What a treat we have for you today! What investors wouldn’t like to hear the story of someone who went from 0 to 121 units in just over 1 year? Even if you are a high level investor, you can always learn from a story like this. If you’re just starting out then you’ll want to hear Josh’s strategy for scaling, and apply some lessons to your on business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Josh Welch Real Estate Background:
- Co-Founder and owner of Three Pillars Capital Group
- Focuses on the acquisition and management of class B/C properties
- Josh and his team have acquired 121 units in just over a year
- Based in Houston, TX
- Say hi to him at https://www.threepillarscapitalgroup.com/
- Best Ever Book: Organize your mind, organize your life
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Best Ever Listeners:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Josh Welch. How are you doing, Josh?
Josh Welch: Hey, I’m doing good, Joe. How are you doing?
Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Josh – he is the co-founder and owner of Three Pillars Capital Group. He focuses on the acquisition and management of class B and C properties. He and his team have acquired approximately more than ten million dollars in assets in just over 12 months. He’s based in Houston, Texas. With that being said, Josh, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Josh Welch: Sure. Like you said, we focus on class B and C assets in Houston. I started out my investing career in single-family rentals, like a lot of folks have. At the time I was working a full-time job in engineering, and then I kind of got the real estate bug and I bought a second one, but I quickly realized that I would have to scale; what I wanted to do was not gonna be done with single-families.
I know there’s guy out there who have made it and done that, but I looked at a couple of bills that my property managers were charging me and I realized that “Holy cow, I’m getting charged $200 to fix a toilet handle. It’s insane.” I networked with some other guys that were in the apartment business at the time and I remember thinking “These guys have made it. They’re scaling, they can bring their expenses down”, and I knew that was the path for me. As soon as that light bulb went off in my head, I knew that multifamily was the way to go, and I’ve never looked back. I’ve been doing it ever since. Now we’re at about 10-11 million in assets and growing.
Joe Fairless: And that light bulb went off in your head approximately 12 months ago?
Josh Welch: No, it took a while to put the pieces in place. Like a lot of folks, I had to do a lot of researching, and digging in and understanding how I really wanted to structure the business, because I knew that if I was gonna do it, I was gonna do 100%; it’s wasn’t gonna be a hobby, it wasn’t gonna be some pastime endeavor. So I really took a lot of time… I would say crafting the idea — the brainchild idea started probably 2-3 years ago.
Joe Fairless: Okay, got it. Were you full-time in engineering during then?
Josh Welch: Yes, I was full-time. I definitely saved up quite a bit, so that I can make the leap. I know a lot of guys that started in this business and they maintained full-time jobs, and they even have been guests on your show; I listened to them and I applaud them, but I knew if I really wanted to get in this in a real way, I had to save up first and then jump at it and just get after it.
Joe Fairless: What type of engineer were you or are you?
Josh Welch: Electrical engineering by trade.
Joe Fairless: Got it. So you were doing single-family homes… By saying you started in single-family rentals, what type of single-family investing were you doing?
Josh Welch: They were mostly just buy and holds. There wasn’t a ton of rehab component to them. At the time I was in Florida. Market conditions were definitely on our side. It was in the 2010-2012 timeframe; the asset prices were pretty low, so I could scale on my own equity pretty easily, and whatnot. But yeah, they were just acquisitions, I would maintain them, fix them up as needed, but there wasn’t any significant rehab.
Joe Fairless: And once you decided, “Okay, I’m gonna focus on multifamily”, what were some of the things that you put in place that you did during those couple years that prepared you to start doing it full-time in the business?
Josh Welch: First of all, I think the biggest thing was setting a plan and a vision. I don’t think you can get anywhere in life in any big way unless you really set a plan and a goal for yourself. So I did that, and that was the first thing – I knew that I wanted to be in this full-time, not having a side-gig, and “I wanna do that by 2017”; I remember at the time thinking that it was gonna take me a year to really understand it and figure it out, network, put the pieces in place so that I would be fully prepared to either do my own deal or partner on somebody else’s deal, to really start to learn things.
Joe Fairless: Having a plan and a vision, knowing what you’re gonna do… So the period of time that you said it took you from light bulb moment to when you started acquiring deals, that’s a couple years. What are some of the tactics that you did to put into motion you being ready to do your first deal?
Josh Welch: I think I really leaned on the fact that I partnered on some other deals. I did a deal with some guys in Boston when I was first starting out… They were more into the high-end condo conversion stuff. They had a few smaller multifamily buildings, and I just really knew that — I’d been analyzing spreadsheets and learning how to underwrite deals for a long time, and I’m like, “Okay, I’ve gotta figure this thing out from the ground”, and that’s why I’m so big with my partners, the people who do my deals; it’s like look, the best way you’re gonna learn about this business and learn how to do deals is to actually do a deal. At some point you have to trade off the knowledge and get your feet wet… So I did that, and that was the biggest thing for me.
That took a while – I took a year really to just invest my own capital in other people’s deals and learn how they do it, so I would then be better prepared to then not only stick to that experience, but then know how to structure my own deals when that time came.
Joe Fairless: It sounds like you were passively investing in deals.
Josh Welch: When I was starting out, yes.
Joe Fairless: I know, when you were starting out. What did you learn from passively investing in deals that now you’ve applied to being a GP on larger deals?
Josh Welch: That’s a really good question. I think the biggest thing is that you can’t take anyone’s method of analyzing a deal at face value. I think understanding the true nuances of how a deal is structured, how money is made on multifamily deals, from all angles, and then making it your own – I think that’s really what separates the people who can jump out on their own and start doing their own deals versus those who don’t.
I would always take a couple deals that I did and I would look at what they were offering, I would first of all figure out what my contribution was going to be, but then I would really make sure the deal made sense, like if I was going to run the deal… Like, “Okay, the numbers that they’re saying here – why is that true?” and “Okay, they’re gonna give us this type of loan. What about this kind of loan?” Really thinking about it from angles to make sure that it made sense to me, that if I were gonna run it, I know I could do the same thing.
Joe Fairless: And when looking at deals based on when you were looking at both as a limited partner, passively investing, and now as a general partner leading the charge, what are some of the nuances of analyzing a deal that perhaps some people who aren’t as experienced might overlook?
Josh Welch: I would say one of the biggest things that I’ve noticed is not really knowing what your competition is doing. I think a lot of people fall into this idea that there’s certain buckets that line items are supposed [unintelligible [00:08:56].08] on a T-12, and if it doesn’t fit that, then “Oh no, this deal is bad. It’s not gonna work”, but maybe for that submarket that expense isn’t too out of line, or maybe it’s bloated, but you’re not gonna know that unless you know what your competitors are doing.
So one thing that we do for every new acquisition – and I do this myself still – is we’ll go and secret shop all the competitors in the area. So if I’m looking at a deal and I’m saying “Hey, I’m gonna pay this much per door. This is the T-12 I have from the seller. Is that really accurate? Is that reality?” The only way we’re gonna know that is by going to competitors and seeing “What are they getting? What rents are they charging? What amenities have they done on their units to get those rents?”, and you can really quickly figure out where you stand.
That’s one of the biggest nuances that I noticed when jumping into my own deal – whether or not you have investors involved in the deal, the operation of the deal is on you, and it’s your job as a general partner to make sure you know everything that there is to know, and treating it like a business. We’re just treating it like you would treat any other business – you have to know every angle of it.
Joe Fairless: When you secret-shop a deal, to me it totally makes sense from an income standpoint how you could kind of verify certain things… Are you able to pick up on anything from an expense standpoint?
Josh Welch: Yeah, and those are obviously a little bit more tricky to come across that. I lean more on kind of all the vendors, and we interview tons of vendors all the time for all of our work. A lot of stuff we do in-house, but the big ticket items that we can’t, we have contracts in place… But that took a lot of legwork to figure out what those rates were, and comparing those to the T-12 that we see, we can figure out in our market, “Okay, is this guy paying too much for an HVAC replacement, versus what we would pay for it?”
So yeah, I would say the expenses are a little bit more tricky to come by, but if you’re lucky and you’ve got a good rapport, with the property manager you’re secret shopping, they might even tell you what they make. I’m not advocating that your listeners go next door and be like “Hey, how much do you make?”, but sometimes if you have a good rapport and you’re gentlemanly polite with them, they’ll tell you what they make. So that’s kind of one way you can glean some insight.
Joe Fairless: So now we’re up to almost the present, we’ll say 12 months ago, at that point in time. Tell us about the first large deal.
Josh Welch: I totally jumped ahead in the conversation on what we’re doing now about secret shopping and all that stuff… So if I’m going back to the first deal, it was probably where I learned most of my lessons, and there’s always lessons that I’m learning and things that I’m taking away and improving the business… But I would say the biggest lesson that I learned is that the fear of the unknown is always gonna be there, but you’re never gonna know what you don’t know until you get started. I know that sounds a little cliché, but there’s tons of things that I never could have read in a book or listen to on a YouTube video, or whatever. There’s just so many nuances to running your own deal that until you actually get your feet wet and you get started and you partner with somebody, or you’re starting your own deal, you’re never gonna know.
That first deal took a lot of elbow grease, and we were newer in the business; luckily, I had already had the experience of the single-family stuff that I’d done, and the other multifamily deals that I’d partnered on, that it wasn’t as daunting… But sometimes it’s apples and oranges, single-family versus multifamily. There’s a lot of things that you don’t understand until you do one, that you just kind of have to take it in stride, really.
I had a lot of family and friend’s money in that first one, and we still actually own that. We’re actually doing very well on that deal. Since we’ve taken over, 80%-90% rents are higher than where they were, and the NOI is about 2,5x up from that… So we definitely did pretty good on that one, and it’s kind of hard to replicate that same performance on all of our properties, but for that one, even though we were going for [unintelligible [00:12:06].20] home run.
Joe Fairless: How did you find that deal?
Josh Welch: That one was through a broker at the time, but the one thing about brokers is they’re great to work with, but you really have to come to play, to show up… Maybe to speak to your listeners here, if you’re gonna look for multifamily deals, realize that all these brokers, especially if you’re new, they get tons of phone calls every day, and communication, so if you’re really going to get some of their time and have them give you one of their deals, you really have to have your stuff together. That means a business plan, that means a website, that means e-mail… All this stuff is very important. Perception is reality, and I can’t stress that enough… And that’s what we did – we came in with a business plan, we were serious about it, we let them know from day one, “Hey, we really wanna do this. We’re not wasting your time. Give us a deal”, and that was kind of how it played out… And we got one. We got a great one.
Joe Fairless: And how much equity did you bring for that first deal?
Josh Welch: That deal was just over 200k equity.
Joe Fairless: Okay. And how many units?
Josh Welch: It was a 14-unit deal.
Joe Fairless: Okay. So you’ve scaled from there, clearly… You’ve gone up a little bit. So that was a 14-unit; then what was the next one?
Josh Welch: The next one we did was a 25-unit deal, and then basically right now we’re in the camp where we’re looking at stuff that’s 50-100 units and higher. That’s the sweet spot that we’re finding for ourselves right now, and that’s been working pretty well for us.
Joe Fairless: Wow. So what property comprises of the largest valuation, when you mentioned 11-12 million in assets right now? How much is that property worth?
Josh Welch: I would say right around five million. It’s a deal we’re actually closing on this next week. It’s a five million dollar deal. Like I said, our goal as a company is we wanna do bigger and bigger deals each time, so the natural progression, as I just explained, kind of makes sense.
Joe Fairless: Okay. So the next one below that, how many units is that one?
Josh Welch: A 25-unit is the one below that one.
Joe Fairless: Okay, and what’s the business plan with that one?
Josh Welch: Just to kind of get into our business plan – we look at classic value-add. I know a lot of guys — that’s their mantra. So we really look for that. We don’t take anything that’s super distressed, but basically [unintelligible [00:14:04].18] management from the operations. A lot of times there’s owners that it’s a family thing, and it’s been in the family for a long time and they just don’t want it anymore, or maybe there’s like a divorce, and so a lot of times these guys are taking their eyes off the ball, expenses get really bloated, or maybe they’re just really unsophisticated and you see [unintelligible [00:14:21].00] on the back of a piece of paper, which I’ve actually seen quite a bit.
We find these guys because a lot of times there’s a huge opportunity to kind of tighten the ship a little bit and treat it more like a business… So we can come in there and not only upgrade the units that are typically very outdated, but we can also reduce a ton of the overhead and expenses.
One of the properties that we did, we got the operating expense ratio from 54% to 36% since we’ve taken over. We see these things where we can really [unintelligible [00:14:46].14]
Joe Fairless: Wow. Yeah, and with your engineering background, clearly, that’s a skillset that is directly applicable to value-add investing. So you’ve got the five million dollar deal you’re closing next week – early congrats on that – and the next largest you mentioned was a 25-unit… So your 25-unit plus your 14-unit, plus what else equals approximately six million dollars worth of property?
Josh Welch: [unintelligible [00:15:14].06] If you add the property that we have next week, that’ll put us at 121. So 121 units is basically — if you add [unintelligible [00:15:24].25]
Joe Fairless: Wow, 121 units, 11 million dollars… So you’ve got the 25-unit property – when is the projected exit on that one?
Josh Welch: I’m remembering that – it was about 1,8 million, and again, that was on appraised value. We had a lot of renovations we were gonna do. That was an example of a property where not only were the rents super under market, but there was just a ton of bloated expenses. It was a scenario where you had the maintenance person — I’m not sure if you’ve ever run into this before, Joe, but the maintenance guy was also the leasing person and the property manager, all in one, and the owner actually was never on-site; he lives in the country. So there was just a ton of just bloated everything.
We were able to go in there and we’ve gotten rents up from — the average at the time was right around $560, and now we’re getting rents that are like $695 for a one-bedroom. So we’ve definitely hit our targets. Our target was $675-$680, we’re at $695 now, so we’re superseding our targets on that one. The NOI equation is pretty simple – if you increase your top line and you reduce your expenses, you get a higher NOI, so because we were able to turn the knobs on both ends, we were able to get a really high NOI and hence a higher valuation.
Joe Fairless: What year of construction are the properties? What are they ranging?
Josh Welch: It’s usually ’60s and ’70s construction we go for. In Houston every market has a different idea of what class C is, but typically what we see is the ’60s or ’70s.
Joe Fairless: So 121 units, 11 million dollars valuation – that’s 91k/unit. That’s incredible. The units are 91k in valuation; I assume that’s now that you’ve done your value-add, now they’re 91k/unit?
Josh Welch: Yeah, yeah. I’m not trying to confuse anyone here. This is after we’ve done all of the work. Some of these projects take months at a time, I’m sure you’re probably aware. When we do a renovation project, just so everybody is aware, it’s not like you just empty out all the units. You have to do it over time, as the units expire, there’s cashflow you have to maintain, debt service to pay… We like to do it as the units turn.
Our projects will typically take, on the largest timeframe, 24 months before we get all the units turned over. We have a very active, aggressive approach.
Joe Fairless: Do you have a benchmark for what you wanna buy at from a 1960-1970’s product? “I wanna buy at around this amount per unit”, or do you think about it differently?
Josh Welch: We’re very much NOI-focused. A lot of people fall in the trap of “Okay, price per door is this”, and generally speaking, yes, there are ranges, but we look at how it is performing as a business, where is the opportunity, and if all the units are super-updated relative to the other assets in that class, then maybe we’re willing to pay a higher price per door… But again, it all goes back to basics – what is the NOI? Where is the opportunity for growth? Can we increase the top line? Can we decrease the expenses? What do those knobs look like, and are they already turned to max?
Joe Fairless: What’s been the most challenging part of building your company?
Josh Welch: That’s a really good question; there’s been a lot of them. I would say not being patient enough to let things work themselves out in due time. I think jumping from point A to point C, just getting really excited about something and going in — it’s kind of like walking before you can run, and I’m not saying that being super-aggressive isn’t warranted or admirable, but there’s some things that you have to build and scale the right way, and make sure that your operations are fine-tuned, so that you can really have a stable platform to scale a really good, sizeable portfolio… And we’re doing those things. It’s just sometimes I see where I want the company to be, and I wish we could be there tomorrow, but you also have to realize that some of these things take time to build. So I would say just being patient and growing smartly, and with a lot of poise.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Josh Welch: I would say don’t take anyone’s method of analyzing a deal at face value. I think it’s very important to understand how a deal is structured, how money is made from all angles of the business… And I said this earlier, but also understanding the true expense in your submarket, because this is what gives you an edge – knowing what your competition is doing… Just treating it like a business, and again, realizing that’s what this is – these are all businesses; you’re buying many businesses, and you have to understand how to analyze it yourself, and you can’t take it for face value.
Joe Fairless: What’s your least favorite part of the syndication process?
Josh Welch: [laughs] Least favorite part, I would say — obviously, we syndicate all of our deals, but you have some people that really are [unintelligible [00:19:42].13] you wanna sign them as a solid, hard commit the first time you talk to them, but you kind of have to play devil’s advocate at all times, and you have to assume “What if I’ve got commitments for X amount of capital of my raise? What if it doesn’t come through? Do I have a back-up plan?” I think that’s my least favorite part of it, because you can’t just take people’s word for it, to be honest with you.
Joe Fairless: What’s your favorite part?
Josh Welch: My favorite part is when the deal is actually closed, and I build great relationships and chemistry with all of my partners involved, and having them trust me from the first day that we met to the day that they send in the funds, [unintelligible [00:20:13].18] to the day that we close the deal, to then the day that they get their first check… I think that’s my favorite part. So rewarding to send out that first check, knowing that “Hey, here’s what we’re doing – we’re actually killing it, and I wanna thank you for being a part of it.”
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Josh Welch: Of course.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [[00:20:35].09] to [[00:21:20].11]
Joe Fairless: Best ever book you’ve recently read?
Josh Welch: Organize Your Mind, Organize Your Life by Hammerness.
Joe Fairless: Best ever deal you’ve done?
Josh Welch: The first multifamily property.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Josh Welch: Not starting sooner, but in reality, over-analyzing to the point where I didn’t take any action. I did this for a long, long time, but that’s where I realized that I know enough and it’s time to get started… Either partner with somebody, or do it yourself, or don’t do it at all.
Joe Fairless: Well, you get a pass on that because you’re from an engineering background. [laughter] What’s the best ever way you like to give back?
Josh Welch: We actually started a non-profit here in Houston called “World Will Be Better”, and it serves to raise money for an elderly homeless shelter. There’s a movement in Houston where there’s a lot of elderly homeless, and there’s an organization that was created to house these people. However, they’re running out of housing for them, so we started a cause to basically raise about three million dollars to plan and construct a new facility for them, so that they can continue to accept more people, and educate them and house them and clothe them, to reintroduce them back into society. We’re really excited about that.
Joe Fairless: And how can the Best Ever listeners learn more about your company?
Josh Welch: They can go to our website, ThreePillarsCapitalGroup.com, and they can always e-mail me too, at JoshW@threepillarscapitalgroup.com.
Joe Fairless: Josh, thanks so much for being on the show, talking about how you were doing the single-family home route, you had the light bulb moment, you put a vision in place, started investing passively first, learned what you liked, what you didn’t like, and then applied those lessons to now doing syndications.
You said 121 units over approximately 12 months, right?
Josh Welch: Yes.
Joe Fairless: Yes. 121 units in approximately 12 months, just over a year – congrats on that, and best of luck on the new acquisition. I hope you have a best ever day, and we’ll talk to you soon.
Josh Welch: I appreciate it, Joe. Thank you.