 32-unit size, it’s kind of hard to find a great one. But it was out of state, so we had to have a third party.

Slocomb Reed: Where was it?

Shawn DiMartile: Just outside of Indianapolis, in an area called Greenwood, Indiana.

Slocomb Reed: Nice. 32 units – was that a value-add deal or was it just a stable cash flow?

Shawn DiMartile: That was a heavy value-add deal, actually. When we bought that property in 2019, I guess for lack of a better term, it was kind of run by a slumlord, and it was in disrepair, top to bottom. So we knew that going in, but these rents were just so far below market. I’m talking like a two-bedroom going for in the $500 range.

Slocomb Reed: You got this with two other partners. Were they both new to real estate as well?

Shawn DiMartile: Actually, when we got it, it was a total of four, five, or six of us. Two of those have since been bought out early on and there are four of us in it right now. What was the question again?

Slocomb Reed: Well, the question I’m getting to, Shawn, is you’re a full-time W2 employee in a non-real estate-related field, you’re in California, and your first deal is a distressed 32-unit in the Midwest, run by a slumlord. Why did you start there?

Shawn DiMartile: Such a good question. For starters, starting out of California was an easy decision, because here in Southern California, with real estate prices and multifamily assets, the prices of those, it’s so much more difficult to find a property that’s going to cash-flow and that’s going to give you the kind of returns we’re shooting for. Not to mention all of the laws regarding the landlords and tenants. But we knew from the get-go we needed to invest out of state. Through a long process, we identified a couple of different markets we were interested in.

And then why we ended up getting into an asset like this has a lot to do with this being our first time and how competitive the market was. It was really difficult to find a steady, stable value-add deal that we could beat out our competition to purchase the property. So we started looking at properties that were more of a heavy value-add. Now, I have a lot more exciting on the construction side of things because my father owned his own construction business, so I had an idea of how to find good contractors, how to vet them, and how to get this place where it needs to be. I wasn’t as worried about that.

But when we found this deal, after underwriting so many deals, even though it was a heavy value-add, even though it was our very first property, we knew there was so much meat on the bone that we could make it work if we just put everything we had learned to use, which ultimately, we ended up doing. We’re going to make out extremely well; we’re going to 3X our money over just two years. We’re actually selling that property right now.

So it’s been a long road and there were definitely some bumps in the road, but we just knew from the get-go, we just wanted to get in the game. We wanted to get our first property, we wanted to get something that we knew we can make some money on, and we knew it was going to be tough, but we went for it, and I’m so happy that we did, because I’ve learned so much.

Slocomb Reed: You’ve 10X-ed the portfolio since then, I believe, but I want to stay here for a moment though, Shawn… A 32-unit in the Midwest, I would imagine relatively low rents especially because of how far below market they were to start with. What did it take to find a property manager who could execute your business plan?

Shawn DiMartile: That’s a great question, and it’s not easy, because as you know, and a lot of people know that might have some experience listening to this, you’ve got your property managers that are very experienced with a value-add apartment complex, and typically, the best property managers for this kind of job are really not going to touch anything less than 100 units. So those are usually out of the question. And then you have your property managers that really only have experience in single-family, and not so much with multifamily and putting together a profit and loss statements, and all that kind of stuff, that’s proper. Then you have your middle of the road, you can find some property managers that manage a lot of single families but they also have some small multi’s in there, 10 units, 15 units, some 50 units, whatever. That’s what we were able to find. We had others that we wanted to manage it, but they just wouldn’t touch something so small.

Slocomb Reed: What action, Shawn, did you take to find a good one? Did you have to go through a couple of bad ones first?

Shawn DiMartile: To find a good one, we interviewed essentially every single property manager that manages in that area, or that manages somewhere nearby. We talked about all of them.

Slocomb Reed: How many was that?

Shawn DiMartile: I want to say that it was 10 property managers, which isn’t a crazy amount to interview. But we went through extensive interview processes using a lot of the questions that are in Joe Fairless’s book. But ultimately, we didn’t have a lot of choices that would actually manage it, so we’ve stuck with the same one. And to get to that one that we picked, it took a lot of interviewing and then going through references. With this company, we talked to several people that they said they manage a portfolio of their properties, that have multifamily roughly our size, and everyone was singing the praises of this property management company, so we ended up deciding on them. Now, they haven’t been the best property management company, but for what we could get, they’ve done a pretty good job. We’ve had to do some renegotiating to make it work the way we want it to work, but I think that we got the best we could.

Break: [00:08:04][00:09:43]

Slocomb Reed: So you’ve tripled your money… What happened to the valuation of the property and what did you have to do to force that appreciation?

Shawn DiMartile: We bought the property for 1.2 million, and we’re selling it right now for just shy of 3.1 million. In order to get that done over the past two years has been a lot of work. We kind of joke that we just bought a pile of bricks because the property is a brick exterior and we’ve replaced just about everything, top to bottom, things that we didn’t want to be replaced…

Slocomb Reed: What’s the cost of that?

Shawn DiMartile: We put over $400,000 into the property.

Slocomb Reed: So you’re all in for 1.6, but you’re selling for 3.1?

Shawn DiMartile: Correct.

Slocomb Reed: That’s pretty exciting.

Shawn DiMartile: It’s pretty exciting. We’ve done a lot of work on it, and it’s been a little bit of a pain, because when you’re trying to manage a heavy value-add out of state with a property management company that doesn’t have the resources as some of the larger property management companies, you have to do a lot of things yourself if you want to get it done right. A lot of negotiating with contractors myself, a lot of calling to get bids from contractors myself, a lot of that stuff. Obviously, all that work has paid off in the long run, but there was a lot of ups and downs.

Slocomb Reed: Tell me what projects you had to GC yourself or find your own contractors for.

Shawn DiMartile: We needed to replace every single one of the second-story balconies or patios. They were literally sagging down from the building. They were sort of a hazard for safety, and they were also just an eyesore. That was such a big project that I really didn’t just trust my property management company to get that done. That was something that I was a lot more hands-on with. I interviewed a whole lot of contractors, found one that was reputable that got the job done. So that was a big one.

And we had some pretty large plumbing projects that need to be done. For example, one of the primary drain lines out of the building that connects to the city main was collapsed, and we didn’t find that out until months after we had closed. That was another really big project that I was a lot more hands-on with. But really, anything that was just above $10,000 really was something that I was really putting a lot more of my own time in to reduce costs.

Slocomb Reed: That was 2019, 32-units. You have literally 10X-ed the portfolio since then. What was next?

Shawn DiMartile: Really the next big step for me and my partners was getting a mentor. We got a one-on-one mentor; this wasn’t like a program or a coaching program. Shout-out to my mentors, Tony Azar and John Azar. But we found them and started a mentorship program, because we knew we wanted to take it to the next level and start to syndicate, but we wanted to make sure we had a lot of experience with us to go through those first couple syndications.

So we got them on board, and really, this year was the year we broke out and 10X-ed the portfolio, and that was because we took down 150-unit and Greensboro, North Carolina, and a 145-unit in Greensboro, North Carolina. Both of those properties were sourced by my mentor, he signed on the loan with us to make that easier, and he’s also a co-GP on these deals. That was really what helped us grow so quickly. And what I would recommend to anyone listening, if you’re going to start syndicating and getting properties at large, I can’t recommend enough that you should really get somebody on board to co-GP with you, that has a lot of experience doing that. But I think that that was really the most important move for us, getting that mentorship, having them help us learn the ropes of the syndication process, and go take down these big deals. It was definitely challenging, but that was the most important move we ever made.

Slocomb Reed: So your mentor sourced deals and personally guaranteed the loans?

Shawn DiMartile: Yeah.

Slocomb Reed: So with these two deals, these 300 units, what will your role be in executing on these business plans?

Shawn DiMartile: So we’re working hand-in-hand with my mentors on moving through with the construction. We’re essentially in the voting process on which improvements are we going to make right now, which contractors we’re going to go through. Really, I could say we’re involved in everything, my partners and I, but we’re doing that side by side with my mentor. What I mean by that is, for example, Tony and John, they’re vertically integrated with their own property management company, and they have thousands of units, so they have managers of the properties in that general area already. So I’m able to communicate with them, for example, my role with the construction side and the CapEx side. I’m communicating with them on what we’re getting done next, when we’re going to do it, how much we’re willing to spend on each project, etc. But I’m doing that hand-in-hand with Tony. But essentially, my role is more on the Capex side and in the improvements to the property.

Slocomb Reed: Got you. Who brought the investors to this deal to fund it?

Shawn DiMartile: We split that with my mentor. Essentially, we needed to raise four million dollars for each of these deals. My mentor actually came in with essentially almost half of that, and then the rest of that my partners and I needed to go raise from our investor database, which we were able to successfully do, and it was very difficult. But as far as bringing in outside investors, that was done by Pac 3 Capital.

Slocomb Reed: Nice. So what’s the plan with these? Is it a simple value-add, raise the rents, five-year hold?

Shawn DiMartile: That’s correct. Three-to-five-year hold; there’s a multiple value-add strategy we’re doing including renovating the units, doing some improvements to the amenities, we’ve sub-metered them, individually water metered each of them on both of those properties, all 300 units; things like that. It’s been going incredibly well. We’re projecting and underwrote for $100 increases in rent. And since we closed just earlier this year, we’re already getting $300 bumps to $400 bumps on the renovated units.

Slocomb Reed: And the tenants have higher utility bills, because they’re paying their own water, right? So what accounts for that drastic increase between the underwritten rent growth and the actual rent growth?

Shawn DiMartile: I think it’s a combination of a couple of things. What we’ve done to the property so far has been a pretty good value-add. One of them is townhomes, which there are not many townhomes in this market. Townhome-style apartments – you don’t have anybody living above or below you, so that’s a really desirable apartment unit. Now, these units were built in the 1980s, so the interiors, the cabinets, all that kind of stuff was really old. We’ve gone in and replaced pretty much everything on these units – cabinets, flooring, countertops, appliances, the whole nine yards, and really brightened them up and made them look more modern. They’re more desirable and we’re getting a rent bump from that alone. But in addition to that, we’ve increased the amenities. We’ve added a dog park, we’ve completely redone the sports area. There was a basketball court and we made it into a multi-use sports area, a little soccer area for kids, some hopscotch, things like that, a brand-new playground, we’ve upgraded the pool area…

There’s been a lot of things to just physically make the property more beautiful and have more curb appeal. But I also just think that that market also has a lot of upward pressure on rents as a whole. Throughout 2020 and in the pandemic, Greensboro, North Carolina was in the top five for year over year rent growth. I think in 2020, it increased 10% just organically. So I think you combine that with the value-add plan and the rents are just exploding.

Break: [00:16:57][00:19:53]

Slocomb Reed: When you were sharing this opportunity with your investors, what kind of a return were you offering?

Shawn DiMartile: We were projecting, I believe, if my memory serves me correctly, 18% IRR, double-digit cash on cash returns year over year, and a 2X equity multiple over three to five years. So kind of a standard thing that you’ll see a lot is double your money in five years, and that was with really, really conservative underwriting. We’re talking when we underwrite our exit cap rate, we’ve increased by 0.25 per year. So for five years, that’s a significant increase. So we keep it pretty conservative, and it’s still penciled out really, really well. Our investors are going to make out pretty well, at least it seems so far.

Slocomb Reed: Do you know how your mentor source this deal?

Shawn DiMartile: This deal was actually already in his portfolio. He bought this property six years ago, actually, with his investors. It was a time in the cycle – because just like with this business plan, he told them it was about a five-year hold; they were just slightly over that five-year mark and it was time for them to sell. He still liked the deal and still saw that there was still more value-add to be done, because their original business plan was mostly exterior and rents just kept increasing. So it was time to sell that property and he said, “Look, we can sell the property to you guys, and I’ll rebuy-in with you guys, and then we can implement some more value-add to the play, if you want.” That’s how we did it. So it was really an off-market opportunity. The original owner was going to buy back in with us, so it made it really easy for us.

Slocomb Reed: Yeah, that’s a big opportunity. Correct me where I’m wrong, Shawn, for our listeners – remind me of the mentor’s name, Tony…?

Shawn DiMartile: Tony and John Azar. They’re brothers.

Slocomb Reed: So Tony and John bought into this for a value-add five-year hold, six years prior. They operated their business plan, they added value for their original set of investors, they got to that five-year mark or a little beyond that five-year mark, and it was time to sell in order to provide the IRR that they had projected. There was still meat on the bone though, enough so that you could come in and effectively operate the same business plan again, over another three to five-year span, and present that same opportunity, again, with the same property. Do you know if there are any passive investors who bought back in again, for the second round?

Shawn DiMartile: There weren’t any passive investors that bought back in, because those were all Tony’s investors, and they all got, I think, just shy of a 3X equity multiple on the deal. But he wanted to push us to raise all the capital ourselves, minus the amount he contributed. He contributed well over a million dollars of his own capital, which helped with our capital raise, and also was great, because it was great to demonstrate that to our investors and explain that to them. But he allowed us to just go outside of what he was contributing; he said, “You guys go and raise all of the rest of the capital we need”, which we did. And I’m glad that he did it that way, because it really pushed us on this capital raise and taught me a lot about that. But that’s how we got it done.

Slocomb Reed: You’ve got your first 32 units, you have these two North Carolina syndications. Any other real estate deals?

Shawn DiMartile: No other commercial multifamily real estate deals. The rest of my deals are single-family Airbnb deals, which that’s completely out of the realm of commercial real estate. But we’ve got a lot of plans for next year, and we will be growing the portfolio. Hopefully, we can grow substantially, but we’ll see, man. It’s a really competitive environment. It’s difficult to find good deals, but we’re on the hunt.

Slocomb Reed: Awesome. Well, Shawn, I know you are one of our Best Ever listeners. What is your Best Ever advice for our listeners?

Shawn DiMartile: Best Ever advice is to go out there and get started. If you’ve read the books, if you’ve listened to podcasts extensively, you can only learn so much before you just start doing. A lot of the things that I’ve learned so far were not in any of the books or podcasts. You’ve just got to start doing it. Just pull the trigger and get it done.

Slocomb Reed: Are you ready for the Best Ever lightning round?

Shawn DiMartile: Let’s go. I’m ready.

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

Shawn DiMartile: I love helping people getting started in this industry. Anytime someone’s trying to ask me questions on like double-checking or underwriting, asking me advice on anything that has to do with operations, I like to try and help people because I’ve been in their shoes before and I know how hard it is to find somebody with experience to help, so I love doing that.

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

Shawn DiMartile: That would probably be Pitch Anything by Oren Klaff. I love that book, and I’ve read it twice now, and I’ll probably read it again.

Slocomb Reed: Shawn, where can our Best Ever listeners get in touch with you?

Shawn DiMartile: The easiest way is to email me directly. You can email me at shawn@ pac3capital.com, or just pac3capital.com, on the website you can reach out.

Slocomb Reed: Awesome. Well, Shawn, this has been a great interview. You’ve added value to us as well as your properties. This is good stuff.

Shawn DiMartile: Thank you.

Slocomb Reed: Best Ever listeners, we hope you have a Best Ever day and we will see you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2677: Unlock the Fund of Funds Model with Hunter Thompson

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Hunter Thompson shares how you can utilize the Fund of Funds model to scale your business.

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Hunter Thompson: Alright. For those of you who don’t know me, we are about to dive in deep into the details. Buckle up, get your pen and paper ready, and make sure to write down questions as they come up. Because I definitely want to get into the Q&A and just burn through as many questions as possible. It’s likely that a lot of things will come up during this conversation. If you’re not yet familiar with this concept, let’s talk about what this is. Why listen to this presentation?

Before we get into the details of what this is all about – this presentation is going to outline a concept, a structure, a model that’s going to allow you to provide your investors with access to operators with extremely large minimums. It will allow you to act as a capital raiser while avoiding challenges associated with becoming a registered representative under a broker-dealer, which I am; it’s kind of a pain, but you can avoid that by doing this. You can also provide economies of scale if you’re just getting started.

So if you just want to be a capital raiser, for example, it usually doesn’t make sense to do that and go through all that process and compliance unless you can raise, let’s say, five million dollars in a year. This will allow you to start with raising half a million, raising a million, raising two million. And if you want to continue to just be a capital raiser, perhaps at that point, you can go and be a registered representative.

Also, if you’re an operator – this is so key; I know a lot of attendees are operators here – it will allow you to create structures that attract fund of funds managers. This is how you can get someone to write you a check for two million, three million, five million dollars, such as my firm, Asym Capital; we’ve done this many, many times. And if you’re an operator and you’ve got a lot of capacity to invest or raise capital, but your deal flow slows down, you can actually create your own fund of funds and invest in someone else’s deal. Lastly, and potentially most importantly, there’s nothing better to do. Everything’s closed down, so you’re stuck with me for the next 20 minutes. So let’s rap about it.

So this is what a traditional real estate partnership looks like, and this is something that has been going on for hundreds of years. You have a capital partner – it’s very common in the real estate business to have a delta between a capital raising partner and the operating partner. One person focuses on operations, the other person focuses on the placement of capital. Those people get together, they form a management company, and that management company purchases real estate. We’re very, very familiar with this.

So as the Jobs Act happened, and as podcasts such as Joe Fairless, as in my own, and many, many others started taking place, people recognize “Wait a minute. I have access to half a million dollars through my friends and family. Perhaps I can be a capital partner in one of these deals.” So what ended up happening is a lot of people in the industry took this co-GP model that’s been proven over millennia and turned it into something that looks a little bit different.

Now it’s like this – a capital partner is here, they’re going to raise money for a deal; we’ve got the operating partner, and they’ve created this management LLC. But the capital partner can’t come up with 100% of the capital because the deals are getting bigger and bigger… What happens is they invest in this deal, but maybe it takes this capital partner, this capital partner… They’ve added all these capital partners in, and the SEC is basically saying, “Look, you can’t just have a bunch of people raising money for a deal, each of which is getting compensation basically exclusively on how much capital they raised. They’re basically acting as a placement agent, but they’re not doing so under a broker-dealer.” I know this is super, super common, and I’m not really saying, morally, there’s anything wrong with it. I’m just saying from a guidance perspective going forward, I would say that this is not ideal, especially the more people you have. If you have 30 capital raisers for a deal, the SEC would really have a problem with that.

So this enters the conversation of the special purpose vehicle. These two terms, SPVs and fund of funds are used interchangeably. That can actually create a lot of confusion, so I’m trying to get in front of that really quickly. The SPV, of course, it’s short for special purpose vehicle; it’s considered a pass-through entity. This is the part that causes a lot of confusion; just because we say a fund of funds does not necessarily mean there are multiple assets. When I say fund of funds, it’s a structure that I’m about to outline, but it doesn’t necessarily mean you’re investing in mobile home parks, self-storage, you’re investing in Florida, Texas, etc. It just means the structure itself; they’re used interchangeably.

Break: [00:05:31][00:07:10]

Hunter Thompson: Here’s how this typically works. You’ve got a bunch of investors and they invest into a fund of funds or a special purpose vehicle, and that entity then invests in an investment opportunity, let’s say a typical deal with Spartan Investments. But there is a manager of that fund of funds. In this instance, this would be the placement agent that’s sole duty is to create the entity, identify the operating partner, pool investors together, and then invest into that other person’s deal. This overcomes a lot of those challenges with third-party compensation, because your compensation is being derived at the fund of funds level. Now, when you look at this and you’re an investor, and you’re attending Best Ever and you’ve got a bunch of friends that you know, from this conference or otherwise, you’re like, “Why would I ever invest in a special-purpose vehicle that then just invests in someone else’s deal? Clearly, I’m getting a middleman-ed.” That’s a lot of what we’re going to talk about today.

Why would this ever happen? Most importantly, I’m going to give you the tactics and the strategies, but this is a very important slide here. Your clients desire your expertise; I cannot overstate this enough. Price is not the determining factor. The difference between a 16% IRR and a 14.9% IRR is not the difference between investors moving forward. The reason is that your clients desire your expertise, they trust you, etc. Now, it may also give them access to operators that otherwise aren’t available. So you can come to them and say “I formed the relationship, I did all this due diligence, I provide access to this relationship through the structure.” It may also create a situation where they have access to an operator that has a very high minimum investment. We did a deal a year ago where the operator has a two million dollar minimum. Well, our investors can’t reach that minimum individually. But if we pull them together in a special purpose vehicle, then we can invest in an operator that’s extremely high quality, a billion dollars under management, etc.

And lastly, as I mentioned, your dream clients – they’ve been attracted to you. And if you’re not focusing on your dream clients and specifically creating your marketing to attract those people, you’re leaving money on the table and you’re not working with people that you love. You want to work with investors that you love, and the way to do that is to focus on attracting them.

Of course deferring to your due diligence, most investors are not like you. As fun as we like to spend our whole weekend going to these virtual events that Ben has done such a great job putting together, most people don’t want to spend their time attending conferences. They just want to go about their business, live their life, work their W2, etc. And of course, as I said, price is not it, that’s never the answer. If you’re struggling, it’s not because of price, it’s because you haven’t increased the value in your customer’s eyes enough for them to want to move forward. So the economics is not necessarily the reason, but it is not even the case that through the structure, they’re less favorable. I’ll give you a quick example.

So you can actually negotiate that your SPV itself gets a favorable treatment that can make up significantly for the fact that there is an intermediary in the deal. Here’s how that would work. Operators want to focus on implementing the business plan. Remember the original example I gave where there’s an operating partner and a capital partner? This is the same concept. They want to focus on actually doing it, not talking to investors. If you’re a capital raiser and you like talking to investors, you feel like, “Oh, that’s clearly the best and funnest part of this whole space.” I tend to agree with you, but that’s not what most people want to do that is focused on the operating side of the business. They want to focus on management, they want to focus on implementing the business plan. So you can leverage what you’re bringing to the table as a negotiation tool to get favorable treatment for that. And you can even get things other than just economics – you can get voting rights, and all these things; transparency, additional reporting, etc. This all results in operators willing to forego some of the economics, to receive larger checks.

How many times have you heard about institutions that have 80/20 or 90/10 splits? The reason they’re able to negotiate that is that they are going to write a $20 million dollar check or 100-million-dollar check. This is the same concept at a smaller level, and this is how it typically plays out. By the way, if this is the first time you’ve seen this concept – watch me; there’s going to be more and more. Not because I had anything to do with it, but it makes a lot of sense, and we’re seeing the industry flow this way. So you can create different classes of shares based on the investment amount.

Now, if you’re an operator and you’re not doing some version of this, you’re going to be so excited when you start. Here’s how this works. Class A minimum is a $50,000 investment. Then there’s a Class B minimum with a $500,000 investment. And the $500,000 investment can have slightly or significantly more favorable preferred return, waterfall structure, voting rights, transparency, etc. This is typically done by creating these different classes of shares, but it can also be done through a side letter agreement. And when it comes to side letters, the issue with those is that it’s a secret kind of agreement. I don’t like to do secretive things in my real estate deals, so I prefer doing these clear class of shares delineations that says, “Hey, look, you want to invest half a million? You get favorable treatment. If not, no problem. Class A is for you.” And by the way, when you do this in your documents, which is pretty much free to do, you’re going to find that random investor that’s going $50,000 investment here, $100,000 investment here… All of a sudden, it’s a miracle; they find half a million dollars and they want to get what everyone wants to get, which is a good deal. So just simply having the opportunity to do that makes a lot of sense.

Let’s talk about what this will look like. I’m sorry to say this is really, really complicated. I couldn’t remove this slide from this presentation, this is the only way to explain it. I will let you know after the fact how to get access to the slides. So I’m going to just run through this really quickly. Let’s say there’s a typical deal that’s an eight pref with a 60/40 split. Let’s assume that the property level average ROI is 22%. That’s prior to the waterfall. Here’s what a typical investor would receive if they did this. 22%, take away the pref, multiply the remaining balance by 60%, add the pref back in, you get 16.4% ROI, just an average return on investment.

Now, let’s assume that you create an SPV and get favorable treatment. Rather than an eight pref with a 60/40 split, you get an eight pref with a 70/30 split for investing half a million dollars or more.

Break: [00:13:49][00:16:45]

Hunter Thompson: I know we’re probably losing some people but bear with me for a second. We’ll show you structurally what this looks like in a moment. The same exact calculation with a more favorable treatment. 22% property level, take away the pref, multiply the remaining balance by 70%, add the pref back in, and you get 17.8%. That’s what the SPV would receive; not the SPV investors, but the SPV.

Now, as an SPV manager, you want to make some money for putting all this together, for doing the due diligence, for pooling investors, etc. And let’s assume that you basically pass through an 8% pref with a 90/10 split to the SPV manager. Now, some of you probably see where this is going, but you’re basically taking a 90/10 split on profits above the pref. Here’s what this would look like.

The SPV itself receives a 17% return. What do we do? The same formula. 17%, take away the pref, multiply that number by 90%, with 90 going to the investors, put the pref back in, and a 16.82% ROI net to the SPV investors. Holy cow, they’re getting a better deal than those that went direct!

Now, there’s a lot to go into details here, there’s all these fees that we can do, and this is just back of the napkin math. I’m trying to show you that it works, and it’s not necessarily less favorable. Here’s what the structure looks like from a structural standpoint. You’ve got the investment opportunity, sending out 17.8% into the fund of funds, you got the eight pref at the fund of funds level with a 90/10 split, investors receive 16.82. And you, the fund of funds manager, all you’ve done is create an LLC, done the due diligence, and put in a ton of work, obviously, but you’re getting 0.98% every year based on capital raised, as long as the deal performs as projected. So here’s what this means. If you raise a million dollars and you operate a fund like this for 10 years, you make $100,000. That’s my favorite way to make $100,000. I’ve done this, and made $100,000 many, many times over. So there you go. This is a wake-up call, both if you’re an operator or a capital raiser; this is a really good way to do this.

I do want to say though, just because this is possible, just because your investors can get a similar deal, or the same deal, or even a better deal, don’t let that goal be a limiting factor in your deal flow. What I mean is, you’ve probably heard the concept of 20 plus two; this is a private equity split. This is far better. I just gave you an example that was a 90/10 split. The two is an asset management fee, the 20 is the carry that these firms like Goldman Sachs implement. Price is never the deciding factor. We’ve implemented the structure alongside groups that have had investors where there was like a 60/40 split at the SPV level, and their firm has a billion dollars under management, which mine does not. So how is that the case? It’s because they’re people that know, like, and trust them, they’ve got more of them, they positioned themselves in such a way to be able to successfully do this… And you would recognize their names. This is not country bumpkins or family offices that don’t really know what’s going on. These are elite players.

As an example, Goldman Sachs doesn’t have a real estate firm. They’re not operating real estate, yet they’re making billions on real estate, because they’re doing this 20 plus two. I’m actually going to skip that just for the sake of time. But here’s a quick note about compliance. I’m trying to give you all the tools. This is not so much the fun part but this may be the most important slide I’m going to share right now. And the industry has not yet caught up to what I’m talking about, but this is really, really important. Get your screenshots ready for this. This is the $100,000 idea. When you create an SPV and you invest not into real estate but into someone else’s deal that’s a security, this has significant implications in terms of the Investment Company Act of 1940, and the Investment Advisors Act of 1940. These are not acts that most of your attorneys specialize in. I know this, unfortunately, because this is a realization that I had to make up on my own.

So here’s what the idea is, if you’re going to go this route – make sure you hire or consult with an attorney who specializes in what they call the 40s Acts; not issuer-focused attorneys. That’s all you got to say, “Do you specialize in the 40s Act?” “No.” “Do you have someone at your firm that does? Great. Can I get an introduction?”

I want to do the key takeaways but you guys already know it, I blitzed through it. Here’s what I’m going to do really quickly. If you want the slides, go to raisemasters.com/FOF-slides. This will allow you to download everything. In fact, there are far more downloads. Raisemasters is our Mastermind, and you just got something super, super valuable that people have paid quite a bit to get some access to, so go there. If you don’t find the URL or it doesn’t work, check me out at the booth and I will see you there.

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JF2674: This Strategy Helped Them Close Their First Two Deals in One Day with Jenny Gou and Steve Louie

Jenny Gou and Steve Louie both started out working in corporate with sales-focused jobs. After seeing the benefits of real estate investing, and the scaling they could have in multifamily, they partnered together and within 10 months, they had found and secured their first two deals as partners, closing on the same day. In this episode, Jenny and Steve share what makes their partnership a success, and the details involved with sourcing and managing these deals.

Jenny Gou and Steve Louie | Real Estate Background

  • Both Managing Partners at Vertical Street Ventures, which was established to help individuals achieve their financial goals through passive investing in real estate.
  • Jenny’s Portfolio: 1,650+ units across AZ, TX, and GA.
  • Steven’s Portfolio: 3,200+ units across AZ, CA, FL, and TX.
  • Based in: Brea, California
  • Say hi to them at: www.verticalstreetventures.com

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Jenny Gou and Steven Louie. How are you two doing?

Jenny Gou: Great. Thanks for having us.

Joe Fairless: My pleasure and glad to hear that. A little bit about Jenny and Steven – both are managing partners at Vertical Street Ventures. Vertical Street was established to help individuals achieve their financial goals through passive investing in real estate. Vertical Street Ventures – they have over 1000 units as general partners, and then they each have passively invested in deals as well. They’re based in California. With that being said, do you two want to give us a little bit about your background and your current focus? Maybe, Jenny, do you want to go first?

Jenny Gou: Absolutely. A little bit about me. I’m currently a full-time real estate investor and syndicator. I’ve been doing this full-time for the last two years. Prior to that, my former life, I was in corporate America for 13 years, working as a Sales Director at P&G. I started with single-family investments just to diversify our retirement, all in Cincinnati,10 homes. They did well, but i wanted to scale quickly, so learned about multifamily, and then here we are. We started Vertical Street Ventures this year along with my partner, Steve, to help others get passive income, but then also share the wealth of knowledge that we have, so that others can achieve financial freedom.

Steven Louie: For myself, Joe, I’ve been a corporate America guy most of my entire life. W2 wage earner, I call it cubicle-to-corner-office; a successful career on the insurance and consulting side. Everything from sales leadership to underwriting, to running the entire office, my last role as a partner at a consulting firm. Halfway through my career, I started investing in real estate, started just like Jenny in single-family homes. That led, most recently, for the last five years, all into multifamily. That’s where Jenny’s husband and I met at a meetup, and the rest is history. We started Vertical Street Ventures and it’s all focused around multifamily investing.

Joe Fairless: I heard you, Jenny, you said you’ve been doing this full time for two years. You had 10 homes in Cincinnati and Steven… Do you go by Steve or Steven?

Steven Louie: Steve is fine.

Joe Fairless: Okay. Because I heard her say, Steve. Fair enough. Let’s call you how you want to be called, Steve. Steve, how long have you been investing in real estate? And then the same question for you, Jenny.

Steven Louie: I’ve been investing for over 10 years. Again, I started in single-family homes, and then most recently shifted over into multifamily exclusively. I built a pretty strong portfolio across the board from a passive investment standpoint. I started with passive investing, I have a portfolio of probably 25 passive investments, and then we’re general partners on over 10 to 12 general partnerships out there.

Joe Fairless: Okay. Jenny, same question. When did you buy your first house in Cincinnati as an investment?

Jenny Gou: Yes. Back in 2017, almost five years ago. I started with one, and then within a year and a half, caught up to 10. In fact, I closed on four on the same day, believe it or not, in the middle of the workday. But then since started multifamily two years ago.

Joe Fairless: Okay. Why did you leave single-family homes?

Jenny Gou: The same reason everybody else does. I think you quickly realize that it’s not scalable. It’s more efficient to jump into multifamily, it’s more beneficial from an income appreciation, tax benefits. And it’s actually the same, if not less work, depending on how you approach it. So it just made sense for us to make the switch.

Joe Fairless: Steve met your husband at a meetup, then dots were connected, you two formed Vertical Street Ventures. What was your first project together?

Jenny Gou: It took about 10 months for us to find a deal, because all of last year COVID was happening and things weren’t very open. So it took us about 10 months to find our first deal, and then one quickly joined afterward. We actually closed on two deals on the same day in December 23 of last year. One was a 28-unit in Glendale, Arizona, the other one was 176-unit in Tucson, Arizona.

Joe Fairless: Okay. Those are your first deals as general partners, correct?

Jenny Gou: Correct.

Joe Fairless: Wow. Congratulations on those. Did you have any paid guidance to help you get to that point?

Jenny Gou: Absolutely. That’s probably one of the Best Ever tips that I’ve received, advice, in this career… Specifically, to find a coach, a mentor. Whether it’s informal, or it’s paid and more formal, whichever you prefer, but it’s absolutely critical for you to educate yourself quickly, and then accelerate.

Joe Fairless: Who did you pay?

Jenny Gou: So I did the informal route. My mentor was actually Steve Louie.

Joe Fairless: I think I know that guy. I used to call Steven, but now I call him Steve.

Jenny Gou: Exactly. [laughter]

Steven Louie: We got closer.

Jenny Gou: Yeah. So when Ronnie met him, actually, Steve was speaking at a meetup. Right around the same time, I had just decided to leave my corporate job. I actually met Steve a few weeks later, we connected instantly, got talking, and at the same time, just in conversation, I said, “Hey, just to get real quick in this business, I want to go find a mentor. I’m willing to work for free, I’ll be someone’s intern.” Steve looked at me and said, “Well, I have properties in Arizona. Why don’t you come work with me for the next couple of months and help me manage my workload there?” as he was still working full-time. That’s how we came to be. We spent the better part of last year interviewing each other, him teaching me, we were underwriting deals – all of that stuff, before we actually decided to partner together on a project.

Joe Fairless: Who does what in the business?

Jenny Gou: Steve is excellent with building relationships. He’s got such a great network in the Arizona marketplace already. So his strength is very heavy in the acquisitions side of the business, building relationships with investors, all of that as well. And then I focus a lot more on asset management and the execution of the business strategy, as well as raise funds and capital for our projects, too.

Joe Fairless: Okay. And I heard in my mind, it was crystal clear – acquisitions, Steve, Jenny, asset management, execution. But then I heard you say that you both work on the investor angle, because you mentioned he is good with investors and that’s also something you do. How do you two divide and conquer that, if that is the case, Steven?

Steven Louie: From a capital raise perspective, I think the great thing is both Jenny and me have very complementary skill sets. At the same time, we have some skill sets that are very similar, too. Just both being in a sales-oriented role most of our careers allowed us to have a pretty strong network of folks that actually tapped into us from an investment standpoint.

Sometimes some of my investors I’ll give over to her, she might be a little bit better fit, and vice versa. We both have the ability to connect the dots with individuals to help move them along the multifamily investment timeline accordingly. So I would say everybody on the team, in some aspect, does some type of capital investment. When they get to a point where they need somebody else, either I or Jenny can come in and take over from that standpoint.

Break: [00:08:09][00:09:48]

Joe Fairless: 28 units and 176 units, first two deals closed, and it took 10 months to find them. Steve, will you just talk us through how you found those deals? I assume it was you because I heard Jenny say you were focused on acquisitions. How you found those deals, how much equity was raised, and where that came from.

Steven Louie: Absolutely. Just real quick from a background perspective. I joined a paid training program, and that was through [unintelligible [00:10:16].16] I joined that program probably about four years ago and learned all the different aspects of multifamily, and then even took down a couple of them myself, just personally, just smaller ones. From that standpoint, that’s how I developed strong relationships with the brokers in the marketplace. That’s one of the keys in order to achieve success in this area, it’s building those relationships with those brokers. By doing that they have funneled over different opportunities to us. The first one, the 28-unit one was because of a relationship, that was probably the fourth opportunity that we’ve done with that one particular broker, in some aspects in terms of relationships. That took off` — it actually came about when somebody fell out of a contract. They gave us a call and that call said “Hey, we’ve got this. You could take it down at this purchase price. Would you like it?” Boom, we did it, got a Freddie small balance loan on it in quick order, due to some of the relationships we had [unintelligible [00:11:18].19] and was able to close that one.

Then the second one was a larger opportunity in Tucson. I had a great partnership with another group out there. Kyle Mitchell was one of the individuals that I’ve been working very closely with. That one we worked very closely together and closed that one in Tucson as well. They coincided on the same exact day, and perfect timing for the end of the year, to achieve some bonus depreciation for all of the investors as well as the general partnership.

Joe Fairless: On the 28-unit when the broker said it fell out of contract, how long did it take you to say yes?

Steven Louie: Probably a couple of hours. We just came back as a team, do we want to do this? Then we had to make the decision – do we do it on our own? That was one of the things. Or do we do it as a syndication? And since this was the first syndication that we did together, we said, “Let’s do a syndication on that.” Obviously, the market has been great in that market, and the opportunity and the actual asset itself was a great asset, too.

Joe Fairless: How do you make a decision to purchase a property within a couple of hours?

Jenny Gou: A little more context to that… We actually toured the property back in July of 2020, and we were ready to buy. So the second we toured it, we underwrote it, we were going to put an offer, and the broker said, “I’m sorry, you’re too late. An offer was accepted.” So we walked away tail between our legs. Then come September, I get a phone call from that broker saying, “It’s about to fall out of escrow. Do you want it?” I had to quickly hop on the phone with Steve and some other folks and say, “Guys, it’s about ready to come back on. We need to take this.” The quick decision was kind of a no-brainer, phone call, and we called them back. Were we the first one he called back? Maybe, maybe not. But because we were able to respond so quickly, it was ours. That was really important.

Joe Fairless: Thank you for that. So you had seen it before, you were familiar with it, and you acted quickly. How much did you raise on that one, Jenny?

Jenny Gou: For the 28-unit, that was 1.6 million dollars. So a relatively smaller sized one.

Joe Fairless: But it was the first deal that you all did, and it’s impressive to raise that amount of money on your first syndication. How many people, if you remember, did that come from?

Jenny Gou: That was our first raise. Transparently, we raised it in 24 hours. It was our first friends and family deal. We had about 12 people, all in, come into that deal.

Joe Fairless: And you said it was friends and family for that one?

Jenny Gou: Correct.

Joe Fairless: As far as friends go, where are some of the places that those friends came from, that ended up having the trust in you to execute the business plan, take care of their money, and then grow it?

Jenny Gou: I think it’s the same for — I think it’s the same for both Steve and me. A lot of these closer friends are part of the deal. These folks have seen us and heard us talk about investing over the last couple of years, both our single-family and then our journey into multifamily. So it wasn’t a surprise; a lot of them had been waiting on the sidelines just to see what we would do. When this great opportunity came up, they were not hesitant at all to jump in with us into the deal.

Joe Fairless: So there’s a benefit to having two deals at once… But then there’s also, from the equity raise standpoint, there could be a disadvantage, and that is which deal do I invest in Steve? Which one’s better? Tell me which one’s going to make more money? How did you navigate that conversation with investors?

Steven Louie: That’s an excellent question. The great thing is multifamily is really a team sport. Jenny and I were partners on this one, and we also had a couple of other partners on our other deal too, which enabled us to raise some of those dollars. I think the initial focus as we were going through the process was let’s focus on ours right here, the smaller one, because that was the first one we kind of collectively did together. I’ve had multiple other opportunities with Kyle in the past. Some of that naturally took place with some of his networks as well. So that was the beauty of being able to close both of the deals at the exact same time as a general partner. So I’d say on the other deal, though, we were actually using a lot more for our net worth and liquidity requirements at that point in time.

Joe Fairless: Steve, I imagine that since you’ve taken down some deals on your own, multifamily deals — first off, what was the largest, in terms of unit size, deal that you purchased on your own?

Steven Louie: So we got a 176-unit, but I think–

Joe Fairless: I’m talking about personally, not syndicating. Because I heard you say earlier…

Steven Louie: So not syndicating – yeah, my largest one would be 35 units.

Joe Fairless: And that is large enough for lots of drama to take place, I imagine… So on your personal portfolio, what’s something that came up that you would do differently if presented a similar opportunity, and perhaps have used those lessons to apply towards your venture now?

Steven Louie: One of the key things is to choose your property management firm extremely well. So do a lot more due diligence on property management. In that particular case we did have to shift the property manager, actually a couple of times, just because we had some heavy lift. The construction was over $25,000 a door on that, and you need to have somebody managing that process.

Especially when I was working full time as a corporate executive, there’s not a lot of extra time during the day to spend on that, so you do have to rely heavily on your property manager. Fortunately, we were able to secure one that knew how to do everything and had their construction arm all built-in. We had weekly meetings to manage all of that. So in between my regular job, we were taking care of all of those details.

Break: [00:17:01][00:19:57]

Joe Fairless: You said you switched managed companies twice.

Steven Louie: Yes, we did.

Joe Fairless: What was the breaking point for switching the management company the second time? Because the first time, I imagined, it was tough. But the second time, it’s just got to be downright excruciating to do.

Steven Louie: First off, I didn’t know anything really about the property managers in town, outside of just spending a couple of days with them and having a bunch of phone calls. So I think you just have to get references out there to make sure that things are moving in the right direction.

The first move was a little bit more challenging, to be honest with you… And then the second one, they just weren’t following through from an asset management standpoint in the way that I’m used to from a corporate America standpoint. We have a lot of project deadlines and things like that that need to happen. So we found somebody that was a little bit more institutional-based. We were able to take advantage that they had some larger properties around the area, literally right around the corner, that we were able to tap into, that enabled us to use one maintenance person in addition to sharing it with another property owner. So making that decision the second time was pretty easy after knowing that they were already managing 120 units right around the corner.

Joe Fairless: Taking a step back – this question is for either one of you, whoever wants to answer… What’s your best real estate investing advice ever?

Jenny Gou: I would say, find the right partner. I’ve seen this multiple times with different sets of partnerships in teams, a lot of folks will jump too quickly into a partnership or a company and realize very quickly after that they’re not the right fit for each other. That’s true in any industry, but very specifically for real estate, because it is a team sport. It is not something you should be doing yourself, unless you don’t want any sleep at all. So finding the right partner… That’s why Steve and I didn’t do a project together for about 10 months, because we wanted to feel each other out and make sure we have the right values, we met each other’s families, we did background checks on each other… So it’s a very thorough process, and that’s one thing I don’t think people are doing enough of in this industry.

Joe Fairless: Was it awkward having a conversation, whoever brought it up, about “This sounds great. But I’d like to do a background check”?

Jenny Gou: Not at al. Again, I think it’s because of our corporate experience maybe. At P&G I had a background [unintelligible [00:22:13].29] all of that, same with Steve. So it wasn’t a surprise, at least for me. But I think it’s a necessity.

Joe Fairless: Who brought it up?

Steven Louie: I used to be — prior to getting into syndication, I was a licensed securities principal as well. So open book on me completely, and I said “I need to find out a little bit more about you. Can we run a background check?” There was no hesitation on her side, we ran it, everything came out clean, and we decided to build this company together, which is thriving. It’s super-fun when you have great partners moving in that same direction.

Joe Fairless: I hear you. Partnerships are critical, and what a great point that you brought up about doing a background check on your partner. And vice versa, having one on you too, for your partner, so that everything’s out in the open, nothing sneaks up after you two have put in a lot of time and effort together to do stuff, because you don’t want any surprises. Thank you for that. Now let’s do the lightning round. Are you two ready for the Best Ever lightning round.

Jenny Gou: Yes.

Joe Fairless: Alright. Sounds good. Steve, [unintelligible [00:23:10].24] lightning round, right?

Steven Louie: Sure.

Joe Fairless: Alright. What deal have you lost the most amount of money on?

Steven Louie: The most amount of money was a passive investment that I had with somebody. The whole project lasted about four years and it was breakeven, with no cash flow throughout the entire project.

Joe Fairless: What went wrong, high level?

Steven Louie: Leadership. I signed on the loan as a key principle, but I signed on with individuals that I really didn’t know very well. That kind of goes back to your other question, fear of missing out – sometimes you’re jumping onto deals that potentially aren’t the best ones because they’re fairly new syndicators.

So if you’re getting into the business, you probably have to go with somebody, if you’re going to be signing on the loan or even as a limited partner, somebody that has done this before and has a track record they can support some of the numbers. This happened to be their first syndication, as well as mine, that I signed on as a key principal.

Joe Fairless: What deal have you made the most amount of money on?

Steven Louie: Most recently, we just sold one in 23 months. That was over two multiples, in the Phoenix marketplace, for the investors. That was a great win most recently.

Joe Fairless: Nice.

Steven Louie: In addition, the cash-out refinances, too. Sorry, I know you said one, but we did a cash-out refinance, 100% going back all into the pockets of the investors.

Joe Fairless: That first deal was a 2X multiple to investors you said?

Steven Louie: No. That was probably my fourth deal.

Joe Fairless: I’m sorry, the first one that you just mentioned. You just gave me two.

Steven Louie: My bad. Yes. That one was back to the investors. Yes.

Joe Fairless: And how much did you make on that?

Steven Louie: How much money did I make on that? We did fairly well. It was a good amount, about three times that amount or so.

Joe Fairless: Like a million bucks…?

Steven Louie: Yeah. I would say just shy of that.

Joe Fairless: Just shy of that. And the reason why I asked is a lot of listeners are general partners, so they hear these numbers, and it’s nice to dig into how much general partners actually make on deals.

Steven Louie: I would say, yes, it was shy of a million dollars there, but it’s a great opportunity… That’s the nice thing about being a syndicator – you can make three, four, five, six times, depending on how the deal is actually structured.

Joe Fairless: Best Ever way you like to give back to the community?

Steven Louie: Giving back to the community… One of the great things is I give back to my local church here. I’m very active in that. I am a leader of the trustees now, so I’m kind of the president of that board, just responsible for all of the activities that go around that, specifically for myself.

Joe Fairless: How can the Best Ever listeners learn more about what you two are doing?

Steven Louie: You can always connect with us on our website. We’re at verticalstreetventures.com. You can always schedule a call with us. We have that right there on our website. We’d be happy to have a discussion with anybody.

Joe Fairless: Partnerships, background checks, finding deals, profitability and property management challenges, and how to navigate them – all topics that are incredibly important to talk about, and I’m grateful that we did on this show. Thank you both of you for being on the show and sharing how you got to this point, and lessons learned along the way with specific examples. I hope you both have a Best Ever day and talk to you again soon.

Jenny Gou:  Joe, take care.

Steven Louie: Thank you, Joe.

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JF2673: How to Fix Trust Issues Between GPs and LPs to Source Better Deals with Zain Jaffer

Zain Jaffer transitioned from the tech space into commercial real estate, bringing with him a unique perspective on sourcing deals, forming partnerships, and streamlining systems to cut down on revenue and time cost. In this episode, Zain shares why trust among investors is vital to finding deals and how gatekeeping advice can harm not only your reputation, but future opportunities.

Zain Jaffer | Real Estate Background

  • General Partner at Bluefield Capital
  • Portfolio: GP on 400 units in family office, 4000+ at Bluefield Capital.
  • Focuses on multifamily, hospitality, senior care, and industrial.
  • Based in San Francisco, CA.
  • Say hi to him at: zain@proptechvc.com | https://www.bluefieldcap.com/
  • Best Ever Book: Blitzscaling by Chris Yeh

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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, Zain Jaffer. Zain is joining us from San Francisco, California. He is a general partner in Bluefield Capital and focuses on multifamily, hospitality, senior care, and industrial. Zain’s portfolio consists of 400 units in a family office and over 4,000 units in Bluefield Capital. Zain, thank you for joining us. How are you today?

Zain Jaffer: I’m doing great. Thank you for having me on the show.

Ash Patel: Awesome. Zain, 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?

Zain Jaffer: I came formally from the tech industry after having an exit. What do tech people do when they make money? They get out of tech and diversify through real estate, after listening to all these podcasts. So I followed that journey and I started off myself buying single-family rentals, doing a lot of hard money lending with construction loans, buying multifamily apartments as well, and investing as an LP in a variety of funds. And it wasn’t until some time passed — and I had a lot of heartache, by the way, investing in third-party funds. You’re paying these management fees, you’re paying acquisition fees, you’re giving a share of the profits to someone else. It wasn’t until some time passed that I realized, “Wow, some of these funds I’ve invested in are totally outperforming everything I’m doing personally.” So I decided to just be smarter to take a lot of the money I have and just give it more to funds. And I decided, let me join one of these funds, which is Bluefield Capital. I joined their platform and now I’ve been investing as a general partner of Bluefield, where I’ve got a lot of my own money in the fund, but I’m also managing other people’s money, and we’ve acquired quite a good portfolio since 2014.

Ash Patel: And what was Bluefield capital before you joined? Was it primarily multifamily?

Zain Jaffer: No. Bluefield is pretty diversified; all the asset classes you mentioned. And since I’ve joined, that sort of coincides with the big trends that we’re seeing with COVID; the landscape’s changed. Now we’re doing things like ground-up construction of townhomes because there’s more demand for more space and more land. There are new types of geographies that are really emerging because of the whole work-from-home movement, or because there’s more job security and more employment.

We’re also looking at some new types of asset classes — and I call them new… I call single-family new because it’s becoming institutionalized. Bluefield is also looking to do more of that. Industrial has been really big, and we’re also looking at experimental asset classes like ghost kitchens as well.

Ash Patel: Incredible. Zain, how many years between when you had your exit and started as a partner in Bluefield?

Zain Jaffer: Probably about one and a half years.

Ash Patel: Okay. In that one and a half years, how did you figure out who to invest with?

Zain Jaffer: At the beginning, you ask for referrals and introductions. You obviously know the big names, so you’re more comfortable putting money in with some of the big names. I invested with Blackstone, I invested with Bridge, and RXR. You also have some capital – for example, I had a big exit from some of my tech companies. I wanted to sort of shelter some of those capital gains so I invested in some opportunity zones as well. And then you’re sitting with all this cash in the bank, you’re obviously deploying it into the markets, but interest rates are so low… And what I love about real estate is cash flow. Then you get approached with a lot of individual projects. I started investing, project by project, trying to understand what is it that these guys are doing?

At the same time, I actually listened to a lot of podcasts and just thought, “Let me just jump in and do something small locally. Let me just start buying some single-family rentals.” It was just a mix of everything. I was trying to figure out, what do I want to do? I had a lot of capital to deploy, and so I just started moving. I made a lot of mistakes in the process, but I think that’s the route for everyone. A few mistakes later, you eventually wise up and you eventually figure out what not to do. So you try to do things that make sense after a while.

Ash Patel: Zain, what was the biggest mistake that you made?

Zain Jaffer: I think it’s a mistake I’m still paying the consequences for today. I focused too much on metrics like cap rates. Or for me — I’m Indian, and being an Indian person, I’m an East Indian, we’re very tight with money. We’ve got this reputation. So we love value. And I was obsessed with metrics like price per square foot. I’m one of the guys that when I go to buy my own home, I’m trying to get a bargain, I would offer way below the listing price, and I want to calculate “The average square foot price is this much in the neighborhood. Here’s what I got it for.” Big mistake. You get what you pay for; sometimes it’s worth paying a premium or worth paying market rates. That’s the mistake I’m still learning today, or dealing with mistakes.

Ash Patel: So your tech background coupled with being Indian defined a lot of your decisions.

Zain Jaffer: Yes. [laughs]

Ash Patel: Awesome. So how did you join Bluefield Capital?

Zain Jaffer: I joined Bluefield when — I had already invested in numerous projects. I was just amazed at some of the returns that generated. So realized, not unrealized; realized, net IRR of about mid 30 percentage points, since 2014. That’s one hell of a track record. When I was speaking to a lot of operators, I felt the Bluefield team was different, because they were very conservative. There he was, just always be deploying, but deploy carefully. You can’t necessarily time the markets, things do feel frothy… But going slow. I was like, “Guys, I want capital deployed. Can you take some money and get me returns?” They were like, “No, we can’t right now. We have a feeling more opportunities will come up.” And I just liked that conservative nature that they had.

The other thing was they had very little tech. They had achieved all of these returns with the old school mentality of relationships; relationships with vendors, relationships with agents and buyers they had worked with in the past. And I thought to myself, “If I can bring some of my technical expertise…” You can bring some of that magic, you see, with these larger institutional funds, like Blackstone. No one has the infrastructure as Blackstone has. But the smaller funds –  I thought I can join these guys. I can get them a website to start with, and start bringing in some technology in, being smarter with how we buy things, and scale up what we’re doing.

Break: [00:06:34][00:08:12]

Ash Patel: Did you have to pitch them to become a GP? Because they have to be thinking “Who is Zain Jaffer? Why should we partner with him?”

Zain Jaffer: I actually approached them and said, “Guys, I’m struggling.” I’ve got these tenants, I own a bunch of multifamily assets through my family office, 400 of them in Texas, a lot of workforce housing in tertiary markets… I contacted them and I said, “Guys, I’m kind of struggling right now. I’m having a hard time collecting rent.” We’ve got a lot of delinquency, we’ve got high occupancy, but people just aren’t paying rents. I’ve never dealt with this before; I’m new to real estate, and here I am, on paper thinking things look great, and I buy the buildings and I realize “Crap, cashflow was not there. I should have bought something that was 50% occupied rather than 90%, where half the tenant base isn’t even paying.” They coached me through that and we decided that “Why don’t I partner with you guys, and you guys can sort of be advisors to me?” Then after realizing we had shared values, realizing that I needed something that was different than me… Like, I’m this aggressive, ambitious guy that’s so impatient, I want things immediately, like in tech. You get it done quickly, you keep executing… You’ve got to throw that playbook away when you go into real estate; you have got to take a very different approach. I thought I’d learned from the team, and decided, “Hey, COVID just hit. There are these opportunities that are going to come out… Why don’t we just partner up and start a fund? I’ll join you guys full-time.” I sort of gave the pitch, they thought about it, and they said “You know what? It actually makes sense. We think it would be a good partnership.” I haven’t looked back since. I kind of wish I had done all that before I made my mistakes.

Ash Patel: I’m still trying to understand this… You joined them full-time. Was that a paid position?

Zain Jaffer: Well, I’m a GP, so you don’t really take a salary as a GP. You’re taking your management fees, you’re taking acquisition fees… You have a share in the partnership, a share in the LLC.

Ash Patel: And your value-add was bringing the tech to the table.

Zain Jaffer: Bringing the tech to the table, bringing a more fresh perspective, I’d say, wanting to learn real estate… Because they didn’t have really a base in the San Francisco region and the tech area. But yeah, sort of a mix of things.

Ash Patel: How many other GPS was there?

Zain Jaffer: There’s four other GPS.

Ash Patel: Okay, so not a huge conglomerate.

Zain Jaffer: No, and that’s what I liked about it. They were just big enough where I could make a meaningful amount of money myself and deploy a meaningful amount, but small enough where there was still room at the table for me. If they were an order of magnitude larger, there’s no way I would have had skin in the game, you could say.

Ash Patel: Yeah, I assumed they were larger just because of the different asset classes they were in.

Zain Jaffer: Yes.

Ash Patel: And I have to ask, when you started in real estate and you acquired your properties, did you have these rosy projections on spreadsheets of the three and five years and how much how many millions of dollars you were going to gain?

Zain Jaffer: Man, I had rosy projections on day one. I’m thinking, “Wow, this seller’s dumb.” I’m here and I’ve figured it out. The broker is telling me this is a great deal. “You should really, really do this.” Here I am, rosy-eyed thinking, “Wow!” I’m looking at my family office portfolio, and I’ve got some bonds that are yielding something 1%. I’m looking here and I’m like, “Oh, my God. This thing can cash flow immediately.” So this is the problem when you have a tech guy or an entrepreneur coming into real estate. In tech – and even investing in tech, because I’m also a venture capitalist… At Bluefield, I started the venture capital fund as well where we invest in prop tech startups. That was another value-add I brought in. When you’re wearing that hat, you back the person; you have to trust the person, you have to back their vision and their ambition, and you assume what they say is true, because things are at such an early stage. You do not do that in real estate. The last thing you want to do is to think “I really like this seller. He’s really ambitious, he’s bold, and here I am, getting a deal.” No. Everything that he said, you just throw it away and you do your own underwriting, your own models; you don’t take what you hear at face value. That was the mistake that I made, and the partner that I had at the time also, trusting in that partner, too. So hey, you learn… Trust but verify I think is the key term that’s now used, and I think that’s the case. It’s definitely hard for a lot of tech people when they come in.

The other thing is too, [unintelligible [00:12:10].26] tertiary market, and it’s the 650 or four and five area code, they know “Ha-ha, money’s calling.” Suddenly, the price is up 20 to 30% when you ask what it’s going for.

Ash Patel: You’re not kidding. I’m in the Midwest, and our goal – personally, my goal, is if I’m going to sell a property, I try to market it to coastal buyers. Because they’re just not used to the types of returns that we have here. So Zain – hospitality, multifamily, senior care, industrial, and then ghost kitchens as well you mentioned… How do you guys look for value add opportunities without getting overwhelmed?

Zain Jaffer: We’ve had to be very nimble, and you can do that when you’re small. Once you find a really good partner — Bluefield’s approach is to partner up with other funds to co-invest often, or to find vendors you really like and you’ve had a track record with. So we know some really good hotel operators who have performed for us historically. We’re very comfortable. And when they underwrite a project for us, they’re not only being held accountable for those numbers; we’ve seen them perform consistently. We’re comfortable. We’re a lot more comfortable with their projections, even if it’s lower than some third-party management firm we don’t know. Same with multifamily. We also have some partnerships with some construction developers who have really performed for us. And when we see them, we think to ourselves, “Let’s go in as a partnership here. You guys put some money into the project as well, some skin in the game. We’ll bring the majority of the capital, our balance sheet, our lending, our relationships, and our deal sourcing… And let’s partner here and let’s start doing this new asset class.” So Bluefield has done a lot relative to a lot of firms, because a lot of firms will just focus on one geography or one type of asset class and real estate. I think that’s the way to succeed. But for Bluefield, because of the depth of the relationships they have, they’ve partnered with a lot of funds, de-risked things and built expertise quite broadly.

What that’s done for us too, is that we were very multifamily focused heading into COVID, and multifamily has been impossible for us. Although we bought a couple of apartments through 2020, we must have made 100 straight offers that were rejected. Because the markets heating up, there’s a flight to safety in multifamily, people are abandoning – or were abandoning – retail and office… We had expertise in hospitality, for example. So that was a sector where we realized “Okay, we’re struggling with multifamily, but we have some experience in hospitality. Let’s double down on that.” So it’s literally this simple. We have an [unintelligible [00:14:42].22] as a team, it’s a small team, six or seven people, we meet somewhere because the team’s spread across the US, and we write on a whiteboard. “Hey guys, let’s put down what our relationships are. Let’s put down what our strengths are.” Our strengths are multifamily, but we’re not winning here, so let’s look at where else we can play. And we can move very quickly enough to one off-site, small team, quick decisions. We’re outbidding and winning. Larger firms are just entrenched, or specialist players are stuck. I feel sorry for the multifamily guys who had this to themselves, and now institutions are coming in and paying 3% or 4% cap rates. And the way people are underwriting, it’s mind-boggling.

Ash Patel: I agree. A 3% cap rate in the Southwest… Hard to make money when you do that. So what percentage of your capital deployed is in your own, deals versus partners deals?

Zain Jaffer: Bluefield, 100% of the deals are our own needles. Initially, Bluefield used to be more of a fund of fund, we didn’t invest as an LP. Now everything we do is a GP…

Ash Patel: Got it, okay.

Zain Jaffer: If we’re going to do anything with another fund, typically we want to see a clean 50/50 share of the GP. I’m glad you’re talking about this. People don’t talk about this enough on podcasts. It’s easy to say I want to partner with someone else. People use the word “partner” so casually and liberally. “Yeah, we’ll give you a 1% share that GP and we’ll give you an assignment fee.” That’s not a true partnership. We don’t want to work with someone where we don’t have a say in the project; we want to have a pretty good say in the project, and we want to have control of the project. If we’re not going to get more than 50% of the share, everyone have at least a 50% share. That way, if you run a fund and I run a fund, I know you’re on the market, you know I’m in the market – guess what? We’re bidding against each other every time, it makes no sense. You and me, we’re similar-sized funds. Let’s just partner together and do more deals together. So if you have a deal that you like, I expect you to bring it to me and vice versa. We’ve done that. We’ve got deals that we could fund in a heartbeat, but we’ll go to our partners and say, “Look, you brought us the last deal. We really want to build a relationship in these three or four markets with you. Let’s work together.” And you sit down and you’re [unintelligible [00:16:44].29] They’re better at managing the asset than we are, we have better lending relationships than they do, and they also have a really good inside contact here, and then you just match up… One plus one is more than two here. In real estate, it doesn’t have to be three, one plus one can be 2.3 because of the leverage involved. The returns are beautiful.

Ash Patel: Yeah, that’s so important, what you just said, where you share your deals, you reward other people that brought you deals, and you continue to build those relationships, which is appearing to be the foundation of how Bluefield is successful.

Zain Jaffer: Absolutely. And once that’s ingrained as a culture… I find real estate is too much about information symmetry. Everything firm, every man or woman for themselves. There’s so much opportunity out there that we all win if we share in that upside together. And it’s a zero-sum game, frankly; either you buy or I buy. So why don’t we both partner together and buy together if we can? Especially when I bid, and you bid, we’re pushing up the price, and we’re like the third or fourth-highest bidder out of like 10, 12, or 15 bidders. I don’t understand what’s going on out there. I’ve talked to other firms, I’ve talked to the analysts even of these other firms, and this is what I’m hearing. “Well, we just had to make the deal make sense. We penciled it out, we had to make a few assumptions, we assume cap rates would compress, we assume interest rates will stay low forever, we assume the rent growth would continue to be where it is, 5% a year or whatever…” That’s criminal. You’re going to blow investors’ money. So when you have two partners that underwrite the same way, then I should share my off-market deals with you and likewise. And it de-risks things, too. There are disagreements – litigation is full of like real estate-related cases – but it’s worth the squeeze. If you have the shared alignment of trust and vision and values, it’s the way to grow, I think, especially for newbies.

Ash Patel: I agree. And I’ve got to tell you, the mentality on the coast is a lot different than in the Midwest and in the South. Here in Cincinnati, we have a tremendous real estate community where we give away all of our knowledge. We’ll ask colleagues to help us underwrite a deal and they very well could steal it, but it never happens. I’ve talked to people who have called me about looking at deals in the Midwest, and they’re baffled. These are coastal people that are calling me. They’re telling me that even amongst their closest friends, they don’t talk about the deals that they have in the works. During get-togethers, it’s like, “Hey, what are you working on?” “I got some things going on.” Whereas here, I’ll share everything; deals that I’m going to make an offer on – no problem. I’ll even share them on this podcast. It’s just a different mentality out here.

Zain Jaffer: You hit the nail on the head. I should have mentioned that the Bluefield real estate team is primarily located in the Midwest. So – surprise, surprise.

Ash Patel: Beautiful.

Zain Jaffer: In the Utah region, but also all over we buy, and the Midwest is a key focus for us, by the way. At bluefordcapital.com, you see we’ve got a map that I coded. You can see on there where our real estate is. But this is it. And I’ve been an LP in many funds, and they’re very hesitant to share the deal with me, because the deal isn’t yet closed. They’re worried I might swoop in, and I’m like, “I don’t have time to do that.” You’re the one designing the blueprint, I’m not going to try to copy the blueprint. “Yeah, but you have your own real estate activities, too.” I’m like, “Okay.” If that’s the level of distrust between an LP and a GP, that’s not a fit there. But in the Midwest, it is different. I think that’s a really key insight you pointed out.

Ash Patel: Zain, what you talked about just a minute ago about how these firms are possibly outbidding you guys on so many deals… I think it’s the same reason that when you first try to give Bluefield money, they didn’t want it, they didn’t need it. Whereas a lot of other operators are just taking as much money as they can. And now they have to deploy it. It’s just a machine that you have to keep feeding. I think that’s helping drive some of these compressions in cap rates.

Zain Jaffer: I tell you, sitting as an LP here — and I don’t do much anymore; I do everything via Bluefield now. Rarely do I invest outside of Bluefield via my family office. But I am shocked at some of the projections I get from funds where they’re underwriting this in the mid 20% IRR. And yeah, because they had success the last three or four years… Everyone was winning the last three or four years. What I liked about Bluefield is every deal they’ve ever done, it needs to pencil out in the mid-teen IRR or less, maybe 10% IRR. But historically, they’ve achieved 30% or 40% IRR and some projects even crazier amounts. I like that about them, that you set expectations with LPs and you under-promise and over-deliver. And I feel like if you do that for the long term, you are going to succeed in real estate, because the industry is very, very small. I think you also alluded to the idea of people stealing each other’s deals. Well yeah, you do that once or twice. But if you want to stay in town and you want to build a reputation, people are going to reference check you; sellers are going to reference check you, buyers are going to reference check you, banks are going to know what you’re about. The industry is too small to try to make a quick buck. This is an industry that is very cliquey, in a good way and in a bad way.

Ash Patel: I 100% agree with you.

Break: [00:21:46][00:24:43]

Ash Patel: Does Bloomfield deploy their own capital or do you guys take on investors as well?

Zain Jaffer: It’s mainly investors. We have a series of funds. We see a deal, we love the deal, priority goes to the fund. Transparently, the best deal is going to come from our fund. But sometimes there’s a deal that’s a little bit too big for us to chew on, so we’ll open it up to other external investors. People can come in and they’ll invest in that SPV, which has a share in that real estate project. Typically, we’ll also open that up to people we want to work with as well. There’s a family office, and we want them to build a long-term relationship with us – we’ll offer that to them.

The priority usually goes to our fund, but then there are some deals that might not make sense. Like, we’ve got one fund where it’s focused a lot on cash flow. The investors want more safety, where the preferred return is important. We’re not going to basically do construction projects in that fund, because we won’t be able to catch up for many years. So we might set up a special fund or it might go to a few LPs and say, “Look, here’s a $50 million ground construction play. The payback is at least two or three years out.” That flexibility has helped us a lot.

Ash Patel: Is there a minimum size deal that you look at?

Zain Jaffer: Minimum size deal – it really depends… I’d say 10 million is probably the bare minimum, and I’d say 100 million is probably the maximum. If we’re going north of 100 million, then that’s why we want to partner with other funds. And you know what? Here’s the other secret to real estate. It takes just as much work to do a large deal as it does to do a small deal. If I’m doing larger deals, it’s way easier. It’s easier because – guess what? There’s a data room. Things are generally more organized. Banks are also more willing to lend on it, and the fee structure makes a lot more sense. Here’s the other painful thing I learned. I own a 35-unit building personally; this is the smallest building I own. A 35-unit building in South Texas. Amd when I want to replace that roof, I have to spend the same amount on that roof as a property that’s about a mile away from me, that has 35 units, but costs five times as much. Sometimes doing large deals is better because you get efficiency and scale.

Ash Patel: Yes, it’s so important. I’ve learned that lesson later in life, but a $500,000 strip mall that I had is actually more work than a five-million-dollar strip mall. You have mom-and-pop tenants versus national tenants, and you have gross leases versus triple net… And those smaller properties can consume you. It’s easier to manage the larger property, so I agree with you. What is your best real estate investing advice ever?

Zain Jaffer: Oh my god… Best real estate investing advice ever. I want to say something unique here. Find out what your strengths are. And for some firms or people, it might be “I like making deals.” Real estate comes down to a few things. Deal-making, which is buying and selling properties, or capital raising, or management of the asset, or in some cases, development of the asset, like construction. Figure out what your strength is. If you’re not strong in those four areas… And I think those four areas are pretty important. Construction – you can subtract that, because that involves a whole new type of real estate. I’d say under management it’s renovation and rehab. Find out which areas you are strong in, double down on those areas, build up competence internally, and if you’re not strong, find a firm that is the best in the world in that area, in that region, in that asset class. Very important. Too many people try to do too many things themselves.

The other thing I’d say that’s much more unique because of my tech perspective is deal-making is still about relationships, but property management is about technology. I promise, today I don’t think traditional property management firms are going to survive unless they embrace a technology stack. There is so much opportunity to improve your revenues and decrease your costs by bringing in prop tech, which is property technology. If management is one of those things one of your viewers wrote down on a piece of paper as something that they’re good at, focus on tech. Otherwise, you’re going to be like the frog in a bowl of water that slowly boils and you get boiled to death. That is actually happening in the real estate industry. Property management firms, and even agencies. Property management firms have to embrace tech.

Ash Patel: These are incredible lessons that you’ve learned in the short time, that the rest of us suffered through and learned the hard way. So good for you. The value of having partners – I’m sure you learned a lot from them.

Zain Jaffer: Yes, and being on the coast… Being in tech, we do tend to partner a lot more. I think I like that vision in real estate where there’s there’s more partnerships. But a lot of people want to own everything themselves, and this isn’t Monopoly. Real Estate feels like Monopoly because you can make a lot of money in it, you can lose a lot of money, but you have to partner with others, and that’s not very Monopoly-like.

Ash Patel: Zain, you’ve got your pulse on a lot of different assets. What would you focus on going forward?

Zain Jaffer: Me or generic advice to a listener?

Ash Patel: I think generic advice, in terms of hospitality, senior care, industrial; they all seem really appealing.

Zain Jaffer: Just pick one. It could be strip malls, it could be anything. Pick one and focus on your geography, understand that asset class, become a sector expert. If you’re asking for generic advice, it would be go really local, go really asset-specific, and don’t make a single damn transaction until you studied three months of the market, you looked at every comp you can get, you’ve talked to every agent you can talk to; don’t pull any moves until then. And then once you’ve done that, get a good damn attorney. Attorneys are so important; they can kill a deal, they can ruin everything for you. The accountants aren’t as important as the attorneys. Learn how to do financial modeling and be smart with deal structuring. You can do seller financing… There’s a lot of smart ways you can enter with very little capital, but be hyper-focused so that if a large fund comes in, they’re not going to have the relationships you have and the knowledge you have of your sector. Ideally, let it be someone that’s within travel distance from you, a couple of hours. Me? I have to take a whole week out to go to Texas; what a mistake that was. I should have done things locally in California. And I have done a few things locally in San Francisco, and it’s so much easier to deal with, and I know people here. It’s way harder when you’re out of town.

Ash Patel: Wait a minute. What do you say to all those people in California, New Jersey, and New York that say, “There are no good deals locally?” How do you find deals in San Fran?

Zain Jaffer: There are always deals everywhere. I figured out an arbitrage opportunity I’ll share with your listeners. I’m going to try to summarize the model that I came up with, and it’s still a model I think that can work. Everyone’s saying San Francisco is way too expensive, it’s very difficult to enter here because cap rates are so low, or whatever, and you can’t make cash flow; when you buy assets for appreciation [unintelligible [00:31:16].14] I figured out San Francisco’s market is unique, and every market is unique, but in San Francisco we have condo units and then we have TIC units. TIC unit means a tenancy in common unit. Basically, you’re buying a share of a building, you’re not buying an actual legal condo. I’ve figured out, as far as a tenant is concerned, they don’t care whether it’s a TIC or condo; they’ll pay the same rent. The TIC is 20% to 30% cheaper than condos. I started buying a bunch of TICs and I started making great cash flow. Even through COVID, I underwrote for a 5% or 6% cap rate. But through COVID it was more like 4% or 3%. That’s way better than the average. I understood the market, I bid low in some cases… The ones I went in too low on were kind of garbage properties. But some of the premium properties are generating great cash flow. You can make money, you just have to be creative and understand the local market. There was a lot of the off market, too.

Ash Patel: TICs in New York are referred to as co-ops. They often do not allow rentals. Is that not the case?

Zain Jaffer: Oh, that’s a shame. I know sometimes you have rules with some of these TIC or condos with the HOAs. That was okay for me. I wasn’t looking for Airbnb, shorts, and furnished rentals. Many of these buildings allow six-month minimums. At least in San Francisco; I can’t speak for New York. So understand the market, and when there are regulations like that, when there are certain factors in the market, play that as a strength. Some of these things you’re talking about make it very unattractive for your average real estate investor to come into. Look at TICs, it’s very hard to a loan on them, and there is a bit of risk. If one TIC owner defaults on the property, you’re liable for that person. Mortgage – you’re liable for that person’s repair costs, because you own a fraction or a share of the building. But I made that a strength. I realized I can buy this 20% to 30% cheaper, and I can now enter the San Francisco market and play arbitrage for the long-term.

The other thing too is when something is difficult to finance — strip malls for example can be difficult for lenders to wrap their heads around. Now, guess what? If you focused on building a knowledge base in strip malls, finding some lenders that get the asset class, finding LPs that want access to this unique asset class called strip malls… Which by the way I think is up 14% when other assets in retail are down significantly… Then you figure out your magic; you don’t try to do a bit of everything.

Ash Patel: I love it. Zain, are you ready for the Best Ever lightning round?

Zain Jaffer: Go for it. Yes.

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

Zain Jaffer: I would say Blitzscaling by Reid Hoffman. It’s not on real estate, and it will make real estate people puke, because it’s about being super aggressive in technology. But man, it’s a fun book. It’s like how Airbnb and others spent a crazy amount of money Blitzscaling their company, and how sometimes that’s the right thing to do for some companies.

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

Zain Jaffer: What’s the Best Ever way I like to give back? I’ve got my own private foundation right now, and we’re talking about it a little more publicly. We’ve done a lot of things anonymously before, but some of the things we’re doing need a bit more public awareness, like climate change. We are the executive producer in a bunch of climate change documentaries we are producing throughout Asia, and we’re also trying to make it more about real estate too, because the construction industry is so bad with the amount of carbon emissions that are produced. There are always green loans and green financing initiatives you can tap into in the real estate sector. So naturally, I thought climate change is a good area to focus on, and our foundation does a lot of that.

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

Zain Jaffer: zain@proptechvc.com. That’s the newsletter I have. I’m building a directory of who the investors are and companies that are in prop tech. Also, I’ve got a podcast that is focused on technology in real estate, it’s called Prop Tech VC.

Ash Patel: Zain, I love your story. Thanks for joining us, sharing your experience of exiting tech, learning some lessons about real estate, and just killing it now. Thank you for taking the time and being on the show.

Zain Jaffer: Thank you so much for having me.

Ash Patel: Best Ever listeners, thank you for joining us. Have a Best Ever day.

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JF2664: 4 Ways Passive Investors Can Find Better Deals First with Judy Brower Fancher

Judy Brower Fancher knows how to find killer deals before anyone else. From staying on top of market trends, to being a wanted repeat-investor, Judy has developed a strategy for getting exclusive access to competitive deals. In this episode, Judy breaks down her methods into four parts so that you can find better deals first as a passive investor.

Judy Brower Fancher Real Estate Background

 

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Judy Brower Fancher with us. How are you doing, Judy?

Judy Brower Fancher: I’m doing well. Thank you for having me.

Slocomb Reed: Great to have you here. Judy is the founder of Brower, Miller, and Cole, a private research firm. Her current portfolio includes 20 senior living multifamily, one industrial, one self-storage, and two multifamily properties. She is a passive commercial real estate investor who just sold the assets of her 27-year commercial real estate marketing firm, where she represented more than 100 commercial real estate companies. She’s based in Newport Beach, California, and you can say hi to her on LinkedIn. She is Judith Brower on LinkedIn.

Judy Brower Fancher: Judy Brower Fancher on everything.

Slocomb Reed: Judy Brower Fancher on everything, great. Judy, tell us about yourself. What got you into marketing for real estate firms?

Judy Brower Fancher: Growing up in Southern California, one has pride in where they live. I think a lot of commercial real estate started here. My dad worked for an architectural firm when I was growing up, then he worked for two large landowners, and he was their public relations person. So I went into my dad’s field, but I like to say that he also has three normal children. That’s how I got started. When I decided to start my own company after working for other firms, commercial real estate was truly what I loved. I like to say I love a building when I’ve known it since it was a hole in the ground.

Slocomb Reed: That’s awesome. Tell us about – you were working in marketing and research for 27 years. Did you have a specialty within that for your clients?

Judy Brower Fancher: Specifically on commercial real estate companies, which is how I got my background, which I hope is helpful as an investor to me now. We’ve done everything from television advertising, to public relations, to putting on investor relations meetings for institutional investor companies, to working with syndicators on getting attention from both the opportunity side and from the investor side… So we’ve worked on every product type, think everything. We’ve done land, we’ve done self-storage, industrial office, multifamily, retail – huge. And the company still exists. I did sell the assets to someone I trained for 10 years. So if anybody wants to reach out to find out about that, I’m just saying that’s a thing. But that’s actually not what I’m doing now. Now I’m trying to make money off the money I earned.

Slocomb Reed: Absolutely. That makes you a pretty well-informed passive investor, right?

Judy Brower Fancher: Hoping so. I’m not as smart on the finance side as I think I am on probably the product and market. The company worked nationally, so I have a really good feel for a lot of the markets. I actually started investing with my clients; I asked permission, they didn’t come after me. I asked a few of my clients if I could invest with them and that’s how I got my feet wet a long time ago.

Slocomb Reed: That’s awesome. Judy, with you focused on your own passive investing now, making money with the money you worked hard to earn, and given that you have a very solid understanding of the assets themselves and of markets, what advice do you have for other passive investors and the research that they should be doing into a market or into an operator before they invest their hard-earned money?

Judy Brower Fancher: I’ve had a really lucky path with being able to invest alongside my clients. Also, I think what you need to do is use all the parts of your brain. You want to look at what are the environmental factors if you’re investing in certain parts of the country? Are you in flood zones? And yes, the sponsor should know that too, but if you’re trying to weigh risk and say, “What can I do that’s more sure?” Because that’s what, as an investor, I want to do now, more sure things… It’s to look at each market and maybe environmental things. I was just in Louisville, Kentucky which I love and I want to maybe do some PR for them. It’s a great city, but it is not growing. I don’t know why. They have the Derby, they have bourbon, it’s not horrid weather, everything about it seems right. But I think if you’re investing now you want to look for cities where there’s tech, because that seems to attract the young families, and that makes it grow. They don’t seem to have tech there. They have Humana, it’s one of the largest health things in the country, but that’s still not the young people coming in. So that’s how I try and look at things.

Another thing that I have done, because I work with companies that are investing, is to look where are my big clients investing and what are they seeing there in the markets? That can help me understand what I might see. I hate to say that anything’s a sure bet, but I have a great story from yesterday…

Slocomb Reed: Go for it.

Judy Brower Fancher: I’ve only done one crowdfunded investment; all the others, I’ve known the people personally that I’ve invested with. But I went to try and do another crowdfund one yesterday. It’s an obvious win. They’re buying properties to take care of all the trucks and all the supply chain stuff. They have huge properties and they’re all over Houston, which I guess they know they’re going to flood to. But they have identified and gotten five properties under control, they have five more that they’ve identified that they’re trying to get under control… The Invest Now button went live, I clicked on it, it said numbe 127 in line.

Slocomb Reed: Wow.

Judy Brower Fancher: Uh-huh. Then I got a thing saying, “Okay, go ahead and get your paperwork started.” Because I’d worked with them before, bang, bang, my [unintelligible [00:06:56].08] They’re like, “Okay, documents will be available at five o’clock.” At [5:01], I went in, I got my documents and started working on them. At [5:50] I got an email saying you’re too late.

Slocomb Reed: Wow.

Judy Brower Fancher: So when you have a sure thing… Like now where everyone thinks industrials, it’s the flavor of the month, above multifamily I believe… If you can get in on it, go; you’re going to win. It’s correct. Right now, industrial, they’re saying they’re going to need 10 times as much. These guys are supply chain support for industrial. I think that’s going to work.

Break: [00:07:30][00:09:10]

Slocomb Reed: It seems like in 2021 and 2020 too here soon, that sense of urgency is vital for getting to the right deals, regardless of which seat you’re sitting in. If you’re on the buy side of anything right now, that sense of urgency is really helpful. Judy, what is it about this opportunity that you pounced on, but were still a little bit too late for? What was it about that opportunity that makes you think that it’s a home run?

Judy Brower Fancher: Because I talked to people from all over the country about what’s going on, I try and read. I don’t think you can buy any industrial right now that’s not a win, literally. I don’t think that’s possible right now, because I think the statistic is they need about three times as much as exists right now. Now, I do look at the timeline because I think things change. You never know what’s coming down the pike. Anything that’s in industrial that’s within five years’ timeline, I’m good with it. I wouldn’t go on to a 20-year industrial, I’m not sure if something’s going to change, where all of a sudden people wouldn’t need industrial and 20 years. But the quicker the better for me, that’s what I look at in all of them.

I got into a multifamily in Sacramento. This is guys that I know, and they wrote back and said, “We can only take part of your money, because everyone wanted in on this.” So it was sort of the same thing. But this is a 12-unit building in Sacramento that was 90% vacant, absentee owner, just hadn’t taken care of it. They’re going to fix it up and flip it within 12 months, and we’re all going to make money.

I’m going to say that having friends in the right places is almost what you need right now. For people that are investing, if you know people in the business, just let them know that you’re interested, because they would rather have people they can come back to repeatedly and get money from than have to go out and find new investors. So if you can make friends with a company that knows that you will send your money pretty quick, that gives you access as an investor.

Slocomb Reed: Judy, thank you; that’s very helpful. Talk to the Best Ever listeners who are high net worth individuals looking to invest passively. They also have very busy, professional, and personal lives… They want to spend one to two hours a week — beyond listening to our podcast and the other podcasts they listen to, they want to spend one to two hours a week studying or doing the activities they need to do to get access to great deals. What are the one or two things that passive investors can do on a regular basis that will help them recognize and take advantage of great opportunities right now?

Judy Brower Fancher: I would think that LinkedIn is a good thing to spend half an hour on. Look at the stories, look at what’s being bought, who’s buying it, and maybe reach out to them. Because LinkedIn is a professional tool that works very well. If you say “Hi. I’m a passive investor. Can I link in with you? I’m interested in your company.” That’s going to be a welcomed outreach. And then honestly, looking at just the trade news, just keeping in touch with what’s happening, and other kinds of news. If you can think up topics about — if you find out where tech’s going and all that, like I’m seeing things that make the economy move that are attractive now, that look like growth things… Healthcare, and I think healthcare and tech are the biggest ones… That seems like the best way to do it. And then depending on how much you’re willing to place, I’m going to sidewind on your question really fast and say that my idea–

Slocomb Reed: Sure, go for it.

Judy Brower Fancher: People talk about that they have a diverse portfolio. They mean they have small and large cap stock, and the stock market just goes up, and down, and up. It doesn’t matter what company you’re in, it doesn’t matter if it’s foreign, or local, or anything… I don’t understand, that’s not diverse. That’s probably the other thing that I would say – if you want to be diverse, that I do have multifamily, self-storage, industrial, and senior housing, and I have stuff in the Northeast, and I think I’m going to buy something in the Southeast now… But I definitely have things in the West, and I have something in Tennessee; that’s where the industrial opportunity came up. It’s an Amazon building so it’s great. I think that’s more diversification. That is another place you want to spend your time, is making sure you’re not just chasing one asset class. Or if you’re going to be a passive investor, there’s no reason not to spread your risk by going in some into a bunch of different product types and different geographies.

Slocomb Reed: Do you think, Judy, it’s important for the sake of diversification, to invest with a broader number of general partners, or should passive investors be finding the one, two, three people they know, like, trust, and can place their money with?

Judy Brower Fancher: I am a fan of experience. So I did a couple of little toe-touch deals, just tested people a little bit. I mean, not to be saying I tested them, but to try and get comfort level. But I definitely like repeat investing with people that have a good track record, that I’ve seen them performing on what they’re doing. They’re like, “Hey, we have this other one. Do you want to go in on that?” “Yes, thank you.”

For me, there’s no reason to put all of my investments with one party. I don’t have anything against putting investments with the same party if they’re doing different product types or different geographies; I think that’s great, because then you do have that comfort level with the people you’re investing with. I like that when you have a question, you can get an answer. That’s the great thing about actually knowing these people that are running the businesses, that you can get hold of if you have a question.

Slocomb Reed: Totally. As competitive as it is right now, to get invested in great deals, do you suggest that newer passive investors do the toe-touch and invest the minimum, or the safe, smaller amount of their capital the first time? Or should they really just be pouncing on the great opportunities they find?

Judy Brower Fancher: If you have an industrial portfolio and you have a bunch of money, you may as well put a bunch in there. One of the things I try and look at, when you’re talking about being busy and everything, is that it’s going to take you some amount of time to get the materials back to them and get everything put in order and everything. And if you’re going to put your money out, and you put in a small amount, and it’s going to take you five years to make $10,000 – is that the best use of your time today? Maybe in your own business, you can make more money than that, faster. Alternately, because I did have a service business where I was worknig by the hour, and I had employees, so net profit at the end of that minus taxes… When I first invested in real estate, and I put in – I don’t know, 20,000 bucks, and I got back 28,000, I couldn’t stop laughing. I’m like, “I didn’t even do any work. This is amazing.” It’s kind of fun, someone else’s doing it. So it’s a little bit of time to do it, but I’m just saying that if you think about the time period and everything, you don’t want to put in so little that the return is a waste of everyone’s time.

Break: [00:15:43][00:18:37]

Slocomb Reed: Let’s say you, Judy, identify a great operator, a great GP – do you go ahead, connect with them, and get preliminary paperwork and stuff done before they have a deal to present, just so that you can get on it faster?

Judy Brower Fancher: I haven’t needed to do that outside of the crowdfunding thing that I tried. The others, they’ll ask for interest and they ask you how much you’re interested. Then they start slotting people in. The smaller ones – I’ve seen that they are doing it on a more personal basis… I guess I’ve filled out things on their website, of what accounts and different stuff like that. But then when it’s an investment opportunity and they email you, then you click in and put in how much you’re wanting to do, and they tell you the “Yes, great.” Or like I said, in that one case, they got oversubscribed really fast and they came back to me and said “Sorry, but we’ll take it.” It was about 50% of what I wanted.

Slocomb Reed: Gotcha. What crowdfunding platforms do you recommend?

Judy Brower Fancher: I am investing with self-defined benefit plan many, like IRA. I have to move it into an IRA account to spend it on real estate. And I have found that Crowd Street has more deals that accept that.

Slocomb Reed: Crowd Street.

Judy Brower Fancher: Realty Mogul didn’t seem to have as many deals that were okay for investing through that. So that’s the platform that I have used. They answer their emails. I don’t know them personally, but they do answer their emails.

Slocomb Reed: Awesome. We’re going to do a Best Ever lightning round. Are you ready for some quick questions?

Judy Brower Fancher: I am.

Slocomb Reed: Awesome. Judy, what is your Best Ever way to give back to the community?

Judy Brower Fancher: I am the vice chair of membership for an Urban Land Institute National Product Council called The Entertainment Development Council. I’m also on the board of my local ULI. It’s another way that I meet and learn things from people that I guess I should have mentioned. If you have a local ULI chapter, that’s a good way to get knowledge on real estate.

Slocomb Reed: What does ULI stand for?

Judy Brower Fancher: Urban Land Institute. It’s the people that own all the real estate in the United States, and the world. It’s an international group.

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

Judy Brower Fancher: I just read a book called Small Giants, which is by Bo Burlingham. It’s about companies that stay small on purpose. They make a ton of money and they stay small, which is my taste. It’s my taste for running a business and for investing.

Slocomb Reed: Tell us about the deal you’ve lost the most money on.

Judy Brower Fancher: I invested — the most money I’ve ever invested into was a high rise in Phoenix to be built. I think it was in the early ’90s. The owner walked away from it. I was a limited partner, passive investor, no choice; just kind of jaw dropped. It’s like, “Oh, my money’s gone.”

Slocomb Reed: What happened? Why did they leave?

Judy Brower Fancher: They didn’t build it. I think that Arizona or the country went into a big recession, and they didn’t move forward on it and they let it go. They turned the dirt back over to the bank, I guess, that they’d taken the loan from.

Slocomb Reed: Wow. Tell us about the deal you’ve made the most money on.

Judy Brower Fancher: It’s coming up. I actually invested in an industrial park in Orange County, California, also in the ’90s. I well doubled my money in 15 months.

Slocomb Reed: You said it’s coming up. That deal went full cycle; what’s coming up?

Judy Brower Fancher: The Sacramento multifamily one is going to probably double my money, I think. I’m about to get out of a fund where… Is it okay to have a second to tell? My client let me in on the friends and family, and I didn’t quite understand what he meant at the beginning; I wasn’t as sophisticated in my investing, I guess. I am in on the people that are syndicating, we — because I’m passively in it– tie up the property, and then syndicate it, so we only have a 90-day exposure before it’s owned by a…

Slocomb Reed: Oh, okay.

Judy Brower Fancher: And that is going to close sometime at the beginning of next year, and I assume that means that we get a bundle all at once. That will be good.

Slocomb Reed: Nice. You said it should double your money. How long is the hold period for that?

Judy Brower Fancher: The one in Sacramento, the hold period is going to probably be 12 months. They said maybe two years, but it’s going to probably be 12 months.

Slocomb Reed: Doubling your money in 12 months to two years is not bad, for sure. Especially when you can do it passively.

Judy Brower Fancher: Yeah. They’re doing it for me.

Slocomb Reed: What is the best way, Judy, to reach out to you if any of our Best Ever listeners have questions?

Judy Brower Fancher: Finding me on LinkedIn is easiest. I guess I probably am Judith Brower. But I think if you search Judy Brower Fancher, you’ll find me.

Slocomb Reed: Search Judy Brower Fancher and you will find Judy.

Judy Brower Fancher: On LinkedIn. Yeah, that is the best.

Slocomb Reed: Awesome. Judy, we appreciate you being here on the podcast, telling us your story of growing up into commercial real estate, spending your professional career supporting commercial real estate investors, getting into investing passively with your own clients, and now being on this podcast is part of it. Thank you. You’re helping other passive investors identify great opportunities. Best Ever listeners, we hope you have a Best Ever day. Judy, thank you again for sharing your story with us and giving us some Best Ever advice. We will see you again tomorrow.

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JF2657: Finding Deals in Nitty-Gritty Details with Jake Harris

When it comes to finding deals, Jake Harris likes to go granular on his market research. By deep diving on the details of potential properties, he’s been able to source deals before others can spot them. In this episode, Jake reveals the strategies he uses to find killer deals and how he stays ahead of the competition.

Jake Harris Real Estate Background

  • Current career: Full-time managing partner of private equity real estate firm, Harris Bay
  • Harris Bay process: “fundamental opportunistic and value add investment strategies.”
  • Portfolio: 150,000,000 in AUM; 200M in development pipeline
  • Has over 20 years of experience in real estate & construction and investment management.
  • Actively involved in CREI
  • Involved in multifamily, office, land, and hotel developments.
  • Based in Tahoe, CA
  • Say hi to him at: www.catchknives.com
  • Best Ever Book: The Gap and The Gain: The High Achievers’ Guide to Happiness, Confidence, and Success by Dan Sullivan. 
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Deal Maker Mentoring

 

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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, Jake Harris. Jake is joining us from Tahoe, California. He is a full-time managing partner in a private equity real estate firm and has over 150 million dollars of assets under management. He also has an additional 200 million dollars in the development pipeline. Jake has over 20 years of experience in real estate and construction and investment management. Jake, thank you for joining us and how are you today?

Jake Harris: I’m fantastic. Thank you. It’s awesome to be on the show. It’s kind of wintery when we’re recording this. I don’t know when it actually airs out, but a nice kind of bundled-up day.

Ash Patel: Yeah. It’s our pleasure to have you. Jake, 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?

Jake Harris: Like that bio said, I’ve been a professional investor for 20 years. It’s kind of spanned a lot of different asset types. I’ve launched a book early in 2021 called Catching Knives, A Guide to Investing in Distressed Commercial Real Estate. I actually felt like there was going to be a little bit more distress in the market post-COVID. So while COVID, and I wasn’t on a flight traveling around doing deals, I hunkered down and wrote a book. I did not anticipate that the government would go print 20 trillion dollars, but so be it. Maybe the music’s going to continue to play for a lot longer.

I primarily invest in secondary and tertiary markets. I’ve been focused on the commercial space. When I say that, there are certain data demographics and analytics that I look at in those markets that I’m betting heavily on. And then I’m a little bit more agnostic to the asset type. I know, kind of like you, I do a lot of breadth of different things.

People say flattering things like “Oh, my gosh. Look at all these things you’re doing.” I’ll be like, “Well, I’m really focused on this market, and I’m looking for good deals in this particular market.” Specifically, distressed allows me a lot greater discount to what that market value is. So heavy value-add development, and kind of distressed, is where I’ve made my bones over the last several years. 20 years ago, I was working doing office remodels for equity office properties, Sam Zell’s… I was too young, I didn’t really know who Sam Zell was, but I see now that string that’s been pulled back. So the breadth – a lot of things, single-family, flipped a lot of houses, 1200 homes, in 23 states, we assembled some single-family rental portfolios that we sold off to the institutionals… And then the last several years I’ve just been really focusing on the secondary, tertiary markets, and the urban core growth of those.

Ash Patel: I don’t know where to start so I’m just going to dive in. What asset classes do you buy?

Jake Harris: Like I said, we do a little bit of everything. We have a ground-up hotel, we’re breaking ground early next year. It’s an opportunity zone deal on the riverwalk in San Antonio. Hospitality is a relatively new thing to me, it’s a combination of looking for value and opportunity. The opportunity zones, for the people that do know about it, is a very favorable way of investing capital gains and deferring those, and then ultimately not having to pay taxes 10 plus years if you hold it and do it right. We have some office buildings. Some of those I just do a modernization on, and kind of let the market determine what is the best value for that. Some of them were converting; so we’re doing a historic tax credit deal, bought a historic office building downtown. It’s actually right next door to the hotel site, and we’re converting that to multifamily, 63 luxury apartments. We have a parking garage, doing some land assemblage, buying industrial land, turning into 100 to 150 units an acre, and then either sell those off to some REITs, or some apartment builders, and some of it we develop.

We’re just finishing out an apartment complex in East Austin. So kind of a little bit of the spectrum of commercial real estate. I haven’t done industrial per se; I’ve never bought that. It’s usually been I’m trying to repurpose it and move it up to kind of a market-rate product. So office, multifamily, hospitality, and land.

Ash Patel: How about retail?

Jake Harris: I have not done any retail. I’ve built some shopping centers 20 years ago, but I have not owned any retail. It looks like there’s some opportunities in that space now… Because people when they get little alligator arms and shy away from stuff is where I tend to now say, “Hey, there may be some risk-adjusted return there.” I wish I would have bought a few things in 2020 or 2021 when everybody was super-scared, but I just haven’t done a whole lot in that space.

Ash Patel: Yeah, I think there’s still a lot of deals out there in retail. How do you come across these deals? Because everybody’s looking for value-add.

Jake Harris: It’s one of those things that there’s not one silver bullet magic way of doing that. That’s part of the reason I talk about it in the book. Sometimes it’s building relationships that won’t come to fruition for several years; it’s talking with other brokers, networking, and communicating. The more specific you can get to what you’re looking for, the more it’s easy for people on those deals to come back and kind of find you. But there’s also a lot of intentionality around that. A lot of my deals, some of the best deals I’ve done, took maybe four, five, six years of just reaching out and pinging the people, “Hey, I’m interested in buying this.” I get into the nitty-gritty; I go into all like tax records and then I go and research. Being the fact that I used to do a lot of distress, and I hired some people away from title companies to do research, so we do this all in-house.

So we track ownership entities, and then start mapping out in a particular market. San Antonio is where I’m doing a lot of investment; all the metros of Texas, Milwaukee, Cincinnati, but now really heavily in San Antonio. We’ll map out all the ownership groups; and it may be a different LLC, but it has the same address. What we do is we start mapping out, here Joe Billionaire has this, this billionaire has these, this has that… And what it does – I call this kind of the mafia rule – is you’re going to have typically about four or five families that do about 80 or 90% of all the commercial real estate deals in the market. But once you’re able to identify where they are, you also determine where they’re not. So even though it’s a fantastic deal and it may be downtown in the CBD of your market, that group doesn’t do hospitality; they don’t do retail, they don’t do something else. So naturally, people would think, “Oh, that billionaire does all those deals downtown. Why even compete with them? They have better finances, and they can just stroke a check whenever it makes sense.” By identifying that, we can find the opportunities.

Then I think as far as layering in future growth – because, let’s be honest, as everybody’s chasing down all these deals, what you’re trying to do is you’re trying to make a future projection of what’s going to happen in that market. Trailing data is nice to tell you a story, but what’s the next three, five, seven, 10 years – depending on your investment horizon  – is more important than what has been happening over the last five or 10. Then I layer in a lot of infrastructures, bond spend dollars, things that are public records, but nobody’s tracking out what’s the road improvement plans for the city, or when the city is putting hundreds of millions or billions of dollars, or putting in a new streetcar, or putting in a new stadium, or putting a new park – those do have returns on investments. So then I start building this kind of systematic way of, “I see what everybody owns; maybe the future’s heading this direction.” Then I start formulating relationships, talking to brokers, talking to some of those property owners, and saying “I’m interested in buying your building.”

What you’ll also find is some of these are outliers. Maybe there’s an office building, and it’s the only one that a family owns in that entire town. They’re based in Missouri, they’re based somewhere else, and you’ll be like “Why do they own this office building in downtown Shreveport?” And then it’s having those conversation pieces, reaching out and now you have the knowledge and data to assess, would they be a seller? Versus that billionaire in town that already has 10 buildings, trying to pick off one of those – it may be a bigger hurdle to achieve. So then I can focus my efforts on maybe that particular building. I do my due diligence, I start doing research, I start assimilating rents and comps for the areas that I’m really, really focused on, so that when an opportunity presents itself, I can move a lot faster than everyone else.

Ash Patel: Do you find that these families get to jump on deals before you? Do they know something that no one else does? Can you trend their purchases and kind of predict the future?

Jake Harris: I wish it was that sophisticated. Some of that is, yes, they absolutely get first look at deals. As people that are brokers or the natural owner of who’s going to buy that product type, they’re going to reach out direct to them first. I worked for a land developer; he was a land developer, he built 10,000 homes, sold [unintelligible [10:08], made 300 to 400 million [unintelligible [10:13] land division until the mid-2005, 2006. So with that, there were only three people that really were big movers and shakers in that land market. They would just text each other, and they would like horse trade deals, because they weren’t creating capital events. “Hey, here’s this, here’s that.” So there is a certain component of that, and you don’t actually know what the price point is, because they like to do that kind of horse trading to keep it off the market. But the question was, how can you predict that? I think some of their legacy knowledge is also a disadvantage to them; because they have 10, 20, 30 years of experience in that market, they’re sometimes jaded about what today’s pricing is.

I know I’ve been guilty of this… Especially when you’re buying houses or properties, and you bought it for two million bucks… And I’ll give you an example of this. There was an apartment building that was a kind of affordable housing. A broker and developer had owned it, and I think they sold it for two million or two and a half million. And then when it came back out on the market, it was like five million. He was like, “Ah, that’s ridiculous. 5 million dollars. I remember when it was 2,5, and it was not that long ago.” But you actually looked at it, and it was like 85 apartments in a 10-story building downtown, and it was $50,000 a unit, and everything else in the market was trading for 150k. But to him, it was “No way”, because of his legacy knowledge. When I looked at it, and sometimes being an outsider, is what is the actual cost? I can’t go build something for $50 a square foot. Nothing. I can’t build anything. So when that’s the price, it’s “Oh, I’m interested. Let me go figure that out.”

Is there maybe a shadow inventory? Maybe they know something that I don’t know. But as I’m also finding, these secondary and tertiary markets are not as competitive as California, or the East Coast, or where you have 50 people. Austin right now; you’re going to have 50 people submitting offers on every deal, regardless if it’s on the market or off the market. And if something sat on the market for three months or six months, you should actually be concerned. But if you’re focusing on smaller cities or markets that you know pretty well, but nobody else does, deals can sit on the market and be fantastic deals, it can sit there for six months or a year. It’s just hard to determine that from the outset, without knowing your specific market.

Break: [00:12:46][00:14:19]

Ash Patel: Secondary and tertiary markets – that must have done really well for you post COVID. Because everybody’s moving out of city centers into these markets, wanting more land, cheaper housing.

Jake Harris: To a certain extent, but offices have also been a little bit of a headwind. A lot of people were working remotely. When I say secondary/tertiary, that also has a loose, ambiguous term. They’ll be like — I’ve been asked that before, “What do you call a tertiary market?” And I was like, “Ah…” “Is Boise a tertiary market?” I said “Yeah, probably. They have a much lower population.” San Antonio, I actually treat a little bit like a tertiary market, but it’s got 1.5 million people; it’s the seventh-largest city in the United States. You’ll be like, it’s going to pass Philadelphia in size. But to your point, it’s so spread out that there are so many different pockets of opportunity, and it’s not the same density of people. There have been some great opportunities since COVID, and some of those markets have recovered much better. I think also what COVID has done is really extrapolated the fact of California — the West Coast has been just doing a fantastic job of driving people out of California, Portland, Seattle, and it’s a net beneficiary of the Boise, Salt Lake, Phoenix, and Texas.

Ash Patel: So right now, we see a lot of office buildings that the banks are starting to take over, they’re going to auction… People are just losing them. What are your thoughts on that? My thought is there should be some great deals in the foreseeable future for office space.

Jake Harris: Yeah, I think 2022 is where we’re going to start seeing those. Obviously, they papered over with the PPP money, or whatever version of alphabet of government throwing money out the window is; it did kick that can down the road. But to your point – yes, absolutely, I think there’s going to be some deals. We’re starting to sign new leases; we’re starting to have people come back. We’ve signed some retail leases. You asked if I have retail earlier – usually, it’s in a mixed [unintelligible [16:25] component, like the street-level retail of office building, Buffalo Wild Wings on a net lease kind of thing. But depending on those market drivers, you could pick up some good deals, like you said, at 50 bucks a square foot. And then can you go put 30 into a TI and be all-in at 80? And then the rest of the market is trading at 150, 200, or $300 a square foot? I like that and I’ll tell you a little bit where I like historic buildings, built in the late 1800s, early 1900s. They have like a cool character to them, a cool facade, they’re limestone, or terracotta, or something pretty cool on the facade.

But actually, for the last 60 years, everything has been focused on the car. And because it’s been such a car-centric focus on the zoning and municipalities, those buildings have been functionally obsolescent, because they didn’t have the four parking spots per 1000 of rentable. But now with Uber, and scooters, and technology is building that, those buildings are becoming more valuable, and I think there’s an opportunity to buy some of those, like you said, at a discount, because you don’t need the parking; you don’t need the same parking. And then, if you can open up and remove the ’80s or ’90s out of some of these office buildings, and then have open ceilings and exposed brickwork, those we’re signing pretty good leases, because it’s unique and it’s special, and you can’t get it from the other office building, and we can also be at a discount under market rents. How you structure those leases, I think is going to matter. Everybody wants that office tenant that signs a 10-year lease; if you’re willing to maybe accept lower, do some different co-working, put together a coffee shop, and make sure that’s in the lobby… Maybe if you open up a coffee shop, that helps that retail and helps some of the leasing… Some of those things, I think there’s going to be some fantastic opportunities here coming in 2022.

Ash Patel: Jake, back to what you said earlier about all these systems you put in place, the data that you go through… Somebody starting out in real estate, or maybe that has a couple of years of experience. How can they find value-add deals? They don’t have the team of people, access to all this data…

Jake Harris: As you said, the first thing that people should do is determine their investment criteria. So they want value-add deals. Walk through that; what interests them about that. You can start doing your homework before those deals, and then go to meetups. Go meet a local brokers community, a real estate investors thing. The more specific that you have, “This is what I’m looking for…” Meet attorneys. Real estate attorneys are fantastic. I’ve got some really, really great deals from real estate attorneys, because we built a relationship and they did a little bit of work for me. Some of them just knew of me. I didn’t even actually had ever done any work with them, and they handed me off a deal. “You’re looking for this market? Oh my gosh, I just saw this. I’m representing a family that wants to get rid of that. Can we put something together?”

Getting very clear on what you want, put that out into the world, and then for someone looking to do these deals that don’t maybe aggregate the data as I do, is just by being in that market and communicating it, you’ll find that like buying a new car, you go buy a new Toyota, all a sudden you drive around and you see the 50 Toyotas everywhere around. I think when you start creating that “This is what I’m interested in”, you’ll see when those opportunities present themselves, as opposed to “I want to do a cool deal”, and then you’re just so blinded by so many opportunities in the ocean of information that’s available. I would say that’s a good place to start, getting specific on what you want.

Ash Patel: Just get out there, network, and just put the work in. How else are you finding deals, besides compiling data. the very specific items that you mentioned earlier?

Jake Harris: We’re building some of them. We create as far as… Well, maybe we find a land… Again, maybe I just missed that window, or not smart enough to figure out how to do some of these multifamilies, that it just kind of started snowballing, and you’re like, “I’m going to go buy it at a four and a half cap, then paint, carpet, clean it, add the rents 50 bucks, and then I’m going to sell it a four cap.” To me, it seems way too risky to do that. I’m not saying that people can’t be successful doing it, because I have a lot of friends that do it, and they are successful. But when I look at this –  part of that comes from my own experience of losing my ass in 2007-2008, being in that subprime, and watching my portfolio go down by — while I was in Phoenix, it went down like 80%. I was sitting down on the street corner in Tucson, like “Dear Lord, can I be worth no money? That would be awesome. Just to start over. Can I just do that?” I still have a little bit of that in the back of my head. Some of these people that got in the market, they’ve only seen up. They’re like “I got in in 2014, and in 2013.” I’ll be like, “Well, yeah. It’s awesome when it’s only gone up. What happens when it curves over? What happens when the market takes a little bit of a dip and steps back?”

So we’re building deals, or heavy value-add. Building is I can go out and I can go build something to a six and a half cap. I’ll be like, I can build an apartment, and that makes sense, and development makes sense because of my background in construction.” I’m not saying that everybody that’s the place that they need to jump into. But everything about this is – your limitations or absolutely your mindset. All limitations that exist are in your own mind.

I’ll tell you a perfect example of this… And I do aspire to build a high rise, at one point. I went down and 20 years ago, I got interviewed to do leasing for industrial centers. I told them, I came in, and I was like “I want to build a skyrise.” They’re like, “What are you doing in this interview? Okay, cool, neat kid, get out.” I knew nothing about real estate or hardly anything, but I told them that I wanted to build a skyrise. I went to grad school down in Miami and got a degree in international real estate and finance. At that point, I’d had maybe 12 years of experience and I was like, “At some point, I’m going to build this high rise with a skyscraper.” And they brought in this person that had just finished building this high-rise, 40-story, 50-story kind of condo project. I sat down and I was talking to him afterwards, and I was like “What did you do? You have a lot of experience, did a lot of market study, you dug into the data, you did a pro forma and build it out?” He was like, “No. I came to this country two years ago with $11 in my pocket. I went out and I bought land, for whatever it was listed for on the market. Then I hired the contractor that was building the one down the street, and the architect is the same one. I just said, ‘Hey, can you build one of those over here? What’s the price?'” They said it’s $50 million. He was like, “Great, let’s do it.”

He took that and then just listed it, the condos, for more than the price of the land, and the cost to build it and do those other things, and then sold out the entire thing, and built the skyrise. So the first real estate deal he ever did at 28 years old, with no credit, no experience, no money, no anything, was the high-rise, the thing that I was aspiring to do at the pinnacle of my career. He just showed up and did it, sold out, and made 20 million dollars profit. I think subsequently he may have lost in another deal… But I was like action and those limiting beliefs have been my biggest holdback to me, and I think that is very, very apt to all the listeners out there, is where are you holding yourselves back, when you think that I need 20 more years, or do 1000 more units, or whatever. The sooner that you can realize that all limitations are your own limitation – it’s the first step of actually going out and achieving those dreams.

Ash Patel: I love that story. Jake, what are you doing to overcome some of your mindset? Not issues, but just your mindset. How do you get over that? How do you improve that?

Jake Harris: It’s like you said a little bit earlier. Networking, being around other people. I’m in a mastermind group that has a lot of people that are quite successful in different walks of life. That mastermind group is GoBundance, and it’s just that there’s abundance in all these different pillars of life. So where you may be crushing it and work, but what if your relationships suck? What if you’re overweight? What if you’re struggling with your health? What if you’re all these other things? So it doesn’t matter if you’re just successful in one area of life. I believe being kind of a whole life millionaire in every single aspect… And it’s not necessarily about how much money you make, but how can you do that and create this bigger impact in every single facet.

Being around other people that are thinking and doing those other things, crushing it in these other areas, where this guy is awesome at fitness, and he’s like “How many days can we go out and hike? How many days can we go out and go skiing, or other things?” And then what happens is, by osmosis… He’s not peer-pressuring me and saying, “Hey, Jake. You need to work out more or lose more weight.” But just being around those people, you just become part of that. So finding that group and those tribes of people that inspire you… I think too many people are surrounded by people that complain, that are negative, they’re focusing on the news, the propaganda that’s being pushed out there… And it’s basically selling someone else’s agenda, so you just need to take control of that and get yourself around people that fire you up and excite you. And then because of that, you become a little bit of an average of that group of people that you’re hanging out with. So absolutely, that’s been huge for me.

Then I would say books. Books are another way of those being mentors or being like other people, it’s picking up those little nuggets. I wish I’d discovered that sooner. It took me getting kicked in the teeth and sitting on the street corner crying and asking to be worth no money to actually unlock that next level. But books are, by far and away, one of the biggest components of leverage that you can instill in your life. I think leveraging money from the financial sense of a bank, leveraging other people’s network and ability, and people working with other people, but then leveraging other people’s knowledge is a huge, huge level up. So I think leverage is probably the number one thing that you can do to get to those next levels in life.

Ash Patel: I love that. With me, I learned this mindset thing later in life. I was the guy who always helped other people change their mindset. For whatever reason, I never followed all the advice that I would give other people. Were you in the same boat, you came into this later in life?

Jake Harris: Yeah, I was the lone wolf, solo, just the same thing. I actually remember the first book for me that kind of unlocked all of this was Robert Kiyosaki’s Rich Dad Poor Dad. I read that when I was in the army, and I was like, “Oh, wow. That’s what I want to do.” And it’s not like it’s revolutionary information, but it’s just that light bulb moment. I actually would hang out with Robert Kiyosaki and go to some of these things in Phoenix and Scottsdale when he was down there… And then they would say things like, “Don’t buy properties that have negative cash flow,” and the market was taking off like a rocket ship, I was like, “What do they know? Ah, these old, curmudgeon guys… I’m so much smarter than them.” So exactly as your point. I feel like that was the best thing that ever happened to me, was getting humiliated, humbled in every single aspect of my life. That caused exactly as you said, a shift to say, “Well, I need to reverse-engineer all of this. I need to be a lot more introspective in my life. Is this the way that I want to live?”

And then I would say turbocharging that for me was when I found out I was going to be a dad. My wife was going off to work, because she was a [unintelligible [00:28:35].19] nurse, she was going to work graveyard, and she said, “Hey, I’m pregnant. I took one, two, three, five tests, they’re all pregnant.” To me, I don’t know if you’ve seen that movie Limitless with Bradley Cooper… It felt like I had one of those moments. Like, I took that NZT pill kind of thing. I was sitting there at the kitchen table and I played out all the permutations and possibilities of my life, and I was disappointed in myself, because I had all this potential, that I was like, “I could do this, I could do this.” I probably would have been comfortable on that path but it was like, “No. For my kids…” I now have three kids. But at the time, for being a parent and what I want for this kid is I want to live up to that potential, and go do that through action, and then I just started doing that. It was not until my mid-30s kind of thing that it really started kicking into high gear. I feel like it’s a journey, I’m always learning.

I just actually got back from a conference this whole weekend where it was focused on health, doing bloodwork and pulling up things to start actually measuring out. You think you’re doing the right thing, but are you really? Are you actually tracking that? So instilling those things into my kids became very, very important for me. And although my mom says I’m a special, unique snowflake, I think the reality is that I’m much more average, and there’s a lot of other people that want the same things out of life as what I want.

Break: [00:30:05][00:33:00]

Ash Patel: She called you a snowflake?

Jake Harris: I don’t think it was at the time of the…

Ash Patel: The beautiful snowflake.

Jake Harris: Beautiful as in unique and very [unintelligible [33:09] I use that because my mom loves me; almost like you could do no wrong. I think with my boys and my kids, to my daughter, to… Actually, now that I think about it, my wife, I think they could do wrong with her. I don’t know, maybe my mom was just overly loving and it didn’t matter what I did, she still loved me. But my dad was the kind of the hard ass, do the punishment and stuff, so I kind of translate that. You need both of it. You need the duality of life, both loving and accountability.

Ash Patel: Yeah. And again, I think it’s so important that everybody takes steps to improve their mindset. Often, success will mask the fact that you need to improve your mindset. Because if things are going well, you pat yourself on the back, your ego is through the roof, you’re thinking “Man, I’m killing it.” But in reality, everybody has room to improve their mindset. Great conversation.

Jake Harris: I would say the one other thing to that is by being around and surrounding yourself with a group like that that’s willing to hold you accountable, as you said, you go and you have accolades, and you get awards, trophies, or make more money, you do those other things//. That may be and you’re successful in 80% of your life, but when you’re with a group that has some authenticity and says, “What about this? You said you’re going to take your mom out to dinner. You said you were going to do these other things. Did you do that?” Does it actually have any effect on them whether you did that or not? But to that point, it’s just helping keep those next levels of those things that maybe you wanted to not talk about. You didn’t want to necessarily. I’m really awesome at coming up with excuses for myself. Having other people around there, that are like, “Hey, Jake. You said you were going to do that. Did you do it?” I think that’s just enough for me, knowing that someone else could call me out on that, that I’ll do it, for all of that 95% or 98% of things. I’ll follow through, whereas maybe my natural inclination would be only 80% of it.

Ash Patel: Jake, how do you stay on task? How do you achieve things? How do you hold yourself accountable?

Jake Harris: I think there’s certain things that naturally I do pretty well. My MO is — being the fact that I was kind of this entrepreneurial lone wolf, and I think there’s people that just have that… So I have a pretty high level of that in existence, because I just have this clock, an inner dialogue like “I’ve got to do more. I’ve got to do more. I’ve got to do more.” There’s a balancing of that, and I think what it was, again, being a parent… Ed Mylett mentioned this at one time, he said he believes that God put us on this planet, and when you go to heaven, or at the end of your life, you get to see your potential. This is the version of you if you’d done everything as the gifts I’ve given you. What his goal was, is to be the mirror image of that; living up to the full potential, and all the blessings, and all the things that he had been given, he lived up to that potential. I think that comes back to your question about how that mindset shift was. When’s enough enough? It’s never. It’s an uphill journey the entire way.

There is no coast, like, “Oh, I’m going to make it to 65 and I get to coast downhill. If I make it to a million, I make the thing, then I get to coast.” So when you actually get rid of the fact that there’s going to be an easier time down in the future… And picture this – I think Ryan Holidays Ego Is The Enemy is a good book for this. You’re just going to continue to level up, and the mountain goes forever until you die. And then when you die, you get to look back, and did you keep making year over year over year progress? Or did you stop on that mountain and start making yearly progress, and just keep looping around and around at that same level? So those systems I put in place… And hiring awesome people, being around accountability kind of groups… Again, I just have this internal motivation, and I look, is this the path that I want to lead to my kids? I can’t live my kids’ life. I know there are some helicopter parents that try to live their lives vicariously through their kids. Some of them try to force them. But the reality is I’m just going to be in the front row. I’m going to cheer them, I’m going to help coach them, I’m going to put them in the right situations, but they’re the ones that have to live their own life. Everyone has to live their own life. Even siblings and other people end up going down different paths. I don’t know what that is for them, but I’m going to try to instill that.

So that system is being challenged; life’s not fair – the sooner you learn that… Life’s an uphill battle the entire way, there is no easy coasting point, and then just preparing for that, for a long journey. I think from your question about mindset, those are the things that have unlocked my happiness. I’m not disappointed that things are hard. I just anticipate that everything’s going to be hard, so I can sleep better at night when I go doing that, knowing that this is the path that I’ve chosen.

Ash Patel: What is your best real estate investing advice ever?

Jake Harris: Action. Do [bleep [38:13]. Just go do it, literally. I don’t care what it is, you’re debating and thinking about doing it; you’re going to learn more, even if it’s losing money, then you would go and try to read it out of the book, or taking another course, or doing anything. Go do [bleep [38:31].

Ash Patel: Are you ready for the Best Ever lightning round?

Jake Harris: I’m ready.

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

Jake Harris: I read a lot of books. The Gap and The Gain by Dan Sullivan and Ben Hardy. I’ll give you a quick synopsis of it. As entrepreneurs, as people that are trying to achieve and do better, we’re always focused on the last little bit. I want to get to 30, get to 25, I’m focused on why didn’t I get those last 5%. Focus on the 25; you started at zero you made it to 25. That’s going to put a position of better gratitude in your life.

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

Jake Harris: I send videos every morning. I typically send two to three videos to people while I’m finishing up my workout. I’ll just do my little iPhone and send a video message to them. I’m thinking about them, whatever it is, something funny just popped in my head… So I think that, because I appreciate that. Secondarily is really thoughtful gifts. It may take me sometimes a year, but it’s random… And I’ll send people random stuff, at random times just because I was thinking of them.

Ash Patel: I love that. I would love to get a video messaging. I would love to send one to somebody that I’m thinking about and make their day.

Jake Harris: Yeah. You have no idea. Maybe they’re going through something; maybe you have an answer to a prayer. Maybe they’re like “Is anybody out there a part of the thing?” We all have ups and downs, and maybe just seeing your face, say “Hey, I love you man. I really appreciate hanging out. It’s been too long. We haven’t had dinner or drinks or whatever, and… Just thinking of you. Kick butt.”

Ash Patel: I’m going to start doing that. Thank you for that. Jake, how can the Best Ever listeners reach out to you?

Jake Harris: So catchknives.com is probably where most of the content is, for the book. Instagram, @jake.realestate is where I’m most active. I know some of my team puts in other things via Facebook and other places. But those are the two main places. You can sign up for the blog or newsletter stuff. We also are going to be releasing some other elements of podcasts, specifically around contrarian investing. So that catchknives.com is probably the single point that’s going to give people the best access.

Ash Patel: Jake, I’ve got to thank you for your time today. We touched on a lot of different things – finding distressed real estate, mindset, just living a better life. Great conversation. So thank you for that.

Jake Harris: Awesome. I really, really appreciate the opportunity to spend some time with you. I know, as I said, it’s recording here during the holidays, and so away from your family… And  then whenever this does come out and air – I think it’s going to maybe come out in 2022… But man, get excited, people out there. It is an amazing, abundant time to be investing, and I really appreciate what the Best Ever show is putting out there and how you guys are hosting it. I really, really appreciate it.

Ash Patel: Awesome. Thank you again. Best Ever listeners, thank you for joining us. Have a Best Ever day.

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JF2654: Industrial CRE: Find Your Competitive Advantage with Neil Wahlgren

The industrial sector can be hard to market to potential investors, but Neil Wahglen has found a way to ensure his company stands out from the rest. From their sale-leaseback strategy, to their unique, storytelling marketing, Neil has been able to not only bring in but maintain long term relationships with high-net-worth investors. In this episode, Neil details how these strategies came together to help him find his competitive advantage in the industrial space.

Neil Wahglen Real Estate Background

  • Works full-time as COO at MAG Capital Partners and is an Industrial Sponsor.
  • He has 8 years of real estate investing experience and is both active and passive.
  • Portfolio: $350M of industrial, single tenant net leased (NNN) commercial.
  • Background: commissioned officer and pilot in the US Air Force and Navy.
  • Based in San Francisco, California
  • You can find him at www.magcp.com | neil@magcp.com

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Neil Wahlgren. How are you doing Neil?

Neil Wahlgren: I’m doing great. Thanks for having me, Joe.

Joe Fairless: I’m glad to hear it. It’s my pleasure. Neil works full-time as COO at Mag Capital Partners, they are focused on industrial products. He has eight years of real estate investing experience, both active and passive. Their portfolio is 350 million dollars’ worth of industrial triple net lease commercial. His background – he’s was commissioned officer and pilot in the US Air Force and Navy. Thank you, sir, for everything you did for our country, you, and your colleagues. I sincerely mean that. Neil is based in San Francisco, California. You can check out their website, magcp.com. It’s also in the show notes. With that being said, Neil, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Neil Wahlgren: Yeah, absolutely. Like you mentioned, a slightly non-standard track to finding commercial real estate. California native, I grew up just outside of San Francisco, I really grew up in the suburbs, a little bored out there… I decided I need some excitement, I went to the Air Force Academy, went on to fly a number of planes, but primarily the C-130, the Hercules. I flew that full-time for the Air Force, and then part-time for the Navy, and the reserves, been to over 100 countries, two combat deployments, to Iraq and Afghanistan. It was just a great, maturing and experiential process in my 20s. That was the right thing at the right moment there. Ultimately, I did that for altogether about 10 years, and kind of hit a transition point where you start looking, hitting that point your life, you’re like, “Alright, can I keep doing what I’m doing now and hit really my goals for all the things I want to do?”

The more I was in a flying world, the more and more I realized my time was stuck two hours in the cockpit, which was stuck to time away from home and not being able to build that family work-life balance that I was hoping for. That was my catalyst for effectively transitioning out of aviation and out of the military side, and somewhat serendipitously ended up running into a family friend, right at that transition point, who had built up kind of an equity-focused, really investor-focused arm of commercial real estate. They had a model where they would effectively partner with developers, operators, and brokers who had a very niche skillset for commercial real estate deals, but didn’t necessarily have that capital component. So we would JV with them on a deal-by-deal basis. That was effectively how I got my feet wet and jumped into commercial real estate about eight or nine years ago.

Joe Fairless: What was your role eight or nine years ago? I know it’s evolved. I assume it’s evolved since. What was it at the beginning?

Neil Wahlgren: At first, it was operations. Kind of bringing that very structured checklist – discipline, multi-component experience of flying, and really piloting and managing a multi-crew aircraft. The founder was skilled at certain parts, but that operational piece, he knew he had a hole to fill. I came in on that side, really just working internally, and then slowly grew and built out a team. Through that process, we ended up growing our holdings and portfolio in about four years by about 10x. So it was a really fast-growth profile, and I learned just firehose effects. We got to see and underwrite through everything, from multifamily, to industrial, to commercial, multi-tenant retail, even some ground-up development stuff… So I really got to see a ton of different types of commercial real estate and a bunch of different partners, and I really got to see and really hone in on what is the type of real estate that I love here, what stands out amongst the rest, and what operating teams do I find exceptional? Ultimately, one of those groups was Mag Capital, who I had the opportunity to join up with full-time about four years ago.

Joe Fairless: And we’ll get to that. Just so I’m clear, you said you first started doing operations, and slowly grew from there. What specifically were you doing when you started out?

Neil Wahlgren: When I first came in, it was a bit of chaos. It was just emails, it was a lot of projects. There was, I would say, ineffective communication going on between investment partners, between operator partners. Really it was just – start from the ground up and every day was “Alright, let’s build this checklist out to have a rhythm, a flow, monthly check in meetings, set up standards and consistencies with both investors and with operator partners, set up expectations, and really start delivering on time or early on what we said we would do.” That was really a major piece that was missing on this firm when I came in, and really setting up that relentless, methodical approach toward day-to-day operations, which slowly grew weekly, monthly, and an annual forecast was ultimately what allowed us to grow.

Joe Fairless: As COO, what are the KPIs that you’re evaluated by?

Neil Wahlgren: Great question. My primary focus is in capital markets. We’re vertically integrated at MAG. We not only broker and source our own deal opportunities, but we also fund with our internal investment partners. So I am graded and effectively judged by how well we can effectively pair those two pieces.

Joe Fairless: What two pieces?

Neil Wahlgren: Both the deal side and the equity side; cash and deals. Effectively, you need to be skilled and efficient at doing both, but more so you need to be balanced and be able to find the right flow to say “Hey, am I looking ahead? What’s my deal flow pipeline look like? Am I preparing adequately on the investor side?” It’s everything from, are we able to get the right deal flow for what our investors are asking for? How many deals per year are we able to fund effectively and quickly? Are we able to do it in a way that commitments turn into true-funded positions? All these granular details of a COO are probably the most important components of the position.

Break: [00:06:50][00:08:23]

Joe Fairless: That’s a lot of responsibility, first off. Assuming that I’m interpreting what you said correctly, does that mean that you’re responsible for finding the deals, and does that also mean you’re responsible for finding the money to fund those deals?

Neil Wahlgren: We have more the latter. So we have two principals, Dax Mitchell and Andrew Gi, who come from a brokerage, a broker background, and also from an effectively commercial real estate appraisal background. They run our acquisitions team, they’re sourcing, they’re using multi-decade relationships to put together and find these industrials, single-tenant, net-leased investments that we do. Then ultimately, as those opportunities come and work through the pipeline to the point where, if it makes it all the way through, they become an offering that we want to effectively bring into our investment group – that transition and that alignment of debt partners, equity partners, and ultimately getting a solid deal under contract, that is where my primary focus really is.

Joe Fairless: So I heard debt, equity, and then you said ultimately getting a solid deal under contract. Are you responsible for any part of the negotiations to get the deal under contract once the other two partners identify it?

Neil Wahlgren: Yeah, most of the negotiations are done on a principal level. Our primary way that we’re sourcing deals is actually somewhat unique, in that it’s through sale-leaseback. It’s a very niche way to create opportunities in that space. Unlike other commercial real estate asset types, these projects probably have more work that’s done upfront, because you’re negotiating not only the purchase price of your asset, but also the brand-new lease that you’re putting in place, and kind of the relationship between those two.

Joe Fairless: Elaborate more on that, will you? You said the primary way you’re sourcing deals is by sale-leaseback. So you’re finding them via leasebacks, or that’s just a mechanism that is used to… I don’t even know. Help me understand.

Neil Wahlgren: Sure. A high level of sale-leaseback is when you have… To use an example, the industrial space. Imagine you have a light manufacturing company that operates and owns its own real estate. So a sale-leaseback is when they sell off the real estate that they own and simultaneously lease it back as a tenant. We come in as a buyer and then we transition to the landlord. They are the seller who transitions to the tenant.

Joe Fairless: Got it. So how you find those deals is by seeking out businesses that currently own the land, reaching out to them, and say, “Hey, do you want to sell to us and just lease it back?”

Neil Wahlgren: Typically, not directly. A lot of it is done through broker relationships. Those types of companies — or what happens, most of the time those companies are recently acquired by private equity backers. Those private equity groups are intensely focused on growing the operational component of their new business, less interested in being real estate owners. They will often be the driving force. They’ll either connect with us directly or through broker relationships, and effectively say, “Hey, we just bought this company, we want to basically move the cash into the operation side to grow EBITDA, grow revenues, profitability, etc. So they will sell the real estate, prefer to be in a tenant position, and then redirect that capital into growth metrics.

Joe Fairless: So you’re responsible for debt and equity?

Neil Wahlgren: Yes. We have specific teams on both sides of it.

Joe Fairless: But you’re the one overseeing it?

Neil Wahlgren: Correct.

Joe Fairless: Okay, so let’s talk about equity. I think most of the listeners are interested in that primarily, but we will talk about that too, because that’s something that gets glossed over, but shouldn’t. Equity – what was the last deal you bought,

Neil Wahlgren: We just closed on a five-building 500,000 square foot industrial portfolio with a single tenant. That tenant was a powdered metal parts manufacture; kind of a neat industry. Imagine 3d printing with layers of plastics, but these guys did the same thing with layers of powdered metal. They effectively forge into these complex parts, sell to automotive, aerospace, heavy equipment, etc. We did a sale-leaseback transaction, buying five different buildings, all tenanted by the same company.

Joe Fairless: How much equity was required for that?

Neil Wahlgren: That one, I believe we raised about 10 or 11 million.

Joe Fairless: Okay, let’s say 11. Where did that 11 come from?

Neil Wahlgren: We effectively have really long-term investment partners. It’s a range of family offices, a range of high-net-worth individuals and retail investors, and we ultimately do multiple deals with the same folks.

Joe Fairless: Okay. So the $11 million came from both family offices and high net worth individuals?

Neil Wahlgren: Correct.

Joe Fairless: What percent do high net worth individuals make up of the 11? Approximately.

Neil Wahlgren: Probably the majority, I don’t have the exact numbers.

Joe Fairless: Okay, the majority. And how are you attracting the new individuals? Not the current ones, but new high net worth individuals.

Neil Wahlgren: Having been in this space a long time, my feeling on it is there are two extreme approaches. You can be more of a marketer, or you can be more of an effectively deep relationship, deal focused type of equity relationship. We’ve chosen to be the latter; so we really do very little outside marketing. Almost all of the growth, all the new investment partners that we’ve made are almost probably 99% referrals. It’s effectively devoting resources, devoting time to folks who invest with us on a repeated basis. They effectively bring friends, family colleagues, and that’s been almost 100% of our growth on that side.

Joe Fairless: How, if at all, do encourage or help facilitate referrals?

Neil Wahlgren: Everyone who invests with us is important. There are some people in our network that we’ve found over time really are just phenomenal partners. Not even necessarily the biggest check writers, but people that really believe in the product, believe in our model, believe in our team, and ultimately bring in what I call outsized referral sources. Those, what we’ve found, is really hyper-focusing on those people. Thank you’s, handwritten notes, gifts, taken out… It doesn’t need to be monetary-based either, but just putting attention back into the people that are really helping make you successful. We really put an emphasis on that as a team, and it’s paid dividends, in my opinion.

Joe Fairless: What system do you use to track that?

Neil Wahlgren: A lot of tags; we use a CRM coupled with our investor portal. We meet three times a week, myself and my equity team, and we outline who needs attention, what is the best way to effectively give back, what’s the best way to receive feedback, or solicit feedback… All those pieces done on a very repeatable consistent process is what we’ve found to be the best approach on that.

Joe Fairless: Which CRM do you use? And which investor portal do you use?

Neil Wahlgren: We use a portal CRM company called simPRO. We recently switched over to that system and I’ve been pretty happy.

Joe Fairless: What did you switch over from?

Neil Wahlgren: Juniper Square.

Joe Fairless: Why did you switch?

Neil Wahlgren: I think Juniper Square, in our opinion – not to get too much in the weeds – perhaps focus more on institutional investor relationships than for the type of relationships that we had. We felt we were able to effectively present opportunities, and manage in a more robust manner in terms of metrics, in terms of graphics, in terms of telling the story of these industrial investment opportunities with the simPRO platform.

Break: [00:16:15][00:19:08]

Joe Fairless: I’m glad you’ve found the right platform. And it’s okay to get into the weeds in this conversation. that’s alright. A lot of investors are looking at different options so this is helpful. As far as the focus, it might have been a little more focused on institutional investors. Can you just give a couple of examples for people who are trying to identify “Okay, here’s the type of portal I’m looking for”? Because most listeners for the show, they’re focused on high-net-worth investors as their investors, so this will resonate.

Neil Wahlgren: With any investment, it comes down to telling a story. Effectively, a system should be just a medium that you’re using that allows you to tell your story in a way that’s effective. If you’re effective, if you’ve told that story well in a clear and concise manner, and you have the right amount of trust and backing with your investors, really the equity will fall into place at that point. Industrial can be tricky. I’ll be honest with you, it’s not that sexy. It’s four walls, oftentimes it’s in secondary markets, it’s not flashy, it’s not on the front end of a new development center… Typically, it tends to be really the value and the beauty of it is the relationship between core dirty often manufacturing operations, paired with the real estate that allows that to happen. So to tell that story, we use drone footage, we use some nice imagery, and we like to pair the story of what operation is happening within these four walls, what type of manufacturing? What are the products? Where does this go? How is this integrated in the American industry? Then really couple this investment real estate around that, and pairing those two, using a lot of graphics. We’ve found that that particular platform allowed us to do it best.

Joe Fairless: What about on the debt side? How do you identify the right debt product for… Let’s use an example, the last deal that you did.

Neil Wahlgren: Sure. Honestly, we’ve found a lot of the industrial products that we’re buying – we find opportunity in the seams. We’re buying secondary markets or kind of what I call commutable secondary. It might be the labor force for this manufacturing is in, say, Des Moines or in Champaign, Illinois, some similar-sized city, and then ultimately the asset might be 10 miles outside of town, but that’s okay. If you have the right strength of tenant and the right credit behind it, that can be the most sleep easy, cash-flowing vehicle you can have. But to your point, those types of markets can be sometimes scary or overlooked by national lenders. So what we found is regional lenders, state-level, or Southwest oriented banks, or Midwest oriented banks who know those areas better, have tighter relationships with companies and individuals in those areas – those really, for our type of model and product, are absolutely the best kind of debt partners. So we do repeat business with typically smaller credit unions and banks.

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

Neil Wahlgren: I would say that the best advice that I have is find your competitive advantage. If you don’t have a competitive advantage, find out how you’ll get it. If there’s not a clear path to that, find a partner to invest with who does. I think relying on commodity skills without having some outlying advantage really leaves a lot of risk on the table for an investment. So I would say find someone who has an ultra-tight niche and specialty, does it well, and then either partner with them or emulate what they’re doing.

Joe Fairless: Is your competitive advantage the two principles and their background? Is it just being focused on industrial relative to the rest of the commercial real estate world that isn’t…? What would you say?

Neil Wahlgren: I think we as a team, I believe we put together better investments in single-tenant net-leased industrial acquired through sale-leaseback transactions than anyone else.

Joe Fairless: That’s a mouthful. You make that sentence long enough, of course you will be exactly that. [laughter] That makes sense, though. I’m glad that you talked about that. I’m glad that we touched on each of those aspects of it too, since that’s your competitive advantage. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Neil Wahlgren: Let’s do it.

Joe Fairless: Best Ever way you like to give back to the community.

Neil Wahlgren: I would say what we’ve talked about before – finding those who put in an outsized effect on your personal development and growth, finding those people, and giving back. So I think we find those folks and shower them with time, with attention, with appreciation, and listen. I think by really taking the interaction level to a higher level with a smaller group of people that are directly responsible for your success – I think that’s what we do best.

Joe Fairless: How can the Best Ever listeners learn more about what you are doing?

Neil Wahlgren: We have a lot of resources on our website, www.magcp.com. Or I’d love to hear feedback, comments, questions from folks as well. You can reach me directly at neil@magcp.com.

Joe Fairless: Neil, thanks for being on the show. I enjoy talking about a sector that I do not focus on in the commercial real estate world, because I love being educated on it. So I appreciate that. And hey, even if we’re not focused on this sector, there’s a lot of takeaways that you talked about that can be applied to any aspect of commercial real estate or any aspect of business, quite frankly. So thanks for being on the show. Hope you have a Best Ever day and talk to you again soon.

Neil Wahlgren: Thanks, Joe.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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JF2651: Three Things All Syndicators Should Do to Protect Themselves When Making Deals with Rick Martin

Rick Martin caught the investing bug when he rented out his first house in 1998, helping to pay for film school. Rick continued to make deals while maintaining a full-time job, and just recently switched to syndicating full-time. From making good deals to choosing good partners, Rick reveals the most important lessons he’s learned over his 20+ years of CREI, including three things you can do to weather any storm as a syndicator. 

Rick Martin Real Estate Background

  • Been involved in real estate since 1998 and recently made the transition to a full-time career as a syndicator.
  • Founder of Fortress Federation Investments, which provides multifamily investment opportunities to its investors, helping them build wealth and multiple income streams.
  • Does both active and passive investing.
  • Portfolio: Throughout his career, he has bought and sold single-family and small multifamily. He still owns a fourplex, but otherwise, he is now invested both actively and passively in 1,992 multifamily units.
  • Based in Redondo Beach, CA.
  • You can find him at www.fortressfederation.com
  • Best Ever Book: Who Not How: The Formula to Achieve Bigger Goals Through Accelerating Teamwork by Dan Sullivan

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

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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, Rick Martin. Rick is joining us from Redondo Beach, California. He has been involved in real estate since 1998 and has recently transitioned into a full-time syndicator. Rick is both an active and a passive investor and has almost 2000 units. Rick, thank you for joining us. How are you today?

Rick Martin: I’m great, Ash. Thanks for having me.

Ash Patel: It’s our pleasure. Rick, 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?

Rick Martin: Way back in the day, around 1998 or so, I bought my first house. I was with a girlfriend, we were going to buy it together, she backed out, I moved forward. A year later, my career, my life took a change, so rather than selling it, I hung on to that thing and rented it. That was up in Seattle, Washington, and I’d gone off to film school up in Vancouver, BC. I was basically a broke student, but I was getting these rent checks, so that’s how the light bulb went off and I discovered passive investing. Really, it wasn’t that passive, because I hired a best friend to manage it and that led to all kinds of problems. But lesson learned.

Ash Patel: How did you progress in real estate from that one house? Did you just buy another house?

Rick Martin: My plan at that time was “I’m going to try to do this once a year.” But coming out of school, having debt from school, and whatnot, that didn’t quite work out. But I did continue to invest as I made my way down the coast. As I said, I was in Vancouver, and I ended up buying a place in Las Vegas, which at the time seemed like a home run, but that was 2004. Four years later, it didn’t look so good, but I held on to that baby.

Then I actually doubled down during the valleys of that recession. I bought some more in Vegas, and I bought some more in the Desert Hot Springs, because at that time I was living in Los Angeles and that was the place where we could go out. I partnered with a friend. It was really hard to get a loan, basically. We were working, we had good jobs, but it was really hard. The capital markets had sort of dried up so we were coming out of pocket, but paying very little for places. Then we put a little bit of money back into them and basically do the BRRRR before I learned about BRRRRing.

Ash Patel: This was all a side gig, right? You had a full-time job?

Rick Martin: Absolutely. It wasn’t like we were doing 20 homes a year. It was looked at that time like “Okay, this is going to be a part of my nest egg.” But then as I began to sell these things, they were really far exceeding my returns in the stock market, and I just really wanted to become more focused on real estate in general. Then toward 2016 or 2017, I continued doing the out-of-state thing. I picked a market, I was sort of trying to decide between Kansas City, Indianapolis and Birmingham, and I settled on Indianapolis and did some BRRRRs and some flips there. Again, I was still working full-time. I wasn’t really considering a career, just as one day this is going to help me retire earlier. Then I got involved in an online program about multifamily. I can’t remember, maybe it was the Best Ever podcast, but I learned about multifamily and thought this is the way to go.

I joined an online course that had a network, a Slack community, got to know several people within that community, then learned about syndication, and actually went passive for my first five. I’m happy to say those have done well, they’re doing well. I knew that I wanted to get involved more actively, so I became a general partner.

The areas I was most interested in at that time was the West, because I knew it the best. But I really wanted to get more involved in the Sout-Eeast, because I could see what was happening down there, as well as Texas. So South-East Texas is sort of where I set my sights. I was also looking in Tucson, Arizona, but logistically it was very difficult to hop on a plane, even Tucson which isn’t that far from Los Angeles. I was also involved in Columbus, so I was flying back to the Midwest trying to meet brokers that way. I thought something needed to change, at least for me, my lifestyle. I’m married, I got a couple of young kids, I couldn’t be hopping on a plane all the time. So I focused on partnerships and made some great relationships in the South-East and in Texas, and I co-sponsored alongside of those guys.

Ash Patel: Rick, early in your investing career, when you were doing these single-family houses, did your friends know what you were doing with investing in real estate?

Rick Martin: They were always just sort of impressed. I went to the University of Washington School of Business, but I had this scratch that I needed to itch. I tried pursuing music, because I was a musician from an early age. All the while I kind of kept my right brain going in investing; this is before I made that career change I spoke of earlier. They were always impressed, like “Wow, how are you doing this Mr. starving artist? You’re buying these houses; you’ve got a nice nest egg going.” I kind of tell them how I did it. But sometimes people have a hard time wrapping their heads around real estate.

Ash Patel: The reason I asked that question is had you taken on some of these friends as investors, you would have scaled sooner…

Rick Martin: Yeah, absolutely. I didn’t think in those terms. The whole using other people’s money thing had come to me much later in life. There are many things I would do differently or I would tell my younger self to do. But yeah, I was basically saving, and then when I partnered, we did bring in a third silent partner. But for the most part, it was our own money.

Ash Patel: And Rick, you mentioned Birmingham, Indianapolis, and what was the other market?

Rick Martin: Kansas City.

Ash Patel: Why did you pick those three, and then how did you settle on Indi?

Rick Martin: I wish I could say that I was studying underlying market fundamentals… But back at that time, I just sort of went with where the buzz was. I shot first and asked questions later. For me, personally, I thought Birmingham was a little flat in growth. There are some markets that were extremely hot, but I thought the barriers to entry were too difficult… And it came down to Kansas City and Indianapolis. And I did like the mix of appreciation and cash flow in Indianapolis. That’s where I started and that’s how I chose it. And then you can go back and you can check the fundamentals. It wasn’t until later that I really started researching underlying market fundamentals.

Break: [00:06:54][00:08:27]

Ash Patel: What year are we talking about that you did Indianapolis and Columbus? This is recently?

Rick Martin: 2016.

Ash Patel: Okay. And right now you’re focused on the South-East?

Rick Martin: South-East and Texas. So we have properties in Augusta, Georgia, we have three now in Sarasota Bradenton, Florida, one in Lubbock, Texas, and another in Webster, Texas which is like a Greater Houston suburb.

Ash Patel: Do you still shoot from the hip, or is there some analytics behind these now?

Rick Martin: No, there’s a lot of analytics. I’ll usually start by assessing what the downside risk is, definitely compare absorption rate based against vacancy and occupancy, see what’s going on there in terms of what’s driving the population. Take our Florida market, for instance – the average occupancy right there is 98% right now, which is pretty crazy. The last two years have had dramatic rent growth. We’re talking 27% year over year rent growth. So we don’t depend upon that. We’ll underwrite it with more of a 2%, 3%, 4%, and kind of consider that extra spike that we’re getting right now as gravy, the cherry on top.

Ash Patel: Rick, I see a lot of syndicators chasing deals with very low cap rates. What happens if interest rates rise,  what are your thoughts on that?

Rick Martin: Yeah, it can happen, and that’s sort of the downside risk I mentioned. I think everybody’s in fear of that. We keep waiting for the Fed to raise interest rates and see if cap rates are finally going to rise along with them. I don’t think you could stand on the sideline, but I do think you have to be very careful. Make sure — whether it’s a deal that you’re actively involved in or passively involved in, make sure that it’s very well-capitalized, make sure it has flexible financing, and make sure it has active cash flow. I think if you have those three things, you can weather any storm, and you can hold out for a better day to sell. I’ve hung on to certain deals for a long time…

Ash Patel: Just like your house in Vegas.

Rick Martin: Yeah, exactly. It’s a perfect example. I held out, I actually sold that thing for a profit, when it looked pretty sorry there for a while. So yeah, the flexible financing I think is a big one. You don’t want to be pushed out of a loan any sooner than you want to be.

Ash Patel: What does that mean, flexible financing?

Rick Martin: It’s tricky, because if you get into fixed long-term debt, that might not match your business plan. Let’s say your business plan, if it’s a value-add and you want to go in, you want to renovate units, maybe turn tenants over in a matter of 18 to 24 months, then you’re going to increase the value, you’re going to go back to the bank and possibly refinance, and pull investor capital out… You’re gonna be stuck in that loan because there are some pretty steep penalties that you’re going to have to pay on it. So you might want to get a floating rate. To some, that sounds risky. But there are things that you can build in to protect yourself. You can purchase a cap, so that the interest rate doesn’t rise any farther than, say, 5%. There are also forward-looking curves. There’s data that predicts what future interest rates are going to do. So you build that into your underwriting, and it accounts for rises in interest rates; therefore, you’re not left holding the bag when you — say you’re coming in at 2.8%, which is like some of the rates we’re getting today. And it’s floating — it might float on up to as high as 5% in a couple of years, you want to make sure that you have all that built into your underwriting.

Ash Patel: Got it? Rick, you’ve got almost 2,000 units. What does your team look like today?

Rick Martin: Actually over 2,200 now as of this call. We’re just closing on another deal. I have two sets of boots on the ground, because like I said, I do like the southeast and I do like Texas. In each one of those, we have an acquisitions person, and we have an asset management specialist in each one of those markets. In terms of marketing and due diligence, we all sort of team up on that, and then I oversee investor relations. I do quite a bit of content development, just to educate the investors, which I enjoy. Then we have some pretty sizable property management teams in place. We have a property management company in Florida, they have over 10,000 units. They know what they’re doing, they’ve been doing it for a while.

Ash Patel: Financials and legal?

Rick Martin: Financials and legal – we have pretty much the same attorney on each deal. So the PPM looks pretty similar, one over the other. We have accountants, we have bookkeeping; it’s quite a staff, from A through Z.

Ash Patel: What were some of the growing pains that you encountered as you’re coming up to 2,200 units?

Rick Martin: I think the toughest thing for me was breaking in to syndication. I didn’t realize it was going to be such a challenge. I was just kind of trying to find my way and see how I could fit in, where I could deliver the most value to people. Quite honestly, that’s what kind of led me into passively investing, which I do out of my solo 401k. I’d come close on a couple of LOIs, but I just wasn’t sealing the deal. And not only did I want to learn, but I wanted to start growing my wealth. So I started meeting with a few operators that I met through various conferences, and got to know them, got to like the way they worked. I also got a peek behind the curtain, kind of see how they communicate with their investors. Everybody does it differently. There’s a lot of content coming in every week, others are pretty quiet, and then a deal comes around. So everybody does it differently, and I can sort of learn from that, and I did, and I still do.

Ash Patel: What’s an example of a challenge that you had with an investor?

Rick Martin: That’s an excellent question. One person specifically comes to mind. He just didn’t want to be a part of an audience. And when your investor base grows, you have to look toward some way of managing that. So you look at a CRM. What’s that? Customer…

Ash Patel: Relations management.

Rick Martin: Relation management, thank you. Well, when I would send out maybe a blog article or some market information, maybe a video that I did, he didn’t like that. He unsubscribed; and he had just subscribed, and he seemed very interested. We’d had a conversation. So I said, “Hey, what’s wrong? What did I do?” He just told me, flat out, that he didn’t want to be a part of an audience. It’s challenging, because I always have to remember that guy. When I’m sending out important information, like a deal, for instance, I have to go “Oh yeah, I’ve got to contact that guy separately.” That’s okay, I’ll do it if that’s what he likes. But it’s just a matter of always remembering. Okay, I have to remember him. Then if other people do that, then it’s kind of hard to track.

Ash Patel: He’s got to have the cleanest inbox ever.

Rick Martin: He must. He’s very particular.

Ash Patel: Yeah. Interesting. What about a challenge that you’ve had with co-GPs or partners?

Rick Martin: I think the biggest thing is, initially, people have reached out to me and asked, would I like to participate in their deal, and I’m always flattered, but if the deal is happening within the next several months, I just can’t do it. I think the biggest thing is you just have to allow enough time to really get to know these people, and meet with them in person, and just make sure that your interests align, that you really do complement each other’s skillsets, and there are no quirks that might rub each other the wrong way. I’ve seen a lot of partnerships go South pretty quickly. I have a little bit of fear of getting into a permanent partnership, because I know that can happen… But I’ve been very fortunate with the level of communication, and I try to reciprocate, and I try to pass that on to my investors as well. So I’ve been lucky, they’ve been very transparent, and I try to do the same for them.

Break: [00:16:14][00:19:07]

Ash Patel: Rick, does that mean you don’t have any permanent partners in your company?

Rick Martin: I’ve come close a couple of times. And for whatever reason, it wasn’t going to work out. Right now, in a sense, I’m sort of a one-man-band. But I’m always on the hunt, I have a lot of great conversations, and I’m always open to that. But right now, Fortress Federation is working pretty well alongside the other partners. They’re pretty semi-permanent; we partner on every deal.

Ash Patel: But the doors open for anyone to do their own venture.

Rick Martin: How do you mean?

Ash Patel: I’m confused about what a permanent partner is, versus the partners that you have now.

Rick Martin: There are lead sponsors and there are co-sponsors. I consider my boots on the ground the lead sponsors, because they’re the ones that are actually operating the deal. So they would look at me as a co-sponsor. Now, I’m talking with someone and we’re talking about doing a deal together where we would be the leads, in Georgia. That person would become a part of Fortress Federation permanently. Like I say, I’ve had those conversations, but I’m very careful, and I think I’m leaning toward that, but at this time, I’m maintaining my co-sponsorship role.

Ash Patel: Historically, you’ve had partners on deals but not so much a partner in your entity, your Fortress company?

Rick Martin: Exactly.

Ash Patel: Got it. Okay. Interesting. Proceed with caution.

Rick Martin: Well, when I do partnerships with people, then everything is legally written out. There’s always an LLC that we enter together. So when I do vet a partner, it’s not as if it happens overnight. These are people that I consider, basically, friends. We hop on the phone and have conversations about things other than real estate as well.

Ash Patel: Rick, if you can go back and give your 20-year-old-self advice, what would it be?

Rick Martin: I think to scale faster. I think, for me, I didn’t really learn about the power of real estate until I listened to my first Bigger Pockets podcast. Bigger Pockets have been out for a long time. I wish I had opened myself up to greater resources. I wish I read more real estate books. I think podcasts were something pretty new. I think it would have been nice having the technology that we have today, but I think there were resources back then. Syndication has been around a long time. I would have started digging into other resources sooner.

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

Rick Martin: Don’t ever be afraid to walk away from a deal, no matter how much time and effort you put into it. It could be heartbreaking; you spent months and months underwriting, you’re flying to the market, you’re speaking with property managers, someone’s accepted your LOI… But you find something; if it’s a red flag, pay attention, and you’ll get another deal. It may take a lot of time, effort, blood, sweat, and tears again, but better to not lose your shirt than to do a bad deal.

Ash Patel: Have you been burned by following through on a deal that you shouldn’t have?

Rick Martin: I have really not. I’ve never lost investor money. But I did make sort of a dream investment where I bought a piece of land in Costa Rica. It was going to be my dream home. Again, I had a partner on that deal, and he sort of switched philosophies midway. We paid a lot of cash for that, and there really was no income coming in. We did this back in 2006. And when it became apparent that we weren’t going to get water, like we thought we were going to get water and electricity, it was just kind of burning a hole in our pocket. We had to sell it at a bit of a loss and walk away.

Ash Patel: I think that is important advice. Even if you’ve paid thousands for an appraisal, you have lender fees, title fees, if it’s not the right deal, you’ve got to walk away.

Rick Martin: You do, and it hurts. Sometimes people have money that’s gone hard and you can’t get that back either. But you really have to pay attention to the red flags.

Ash Patel: Don’t let your ego force you to continue.

Rick Martin: No. Or maybe you want it so bad… You’ve been wanting to get into this business for the longest time, or you really want to do a deal… Don’t let that overtake the facts.

Ash Patel: Yeah. Thank you for that. Rick, are you ready for the Best Ever lightning round?

Rick Martin: Heck, yeah.

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

Rick Martin: Recently, I would have to say Who, Not How, but I will plug the Best Ever book on syndication. I do think it’s a comprehensive resource.

Ash Patel: Awesome. Who, Not How – what impact did that have on you?

Rick Martin: Just not to try to do everything yourself. How refers to how I’m going to do this? What are the tactics I’m going to use, when you really should be leveraging other people who can maybe do it better, and free up your time to focus on big picture items that you should be focused on.

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

Rick Martin: I have a soft spot in my heart for kids without parents. I have a few places that I’d like to donate. I give out a lot of free content. One of my mantras is just add value no matter what, deliver good content, and don’t expect anything in return.

Ash Patel: I love it. Rick, how can the Best Ever listeners reach out to you?

Rick Martin: The best way is to go to www. fortressfederation.com. There’s a free resource that’s a quick start guide to investing in syndications.

Ash Patel: Awesome. Rick, thank you for sharing your story with us today. From being on the West Coast, buying a house you were supposed to buy with your girlfriend, that didn’t work out, but that kind of got you the real estate bug, and you’ve achieved a tremendous amount of success. Thank you for sharing your story with us.

Rick Martin: Thanks so much, Ash. It was a pleasure.

Ash Patel: Yeah, pleasure is ours. Best Ever listeners, thank you for joining us have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2647: These 5 Value-Adds Doubled Her Car Wash Investment in Just One Year with Steff Boldrini

Steff Boldrini took her car wash portfolio, originally valued around $2–$3M, and almost doubled its value to $4–$5M in just one year. From adding credit card machines to creating subscriptions, Steff used tech to level up her properties with a 46% cash-on-cash return. In this episode, Steff shares the wins and obstacles she’s faced managing three car washes and one storage unit, and the tech secrets that got her where she is today. 

Steff Boldrini’s Real Estate Background

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Steff Bolrini. How are you doing? Steff?

Steff Bolrini: I’m wonderful. Thank you so much, Joe.

Joe Fairless: I’m glad to hear you’re wonderful, and it’s my pleasure. A little bit about Steph. She’s a full-time real estate investor. She began her journey actively seeking out long-term, low-maintenance, recession-resistant asset classes. Now her portfolio consists of carwashes –we’ll talk about that of course– self-storage and short-term rentals. Based in San Francisco. With that being said, Steff, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Steff Bolrini: Absolutely. I have been in tech sales my whole career just by being Silicon Valley, ended up working in startups, and started learning about commercial real estate with a person that I was dating, who was a very successful real estate investor. I decided to start learning as much as I could from him and taking all the notes that I could possibly take. That’s how I got into real estate.

Joe Fairless: What was it about that conversation or conversations with the person you were dating that piqued your interest in commercial real estate?

Steff Bolrini: I was investing as an angel investor in a few startups. As an angel investor, compared to real estate, it was hands down real estate. A much, much better, safer, and more profitable form of investment. That is why I decided to focus on real estate and forget about startups, at least from an angel perspective. Not venture capitalists, not buying shares in the secondary market which can be profitable, but as an angel investor.

Joe Fairless: Okay. So safer and more profitable – two incredibly compelling reasons to switch it up a little bit. But there could be alternatives to angel investing, where as you said, angel investing is incredibly risky or an aggressive investment. Why not scale it down into other types of investing? Did you look at any other type of investing before you went into commercial real estate?

Steff Bolrini: Does crypto count as investing nowadays? I don’t even know anymore.

Joe Fairless: Sure. I think so. I think it’s official now.

Steff Bolrini: I think so, too. I recently got into crypto even though I don’t believe in it; I think it’s all air. But you have to just adapt. And also in the stock market a little bit.

Joe Fairless: Got it. Alright. What was your first deal?

Steff Bolrini: First deal was a portfolio of carwashes and self-storage. I just came across it because it had a self-storage facility in it and I said, “How hard could it be to learn about carwashes and manage it remotely?”

Joe Fairless: Sounds super simple. No issues at all would ever come up with that.

Steff Bolrini: Zero. There are zero moving parts in carwashes.

Joe Fairless: You’re in San Francisco. Where is this portfolio of carwashes and self-storage?

Steff Bolrini: It’s in north of Texas.

Joe Fairless: In North Texas or north of Texas, like Oklahoma?

Steff Bolrini: North Texas.

Joe Fairless: North Texas. Okay. What city in North Texas? I’m actually from DFW so I might know the city.

Steff Bolrini: Amarillo.

Joe Fairless: I went to Texas Tech. So yes, just north of Lubbock.

Steff Bolrini: There you go.

Joe Fairless: Alright. So this is in Amarillo, you are not in Amarillo, you’re in the opposite of Amarillo, in multiple ways that are defined. You’re in San Francisco. So how much was it and then just tell us about it, please?

Steff Bolrini: Yes. I don’t really talk about numbers, but what happened was that I managed to negotiate better pricing, because carwashes, by nature, take a long time to sell. That’s a value-add in itself; you can negotiate there, the cap rates are higher, and there is a lot of value-adds in carwashes that I had no idea existed. It has been a crazy journey both good and bad, because those take a lot of your time, especially as you’re learning a brand-new asset class. But the returns are incredible. Determining if I would do it again, but in the process of putting things in a very organized manner, delegating as much as possible, finding the best employees in town; even though you have to pay them double, I do not care. Because obviously the returns, they make the carwashes smoothly and it pays for itself, as you know.

Joe Fairless: I’ve never owned a carwash, but I’m looking forward to learning more about that and the self-storage. Help me with specifics on this… Because you said there’s a lot of value-add and lots of stuff profitable… But in this show, we want specifics. Can you share some specifics of the deal?

Steff Bolrini: Absolutely. With regards to cash on cash, we are today at at least 46%, and it’s going to go up next year because we used the income to pay for some actual credit card machines in the property.

Joe Fairless: Who’s we?

Steff Bolrini: Me. Me, myself, and I.

Joe Fairless: You are we. Okay, got it. Sorry I interrupted.

Steff Bolrini: No worries.

Joe Fairless: So you used income to pay for credit card machines?

Steff Bolrini: Yes. That’s one of the value-adds for car washes. Today, there are a lot of people that are retiring, that is old school, that — they only accept coins, and that is definitely a number one priority if you want to add value to a carwash that only accepts coins. Because normally, with coins, the timer goes down, and people have that four minutes to wash their cars. With a credit card, the timer goes up, and they take their time to wash their cars. That by itself already adds value to obviously the income.

Another thing that you can do is add a $1 acceptor, which makes it a lot easier for people to not think about putting so many coins in there, especially nowadays with inflation. You can implement a subscription… I’m sure a lot of people here have subscriptions to car washes, and that’s just another value-add that you can add to these carwashes that were owned by some older people. You can add the pet wash, believe it or not. And one last thing that you can do is rent the piece of your land in the carwash to a snow cone vendor. So that’s another value-add. Apparently, they go hand in hand together.

Joe Fairless: Alright, that makes sense; snow cone, or food truck, or something like that.

Steff Bolrini: Exactly.

Joe Fairless: Any permits needed for that?

Steff Bolrini: Not over there. But definitely in California, you would.

Joe Fairless: Fair enough. The subscription for the carwash – what technology is used to track that?

Steff Bolrini: I have not implemented that subscription for this one yet, because it’s self-serve, so people wash their own cars… And I have not seen value being added for self-serve owners. However, obviously, with tunnel carwashes, they thrive on the subscription business. So there are quite a few vendors out there that do that for you.

Break: [00:07:54][00:09:27]

Joe Fairless: What would this be worth if you were to sell it today?

Steff Bolrini: Great question. We would have to take a look at the returns. I’d say, I don’t know, four or five…

Joe Fairless: Four or five million.

Steff Bolrini: Mm-hmm.

Joe Fairless: And that’s just the carwash or carwash and self-storage?

Steff Bolrini: Just the carwash.

Joe Fairless: Just the carwash. And you bought this as a portfolio.

Steff Bolrini: Correct.

Joe Fairless: And it was what – one carwash and one self-storage?

Steff Bolrini: Three car washes and a self-storage.

Joe Fairless: That’s what I was missing. Okay, so three car washes and one self-storage. How many units is the self-storage?

Steff Bolrini: It’s about 100. It’s a small facility.

Joe Fairless: Okay. And the three carwashes, the four to five million valuation would be for all three of those.

Steff Bolrini: Correct.

Joe Fairless: Got it. Okay, cool. How long ago did you buy it?

Steff Bolrini: A year and one month ago.

Joe Fairless: Wow. That’s a short turnaround for four to five million. But what range… You don’t have to give the exact numbers, but can you just tell us the range that you bought this for? Just so we have an idea of what it’s appreciated too.

Steff Bolrini: It’s around, let’s say, two, three, more or less.

Joe Fairless: Wow, that’s awesome. How do you learn that business?

Steff Bolrini: If I were to do it again today, the first thing I would do is to go to a conference and meet as many people as possible, so they can be your mentors, and help you, and guide you, and share which vendors are actually the best one for everything that you need to implement. I’d also definitely have the best team in town, so get to know the people there, ask for references, who is the best person that you have ever worked with, and build a very strong team. You’re going to learn, you’re going to come across people that are not that great, but just hire slow, fire fast, and take it from there, and continue the journey. It’s not without its bumps. So many things have already happened this year that gave me quite a few gray hairs, but it’s part of the game, in any asset class, in any job, n any entrepreneurship.

Joe Fairless: I’d love to learn more about those bumps, but before we talk about that… So that’s what you described as what you would do now, knowing what you know – you’d go to conferences, meet a bunch of people. But how did you learn the business? I mean, you’ve at least doubled the value of the carwash in a year. So how did you learn the business, and what steps did you take to successfully set this business up?

Steff Bolrini: Went there, spent some time there, installed cameras indoors and outdoors, alarm systems that notify me who’s in and who’s out… Again, a very good team; I have a great team of VAs that I hired to delegate quite a few things. But I learned by having the owner there available, which is another thing that I would definitely recommend, especially if you’re remote. If you’re on-site, be available for about six months; if your remote, for him or her to be available for a full year, because you need to go through all of the seasons – snow, rain, and everything else that could happen, and ask questions as you’re learning the business. So that’s definitely one of the very important things to do and put on your contract.

Joe Fairless: Just so I’m tracking – when you say having the owner available, does that mean after you purchase it, having the owner as a consultant, where you’re paying him or her a fee?

Steff Bolrini: Yes. However you guys negotiate it. If it’s free…

Joe Fairless: How did you negotiate it? What do you do?

Steff Bolrini: I didn’t. I just said, “Can you please help us? We have questions.” His son was also available to help, so we also paid him some money to be there at the beginning of the transition period.

Joe Fairless: Okay, so you paid the son to help out and to be there during the transition period. And by “be there”, will you just define that? The son there a certain amount of hours every day, or just he’ll answer the phone call whenever you call and he’ll respond to emails?

Steff Bolrini: In the beginning, he was collecting some of the money, and he was helping out whenever something broke, and also teaching the employees how to run the business to an extra level that they did not learn until that point in time. So it was basically educating the employees and collecting money, until I found somebody trustworthy that would be able to collect and deposit.

Joe Fairless: How did you find that trustworthy person?

Steff Bolrini: He was right in front of me, he was one of our best employees. We also have a coin counter machine in every single carwash, so we know exactly what’s coming in, and we can make sure that we understand if they’re collecting everything or not.

Joe Fairless: And when you say he was one of your employees, what was he doing before?

Steff Bolrini: He was actually working at the carwash doing just daily maintenance, and then we just gave him more hours to do the full management during the transition.

Joe Fairless: So these are self-serve carwashes…. And I must be picturing something wrong in my head. With self-serve I just picture a structure, some hoses, my car pulls up, I get out, I wash it, I leave. There are no employees there.

Steff Bolrini: Oh, there are… We have to collect trash, and collect money, and clean everything… It’s unbelievable how many things can break. There’s some vandalism once in a while, people try to break in as well… So there are all kinds of things that do happen that we do need them there daily, every single day of the week, and sometimes twice a day.

Break: [00:15:23][00:18:16]

Joe Fairless: How many employees per carwash?

Steff Bolrini: Oh, just one.

Joe Fairless: One. Okay.

Steff Bolrini: And they’re part-time.

Joe Fairless: You need to have one part-time employee per carwash.

Steff Bolrini: Basically, yes.

Joe Fairless: Basically. Okay, got it. Let’s talk about those bumps. What are some of the bumps that have happened in the first year and a handful of months since you’ve owned it?

Steff Bolrini: Within nine days, the roof caved on one of the carwashes. Thank God for Nationwide, they are indeed by your side… They paid within two weeks. My best employee quits without notice. We have thefts…

Joe Fairless: Why?

Steff Bolrini: He was just overworked, he had a full-time job. He did end up coming back, thankfully, but we hired somebody else, who was not great at all. Some of the pipes froze during wintertime, we had a very bad vendor for credit cards that initially quoted us 15,000 and it ended up being more than 60k. We had homeless people around the property… The latest one is that my best employee went to jail recently, for something that he probably didn’t do, but it’s part of the business. So you just have to deal with it.

Joe Fairless: Are you the management company?

Steff Bolrini: Yes. Right now, yes.

Joe Fairless: Okay. So you personally are the one who is overseeing the employees who then operate the business.

Steff Bolrini: Yes, because I did not know anything about this asset class, so I had to learn, and take all customer calls, understand what their problems are, understand what is going on over there, understand the vendors over there, and really build the strongest team so far that I can find.

Joe Fairless: When you say customer calls, that’s people washing their car, calling the number that’s on the machine because something’s not working?

Steff Bolrini: Exactly.

Joe Fairless: That goes to your phone?

Steff Bolrini: Yes, through Grasshopper.

Joe Fairless: Okay. In my previous life, I remember I knew what Grasshopper was. But remind me, what does that service do for you?

Steff Bolrini: It’s just a voice-over IP. They call the actual business number, it rings in your phone, so they never know, obviously, your number. You can text them back, you can issue them refunds, ask them to send them Venmo (or over there it’s CashApp) information, and just communicate with them a lot easier.

Joe Fairless: What was the last phone call you got from a customer related to?

Steff Bolrini: I put some money in the machine and they didn’t give me any money back.

Joe Fairless: And what do you say to that customer?

Steff Bolrini: We sincerely apologize for this inconvenience. If they are onsite, we try to refund them right away. If not, I will just ask them to send their Venmo or CashApp information, and we’ll just issue the refund.

Joe Fairless: Okay, so you’re going based on trust that they’re telling you the truth?

Steff Bolrini: Most people are telling you the truth. Yes.

Joe Fairless: Got it. Have you paid one customer multiple times?

Steff Bolrini: That’s why we asked them to text their cash app, so we can keep track of it.

Joe Fairless: Yeah, fair enough. This is fascinating. Anything else related to the carwash that we didn’t talk about that you think we should?

Steff Bolrini: Just use as much technology as you can for not only carwash, but all of your asset classes. Real estate is the last one to adopt technology, the last industry. So therefore there are so many opportunities out there for us to be ahead of the game and be ahead of all the other people that are not adopting technology.

Joe Fairless: What do your VAs do?

Steff Bolrini: They take care of the self-storage facility, they’re going obviously to be eventually transitioning all the phone calls to them, and they do whatever is happening that day. Purchase things for the carwash and everything in between.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

Steff Bolrini: If I were younger, I would definitely start by being a broker in the commercial field. That would be my best advice.

Joe Fairless: Why?

Steff Bolrini: Because you learn from being hands-on while you can still make money, you’re going to have access to so many deals that you can just make an offer before they even go into the market, you’re going to understand if they are good deals or not, and you can even put your commission into that deal. So it’s hands-down, I think, a phenomenal way to get started in your 20s.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Steff Bolrini: Yes.

Joe Fairless: What’s the Best Ever book you’ve recently read?

Steff Bolrini: I was going to just talk about conferences as a resource.

Joe Fairless: Sure, yeah…

Steff Bolrini: [unintelligible [00:23:03] is the business. But I recommend people go to conferences to build relationships and learn.

Joe Fairless: What’s one that you’ve gone to that you got a lot of value from?

Steff Bolrini: Real estate guys, actually, Cruise? I got a lot of really incredible relationships from these people.

Joe Fairless: Best Ever way you like to give back to the community?

Steff Bolrini: I love giving back to specific organizations and taking calls from new investors that have questions.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Steff Bolrini: They can find me on all social media and I have a commercial-only real estate podcast called Commercial Real Estate Investing from A to Z. We do not talk about residential or multifamily. Or my website, montecarlorei.com.

Joe Fairless: Which is in the show notes. Steff, thank you so much for talking to us about your three carwashes and answering all my questions. Because I didn’t know much about car washes so thank you for humoring me and I’m sure a lot of listeners enjoyed learning more about carwashes as well. Hope you have a Best Ever day and we’ll talk to you again soon.

Steff Bolrini: Thank you so much, Joe. I really appreciate it.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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