JF2763: 100% Tenant Turnover in 6 Months: Tips for Overcoming Value-Add Hurdles On Challenging Properties ft. Ben Suttles

Ben Suttles, managing partner at Disrupt Equity, faced a problem with his deal: there was 80% occupancy, but only 35% of the tenants were paying rent. Add in the crime rates and drug deals that occurred on the property, and he soon found himself having to do massive turnovers to the complex. Ben shares the lessons learned from this challenging deal and how he was able to turn it around for a profitable outcome.

Ben Suttles | Real Estate Background

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Ben Suttles. Ben is joining us from Houston, Texas. He’s an apartment syndicator with Disrupt Equity. They have over 200 million in assets under management, with 2000 units across Texas and Georgia. He’s also an LP in 2500 units. Ben, can you start us off a little more about your background and what you’re currently focused on?

Ben Suttles: Well, thanks, Slocomb. Man, I really appreciate the invite. Hopefully, I can add some value to your listeners today. A little bit about my background – I come from IT sales. Everybody’s going to be like, “How did you get into multifamily syndication?” I’ll tell you a little story here. As a lot of people that are probably listening, I have read a little bit of a book called Rich Dad Poor Dad, I did the same thing in 2012. It was a light bulb moment. I said at that point, “Hey, I need to get into real estate.” Not knowing anything about multifamily; everybody knows about single-family, rentals, flipping, the stuff that you see on HGTV. So I got into that in 2012 and 2013, and did that for a couple of years here in Houston, where I’m from.

As some folks realize, after a couple of years of being a landlord on your own, flipping houses on your own, I lost the remainder of my hair, and I was looking for something different. I love real estate, I love building legacy wealth for my daughter, and ultimately looking to try to get out of the rat race as soon as possible, too. So I started looking at commercial real estate; and within commercial real estate, I found out about multifamily. So in 2015, I joined a group, learned how to do it, learned how to raise money, and I found out that my skill set as a sales guy was a good segue into raising capital and doing presentations and pitching deals. So I kind of took off from there. I did my first deal in 2015, did another deal the next year…

From there, I said, “Hey,  I really want to scale this out, but I’m lacking some of the things that I need in order to scale.” I started actively looking to identify a potential partner. In 2017, I met a gentleman named Feras Moussa; he came from IT as well. He wasn’t on the sales side, he was on the development side, but he had some of those skills that I was lacking. I’m a big proponent of one plus one equals three, so it was a good symbiotic relationship. In 2017, we created Disrupt Equity.

After that, we went on a tear for the next few years, bought a bunch of deals, then obviously COVID hits. But we’re back onto it now, we’ve got some pretty ambitious goals for 2020 and looking forward to getting back into the swing of things. We sold about five deals last year, and hopefully, we can continue to grow in the multifamily space.

Slocomb Reed: Awesome. So within your partnership with Feras at Disrupt, what do you focus on? What’s your specialty?

Ben Suttles: I’d say it’s raising money, acquisitions, and then ultimately, on the back end, I do the asset management side. Feras helps with the back office, IT, and also the property management side of our business. We have our own property management company, and that in itself is its own job. So we’ve divided and conquered, and again, it’s worked out fairly well, because his skill set does well over there, and this is kind of where I thrive. And it ultimately is what we enjoy to do too.

But I’d say day-to-day, the main part of my day is going to be the acquisitions, which is talking with brokers, identifying opportunities, and working with our underwriting team. The flip side of that, the other four hours, actually, probably six or seven hours of my day, is going to be the asset management side of our business… Just managing our current portfolio and making sure that we’re hitting the business plan that we’re trying to hit.

Slocomb Reed: Are you doing all of the asset management yourself for the whole portfolio?

Ben Suttles: No, we’ve since hired on a couple folks that actually do the day-to-day, and I’m just managing them. I think as you grow a company, you step back from doing the doing, to managing the people that are doing the doing. It’s been a little bit of a paradigm shift for both me and Feras, because in the beginning, you’re doing everything. Then you start delegating and carving out little pieces, and then you wake up one day, 80% of that is somebody else. Now you have to manage them and make sure that they’re doing it in the way that it needs to be done, keeping them accountable, keeping everybody trending towards the same goals, managing people and their time, and sometimes in some cases there are challenges. Bottom line – yeah, I manage the asset management team, I guess is probably a better way to describe it.

Slocomb Reed: Gotcha. Yeah, I was going to ask with 2000 doors and 200 million in assets, how you’re doing all the asset management yourself…

Ben Suttles: No. It would be very difficult.  I think that if I was to do that, I would never have any time to buy anything else, because you’re constantly blinders on trying to focus on making sure that your current portfolio is performing well. You don’t have time to go develop relationships with brokers, underwrite additional deals, or make offers, because you’re so bombed doing that. Actually, it’s a good point that you bring up asset management, because our first hire at Disrupt Equity was an asset manager. I identified that it’s just a really — I’m not saying time suck, because it has really negative connotation, but it was just not the highest and best use of the time that I felt like I needed to use. I wanted to focus more on acquisitions, so the first person I did was hire an asset manager. It was one of the best decisions that I’ve ever made.

Slocomb Reed: So a lot of time was spent in asset management. Do you guys have property management in house?

Ben Suttles: We do. We do first party and third party, so that’s been its own set of challenges. But yeah, we do have our own property management company called Disrupt Management. We started that in 2019; actually Q4 of 2018. Everybody knows what happened three or four months later… So it was a blessing and it was a little bit of a curse. Obviously, bad timing, but I’m actually glad that we took over our whole entire portfolio at the time that we did, because it allowed us to have that transparency and allowed us to pivot… Because all those things – I would have cringed to have a third-party company trying to manage our assets during COVID. Things were shifting week-to-week, nobody knew what was going to happen, what were the rules and regulations, and it was really nice to have our own in-house management where we could say, “Hey, no, we got to do it this way.” Boom, it gets done that way. Versus trying to go back to one of the big property management companies and say, “No, I want you to manage my assets this way.” It doesn’t work like that; they’ve got their own box… I understand why they do it. They’re big and they have to slam everybody in there in order to be able to manage it all. But it makes it difficult when you want them to pivot or be nimble when challenging times pop up. So it was a blessing in that respect when COVID popped up, because we could pivot when we needed to.

Slocomb Reed: Yeah. I do a lot of direct to seller lead generation here in Cincinnati, and in the conversations that I was having with owners in 2020, there was a direct correlation between how close the owner of the property was to the tenant, and how well their property performed in early 2020. The owner-operators, people like me, I didn’t have any collections issues, in March, April, May, June 2020. I’ve said this on the podcast before, but the moment the shelter-in-place order was announced, I had a plan. I reached out to all of my tenants and said, “Hey, if you experienced any financial hardship? I have plans to help you through. Please connect with me.” Several of them did.

On the other side of that spectrum though, the people in Cincinnati whose properties aren’t local, the owner is not local, and they hired a big box third party manager like you were saying, who has to fit everyone into the way that they do things – those are the people who really suffered. Those were the tenants who took advantage of the opportunity to not pay rent and not get evicted. The further the owner of the property was from the tenant, if they weren’t here locally and they were relying on a third-party manager, and they were relying on the wrong third-party manager, those are the people whose collections absolutely plummeted. So to your point – yeah, I bet it was. I don’t know how much time you spent comparing yourself to other operators in the space, but getting yourself that close to the tenant right before a serious macro-level event happened – I’m sure that did help with your operations.

Ben Suttles: I’ll also say we were able to control the messaging that went back to the tenants, too. I think in a lot of ways, that’s also challenging. Because for people that are trying to filter, “Hey, I want you to say this, or I want you to direct them to go here,” that can be tough when you’re trying to do that through a third-party company. Once we got our hands around what was happening with COVID, I think at the end of the day, it was always nice to say, “Okay, hey. We just found out about this new rule or this new whatever mandate, let’s send out a letter and say, ‘Hey, this is how we’re going to handle it. These are who you need to talk to.'” We provided almost like a Wikipedia page to all of our tenants with all the different links to all the different resources within their specific sub-market. People – man, they really ate that up, they really appreciated that because we took all the guesswork out of it. “Hey, if you’re having challenging times, you need to go here. Or if you need this, you need to go here. If you need this, you need to go here.”

We curated the page for actually all of 2020. We finally took it down I think in Q1 2021, but that was where we were pushing everybody, and we had essentially figured out all the resources and how to help them. People like that, and I think that that’s important. I think even in normal times, just communicating with people…

Slocomb Reed: Yeah, totally.

Ben Suttles: I think in a lot of ways if you try to wall yourself off and be all rigid, it’s hard to work a solution. But if you come to people and say, “Hey, this is what I’m trying to do. But ultimately, we want you to stay at the property. We know it’s been challenging, but here are some solutions.” We’re doing that even to this day, as eviction courts are starting to open up; we’ve found ourselves working out deals with folks, trying to get them back into paying rent, and how does that work, and “Hey, if we waive this, let’s get you back on track. You don’t want to have that eviction, that scarlet letter on your record, so how do we make this work?” It’s really been successful. If you start really working with people and talking to them, a lot of people have come in out of the cold and said, “Okay, here. Here’s what I can pay, what can you do to work with me?” It’s been very, very successful this year, and so we’re going to continue to do that, too.

There have been some submarkets, Atlanta being one of them, that are still trying to get their act together as far as eviction courts. And what they’re telling people is that “Hey, I’m starting from March 2020 and I’m working my way all the way to where it is now.” So they’re two years behind, man, and some of these are still not fully open. If they are there – again, they’re starting in March 2020 and they’re working their way through… You can imagine what kind of backlog they have, it’s crazy.

Slocomb Reed: Ben, you’re in a breadth of markets, at least in Texas and Georgia, but I know you said before we started recording that you’re also looking at Columbus.

Ben Suttles: Yup.

Slocomb Reed: Quick question… As involved as you guys are in day-to-day operations, the way that COVID was handled in a market with shelter-in-place, mass requirements, and eviction moratoriums, how much is that playing into your decision about whether or not you want to enter a market right now?

Ben Suttles: Huge, it’s huge. We love Atlanta as a market but, man, they muck the whole thing up, man. I would say, for the most part, and in normal times, Georgia was fairly pro-landlord. But it went almost completely to the other side of the spectrum when COVID hid and they just didn’t really work with us. They made it very challenging to get rental relief through. Maybe they don’t realize this, you have federal funding, went down to the state level, state-level then goes down to the local level, they push it down to the local administrations. Now there were some statewide programs in certain states, but in some locations, especially in Atlanta, it was administered by the counties. Each county had its own set of rules and regulations. If anybody knows anything about Atlanta, that’s made up of seven different counties.

We had to deal with four different ones and each one of them was extremely challenging. It has made us kind of pause acquisitions in Atlanta because not only do we know there are huge delinquency problems, they haven’t been able to evict anybody even to this day, we also just have a little bit of a sour taste in our mouths, I’d say, from how we were just treated as landlords by the local administration. I know that obviously stuff happened and I’m not trying to politicize anything. There were other states and other locations that handled it a lot more effectively. I’m not saying that one is better than the other, we’ll still ultimately go after deals in Atlanta if that makes sense. But I’m certainly going to be a little bit more cautious on my underwriting of deals in certain markets because of what happened during COVID.

Slocomb Reed: Ben, it sounds like you guys have taken a lot of deals full-cycle already. I think you said you sold five properties last year.

Ben Suttles: Yep.

Slocomb Reed: Tell us about the biggest challenge that you’ve had to overcome specific to a particular deal you took full-cycle.

Ben Suttles: Another Atlanta deal. This deal was challenging from the beginning, it was in what I’m going to call a transitioning market. You read into that statement however anybody wants to read into it. It is South Atlanta, anybody that knows anything about Atlanta, South Atlanta is different than North Atlanta. We’ve done very, very well down there but you just have to realize what you’re getting yourselves into. Well, this property had every challenge that you could possibly have. It had down units, it had crime, and it had deferred maintenance. We bought it from a slumlord that did nothing but put band-aids over just gaping wounds on the property. It had tenants that were criminals and everything else. I would say the most challenging deal that we ever had was that one. We bought it, on paper, it was at 80% occupied. Of that 80%, only 30% were actually paying rent.

Physical occupancy of 80%, economic occupancy 30%.

Slocomb Reed: Yes.

Ben Suttles: We weren’t making a lot of money so we were bleeding money from day one. We took physical occupancy down to 35%, you can now imagine that we are really hemorrhaging money. We had to do all the work, upgrade the property, and then release it back up, all of this takes a good 18 months. At the end of the day, it ended up being all right but we had challenges from the lender. The lender tried to blow the deal up because they’re one of these loan-to-own bridge lenders, I’m not going to mention anybody’s name. They were very, very challenging, they held up draws, they would give us approvals on stuff and then kind of come back and renege and say “Oh, no. Actually, you can’t do that.” There was every challenge in the book. We had a lot of criminal problems and that created some challenges when you went to go try to sell the property too. There were news articles and all kinds of stuff. That was probably our most challenging deal.

Now, it ended up being profitable. I’ve never lost money on any of the multifamily properties that I’ve had. Now, the one time that I have lost money is, COVID, March 2020, me and Feras get a deal under contract here in Texas. This was before the 15 days to stop the spread or whatever it was called. Early March, we’d already done our due diligence, we went to go do the capital raise, and they shut the economy down. We’re like, “Okay, that’s going to dry up, equity is gone dry up. How can we physically get this deal across the finish line?” We went back to the seller who had said, “I’m going to probably refinance, we’ll work something out. Yeah, I’ll give you your earnest money back.” Once we made it official, then everybody starts clamming up, and the guy didn’t want to give us our earnest money back.

Well, we ended up having to sue him to get it back and we took it all the way to arbitration. It took a good 18 months to finally get our earnest money back. We didn’t get it all back because you have to factor in the fact that I paid $50,000 for a lawyer to go chase after the earnest money that I had.

Slocomb Reed: How much was the earnest money?

Ben Suttles: It was quite a bit. I think it was $250,000.

Slocomb Reed: You got 80% of it back.

Ben Suttles: Yeah, we got some. But that was the only time where I feel like we’ve somewhat miscalculated it. The lesson that we learned from that deal, was to get everything in writing. Because this guy, verbatim over the phone, told us that he would give us our money back and then reneged on it. It was essentially, you go back to the lawyer and say, “Hey, well, this guy told us that.” Unfortunately, it’s unenforceable. A verbal agreement in most states, certainly not in Texas, is just not enforceable. That was a hard pill to swallow because, on top of that, COVID hits, and our acquisition pipeline essentially evaporated overnight. We didn’t have any deals selling, we didn’t have any deals buying. Ultimately, we had our current deals, but obviously, those were all slowing down because we’re still trying to get people to actually just pay rent. It was kind of a double whammy for us. But that’s probably the one time where I was just like, “Man, we probably could have done some things a little bit differently on that one.”

Break: [00:20:25][00:22:21]

Slocomb Reed: Ben, going back to the Atlanta deal that you ended up buying with only 30% economic occupancy. You made money, it was much more of a lift than you expected, where are the lessons learned in that deal? Going back, were there any red flags that you just didn’t recognize upfront or is there anything that you recognize now that you would have done differently at the onset?

Ben Suttles: Yeah, there’s a big, big lesson to be learned and yeah, I had red flags going off in my head but on paper, it looks very, very strong. A young guy with some hubris involved, where I’m like, “I can make this work. I can do this. I can make this profitable.” But I’d say the biggest red flag, not a red flag, but I guess the lesson learned is who you buy a deal from. I think people discount that. If you’re buying from an institutional person versus some slumlord, guess what? The institutional person is going to take care of the asset, the slumlord’s not. You need to realize whatever CapEx budget you have and if you’re buying from a slumlord, go ahead and double it. There’s going to be all kinds of skeletons in the closet when it comes to the deal because there’s just going to be a ton more deferred maintenance or there’s going to be things that are going to be uncovered once you take over the property and find out that this guy or this gal hadn’t done anything. We had gotten the sense that this was who that person was just based on the conversation that we had with the broker. That should have been a huge red flag. But again, we’re trying to get into a new market, the first asset in that new market, we’re willing to roll the dice a little bit. That was red flag number one. I’d say red flag number two is…

Slocomb Reed: Ben, before we go to red flag number two. Slumlord is a very triggering term in our industry, it’s even more triggering out of our industry. I want to give you the opportunity to put some definition behind that. What is it that you mean when you say slumlord and how can people who are underwriting deals, analyzing deals, identify a bad owner operator who’s leaving a property in very bad condition?

Ben Suttles: Apologies, I’m certainly not trying to…

Slocomb Reed: I’m not saying that you did anything wrong. It’s just a very broadly used term that I want to put some details behind what you mean when you say that.

Ben Suttles: What I consider a slumlord… Here’s a more positive way, a low-cost operator.

Slocomb Reed: You’ve gone too far in the wrong direction now.

Ben Suttles: These people don’t put any money into the project. That is the definition of they are there to just squeeze as much juice out of it without putting a dime into the property. That is not what we do at Disrupt Equity, we put money into our properties because we’re trying to create value and create a better community for our tenants. We look at it from an abundance mindset versus a scarcity mindset. We knew that doing the due diligence, and again, talking with the broke, just how these guys operated, and just pick up on these details that they’re trying to kind of drop on you. Because they don’t want to be perceived as not telling you about something. We also had another deal in Texas, it was the same thing. The person had owned it for 10 years, had not really put any money into it, and I would say that was the second most challenging deal. The lesson again that we’ve learned is you really have to know who you’re buying from.

The other thing too, is you have to have some kind of audited, not necessarily audited financials, but do some due diligence on the financials too. Because, in a lot of ways, these people that are kind of mom-and-pop low-cost operators, their books are either going to just be very, very sloppy or they’re downright fraudulent. In this case, it really was. Yeah, people say, “Why didn’t you sue them?” Because at the end of the day, that’s buyer beware. You have to do your own due diligence upfront, folks, or you can’t necessarily blame the guy. Now, if there was some clear-cut fraud that I could tie back easily and not have to spend 100 grand to go chase them with, that could be one thing. But we said “Hey, we’re just going to roll with it. We got enough money and enough capital to put into the project. We’re going to make it work.” That’s what I mean when I say that term. It’s just people that don’t put any money into it and all they’re trying to do is take money out.

Slocomb Reed: I will always stand behind the belief that treating people with dignity and respect is the most profitable way to operate any business. It sounds like you agree and it sounds like this is a property, it sounds like you’ve bought a couple of properties from people who did not operate that way. They just wanted money in with no money out, they let the place fall into disrepair because they knew there would still be someone who was desperate who needed to rent from them. Even if it was below market rent, hey, they have no expenses because they’re not fixing anything so why not just take below-market rent from someone who’s desperate?

Ben Suttles: A lot of these guys’ basis, we bought this deal in Atlanta. People are probably going to cringe because anybody that’s looking at Atlanta is going to say, “Whoa, what?” These guys bought in at 10,000, the door. The deal they bought in Texas was bought in 2008, everybody knows what was happening in 2008. Those guys bought it at the bottom of the market so their basis is low. They’re still probably cash flowing, to be honest with you, because their basis is so low. They have no real incentive to push it at all.

Slocomb Reed: Other than treating people with dignity and respect.

Ben Suttles: Well, that’s just the types of folks that they were. But my point is that there was no financial incentive for them to push it either, not to mention just the type of person that they are. But yeah, we live in an abundance mindset where, hey, if you put money in, you’re going to create money. If you create a community, you’re going to not only have less turnover, but you’re going to attract the right tenants that want to live in a community that’s safe, that has the quality and clean housing. That’s important. People need to realize that if you look at it through that lens, you will still make money but you will also be doing good for the community because all ships rise with the tide.

If you’re coming in and you’re the first person on the block, you’re the trailblazer that’s going to dump 10,000 a door into your community, and you’re just going to completely revolutionize it, and you’re going to start pushing rents, guess what? The guy next door is going to say, “Man, in order to compete, I either got to refi and pull some money out and put some money back in this thing, or I got to sell.” And the next guy that buys it from him is going to do the same thing because he’s going to say, “Well, hey, Ben and Feras are doing a great job. I got to put 10,000 a door into my deal too.” Guess what? All ships rise with the tide folks. I’ve seen whole communities transformed just by what we can do. It’s an exciting incredible thing to see it and the same thing can happen in single-family too. Don’t think of it in terms of gentrification or something negative. You’re just trying to lift the community up by improving the housing that’s in there. That’s what we try to do and try to look at it through that lens.

Slocomb Reed: Ben, I distracted you from lesson two on the Atlanta deal.

Ben Suttles: What was less than two? Oh, okay. Yeah, less than two. We get through, we bought it, we’re under contract, another big red flag… People are going to say, “This is glaring.” We’re on the property doing due diligence, within the first five minutes, I saw a drug deal go down. But I was like, “Okay, we’re just going to…”

Slocomb Reed: Is this after you bought it?

Ben Suttles: No, we’re under contract, we’re doing our on-site DD, due diligence, unit-to-unit walks. I see a drug deal go down, I’m like, “Cringe, not great. But we’re going to identify these people, we’re going to have security from day one, and we’re going to get them out.” But as we were walking through the community, there was not once but twice, where there were people that literally threw trash out of the balcony onto the ground right in front of us. The big red flag there is that they didn’t have any sense of community, they didn’t care because they felt like the landlord didn’t care. It really wasn’t their home, it was just a flophouse, so who cares? They don’t care about me, I’m just going to throw trash on the ground. I knew right there that we needed to just re-tenant the whole entire place because it was just going to be too challenging of a property.

But that was probably a big red flag that, “Hey, we’re going to have to do some thinning of the herd a little bit on the occupancy.” And we did. Again, we took it from 80% on paper down to I think 35%. But that was a big red flag. When you see crime, when you see people not taking care of the community, you know you’re going to have some challenging times, and you’re going to have to re-tenant that property. People don’t take into consideration that there could be a fair amount of turnover in year one, to the point where we turned over the whole entire property in less than 12 months. I think we turned it over and six months, was what we did. Either people just skipped in the middle of the night, they were evicted, or by natural attrition, they just moved out. You need to take that into consideration. That was a big red flag for us.

Slocomb Reed: Ben, are you ready for the Best Ever lightning round?

Ben Suttles: Let’s do it. Let’s do it.

Slocomb Reed: Awesome. What is your best ever way to give back?

Ben Suttles: We have a charity, it’s called Disrupt Gives. It provides financial literacy and education to our tenants. It’s an actual charity and we do this every year where we put money in as part of our asset management fee that we take on a property, as well as have events where we can raise money and dump it back in. But we do that and that’s the way that we give back. But I am also big on charitable organizations and I love giving back at the Houston Food Bank and some other organizations that we’re part of as well.

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

Ben Suttles: I’d say we’re getting into EOS, entrepreneur operating system. I just recently read Traction about three months ago. I wish I had something a little bit more recent but I’ve been a little bit busy the last few months. I’d encourage anybody that’s really trying to scale out a business or build a business. Or maybe you’ve already built a business and you just feel like you’re in a rut, look into EOS. I think it’s revolutionized how we’ve been able to scale our business and how we’ve been able to operate. I encourage everybody to at least read the book. I think it’s Gino Wickman is the author of that one.

Slocomb Reed: Ben, what is your best ever advice?

Ben Suttles: I’d say be persistent but also just keep grinding it out. People that get into real estate have this understanding or this thought that, “Hey, I’m going to get rich and I’m going to get rich quick.” I see people that I aspire to be and I can quickly get there. Just be patient but be persistent. Because I think that that last day where you’re just about ready just to hang it up and just say, “You know what? I’m done with this. I haven’t found a deal or the deals that I have done haven’t been profitable.” It’s that last day that if you just continue to grind it out, you’re going to see a lot of progress and you’re actually going to hit one. I’ve seen people that three months in “Oh, the market’s too hot, it’s too expensive, it’s just too competitive.” On day 91, kept grinding it out, they might have found the deal. But instead, they just hang up their cleats and say “Alright, I’m done.” Be patient, be persistent. I’ll tell you, the profits and the money will come, you just have to continue to keep grinding it out.

Slocomb Reed: Absolutely. Ben, where can people get in touch with you?

Ben Suttles: You can check us out at www.disruptequity.com or you can email me directly. I like to talk shop as people can probably tell, ben@disruptequity.com as well.

Slocomb Reed: Awesome. Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please do subscribe to the show, leave us a five-star review, and share this episode with a friend who could gain some value out of the conversation we just had with Ben Suttles. Thank you and have a Best Ever day.

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JF2757: How To Analyze And Select Asset Classes For Long-Term Holds ft. Zach Morrow

How do you know what asset class is right for you? In this episode, Zach Morrow—VP of Investor Relations at Boron Capital—shares how he selects his investment assets and the advantages of long-term holds.

Zach Morrow | Real Estate Background

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Zach Morrow. Zach’s joining us from Lubbock, Texas. He is a GP who specializes in investor relations with Boron Capital; they help LPS place capital in self-storage, mobile home communities, corporate housing, wedding and event venues, and blockchain and crypto assets. In their portfolio currently, they are operators of about 30 million in assets under management in real estate, they’re partnered in another 80 million. They’re also partnered in a family of funds controlling 60 million in crypto assets. Zach, can you start us off with a little more about your background and tell us what you’re currently focused on?

Zach Morrow: Yeah, absolutely. Well, Slocomb, excited to be here on the Best Ever show. I love the show, you guys have done incredible things. Glad to get to connect here today and get to share and excited for where we go. As far as the background and focus – two different stories there. I’d say current focus right now on the real estate side is an expansion in self-storage and mobile home communities to asset classes we really like. On the flip side of that, everybody’s always like “How did a real estate group get involved in crypto?” That’s another interesting story, but that is a large focus as well for our current expansion, is the cryptocurrency and blockchain technology. Very excited to have been able to manage that fund, get that fund launched, and be able to get access to people who haven’t otherwise had access to professionally managed assets in that space.

Slocomb Reed: Awesome. What got you into real estate in the first place?

Zach Morrow: Well, in the first place, I would tell you it was Blake Templeton. He’s the owner and founder of Boron Capital, he started it back in 2006. Originally, I was just a guy who was trying to figure out his way in life. I left high school and ended up joining the Marine Corps, I did five years in the Marine Corps. Actually, in boot camp, I got pulled out of essentially the squadron and got sent over to an interview that I had no idea what it was for, and they started asking me a whole bunch of questions. They’re asking questions, there’s a group of people saying, “Okay, if you’ve ever had this, raise your hand. Get out.” If you raised your hand, they’re just like eliminated, we don’t know why we’re there.

Put down a long track of interviews, follow-ups, and different things like that that ended up leading me to DC, where I served at a top-secret facility in a department of the White House on a presidential security force. Spent quite a few years doing that in DC, and started a family, met my now wife, 12 and a half years now married, and have our daughter there, I’ve got two kids now. While working in the Marine Corps, I realized that there were a few different things I was looking for in life. One of them was a little bit more ability to control my future and spend time with my family and put them first. I left the Marine Corps and kind of started an entrepreneurial business journey. That led me to eventually getting introduced to Blake, grew a relationship with Blake and the Boron Capital team. A couple of years after that, ended up selling what I had been working on and coming over to join the team full-time. Been over here now for coming up on five years.

Slocomb Reed: Zach, I have to ask, this is not politically motivated at all, I just think it’s cool… Which presidents did you protect?

Zach Morrow: As far as actually working directly with that president, I only got to work with George W. Bush one time, and then I served the entire first term of President Obama. I actually got to work with President Obama and Vice President Biden at the time, who actually now is the president. Now I guess I could say I’ve worked with three actively sitting presidents during my course of service there.

Slocomb Reed: Gotcha. You guys are most attracted to self-storage and mobile homes right now… What other asset classes were you considering and what led you to those two?

Zach Morrow: As investors, I think we always have to ask the question of what are we fundamentally driven by and believe in long-term, and then also, what do we feel can best operate with our current situation of where we’re going in the future and where that lines up economically. Historically, you mentioned wedding event venues, you mentioned corporate housing – we’ve done things in corporate housing, we’ve done things in the venue space, we still own assets in that space, although we’re not currently expanding in those areas. We’ve done multifamily and single-family as well. Over 16 years in business for the company this year, and over that time we just continue to ask the question of what’s going to be the best asset class in the present timeframe. If you want to break down some of those thought processes, happy to do so.

For every investor, it’s just understanding where you’re at in the cycle. It’s the same thing we had to do as a company, is where are we at in the cycle and what’s going to help us grow and scale to the next level that we’re looking to grow and scale into. So how we transitioned really from some of those asset classes over to self-storage and mobile home communities was really diving into the questions. 2019, we actually were selling a lot of multifamily, sold assets that year. We were really just looking at the cycles as far as the areas we were located in, and felt like the valuations were reaching higher numbers. At that point, we felt like it made sense to have some dispositions there. After coming out of that, we were asking the question, where do we want to go now, where do we want to continue to expand, and where do we want to allocate capital?

2020 was a time where we were processing some expansion in corporate housing. But obviously, very early in 2020, we saw a significant shift in the markets. Predominantly, a lot of our corporate housing actually is servicing areas around oil, so in 2020 that market took a large pullback and quite a hit. We put a pause on that and really just called a timeout. When the status quo changes, we have to be willing to adapt, improvise and overcome. We’re coming off of dispositions and we were planning on doing a lot of acquisition in 2020 and growth there, but really, we just decided, “Why don’t we just slow down, process what’s happening, take this all in, and get an understanding of where things might be going?” We were watching the shifts, the changes, the mandates and things like that, also the Fed’s response with quantitative easing, and the purchasing of assets, and things like that for their balance sheet… We were at a point where we decided we really want to be able to get into asset classes that we feel could succeed during strong times, but also have proven to be recession-resistant. Affordable housing through mobile home communities is one we feel like the supply and demand deficit was there for good acquisitions. We also feel like they’ee historically proven to be not only a lower risk asset as far as recession goes, but also strong numbers as far as income basis over time.

The same thing with self-storage. Regardless of an up or down economy, self-storage, really over the last 25 years, both asset classes have not only been at the top as far as income producing, net operating income against other real estate assets, and also have outperformed things like the Dow, S&P, and things like that, but they’ve also shown to be lower risk.

For us right now, we’re really in a season where our main focus is long-term asset accumulation, and these were two asset classes that we felt had the long-term ability to appreciate and sustain through ups and down markets. We came out of a value-add phase and shifted now with a focus more on long-term asset allocation. That’s the structure you would see in our real estate fund, is we’re primarily focused on accumulating assets that we want to hold for the long-term, focused on return of capital first, and then allowing investors to continue to partner in the equity, in the upside, even after return of capital.

Slocomb Reed: Unlike most people who are syndicating commercial real estate – they’re looking at the five-year hold, and they’re looking at delivering on a juicy IRR – you said that you guys are more focused now on building a longer-term hold portfolio. That’s because you believe we’re going into a recession?

Zach Morrow: I wouldn’t say it’s predominantly that we’re just absolutely certain we’re going into a recession, but when you’re processing your portfolio as a whole, you need to be prepared to not only hedge towards the downside, but also be able to create opportunities on an upside. We believe that these are positioned for both.

Now, to your point, we have to ask the fundamental questions on — what you’re describing is what I would typically call a value-add. So if I’m syndicating for a typical apartment type deal, let’s say multifamily, because it’s a very well-known asset class. I’m sure many investors listening to this have seen a deal come across their desk where it’s a multifamily property, there was a value-add, which essentially means we’re going to purchase it, it’s probably under-managed, the occupancy may not be as good, it has some deferred maintenance… We’re going to come in, correct that, put some money into the property, increase rents, increase the actual occupancy, and then seek to flip that, sell that, have a disposition of that asset, maybe two, three, four, five years down the road.

As you said, that does create a nice juicy IRR on paper. But if your main intention is the turnover of capital, then that’s going to work for you. If you’re in a position where you’re really looking for long-term quality assets that can continue to appreciate, continue to cash flow, and limit your actual variables, then maintaining the asset would be something that you’d want to look for. So if we actually go and sell that asset, one, we create new variables of being able to purchase a new quality asset, two, we’re going to be forced to either quickly 1031 to defer taxes, or we’re going to be subject to capital gains, which then forces the speed at which you have to make a purchase.

I’m sure most people have been around an area where they have made a disposition, now they’re like, “I got to get this money put back to work.” Because at the end of the day, it wasn’t about the money, it was about having a great asset so that I can earn money. But once I get the money, I still want to put that back to work in an asset. We’ve done that, we’ve done the value-add, what we’ve found is that the real thing that the investor is looking for is security and getting their capital back. So when they have a disposition, now they know “Okay, in three years I’m going to get my money back”, so then they have certainty of that return. But then ultimately, they do want another deal, they want to avoid the taxes, and they want to be able to continue to own great assets. So our goal was to be able to find assets that could continue to appreciate, could continue to have good, strong operational income, and then rather than have a disposition, we utilize strategic refinance, to help do return of capital. Then once all the capital is returned, our investors still continue to participate in the upside. And we’re able to continue to do that every four, five, six years you can go in, capture some of your appreciation, and it eliminates the need to be forced into new assets, which reduces your risk by reducing your variables; it eliminates the need to rush into a new deal, and it also helps on taxes significantly, because any appreciation that we capture through refinancing actually isn’t taxable, because it’s shown as debt versus capital gains. We’re really helping limit tax issues, seeking to limit the variables as far as needing to rush into new assets, and being able to just continue to focus on growing the assets that we have.

Slocomb Reed: Zach, you’re preaching to the choir here. I’m a long-term hold investor.

Zach Morrow: Yes, Slocomb.

Slocomb Reed: You’re saying a lot of the things that draw me in. Based on our conversation thus far, let’s see how many Best Ever listeners we can convince to write a long-term buy and hold.

Break: [00:15:29][00:17:25]

Slocomb Reed: I have three questions for you. I want to make sure I get to all of them, and then I want to pivot the conversation. Long-term hold investing – so many advantages; you just listed many of them. The tax advantages, the advantages of stability, the advantages of cash flow, still having the opportunity to take advantage of the appreciation of the portfolio with a cash out refinance, that lets you draw some capital and get it redeployed without any risk of having a taxable event. Specifically, self-storage and mobile homes, why are those two, in your opinion, the best asset classes for the long-term hold right now?

Zach Morrow: Well, one, I’m looking at the data. As I mentioned before, the data has shown that if we did what’s called a base 100, and that’s essentially just a study that shows if I put $100 into this asset class over 25 years, versus other asset classes, what would it have done. If we took all self-storage REITs specifically, just kind of as a base, they’ve outperformed every other asset class in real estate for the last 25 years. Not too far below them were mobile home communities. So as we’re processing actual net operating income, which for a long-term hold, you have to be able to focus on NOI. You have to be able to produce a good, strong cash flow income. That’s one of the issues we really saw coming out of multifamily, is that with the value-add play, in most cases, it’s extremely suppressed income, if any, because you continue to put capital into the deal until you sell. So in a lot of cases, you’re not really seeing any true income, and in most cases, you have to sell the property so that you could profit from the money that you were putting in.

Slocomb Reed: Zach, I have to play devil’s advocate. Remember, I’m on your side here, but I hear Best Ever listeners in my ear right now saying “Yes, but the IRR, the annualized return that I’m offering, 15%, 18%, is higher than your cash-on-cash returns.” That’s what attracts the majority of people to these kinds of syndications, is when you sell, the resulting return over the life of the investment is greater than just what cash flow would have done with their money. I know how I want to respond to that, Zach, but how would you want to respond to that?

Zach Morrow: Well, I think for every investor, they’ve gotta decide where they’re at; and everybody’s at a different position. Depending on where your capital is at and what you’re trying to accomplish, you may like a shorter-term opportunity; it may be better suited for you and your personal needs. I’m not here to say that it’s going to be a better opportunity every single time. But what I would say is that when I process the actual numbers, let’s say it was a 20% IRR like you mentioned – well, we’ve got to process what’s going to happen with that money, and the risk I assume. Me, personally, I’m very concerned about being able to maintain stability over the long term, and I can do that best and assets I know and control. What I can’t do, as somebody who’s putting deals together, is guarantee… Well, we can’t guarantee anything. But of course, with anything, if I’m just putting money to work in the value-add position, when that money comes back to me, I have a new burdens. I might have given you a 20% IRR, but what else did I give you? A pretty large tax burden. So you’re going to have a pretty large tax burden come right out of that initial profit. So one key difference is just going to be the tax advantages of the long-term hold. In a lot of cases with the long-term hold, at most you can eliminate or at least strongly reduce any operational income or tax benefits and in certain cases, take losses that are going to help offset and create additional profits in your overall portfolio. In other cases, it’s not just a cash-on-cash return. While there is a cash-on-cash return, if and when you can utilize strategic refinances, which we’ve been able to successfully do, and believe we can continue to successfully do in the future, you are able to access your appreciation over time.

The main difference with a disposition is that you are accessing appreciation, which then looks like a great return on paper, but then you don’t have your asset anymore, so you’re assuming additional risks. I believe we can reduce risk significantly, I believe that through the tax advantages we can actually increase the return significantly, and I believe that you can have all the benefits without any of the drawbacks by staying in a long-term hold.

Slocomb Reed: Yeah. Not only have you created a taxable event by selling, but also one of the things that attracted me to real estate in the first place. Zach, I’m really just putting Slocomb words on things that you already said. One of the things that attracted me to real estate early on is the acquisition process and the value-add or the repositioning soon after. That’s the majority of the work involved in buy-and-hold real estate, it’s all up front. You have the capital or you raise the capital, you’re underwriting deals, sifting through as much as you have to define the right one, the great one, getting it bought, turning over the tenant base if necessary, getting rents up to market whatever the asset class, and then eventually, you get to the point where the work is done and all you have to do is maintain momentum, you don’t have to build it anymore. To your point…

Zach Morrow: [unintelligible [00:23:00] stays in motion.

Slocomb Reed: Yeah. And to your point, Zach, there should be a liquidity event available to you in the form of a cash-out refi that allows some of your capital in the form of equity to remain deployed as equity in real estate at a solid return. Get your money back to go do it again, but you’re still left with an asset where you’ve already hunted, you’ve already found it, taken it down, gotten it performing… Nothing is ever completely set it and forget it, but you have it in a much lower maintenance position when it’s already been repositioned. Leave some capital deployed, get your return, get your money out, go do the next one, while you still have the previous one cash-flowing for you. Yeah, I’m in there with you, and I see much better growth potential from a personal perspective doing it that way. The question was, after we got sidetracked with our excitement, or at least my excitement, why self-storage and mobile homes are the best asset classes with a long-term hold, and you were citing studies that demonstrated that self-storage and mobile homes over the last 25 years have outperformed every other asset class. Considering this is a long-term hold model, what returns are you targeting?

Zach Morrow: As far as targeted returns, typically we’re not advertising future returns. That’s just something from an overall basis that our counsel has brought to us. But what I will tell you is some basic targets and typically what we do…

Slocomb Reed: Zach, let me re-ask the question.

Zach Morrow: Okay, perfect.

Slocomb Reed: When you’re looking at a deal, what potential return from that asset excites you? What kind of a return are you looking for from a property when you’re considering purchasing it?

Zach Morrow: What we’re looking for right now in acquisitions is we’re looking for properties that are already up and running. We’re not doing any development of properties. A lot of our value-add comes from being able to implement new management, and then in certain cases, we are putting money back into the property to create opportunity. But if I was going to give a ballpark, we’re more of the conservative side, we’re more about sustainability, long-term expectation, and maintaining good assets for a long time. Return of capital, allowing our investors to have no money in the deal while continuing to profit from it. But if we were going to just do a general, we’ll say 12 to 15, 15 to 20 ballpark; I’ll leave it open that way.

Slocomb Reed: Cash on cash return?

Zach Morrow: We’re talking total return.

Slocomb Reed: Total return including…

Zach Morrow: Yeah, if we were going to run IRR [unintelligible [00:25:31].13] But from a basic target, we typically say… Again, our first thing is return of capital, and then second, it’s a preferred rate on that capital while it’s working in the deal. Initially, when somebody is working with us, the first thing we’re going to do is begin returning your capital’; our typical target in there is the first five to six years for a full return of capital, and then from there, over the next 12 to 24 months, a full return of the accumulated pref. Our pref right now is that 8%, and then from there, the investors are able to continue to maintain all of their equity inside that deal for the life of the investment.

Slocomb Reed: You guys decided to make this pivot about two years ago?

Zach Morrow: Correct. We shifted into self-storage and mobile home communities, like I said, about two years ago. At that time, we went out and we were really asking the question of where and how do we need to make this change. What we did is we went out and found great connections, great operators, and put together the partnerships to make this happen.

Slocomb Reed: Where in the country have you guys been buying the last few years?

Zach Morrow: The actual group that we’ve partnered with, they’re across 25 different states right now. Our most recent acquisitions have been in the DC, Maryland, Virginia areas, and then down in Texas.

Slocomb Reed: Okay. Gotcha.

Zach Morrow: Basically, things I like – I like the Sunbelt, from Texas running east out towards Florida, South Carolina, and then we’re looking at the East Coast, we’ve gone up into the DC, Maryland, Virginia area.

Slocomb Reed: Zach, I’m hoping this is a conversation that you and I can continue on a subsequent episode. I’ve got a couple of things I have to ask before we have to wrap this up though. The first is you’re in investor relations; demographically speaking, who is attracted to this investment opportunity for the long-term hold, as opposed to what other people are syndicating?

Zach Morrow: I mentioned it earlier, but everybody’s at a different place in their investment cycle. I can tell you that a majority of our investors are high-net-worth individuals. These are people that have grown their net worth and they want to preserve, protect, and see that growth over time. They have that same sort of mindset. If you’re in the mindset of asset accumulation and continuing to grow your wealth that way, then this is a great opportunity. If you’re in the mindset of “I need to increase the cash on hand,” well then running through some shorter-term syndications may be a better opportunity for you; or I would tell you to come look at our crypto funds. [laughs]

Slocomb Reed: Well, that was my next question, Zach. Not to sound as questioning as I sound, but why get into crypto? The crypto assets in your portfolio, what is it that they’re doing to complement what you’ve got going on in real estate?

Zach Morrow: I think the reasons we all love real estate are probably pretty well-known. Obviously, it’s a proven track record historically, and it’s not going anywhere, it’s going to continue to remain a supply and demand issue, it’s going to continue to be needed, and we believe in its foundation over the long-term. So as we’re continuing to grow and expand our portfolio there, we also have to ask the question of where and how do we want to continue to balance out our portfolio? Even as a company, we’re asking the question of where and how do we want to deploy capital. We were asking the question back in 2020 about asset classes. I think that, again, going back to that same deal, when the status quo changes, you have to be willing to change. As we looked at the economic landscape and we really spent time diving deep into a variety of different asset classes, not just asset classes with inside real estate, we believed that the utility and long-term growth curve of cryptocurrency blockchain technology would be one that plays a very large role in society over the next few decades.

At this time, it was one where we wanted to build out the opportunity to allow investors to join us in that. That’s what we did; same thing, same process, identify the asset class, create the strategy, and then put together a team of experts to be able to deploy and manage that appropriately. Without getting into a deep dive of how it all works, which we can maybe at another time – but it all came down to the fundamentals that we believe that the long-term use case here and the opportunity was one that we wanted to participate in.

Slocomb Reed: This is still about the long-term hold, it’s just not in real estate.

Zach Morrow: Correct. We are not focused on trying to make a quick buck, we’re not focused on trying to catch what’s trendy. We’re trying to participate and put capital to work in areas that we believe will continue to be profitable for many years to come.

Slocomb Reed: Zach, to completely oversimplify everything you just said about crypto, acknowledging that this is an oversimplification analogy that I often use with some of my clients as a real estate agent in Cincinnati, my investor clients… This deal that you’re considering right now, it’s not going to produce great returns year one. You’re buying it to stick it in a time capsule and leave that time capsule in the ground, open it up 10 years from now and see what you have. Obviously, especially with the example of real estate, you shouldn’t be developing cash flow. You’re not ignoring your property. But when it comes to the value of the asset that you’re purchasing now, in a lot of cases, it’s about what you’re going to have 10 years from now because you held it and took care of it. What I’m hearing you say is that you’re investing in crypto for the sake of putting it in a time capsule and sticking it in the ground, and your belief is 10, 20 plus years from now, what you will have will have appreciated in value beyond the capacity of other asset classes to appreciate, is that correct?

Zach Morrow: To say that is the simplification, the management and strategy inside that space does require a bit more than say a self-storage and mobile home community. It’s not just a set it and forget it; we do actively manage an index, which means we’ve got a large portion of our portfolio in long-term holds, but we do have a portion of portfolio that we actually actively manage, and do some trades, and things like that. Because of the nature of this specific asset class, it does require more active management.

But when I process the actual industry, the industry the technology will be something that we believe long-term. Then where and how we allocate inside of that space is one we have to monitor on a regular basis. Now, we do have ones that we believe are great long-terms, but you have to let the data do the talking. We have to stay up to date on that.

Slocomb Reed: Gotcha. It’s time for the last segment of our episode. Zach, are you ready for the Best Ever lightning round?

Zach Morrow: I think so, let’s do it.

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

Zach Morrow: Okay, the best ever book I recently read – and I’m not 100% through with the book, but Ray Dalio, the Changing World Order.

Slocomb Reed: Tell me a little more about it.

Zach Morrow: If you follow Ray, obviously the founder of Bridgewater Capital… Ray has a great book called Big Debt Crises. This really expands really on a more macro-level on how empires rise and fall. Understanding the cycles inside of actual empires. Processing things like the Dutch Empire, the rise and fall of the British Empire, actually looking at how the US and all the trajectory of all the things that go into a rising empire, a strong empire, and what has led to the fall of empires in power. So when he says world order, he’s really just talking about the overarching, whoever is the world power at that time, and that’s changed over time. Breaking down the cycles within that and the identifiers and then how to use that information withinside your investment outlook.

Slocomb Reed: The book is Principles for Dealing with the Changing World Order. I just found it on Audible, by Ray Dalio. Why Nations Succeed and Fail. Thank you, it’s on my wish list now. Zach, what’s your Best Ever way to give back?

Zach Morrow: Obviously, the first thing, I consider myself a man of faith. Everything as far as giving back, for me is about how do I, one, from a financial position, give back. I’ve got some ministries that we directly support financially and then we have other ministries that we are directly involved with from a time perspective and actually helping run and operate those ministries. In particular, through the owner and founder of Boron Capital, Blake Templeton, we’ve got a men’s retreat that focuses on men, and then they’ve got a marriage retreat as well that focuses on marriages. Those are the two areas that we really like to spend time in.

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

Zach Morrow: The Best Ever advice… I wasn’t prepared for this one, Slocomb. The Best Ever advice, I’d really say something that I’ve been recently looking into is thought life. Thought life, the conscious versus the subconscious. It’s an astounding fact and stat that 95% of your thought life is dictated by your subconscious. On a regular basis, only 5% of your decisions, actions, emotions, beliefs are consciously decided upon throughout your life. If we really want to control our outcome, we want to control where we end up in life, you need to find a way to be renewed inside of your underlying beliefs and principles. So evaluating those principles, being aware of them, becoming aware through those principles, and then finding a way to actually transform within them, because if those are the things that are going to be governing your daily life, you want to become more aware of them, and then it’ll actually help you gain more control in everything you’re doing. So I would say self-awareness, and making those changes that are necessary to be who you want to be and be how you want to be.

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

Zach Morrow: Yeah, the best way to get in touch would just be to text us. We have a text line, I think that’s the simplest way. A lot of people want to text now. We have a text line, you just text the word “info” to the number 877-771-0615. Text info to 877-771-0615 and then we’ll reply back to you, get connected, and I actually get those messages directly. If somebody wanted to talk or had questions, we’ll be happy to visit with them there.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to our podcast. Please do leave us a five-star review. If you know someone who would gain value from this conversation we’ve had with Zach Morrow about long-term investing, please share this episode with them. Thank you and have a Best Ever day.

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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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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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JF2750: Institutional Investors vs. Syndication: Which Is Better? ft. Sam Sells

Sam Sells went from buying his first mobile home park with a credit card to having $66,000,000 in assets under management. In this episode, Sam shares how he scaled his portfolio, along with his experiences working with institutional investors and how it compares to syndication.

Sam Sells | 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, Sam Sells. Sam is joining us from San Antonio, Texas. He is the founder of Wild Mountain Capital, a real estate syndication firm. Sam’s company has $66 million of assets under management. They have syndicated 21 deals in the last three years, including self-storage and mobile home parks. Sam, thank you for joining us and how are you today?

Sam Sells: Thank you, Ash. Happy to be here.

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

Sam Sells: Absolutely. We just closed a good-sized deal for us with institutional partners on a multifamily project in Dallas Fort Worth. It was really interesting making that transition from syndicating to institutional investors and the fund transition too. A little bit about myself. I am retired Air Force, I love the military, I love veterans, I love our country, but I’ve been spending the better part of 20 years doing single-family flips way back before it was quite such a fad as it is now. We made it through the downturn and kept on going, because our basis was really low and we kind of brought that into the multifamily space. I started this company with my dad three years ago, and we look at apartment complexes, other assets that we can essentially flip, create a lot of value, and capitalize on that value, and move forward.

Ash Patel: Sam, what was your real estate experience before three years ago?

Sam Sells: 2003 I started flipping single-family homes with a friend of mine, and then since then really did it everywhere I went. Even when I was in Africa or Afghanistan or Asia, whereas, in the military, I usually have some project somewhere going on that I was either funding or supporting in some way or other.

Ash Patel: Take us through that evolution. So single-family homes… How did you transition to multifamily?

Sam Sells: Single-family homes is super-hard to scale. Looking at getting out of the military soon, I knew that was coming, I knew that we really needed to find a way for my family to prosper in a way that would change our legacies for our kids and our grandkids and so on, as well as make a difference in the world. There are lots of different ways you can make a difference in the world. You can do that just by lifting where you stand. The same way that 10 people would all get together to lift the piano that you can’t do by yourself, you would work with other people to lift something heavy and small, or you can create a team that goes out and changes the world through multifamily investing, by taking rundown places, or mismanaged or neglected in some fashion, and turn those around and create value that people are willing to pay for.

I spent a lot of time traveling around the world, focused on health security. That’s what my master’s degree is in, is health administration policy and global health, so I did a lot of global health. I came back and decided I can’t do health security as a person by myself; I need to go do that with an institution like USAID, or one of the many NGOs or IGOs and national non-government organizations that do all these wonderful things… But my family was tired of me being gone all the time, so I decided to switch from health security to housing security, and focus on that. Affordable workforce, anything like that, we’re focused in that game.

Ash Patel: Sam, you started this company three years ago with your dad. Tell me about that. How was that a good idea? How’s it working out? And what was your dad doing at the time?

Sam Sells: Like all really bad ideas, you think it’s a really good idea in the beginning. We did the math and figured out that mobile home parks are much better than single-family was, and decided, “Let’s just go at it, dad.” He had worked in construction for 30 years or so, big firms, but still, they didn’t have any kind of retirement plan, because that’s the construction world. So as he was getting up towards retirement — when I was a little kid, my parents used to say, “Sam, you’re my retirement.” If you’re in the military, you can take care of your family, but you’re not making a lot of money. You have great benefits and you could travel and do a lot of other things, but you don’t join the military to get rich or wealthy, or even really well off. You just join the military to serve your country or to get an education or whatever other reason you have.

I took the $30,000 I had saved up in a Roth IRA, emptied it, and my dad had about 80 grand, and between the two of us, we bought a mobile home park, a small one. Then we turned around and we bought another mobile home park, a 42-unit, doing a master lease, which I think is probably pretty hard to do right now, in the current climate. But we master leased a property and we had come up with $100,000 combined for that one, which meant that I used the credit card and refinanced the car that we had paid off, and doing all the things that you’re not supposed to do financially. Plenty of books out there saying that’s a terrible idea, but that’s what we did… And here we are, $66 million in assets that we own and operate, and we’ve done those with friends, partners, joint ventures, we’ve syndicated, we’ve done all kinds of things.

Ash Patel: You have several other family members involved in this company as well, right?

Sam Sells: I do. I have a brother who I thought was a marriage attorney or something. He was an attorney and Houston for a long time. As family members are, you know your family member, but you don’t really know them sometimes. We had a thing we needed to get done legally, and I sent it over to my brother, I was like, “Hey, can you help me with this?” He’s like, “Yeah, sure. I can help you. No problem.” And I made a comment like “I know this is outside of your expertise.” He said, “What are you talking about Sam?” I said, “Well, this is real estate.” He says, “Sam, I’m a commercial real estate attorney.” [laughs] I was like, “Oh, sorry. Why didn’t you say something?” He’s like, “You never asked.” “Okay.” So that was a natural fit…

Ash Patel: By the way, most people know what area of law their siblings practice…

Sam Sells: Maybe so. If you have a sibling who’s a doctor, do you know what their specialty is?

Ash Patel: Yeah, of course. [laughs]

Sam Sells: But I didn’t, I guess that’s what it was. Then we brought on my brother, who – he and I are in the same place in Florida together. We were special operations and he was doing — human intelligence was this thing, and he really wanted to take over property management, and so he took over property management, which is great, right up his alley. A big, strong guy, who loves that human aspect and the opportunity to really make a difference in people’s lives in a very, very personal way… So talking to them, working through their issues with them, and helping them. And I was on the business side of the house, and my dad was on the construction side of the house. So that was a natural fit. Then my other brother was an attorney, and those are all the pieces you need to run a commercial real estate company.

Ash Patel: Sam, you mentioned earlier the switching from the syndication model to institutional investors. Can you dive into that?

Sam Sells: Absolutely. We will still syndicate, and we’re happy to work with other syndicators who want to come to join an operator who likes to operate, like us. There comes some time in your lifecycle when you figure out what you’re really good at. We figured out that we’re good at operating. There are plenty of other things that we’re not good at, but that’s what we’re really good at. Acquiring, getting things under market, then closing those deals even if they get super hairy, and operating it, and really creating the value in a very, very short fashion.

So we had started reaching out, we went into larger deals, and started working and engaging with family offices. Everyone likes to say they have family offices, which by the way, are super-slow to act. So that’s great if you have a six-month acquisition timeline, and if you can find deals where they’re going to wait around for six months while you buy them; it’s either got to be a development ground-up kind of deal, or most family offices we met, they want to sit and have tea and do all those wonderful things to really get to know you. And they should; they need to preserve wealth.

Institutions, however, will move a little bit quicker. You’ll still probably need at least 90 days to get through a deal, and you probably don’t want to engage them for the first time halfway through your deal. But we’ve found that they are incredibly professional, they will do an extreme amount of due diligence on you, personally and on your company, all through your financials, all through who you are, and so forth; [unintelligible [00:11:18].18] very, very comfortable. And then the margins are much thinner.

As a syndication, you’re looking at all these awesome fees that you can collect potentially, and so forth, but institutions – they know those fees, they know what the market is, and they really want to maximize returns for everyone, yourself included. And you also have to have money; you have to have 10% or 20% on the sponsor side, from the sponsors, to work with an institution. There are syndications you can do with very, very little cash, which is why we like them, particularly at the beginning. Have your own personal cash.

Ash Patel: What are the benefits of having an institutional investor versus normal syndication investors?

Sam Sells: Definitely pros and cons. Pros for institutional investors – is it’s one group and one phone call. They may be working with a $150 million funds, but they need to deploy that capital, and so they’re going to write a check for $5 million, $6 million, 10, 15, 20, 30, 50, $100 million, depending on what kind of institution and what they’re looking for. They have target markets, they have target deal sizes, they have target deal types… So if it’s a class C value-add, or a class B value-add, a class A value-add, a core plus, whatever that is, that’s what they’re targeting. So if you’re a good fit for them, the pros are you can pick up the call, you know exactly what to expect, you know that on the other line they’re going to answer. You know what type of capital they need to deploy, you know what their timelines are, you have worked through the legal process, which you’re going to need a very savvy attorney who can help you get through all that stuff. Fortunately for us, my brother gets to spend 18 hours a day going through that litany of legal documents, and so forth.

But at the end of the day, it’s ease, and it solidifies a big portion of the deal, your capital stack, your equity, and how that’s going to work. In addition, when you’re going to the lender now, depending on this institution, they may or may not sign on the deal. A con is that you have to have a balance sheet personally as a sponsor or as a group, that you can take down that 20, 30, 40, $50 million deal.

Break: [00:13:36][00:15:32]

Ash Patel: In terms of institutional investors, what are some of the cons? They don’t sign on the loans at times. What’s their due diligence process like? Is it way more rigid?

Sam Sells: Their due diligence process is super-rigid, or can be very rigid. They’re really going to dig into your life, they’re going to know about your kids, they’re going to know about your cars, they’re going to know all kinds of stuff. Our institutional partners had reached out and they had listened to the podcasts I was on. He brought up one of the stories and said, “Hey, Sam, I really liked that story about you and your dad, starting with credit cards for your company.” I just thought, “Oh, man, and you still are working with us?” He laughed and he said, “Yeah, it just shows you guys have grit and determination, and you’re going to make it work. Obviously, you haven’t folded, you’re here, so you figured it out.” The cons are – yeah, they’re going to go all through your life. If you’re not ready for that, then syndicate.

Ash Patel: I had no idea. So they do a comprehensive background check.

Sam Sells: Comprehensive, all the way. It’s funny, I’ve gone through a top-secret clearance in the military, all these other clearances, and done lots of different things… And it’s just funny to hear the other person bring up stuff from your past. I’ve had that before, but it’s been in very different settings.

Ash Patel: Military settings?

Sam Sells: Yeah. Military settings.

Ash Patel: Now you have an institution across the table from you asking similar questions, huh?

Sam Sells: Yeah, absolutely.

Ash Patel: Is it true that institutions want a package of deals or properties, or will they partner or buy just one-off deals?

Sam Sells: One of the pros — I guess you could look at as a con, but to me is really a pro… It’s that they’re looking for a programmatic approach. So they’re coming to you to say, “Hey, Sam. I want to partner with you over and over and over again, because we know you, we like you, we trust you. We know what you deliver and we know you’re going to get after it, and we have no concerns.” However, if you’re not ready for that or if you’re you don’t have the momentum to carry through that level of work, then it might be probably something you don’t want to do.

Ash Patel: Sam, in terms of negotiating with them, do they require higher returns than normal syndications, or are they okay with lower returns, since they have so much capital to deploy?

Sam Sells: Returns are all about risk. So if their group  is focused on class C markets, then they’re going to be looking at those 18, 19, 20% IRRs. Really, each institution is — in a way, they’re like the single investors. If they’re savvy investors, they’re looking at different risk profiles and saying, “Okay, I can take a 25% IRR, because this is a development deal. I know I’m not going to make any money for three years, but after that, I’m going to get paid a lot of cash. I’m happy to wait.”

You’ve got other investors who say, “I want dollars day one, and I don’t care what the IRR is. I just want cash on cash return.” So you’re looking at deals in totally different aspects, and deals that made sense on one side don’t make sense on the other side. That’s why ten different investors can walk into a deal, nine of them can say, “This thing doesn’t pencil,” and one of them says, “This is perfect. This is exactly what we’re looking for,” which is fantastic. So institutions have their own personalities.

Ash Patel: Yeah. When you interact with them, do you feel like you now work for them, or do you feel beholden to them, since they’re the Goliath?

Sam Sells: Funny you mentioned that… When we first started working with an institutional partner, we had this conversation a lot internally. Like, “Oh, my goodness. They’re just going to grind us to a pulp,” or “They’re going to do this, or that.” In the end, what we found out is that they’re really good people to work with; they’re very conversational, it’s very easy to say, “Hey, this is what we’re thinking. What do you guys think?” They said, “Well, on these deals, this is how it worked for us.” Every deal is a little bit different, every property has surprises after you close. If you’ve ever bought multifamily properties, you know. Somewhere in one of those doors, there’s a surprise for you. You may not find it for years, but you’re probably going to find it, and you’ve just got to be able to roll with it. Folks who have been doing this for a long time understand there are surprises, but with the institutions at least that we’ve been privileged to work with it, it’s been a very comprehensive, but very partner-led approach.

Ash Patel: Sam, it seems like it’s a lot of people’s goals to work with institutional funds. What do you say to that person and then what tips would you give them on how to get there? Or how to position yourself so that you’re in a favorable light when they look at your balance sheets, assets etc?

Sam Sells: Great question. I think what I would say is, “Come talk to us.” We’re happy to provide some coaching or mentorship on how to do that. I used to talk to my troops a lot about trajectory in the military. What trajectory are you on? Where are you going? 20 years is going to happen, 10 years is going to happen, where do you want to be? You may say, “I don’t know where I want to be.” “Well, great. Let’s set a trajectory somewhere. At least you’re going forward.” For institutions, they are looking for certain things, and you do need to set yourself up in certain ways. For us, one of the big things that they really liked about us is that we were vertically integrated. We had property management in-house, and we had development in-house, which allows us to have cost efficiencies and speed. Trying to say this without using military terms, but your speed to action is just really quick. If we want to make a change at a property, I can send a text message and I know that my brother’s out there and he’ll make the change right then. I don’t have to file a change order, I don’t have to go through all these processes. We can just change.

Ash Patel: Sam, the million-dollar question. On your next deal, would you prefer an institutional partner or a normal syndication investment partner?

Sam Sells: My next deal, one of each.

Ash Patel: Really? Interesting. So you’re not 100% one way or another; you just look at all the pros and cons.

Sam Sells: I look at all the pros and cons. Syndicators are guys who have grit, determination, they’re out there, they’re risking it all. Institutions have this huge backing behind them, and we are happy to work with institutions and provide that military-grade level of integrity, action, speed to the fight, understanding that no plan survives first contact with the enemy; it’s just gone. But we understand that, we know how to flex, and we know how to get after it. Myself, my brother, the other team members who are veterans, we work in very agile, small units that we’re able to do really cool things.

Ash Patel: So you want the action with the boots on the ground?

Sam Sells: I love the action with the boots on the ground. And as a syndicator though — look, I started with 30 grand and a couple of credit cards and a whole lot of hustle. So we always want to give back, we’re happy to work with other syndicators who — look, they are not vertically integrated, they haven’t done all these things, but they’re really good at raising capital, or cash. We’ve done I think four deals, we’ve syndicated with other people who were very new to this process, and we’ve helped them through that process. There were some speed bumps in that process, absolutely, but we’re here.

Ash Patel: Awesome. Sam, I’m going to ask you an off-the-wall question… Would you consider looking into retail, different asset classes, industrial, warehouse?

Sam Sells: Absolutely. I built probably 12 medical facilities, overseas clinics, I led the team on a $64 million rehab, a 500-bed, largest wartime facility in the world. My dad has done a lot of industrial builds. I apprenticed as an industrial electrician, so there’s some inherent capability in those spaces that we would love to do. And we’ve talked about it; there are some nice gains. We’ve kicked around some deals to ourselves, and — I don’t know that I have a partner who would want to raise cash for this industrial deal… We understand the location, the site; this is North Houston, or this is wherever. Yeah, we would definitely entertain that.

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

Sam Sells: Find a partner and create as much value as you can.

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

Sam Sells: Absolutely, Ash. Give it to me.

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

Sam Sells: The Mission, the Men, and Me.

Ash Patel: What was your big takeaway from that?

Sam Sells: It hit home, because I’m a boot on the ground guy. Analysts who are sitting behind that computer desk looking in Excel love deals and hate deals. The guys who have boots on the ground love deals and hate deals, and usually they’re completely different; so you need the boots on the ground.

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

Sam Sells: To me, it’s all about how we structure our lives and what trajectory we’re on in our lives. When we screen a deal, the first criteria is can we make a difference to the residents there? The second is can we make money doing it? Because this is a capitalistic paradigm that we operate in.

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

Sam Sells: LinkedIn is a great way to reach out to me. Find me, Sam Sells, Wild Mountain Capital, or send me an email at sam@wildmountaincapital.com. I’m very responsive most of the time, except when we’re closing on a deal, working 18-hour days to get it across the line and [unintelligible [00:25:29].26] on it. But if not, I’ll get back to you as soon as I can.

Ash Patel: Sam, I’ve got to thank you for being on the show today and sharing your time with us. Your amazing journey, starting out with single-family homes, buying a mobile home park on a credit card, and now dealing with institutional capital, $66 million of assets under management… Incredible story. Thank you for sharing that with us. Thank you and your family for your service and your sacrifice.

Sam Sells: My pleasure. Thank you, Ash, for having us.

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

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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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JF2736: 3 Tactics for Building Excellent Networking Skills ft. Vish Muni

Does networking online really work? How do you make sure you stand out? Vish Muni, Founder of PGL properties, reveals the tips and tricks that have helped him excel at networking to find new deals. He also discusses what he looks for in an operator and reviews his latest deals.

Vish Muni | 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 Vish Muni. Vish is joining us from Belton, Texas. He’s the founder of PGL Properties, which syndicates class B and class C properties. He’s a GP on over 430 doors and an LP on almost 700 doors. Vish, can you start us off with a little more about your background and what you’re currently focused on?

Vish Muni: Well, thank you Slocomb for having me on your show. Well, I used to be an IT person for 15 years, and about 10 years back, me and my wife decided to start a real estate company called Duplexaholics. It is primarily for investing in only duplexes. Our goal was to buy one duplex a year for 10 years. When we started, we bought one duplex a year, the first year, the second year, the third year, and the fourth year, we bought a fourplex, and the fifth year we bought a single-family home, and then we hit a wall. In the next five years, I managed to continue with the business, in spite of all the financial challenges… But in year 10, I decided to take a step back and see what are we doing wrong. People talk about having a fantastic lifestyle after investing in real estate, and out here, I’m 10 years into it and all I’ve been doing is having problems after problems in terms of finance. That is how I discovered something called syndication. This was 2019, and that is when everything changed. I decided to stop chasing too many rabbits, so I gave up my IT job and decided to focus full-time into multifamily investments.

Slocomb Reed: So that’s in 2019, after 10 years of going the owner-operator route.

Vish Muni: Yes.

Slocomb Reed: As a duplex-aholic.

Vish Muni: Yup, Duplexaholics. We still have that company, we still have a single-family portfolio, but my entire focus has shifted. I tell people I’m a slow learner; it took me 10 years to decide what I was doing may not work in the long run.

Slocomb Reed: Gotcha. So you’re based out of Texas, or what areas are you currently investing in? Or what areas are you looking to invest in?

Vish Muni: Well, the properties which I’ve invested in so far have all been in Central Texas; within Texas there’s the Texas triangle. Unlike the Bermuda triangle, this is the Texas triangle, and nothing vanishes and nothing goes missing. It consists of San Antonio, Austin, Dallas, and Houston; I’m right in the middle of the triangle. More than 80% of the Texas population is in these three major cities, so all my investments are within this triangle. What I’m looking at investing is – because it is a syndication, so it really doesn’t matter where the property is going to be, as long as I partner with the right partners, that’s what is going to happen. But going forward, I’m open to invest in Atlanta, Florida, and the Carolinas.

Slocomb Reed: Gotcha, okay. Are you primarily investing in Texas right now because of the proximity to you?

Vish Muni: Yes, right now that is what it is. Because I just got started a year back, and right now, I’m looking at primarily the Texas market; but that doesn’t stop me from looking at other locations.

Slocomb Reed: So the last two to three years, you have been the general partner on 432 units. How many properties is that?

Vish Muni: That is four properties.

Slocomb Reed: So a quicker pace than one a year. Are they all around that 100-door mark?

Vish Muni: Well, one of them is a 232 mark, and the rest of them are all at 65 to 70-unit. Of those four properties, three of them are in Texas and one property is in Omaha, Nebraska. These are four different operators I partnered with on year one. Since I was getting into the business, I was open to partnering until I have my own team. So that is how I partnered with four different operators. But it’s all good.

Slocomb Reed: Gotcha. So four deals in your first couple of years, partnering with operators. Tell us a little more about how those partnerships work out. What is it that you’re bringing to the partnership and what is it that you’re looking for from an operator?

Vish Muni: Well, a couple of things that I look for from an operator. Number one, I believe strongly in educating myself in whatever I’m doing. Being 10 years on my own taught me a lot of things; number one, to educate myself educate, educate, educate. Number two is to have a mentor, because I don’t want to spend another 10 years only to learn that things don’t work. So I educated myself, and I have a mentor. Number three is all about relationships; everything is about relationships. So these are the three things I would not deviate from; my focus is on these three things.

Now, all these different operators – what do I look for in operators? Number one is how long have they been in business, and what kind of business? How many full cycles have they done? At what level are they investing? What are the locations? What is their track record? Now, if I were to work with them, how comfortable am I going to be? If I’m going to talk to someone who invests in my deal, they’re investing in the deal because of me, not because of the deal. If the deal itself is good, and they don’t like me, they’re not going to put money in the deal. So it comes back to the relationships. That is one thing that I’d be looking for in all the operators. What is the track record? How long are they been doing it? Which are the markets? And do they fulfill all the promises they’ve made? That is how I got onto these deals… And who are all these operators? The ones with whom I built relationships over a period of time, I met them on several occasions, and I would not invest with any operator if I don’t know them, if I am not convinced with them in the first place. If I’m not going to invest in their deals, I’m not going to ask my investors to invest.

Slocomb Reed: Vish, you focus primarily on capital raising, then on identifying operators you can partner with who give you the opportunity to deploy capital?

Vish Muni: Yes.

Slocomb Reed: Gotcha. 10 years as an owner-operator… How large did your portfolio get before you got into syndication?

Vish Muni: I had five duplexes, two fourplexes, and four single-family homes.

Slocomb Reed: Gotcha. Which of the skills that you developed as an owner-operator prior to syndication have been the most valuable to you now that you’re focused on capital raising for syndication deals?

Vish Muni: Number one, I always liked networking. Networking – I had to step up a notch in terms of networking. Earlier, I used to network with five different people. Now that same five different people are not going to make a cut, so I had to spread myself in terms of what platforms I’m going to be in, and education. So I needed to improve my networking skills, that is number one. Number two is relationships. I used to probably work with three or four financial institutions earlier. Now with multifamily, I need to take the same relationships to a different level, because the game has changed. It’s not me anymore, it’s a whole team of people. The volume of transactions, it’s not a million dollars anymore, it would be a $20 million or $15 million deal. So the relationships also, everything changed. I hope I answered your question. Was that your question or I deviated?

Slocomb Reed: Yes, you’ve talked a lot about the value of building relationships and networking. Are there any particular aspects of operating as an owner-operator that you’ve found have translated very well and very importantly into being a capital raiser?

Vish Muni: Number one, identify people who are really good at what they’re doing, and let them do their job; don’t micromanage them. Because I learned the hard way when a property manager fired me as the owner. So I decided not to micromanage. If I’m going to delegate something to someone, let them do it; I’m not going to micro-manage. In terms of relationships, people like to know whether they can trust me or not before they do anything. And I don’t need to sell them into anything, as long as they trust me and like me and what I’m doing, I just need to influence them in the right way and educate them.

Slocomb Reed: Gotcha. The 232-unit, significantly larger than your others – is it the most recent deal you’ve done?

Vish Muni: My recent deal was last October; we closed on a 75-unit deal in Lake Conroe, Texas. The 232-unit deal was almost a year now, it was back in March 2021. That was scheduled to close in 2020, and a lot of things did not go as planned just after Thanksgiving; the holidays came up, and the New Year’s, and then Texas had a snowstorm, and two of the buildings collapsed, and the insurance claim… So it finally closed after four months; that was last March. That was the biggest deal so far, and the latest deal was the 75-unit deal.

Slocomb Reed: Gotcha. You just brought up something I wanted to ask about, Vish, because we’re recording this in early February of 2022, and Texas has been hit with another snowstorm; not as dramatic, to my understanding, as the one in late 2020, early 2021. But have these weather events in Texas recently, the cold weather events, affected the way that you underwrite your deals in Texas?

Vish Muni: Well, you’re going to add a little more CapEx items to that. Also, when you’re doing the due diligence, pay a little more attention to the roofing, piping, wiring, and anything which you think might get affected. Pay close attention to that.

Break: [00:13:43][00:15:39]

Slocomb Reed: Are you adjusting your insurance expectations?

Vish Muni: Well, yes. When I’m underwriting, we are probably adding another 20% to the underwriting template.

Slocomb Reed: Gotcha. With the largest deal a little over a year ago and the most recent 75-unit, are you underwriting to the five-year hold?

Vish Muni: Yes. I’ve not been underwriting, because my role in all these deals has been participating in the due diligence, also risk capital, and also bringing capital to the deal. I do look at the underwritings, but primarily I’m not underwriting these deals.

Slocomb Reed: Gotcha. Focused on raising capital. You’ve talked about the emphasis that you put on networking to build relationships. Vish, what is your favorite way to network?

Vish Muni: Well, it’s very easy to network, because I use a simple formula called FORD, as in automobile Ford. Anyone can use that formula, I’m going to speak about it. F in FORD stands for family, O stands for occupation, R stands for recreation, and D stands for dreams. If you just focus on these four in no specific order… Everyone has a family they want to talk about, anytime; people wouldn’t stop talking about the family the minute you ask them. Occupation, everybody says that they like their job, they don’t like their job, they want to switch, everything. Recreation – I don’t know of any person who doesn’t like something. Everyone loves sports; talk about sports, which game they like. If you don’t know something, that’s fine, ask them to teach you about it, they will be excited to teach you. And dreams – everyone has a dream. Unless you ask them to specify, they won’t talk about it.

Just use a simple formula to connect with people. Once you connect, make sure you follow up on that. If you don’t follow up, it’s of no use. I’m a Texas realtor also, and then I also need to connect with people all the time. There are multiple locations people can connect to, there’s no one specific location. You could go out for a drink and you could meet somebody, you could go to a workout and you could meet somebody there. Just stick to this FORD principle. You can connect any time all the time.

Slocomb Reed: I have a friend who likes to say that someone who talks about themselves is egotistical, someone who talks about things is boring, but someone who talks about you is a brilliant conversationalist. FORD, family, occupation, recreation, dreams. That’s an acronym I’ve come across several times, Vish. When it comes to networking, are you primarily looking to meet people on online platforms? Are you attending conferences? Are you attending local meetups? What are your tactics for getting in front of people to have the opportunity to have that conversation and build a relationship?

Vish Muni: Well, in terms of the order of meeting people or building relationships, I would say meeting people online is the last. The first is I like to meet people in person. Most of the events in Texas I try to be there in person. I like to shake hands with people with whom I want to do business or with whom I want to build relationships, that is number one. Number two is local meetups – yes, most of the time I’m there. The last is online meetups. Online meetups, I feel it’s like Facebook friends. You ask anybody, everybody has like 2000 friends. But if you walk by the same person on the street, he or she wouldn’t say hello to you. Even if you go talk to them, they’ll say “This guy is weird, there’s something wrong with him. He’s walking up to me and wants to shake hands.” But it is the same person. So online is good, but I think I wouldn’t depend only on that. I like to meet people in person. Where do I meet these people? Everywhere; they’re everywhere. I belong to something called Toastmasters, I meet people there. I meet people at the Lions Club I’m a member of. You go to a fitness center, you meet people there. They’re everywhere. It’s just that I need to step out of my zone and meet them, because nobody’s going to walk to me and say, “Hello, nice to meet you.”

Slocomb Reed: That makes a lot of sense. Tell me what is the number one lesson you’ve learned thus far in your syndication deals?

Vish Muni: Disclosure, number one. Disclose what it is; speak out as it is. Don’t sugarcoat things, because it will come back to bite you. Be honest and upfront with what is happening. I’m playing with other people’s money, so it’s best just to be honest and educate people all the time. Let them come to a point to say “You educated me too much, don’t give me any more information.” Sooner or later, they’re going to come back to you and tell you that you did not tell this to me. That is why from day one, educate them, be transparent, speak out, tell things as it is. If the deal is not going to work out, tell them “No, the deal is not going to work out.” Before anything, people want to know if I have any skin in the game or I’m just selling them something, so that is what I would do. If you do things right, you don’t need to sell it to them, they’re going to invest in you. What I feel is I need to take care of one relationship at a time for me to get to 10. Because if I’m not taking care of what I have, it’s very unlikely he or she is going to come back to you and leave you alone. They’re not coming back to you, they’re not going to refer you to anybody.

Slocomb Reed: Vish, you’ve successfully executed [unintelligible [00:21:24].00] four syndication deals in the last couple of years, focusing on raising capital and raising that capital primarily through networking, building relationships, making sure that you’re focusing on the person with whom you’re meeting, not yourself, and their family, occupation, recreation, and dreams, but also their goals and their aspirations for investing… And you said that one of the most important lessons you’ve learned is to be upfront, be honest, disclose, don’t sugarcoat. This is very helpful advice. Are you ready for our Best Ever lightning round?

Vish Muni: Yes.

Slocomb Reed: Vish, what is your Best Ever way to give back?

Vish Muni: Well, I belong to the Lions Club in Temple where I live, and I’m a certified vision screener. That is one way — I do vision screening for people who can’t afford to get their eyes checked, that’s number one. Then I always look for opportunities to volunteer. Me and my wife are big-time into charity and donations, and to help people educate, more than anything. People could have all the money in the world, but if they’re not educated, they’re going to lose that money pretty fast. Education alone could change people’s lives, so we try to educate or we try to donate to education centers. Also, once a year, me, my wife, with my daughter cook about five to 10 lasagnas to donate to the homeless shelters close by.

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

Vish Muni: I’ve read several books. I think what sticks to me every day is one by Tom Wheelwright. He’s written this book called Tax-Free Wealth, which I read three times, and then Robert Kiyosaki’s book Rich Dad Poor Dad. There’s another book called Unfair Advantage. But the Tax-free Wealth one so far tops my list.

Slocomb Reed: You know, I catch myself quoting Tax-Free Wealth by Tom Wheelwright all the time. Especially with people who are not in real estate and don’t understand what we’re doing, don’t understand the advantages, the tax advantages of what we’re doing, I end up quoting that book way more often than I expected when I first read it. Vish, what is your Best Ever advice?

Vish Muni:  Well, I tell people to join a mastermind group, that is number one. Number two, get a mentor. These two things alone would change their life or change their investment strategy in whatever they’re doing. In the 10 years, I didn’t dive either of them, I didn’t have a mastermind group so I thought whatever I was doing is the best thing, and I didn’t have a mentor. Now, that is my advice to anybody, I tell them to join a mastermind group, and number two is to go get a mentor. These two are expensive but the 10 years is more expensive than these two.

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

Vish Muni:  Well, they can look me up on LinkedIn as Vish Muni, that is the best way they can reach me, because LinkedIn messaging is the best way I would reach out to them faster than text messages.

Slocomb Reed: Excellent. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and please share this episode with a friend so that we can add value to them through our podcast too. Thank you and have a Best Ever day.

Vish Muni: Thank you, Slocomb.

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JF2733: Avoid These 5 Costly Mistakes with Multifamily Insurance ft. J.T. Lynch

Are you getting good advice from your insurance broker? Do you have the right coverage for your properties? Insurance broker J.T. Lynch reveals five common mistakes investors make when dealing with multifamily insurance, and how to properly select and dissect a plan.

J.T. Lynch | Real Estate Background

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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, JT Lynch. JT is joining us from Denton, Texas. He is a broker at Ramey King Insurance, which has specialized in multifamily insurance for over 35 years. JT also has four years of real estate experience. JT, thank you for joining us, and how are you today?

J.T. Lynch: I’m doing great. Thanks for having me.

Ash Patel: It’s our pleasure. 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?

J.T. Lynch: Sure. I actually started out in personalized insurance and then quickly realized that commercial is the way to go. Getting into the agency that I’m with – it’s a private family brokerage. It’s actually been in Denton, Texas since 1889, so it’s been around forever. My boss, he specialized in multifamily for over 35 years, and we’re all over the nation as well. The pandemic is terrible as it is; it’s actually opened up a lot more for our business because of the Zoom meetings, to be able to meet people farther away than just North Texas. It’s a great industry to be in, I love meeting all different syndicators and everyone that’s helping out in the whole process. It’s like a smaller type of family, so I love the environment.

Ash Patel: JT, help me understand that… Why are you now able to get more clients post-COVID?

J.T. Lynch: We did a lot of events, face-to-face events, maybe at a different location here in Dallas. But with Zoom, it opened people’s eyes to go, “Well, since we can’t go anywhere… Well, I’ll get on this Zoom. I heard about this Zoom right here.” Now people are coming in from Georgia and California. It made the world a lot smaller. Now it’s kind of a norm; people are doing more podcasts and Zooms, it seems like. When you’re going to an event, you can only go to one thing a night almost if you’re going in person, but with Zoom, you can do almost unlimited throughout the day. It’s just allowed us to reach more people to be able to help more people and more properties.

Ash Patel: Got it. Four years of real estate experience. What is that? What have you been doing?

J.T. Lynch: Multifamily insurance… I’ve got a passive deal going on right now looking to do more, possibly looking to get more involved; looking to learn as much as I can as well. I’ll be at the Best Ever conference coming up here on the 24th to the 26th, so I’m looking to learn as well, and get more involved. But right now, it’s mainly just the multifamily insurance space.

Ash Patel: But your real estate experience is on the passive side.

J.T. Lynch: That’s correct.

Ash Patel: Alright. What are mistakes that are made with multifamily insurance?

J.T. Lynch: Oh, man, there’s a lot. One of them is just not having your team together. You’re looking for properties, you finally find what you think is the right one, but then you don’t have an insurance broker that you’d go to and trust. So if you don’t have your insurance numbers lined up, we all know that everything is so tight these days that if you thought this property was going to be $300 a door, but now it’s actually more like $500 a door – well, that’s going to throw everything off from the start. So I would say get your team together first; not just your syndication team, but your brokers, anybody else that’s part of the deal – get them together first. That way, when you find the right deal, it’s easier to take down.

Ash Patel: No, what mistakes are made from an insurance perspective?

J.T. Lynch: From an insurance perspective, it’s not even knowing what to expect. You don’t know if the property’s in a flood zone, maybe it’s a property that’s built in the 1960s to the 1980s and you’re not looking out for aluminum wiring, or you’re not looking out for the Federal Pacific Stab-Lok breakers. Having your team in place, as I said before, with a broker that you trust, they’ll let you know things to look out for. Before you submit an LOI, I would tell you for instance, “Hey, this property, it looks like it’s in a flood zone, whatever. Expect to pay $5,000 more in premium because of that. It looks like on the T12 their insurance had increased quite a bit back in August. It looks like there could have been a claim, so make sure to ask the owner and broker about that.” There are different things that we can find before you even submit the LOI. Again, a good team member put in place will help you with those, because that’s the first mistake you’re going to make, and it can be a costly one.

Ash Patel: And T12 is trailing 12 months.

J.T. Lynch: Yeah, that’s your trailing 12 months of the different finances that come into play, like insurance, for example.

Ash Patel: Okay, I have to ask you. I interviewed somebody not too long ago where there was a tornado, and the roof flew off the building, and a lot of water damage. The insurance company didn’t cover it, because they claimed there was no tornado in that area, and the roof was faulty. How do you deal with a situation like that?

J.T. Lynch: Well, with something like that — first of all, you’ve got to make sure that you have the right coverage. If you’re not covered for wind, or named storms, or whatever that could come into play in that area, then that’s, again, another mistake. But if you’re on the coasts and you don’t have named storm coverage, the named storm comes through like a hurricane and does damage that you don’t really have much to fight against. So first is to make sure that you have the right coverage.

Ash Patel: Wait a minute, so there is specific coverage for when they name storms, like Sandy and…?

J.T. Lynch: Yeah, that’s correct. If you’re, say, on the coast near Florida, almost anywhere in Florida actually, or Houston, Galveston, that type of coastal areas – yeah, they’ve got a deductible for a named storm.

Ash Patel: If you don’t have named storm coverage, do you not get covered if the weather people name the storm?

J.T. Lynch: That’s correct. You could have a normal storm come through, just a normal thunderstorm that may do damage to the property – you’ve got a deductible for that. But a named storm that gets big enough to be named, that does damage and you don’t have the right coverage, then you could be paying for that yourself. It’s just like being in a flood zone and not having flood insurance. So you got to make sure that you’ve got the right coverage for your property and where you’re at. That’s the first step to that.

Ash Patel: Okay, that’s insane. How are we supposed to know that? Unless the insurance broker tells us these things, how do we know?

J.T. Lynch: The good news is your lender is going to help you as well. The lender looks at it as “This is my property until you pay it off.” So they’re going to want to make sure that they’ve got all these different items covered, so they’ll have a checklist of items depending on the property and where you are, of the types of coverage you need. Especially if you’re getting an agency loan, a Fannie or Freddie loan, or bridge loans are really popular nowadays, your lender is going to let you know exactly what you need for that property.

Ash Patel: Alright, so I recently switched a few years ago to a new insurance person, and they kind of yelled at me. They said I’ve got earthquake coverage on all of my properties. Well, the reason for that was the last broker said Ohio’s on this fault line, blah, blah, blah, and scared me. So I’m paying $20,000 extra a year for all my properties on earthquake coverage. Okay, well, who do I believe? You guys all steer us in different directions, so how do we know who to believe?

J.T. Lynch: It’s a tough thing. Obviously, we want you to be insured properly, If you didn’t get earthquake coverage and then there was an earthquake event, then now it’s on us for not even mentioning it. The proper thing is to mention that there is a possibility of an earthquake happening in this area and then ultimately, it’s up to you. There have been earthquake events in Oklahoma and Texas too, and there’s a lot of speculation as to why. Some people think it’s just because of a lot of the fracking that goes on here, so there are slight tremors. There are some properties that choose to get earthquake coverage just in case. That comes down to your risk tolerance. If somebody is more willing to take that gamble and not spend that extra money just because they know that there’s not a ton of earthquake events in the area, it’s all a gamble. Our job is just to line it up for you, let you know what the potential hazards are, and give you statistics and a good idea of what is good to be covered. But ultimately, it’s up to you. It’s all a gamble, really.

Ash Patel: There are a lot of horror stories from people dealing with insurance companies. What’s the worst horror story you’ve dealt with, with an insurance company?

J.T. Lynch: The story that you brought up, about the roof flying off the apartment complex and then saying that it wasn’t even a storm. I’ve heard of different scenarios like that, of just trying not to payout. Our job as brokers is to find you the best carrier that will fit your lender requirements. We’re also trying to find you the best premium as well, but that’s not always the most important, we want you to have the best coverage as well. So we’re going to go out to multiple carriers to find the best options. Part of that is going to a trusted carrier that we know is going to take care of you. I don’t deal too much with the claims process whenever there is a claim, but I do make sure that the right parties are talking to the right people, that you’re talking to the claims adjuster… And in the event that it’s not looking like the payout is going to happen as it should, then there are some other options there for you. It really depends on the situation that happened, but our job is to get together the right narrative of what happened, what you did or didn’t do to have it properly covered, to make sure to bring the correct narrative, to make sure it’s covered properly. There are a lot of crazy horror stories out there. Unfortunately, a lot of times it’s because the owner or the agent didn’t have it properly insured. It’s ultimately what it comes down to. We try to get it right from the start, and hopefully, we can avoid some of those.

Break: [00:12:23][00:14:20]

Ash Patel: JT, I’ve interviewed a lot of people that came from the financial industry and transitioned into real estate. When I ask them, “Why didn’t you recommend real estate investments when you were in the finance industry?” their answer is always “Well, there is no way for us to get paid on those investments.” Because mutual funds will give them all kickbacks and bonuses, real estate syndicators don’t do that. But they leave the finance industry, because they realize there’s so much more money to be made with real estate investments. Are you guys similar, in that certain companies will pay you higher based on what you bring them?

J.T. Lynch: No, not necessarily. One carrier may give you 5% in commission for each sale that you bring, another might give you 8%-9%. There are not that many carriers really that will write multifamily. There’s a ton that will write your business auto, there’s a ton that will write your single-family house, but there’s not a ton that will do multifamily. So as far as the payouts, the commission splits and all that, we really don’t even pay attention to it. We want the best option for the client as far as coverage and premium go, and that’s it. Because if we’re not getting the business at all, then what does it matter? If we’re getting business that is extremely expensive or not the right coverage – well, then that doesn’t help me down the road.

We want to do what’s right from the start, so the commission splits and all that, I don’t pay attention to it at all. [unintelligible [00:15:50] they do differ. Some of these carriers, they’ll tell you, “In order just to access me, to get quotes from us, you have to bring in a certain amount of premium every year.” Some of your small brokers that are just getting into this might not have access to these carriers, just because they’re not bringing in enough business yet. There’s a lot that goes into it, but I hope that answers your question.

Ash Patel: It does. Does that mean the vast majority of people could be influenced by the percentage commission they receive?

J.T. Lynch: It could be, but it’ll catch up to you really quick. Once you start seeing that quotes are much higher than your buddies down the road, and “Hey, you’re only bringing me three different options. I heard of another broker that’s going to multiple other places.” People are smart, syndicators are smart, they talk; like I said, it’s a big family. So if you’re not doing the right things, you can get away with it for a few properties, but eventually, they’re just going to go to where they’re treated right. So doing the right thing at the start is the best way to go for

sure.

Ash Patel: Can you talk to the Best Ever listeners a little bit about personal and business umbrella insurance?

J.T. Lynch: Yeah, absolutely. An umbrella policy is something that most lenders are going to require. The size of the umbrella really depends on the size of the property. If you think of 100 units versus 200 units, the 200-unit has more risks, because there are more people; not just tenants, but family members of tenants, friends of tenants, people coming and going. That could get into an accident on your property and you could get sued for it. The umbrella kicks in after your general liability limits have been exhausted, so usually, you’re covered for a million dollars insured liability per occurrence; but what if they sue you for $2 million? Well, your million dollars is covered through your regular general liability policy, and then your umbrella kicks in to cover you for the rest. Most umbrella policies are really inexpensive, so to get $5 million worth of coverage, it can cost you $2,000 extra in your premium. It’s a great thing to do. Again, your lender is going to require that amount that you’re going to need.

I have a personal umbrella policy for myself. I’ve got an eight-year-old, and my wife is expecting, we’re due in July; we’re not a huge family, but still, my umbrella policy is $120 for the year, something stupid like that, or maybe $180, and it’s a million dollars for our whole family, and it travels with us wherever we go in the world. In the event that something happens and we get sued over what our general liability limits are, that umbrella kicks in and it helps us out.

Imagine you’re driving down the road, you run through a red light and crash into somebody’s really nice car, and this person happens to be a surgeon who makes 500k a year. Now all of a sudden, they’ve hurt their hand and they can’t work for a few years. So your normal auto limits aren’t going to cover that type of lawsuit, so that’s where your umbrella kicks in to help you out. Again, it’s so inexpensive; just buy it, and then it’s added into your normal renewal every year. You won’t even know the difference and you’ll have that peace of mind, you’re protected.

Ash Patel: JT, here’s a silly question. You take somebody that’s done a handful of two to four-unit properties, and all of a sudden, they get a $5 million deal that’s 100 units; can they just go to their existing insurance broker? Or is there something different about those larger multifamily deals?

J.T. Lynch: That’s a great question. A lot of the captive agents like farmers in State Farm, a lot of them can only do two or four units; they can’t get much bigger. So when you’re getting into the bigger properties, you’re going to need an agent that is specialized in these bigger properties, that has access to these carriers that will write them. So I would say yes and no; it depends on the broker, it depends on who they can access in order to be able to help you out with those.

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

J.T. Lynch: I would say be an open book and be willing to help as many people as possible. As I said, this is a huge family and I was helped out tremendously when I first started. I just try to give back that way, and try to help as many people as I can.

When I go to a conference or when I’m on a Zoom call to meet new investors, I don’t tell them what I do off the bat, I try to figure out what they’re doing and how I can help them. I’ve been doing this a long time, so I’ve got a large network of, obviously, other syndicators, CPAs, attorneys, so there’s a lot of places that I can lead you. I’ve found that helping others first makes all the difference in the world. You’ll start getting referrals, and your business will travel in ways you didn’t even realize it could.

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

J.T. Lynch: I am. Let’s do it.

Ash Patel: What’s the Best Ever book you’ve recently read?

J.T. Lynch: Richest Man in Babylon. Our boss had us read that. It’s been around forever, and it’s a great book; everybody should read that.

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

J.T. Lynch: Like I said, just making sure that I’m helping others in their goals, whether it’s introducing them to my network, or helping them with insurance; however I can give back to the multifamily family is the best way.

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

J.T. Lynch: The best way is through email jtlynch@rameyking.com.

Ash Patel: JT, thank you for joining us today and sharing some insights of the real estate insurance industry, the insurance industry as it applies to real estate.

J.T. Lynch: Absolutely.

Ash Patel: Thank you again for joining us. Best Ever listeners, thank you for joining us as well, have a Best Ever day.

J.T. Lynch: Alright, thank you.

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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JF2722: 3 Benefits to Investing in Mixed-Use Developments ft. Sam Bates

In this episode, Sam Bates—CEO and Founder of Bates Capital Group—shares the advantages of investing in mixed-use developments. He also walks us through the details of his first commercial development deal, the challenges he’s faced, and how he scaled his business to $190M in AUM.

Sam Bates | 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, Sam Bates. Sam is joining us from Dallas, Texas. He is the founder and CEO of Bates Capital Group, which has $190 million of assets under management. Sam has a 12-year track record of real estate investing experience. Sam, thank you for joining us, and how are you today?

Sam Bates: I’m doing great, Ash. Thank you for having me. Looking forward to discussing real estate with you.

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

Sam Bates: Definitely. From an early age, I was always intrigued by money and started investing when I was 11 or 12 with the help of my grandpa. I went and got my undergrad in finance, worked at UBS as an investment analyst, and thought I was going to do that for the rest of my career. I decided to go back and get my master’s in personal financial planning, and I got an MBA during that time period. I quickly realized that the financial planning route – they said they’re fiduciaries, but they aren’t. They just stick people in the same investments, or at least back then, if they had 250,000 or 10 million. After the stock market crashed in ’08, I realized I needed to find another avenue and I started investing in real estate. I love real estate, just because you can truly add alpha. People in stocks and equities talk about adding alpha, but I feel like buying assets or developing assets so you can surely add that return that people can’t get in an investment. I think that’s why syndications and private placements are so great.

Now we’re focusing on acquisitions, developments on multifamily, we develop single-family, we do lot developments, we do a lot of different things. We’ve owned some commercials, RV parks… So just anything where we can find value, we’ll look at it.

Ash Patel: That’s a lot of ammunition you just gave me. Can you explain to our Best Ever listeners what adding alpha is, or chasing alpha?

Sam Bates: Chasing alpha is basically providing more return than what the index or the market can give. The higher the alpha on a stock, the higher the return probability is, but also the higher, essentially, the volatility is. I think with real estate, you can correlate it — especially if you have a stock portfolio, you can correlate it where it’s actually more diversified and create higher returns than you might just with a regular mutual fund or ETF portfolio.

Ash Patel: Thank you. Sam, can you give me an idea of the timeline from when you got into the finance industry – how many years later was it that you got into real estate?

Sam Bates: I started in 2005 at UBS, and then I got my master’s, and I was in consulting actually, doing tax consulting and optimizing business operations for a few years, and I started investing as a limited partner in 2009, then did a lot of single-family homes on my own, the BRRRR strategy, fix and flip… I did a development, and I realized that you couldn’t scale in single-family as you can in multifamily, so I transitioned to multifamily as a general partner in 2016, and have been doing it for six years.

Ash Patel: Got it. Sam, you walked away from a pretty lucrative future in banking, being a personal financial planner, very well-educated. Was that a hard decision, to leave all of that behind?

Sam Bates: It was, but at the same time, I didn’t feel fulfilled, honestly. I knew that there had to be a better way to, I wouldn’t say make a living, but just to enjoy life and to make an impact. Ever since I was little, I’ve always wanted to make an impact. I grew up on a farm, where everybody in the community was farmers, or very blue-collar people. I didn’t quite understand business at that time and I always thought you only could make an impact being in the medical field. For a long time, I thought it’d be a doctor. But now I’ve realized that the US, and really the world in general, needs a large helping hand with financial literacy. We don’t get that from our educational systems. Luckily now, with podcasts like yours and all these other podcasts that have popped up on educational platforms, people are getting more educated on how to invest. But the mass majority of people still have no clue on how to invest. I love being able to share my wisdom about real estate or other private placements that they don’t know anything about.

Ash Patel: Sam, I’m glad you shared the issue with being a fiduciary. I’ve had the luxury of interviewing a number of former financial advisors and planners, and I always ask them, “When you were in the finance industry and you found out how great real estate investing is, why didn’t you recommend that type of investing to your clients?” Most of them, right off the tip of their tongue, will tell you, because there was no way for them to make money on it. There are no kickbacks, there are no instruments where they get bonused on how many real estate investments they put their clients in… So what a huge gap that they have there.

Sam Bates: Yeah, that’s exactly the case. I think they don’t get compensated, so they aren’t going to recommend clients into that. Also – and this was myself when I was a financial analyst – most of them don’t understand real estate. Financial advisors are glorified salespeople, and they’re trying to push a product, sell a product, and every sales position has numbers they have to hit, and financial advisors have to hit different numbers. I saw 15 to 20 people will get fired because they weren’t hitting numbers in a couple of years. So it’s more about meeting those goals and objectives than truly doing what’s right for the client, unless you own your own RIA or small investment firm; but the big brokers, it’s all about numbers.

Ash Patel: Just churning and burning.

Sam Bates: Exactly.

Ash Patel: Did you leave your career after you became successful in real estate, or were you in the beginning phases of it?

Sam Bates: I spent 12 years basically in corporate America, and I was doing it in tandem. After grad school, I worked at a consulting job for five years, then I worked at an energy company for five to six years, doing tax planning, tax strategy, business optimization. Concurrently, I was invested in real estate, because I didn’t want to stay in tax for the rest of my career. I saw how lucrative real estate could be, and I saw the freedom it gives… When I say freedom, I don’t necessarily mean time freedom; I spend as much time working in my business now as I do than ever. But I’m spending two months in Colorado, where if I had a job, I couldn’t do that. It just gives you a lot of flexibility, and you get to make an impact. Hopefully, the investors that you bring up, and essentially create a better life for them, will also help invest in different organizations, charities, or whatever that they think is worthwhile and suits them.

Ash Patel: Sam, a great little nugget of knowledge there. A lot of people might have the misconception that if you get into real estate, you can work a lot less. But most of the people that I know work a lot more than they did in the corporate grind. But it’s just a lot more fulfilling, a lot more satisfaction.

Sam Bates: I completely agree. I think a lot of the “gurus” or people that are trying to sell a program say you just have to work two hours a week, five hours a week, or whatever. And maybe you can do that if you have a portfolio and it’s stabilized. But I feel like if you have investor money, it’s your fiduciary duty to make sure you’re getting the best return; and I also want to grow the business and grow the company. I’ve worked a lot, but I enjoy it. I’ll tell anybody that if they’re wanting to get into real estate, don’t get in it for just the money, because you aren’t going to make money right away. You should follow your passion and follow whatever you like and enjoy, because you’re spending 50, 60, 70 hours a week maybe on working whatever business or career you decide.

Ash Patel: We’ve both been in real estate for over 10 years, and we’ve seen those people that did it for the wrong reasons not have the staying power. You truly have to be passionate about this to make it a success. So yeah, great point. Did any of your former financial colleague’s defect with you into real estate?

Sam Bates: Not to my knowledge, but I’ve had quite a few different former colleagues and clients invest with me as a limited partner. They’re still doing their W2, in either a finance job or accounting tax job, but they’ve started to invest with me. I think it just shows… It’s interesting how some financial advisors will invest with me, but they’re telling their clients to invest in the stock market.

Ash Patel: I introduced a really good friend of mine who is a very successful financial advisor… And I told him about Joe Fairless and these syndications that I’m investing in – this was years ago. I just made an introduction, they had a meeting, and then my buddy calls me and he says, “Wow, what an incredible opportunity.” I said, “Are you going to put your client’s money in it?” He says, “Ash, I have no way to get paid on these deals, but I’ll put my own money in it.” So yeah, good point.

I’ve got to ask you, you have $190 million of assets under management, and all we’ve talked about is you investing in a couple of single families and one syndication. So if you don’t mind, give me the journey of how you got here.

Sam Bates: Well, I started looking for multifamily back in 2014, and for the first year and a half or two years, we weren’t winning any deals. We were told that we were too young – because, at that time, I was in my late 20s to early 30s or something like that, and they didn’t trust that we could close. After about two years of banging my head against the wall, I partnered up with a couple of guys. One had development experience, and our first syndication was a mixed-use development of 60 apartment units and 10,000 square feet of retail space. That went really well. Since then, I’ve been a general partner on 14 projects, mainly multifamily, but some, as I mentioned earlier, just different asset classes, mainly in Texas and throughout the Southeast.

Ash Patel: What types of asset classes?

Sam Bates: Mostly apartments and multifamily. I have 1025 units of multifamily throughout Texas and the Southeast. But we have done commercial development, and we’ve done some lot developments. I just bought into a company that they build about 150 homes a year, and we’re going to try to scale it to 1,000 homes over five years. So just dipping my hand in different pots to diversify and hopefully give myself and investors more diversification than just investing in the standard B or C class multifamily acquisition.

Ash Patel: Well, let me play devil’s advocate. What do you say to those people that tell you to be hyper-focused on one thing? You’re all over the place.

Sam Bates: Yeah. Well, I think real estate, especially multifamily acquisition development is very similar. If you understand the details, you can understand it from a high level. But I’ve always surrounded myself with great partners. I have four partners, one’s been a developer for almost 30 years, one was [unintelligible [00:15:06].11] and worked in tax with financial institutions, one is an attorney and used to work in private equity, my other partner is an investment banker… So we bring a wealth of knowledge, and I feel like there’s not one thing we can’t figure out. I know it’s good to focus — they say the riches are in the niches. But at the same time, I feel like we can look at other asset classes. In one of our developments, we 4X-ed our money, and on an acquisition you aren’t going to do that in today’s day and age.

Ash Patel: I agree with you 100%. I will look at anything that makes money. I don’t care if it’s real estate, a startup, or anything. I agree with you. You mentioned that in 2014 you weren’t winning any multifamily deals. Looking back, with all of your experience now, why was that? What were you doing wrong?

Sam Bates: Two things; they always say the first deals the hardest to get. I will say that, because if you don’t have a track record, brokers are going to take a chance on you. Also, back in ’14, the masses were saying we could have a correction in ’16 or ’17. So I’ve always been conservative, and that’s why we only take down a couple of deals a year. But my underwriting was very conservative back then, and if I just knew what from ’14 to now would have held… Hindsight is 2020, but we were looking at deals in DFW for 30,000 to 50,000 and we thought that was high. Now those same deals are probably showing at 150k.

Ash Patel: Well, you weren’t alone; a lot of people had the same fear of an economic collapse a recession. But you got over that. If you were to give some of the Best Ever listeners advice, that are looking for their first deal, and you don’t want them to repeat what you did, what would you tell them?

Sam Bates: I think you need to be obviously tenacious, because you’re going to have pitfalls and you’re going to have struggles that you have to jump over. But what we didn’t do and I wish we would have done was to talk to experienced people. We were doing a lot of underwriting with rule of thumbs, and it just wasn’t working. If we could have tweaked our underwriting, reduce expenses, or increased income a little bit more and not be as conservative as we were, we probably would have got several deals that year. But I’m glad, because I’ve been able to get into development. I think if I would have gotten a few acquisitions, I would have never gotten into development, and I would have never met a couple of partners that has changed my work life, by far, for the best.

Break: [00:17:44][00:19:54]

Ash Patel: Sam, your first deal was a big development deal. Can you walk us through that?

Sam Bates: Yes. We did a 60-unit apartment and 10,000 square feet of retail space. We sold off the retail space pretty much a year and a day after it was occupied, just to pay long-term capital gains instead of short-term capital gains. But we still have the 60-unit apartment. It’s in Kerrville, Texas and it’s been a phenomenal deal.

During the development process, there were a lot of struggles; that year, during the development phase, it rained a significant amount, so we postponed some of the development timelines we had. We had to fire a contractor, we had to fire a property manager… There were just a lot of hurdles we had to cross. But once we provided a great return to our investors on the commercial side, we refinanced and provided our investors over 100% of their initial capital back, now it’s cash flowing. We’ll probably hold on to it for another 10 or 15 years and just continue to cash flow. It’s in a very stable market, it’s in a market that has a high demand for apartments, so we’re always that 98% to 100% occupied, and it’s a very easy asset to manage.

Ash Patel: What was the time difference between when investors funded the deal to when they got 100% of their money back?

Sam Bates: That’s actually a good question. They funded probably in March or April of ’16, and then we sold the commercial deal in July of ’18, and then we refinanced the apartment in November of ’18. So two and a half years or so.

Ash Patel: How did you find tenants for the commercial property?

Sam Bates: Luckily, we had two tenants before we built it out. We built a suite for Keller Williams, it was a triple net lease, and then a gym which was going to be an Anytime Fitness gym, but the owner decided to back out, so we brought in another gym, and it was also a triple net. We had leases and we had gradual rental increases per square foot over every couple of years. We were planning on holding on to it for five to seven years, but we got an offer that met our seven-year projection, so we felt like it was a good time to sell.

Ash Patel: Sam, you guys profited tremendously by selling brand new commercial units with fresh leases in them. Why not do more of that?

Sam Bates: That’s not our bread and butter. The Keller Williams triple net leases – we’ve done a couple of them and those have fallen into our laps. But nobody on our team is out there looking for retail clients or retail land. I’m more of a multifamily expert, so we’ll do it… We’ve built office buildings, we’ve built medical complexes, but it’s usually when the tenants reach out to us.

Ash Patel: And when you say Keller Williams, was it Keller Williams Realty, or did they have a client for you?

Sam Bates: It was Keller Williams Realty.

Ash Patel: Okay. They set up an office there.

Sam Bates: Yeah, they set up an office in the building.

Ash Patel: And right now, while multifamily is trading at very low cap rates, why not consider selling?

Sam Bates: We’ve actually sold four or five deals in the last couple of months. I think it depends on the whole period. We just sold a deal last Friday that we held for two years. We were planning on holding it for five years, but we’re able to do a 54% IRR to our investors, so it made sense. But there’s some other deals we’ve done with joint venture partners that we knew from the get-go they’re going to be legacy assets that will hold 10, 20, 30 years. So I think it just depends on the plan and who your investors are. When you do syndications, it’s harder to hold longer, when you have 30 or 40 investors or 100 investors. Obviously, everybody has different ideas and conflicting ideas. Usually, syndications are being held for a lot shorter duration than maybe a joint venture or something that you do on your own. But I was actually reading an article this morning that’s saying experts are predicting most real estate bills to be held for double or triple the time that they have currently been. This is because of inflation, unevenness, or unknowing of what the future might be.

Ash Patel: Sam, a crazy mixed-use development, a huge project – how did you get investors for that?

Sam Bates: That was, by far, probably the most difficult raise we’ve had. But we went to friends, business colleagues, and a couple of family members. All of us that were the GPs in that deal had a 10-year track record or longer of experience as a professional, and we had built credibility in other industries where they felt like they could trust us with their money. It paid dividends and I think we’ve compensated them, reimbursed them significantly for it. On that deal, we didn’t take any fees, we didn’t even take an asset management fee, the split was 80/20, so it was very favorable to the investors.

Ash Patel: The split was 80/20 to the LPs.

Sam Bates: Yes.

Ash Patel: Was there a preferred return?

Sam Bates: No, there was no preferred return, but there wasn’t an acquisition fee, a development fee, or an asset management fee. We did the construction at cost, so it was very investor friendly.

Ash Patel: Have you continued to use that model in the future, or has it changed?

Sam Bates: Our structures change significantly depending on each deal. We’ve done joint ventures where it’s 50/50 splits, we’ve done 80/20 with no pref, we’ve done 70/30 with a pref, we’ve done 60/40 with a pref; it just kind of depends on the structure of the deal.

Ash Patel: That’s a very impressive property that you guys built. What were some of the hard lessons you learned?

Sam Bates: I think the hardest lesson was — it was five hours away from us, and working with new people that you hadn’t trusted or had a relationship with before… Even though they’re recommended, they didn’t turn out to be what they said.

The first property management company, we fired because we found out she was in essentially embezzling from us. We were going to give her the lease-up bonus, but she took it before we gave it to her and she took it without asking. She just took it from our operating funds. We had to fire her for that. There are just a lot of lessons. The cable issue, the property management company was going to take care of it, but we learned that they didn’t take care of it, so we had to go and reach out to the cable provider. It was probably a 60-day back and forth that occurred during the lease-up, but it should have been done before the lease-up. There was just a lot of things where we learned that we need to have better controls and better checklists to make sure everything was getting done on time and according to plan.

Ash Patel: Would you develop a mixed-use building again?

Sam Bates: Oh, yeah. At least half of my projects have been developments. We have for developments in our pipeline this year. All of them are multifamily, except one, which is multifamily and single-family subdivision. But if a mixed-use development came open, I would definitely entertain it.

Ash Patel: Alright, Sam. You were skeptical about the economy four years ago; you have to be more skeptical today. How are you preparing for what could come?

Sam Bates: That’s a really good question, and I wish I had a crystal ball. Back then I was probably more skeptical, honestly, than I am now, because I just didn’t know as much as I know now. With the Fed and the other governments around the world printing $40 trillion in the last couple of years, I don’t know how the economy is going to go in the future. I think a lot is going to depend on the midterm elections, and then maybe even the election in 2024. I’ve listened to a lot of experts and some think that we’re going to go through a continued expansion until maybe the end of the 20s. That just seems crazy, since we’ve been in an expansionary time basically since ’08 to ’11. To have 20 years of good times is hard to believe. So I’m not going to predict if it’s going to crash or not. But to answer your question on how to hedge against it, I’ve become very selective in acquisitions.

I think people that are paying three or three and a half caps on the 1970s and ’80s deals, they could get taken out if the tide changes. We’re focusing more on developments. People say that developments are risky, but I could easily argue it’s a lot less risky, and we de-risk the investments when we can build at seven, eight, or nine caps, and sell it at four or five caps, or even three caps in some markets. I think you just have to be cognizant, you have to be a fiduciary, and pay attention to the markets. Each market is different. Dallas is different than Atlanta; those are two of the markets we invest in.

So I think you just have to have intimate knowledge of each market. One thing I’ve learned over the years, and it’s happening a lot now, is people are trying to get as highly levered as possible. They’re taking out bridge loans, putting on pref or mez, and they’re levering up to 90%. I think that could be a monumental failure for a lot of syndicators. So trying to have the right debt and just making sure you can cash flow throughout any correction.

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

Sam Bates: That’s tough. There’s so much. I would say be educated, surround yourself with great and experienced people, and just be passionate and focused. If you stay focused and surround yourself with great people, you can do some great things.

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

Sam Bates: Yes, I am.

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

Sam Bates: The most recent book that I think changed my life is Who Not How. I’ve always been a person that’s a doer but now I’ve realized that I can’t keep doing everything if I want to grow and expand. We’ve brought in a lot of employees over the last six to 12 months and it has taken a lot off my plate. I can focus on the $2000 an hour task or $250,000 task, instead of a $15 an hour task.

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

Sam Bates: There’s a lot of different charities that I like to give back to. I’m a Christian so I support the church I go to. Also, there’s a friend from high school and then some nonprofits that I met in Dallas that focus on a lot of different areas, economic empowerment, child slavery, women slavery, expanding the Gospel. I give back in a lot of ways. I also talk to people who are interested in real estate, I know everybody has to start somewhere. When I started back in ’08 or ’09 reading books, I knew nothing about real estate so I like to help people expand their horizons.

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

Sam Bates: You can reach me at batescapitalgroup.com, or by email at sam@batescapitalgroup.com.

Ash Patel: Sam, thank you again for sharing your story with us. Coming from the financial industry, having your master’s degree, being a personal financial planner, then finding real estate, and having $190 million of assets under management. Thank you again.

Sam Bates: Thank you for having me. It was a pleasure.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with someone you think can benefit from it. Please also 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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JF2713: 1,800 Units as GP: His Multifamily Portfolio Growth Strategy ft. Chandra Mishra

Chandra Mishra has amassed a portfolio of over 4,800 units as both GP and LP while working full-time as a physician and anesthesiologist. To add to his work, Chander has also honed in on the competitive Dallas-Fort Worth market. In this episode, he shares how he balances his full-time job with commercial real estate investing, his strategy for underwriting deals in a competitive market, and how he grew his portfolio.

Dr. Chander Mishra | 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 Chander Mishra with us. How are you doing, Chander?

Chander Mishra: I am doing great. How are you, Slocomb?

Slocomb Reed: I’m doing great, excited for this interview. We were just chatting about our traveling experiences before the recording. Chander is the founder and CEO of Blue Ocean Capital, which invests in value-add multifamily assets in primary markets currently concentrating in Dallas-Fort Worth. He’s the GP of over 1,800 units and LP of another 3,000 units. He works full-time as a physician, an anesthesiologist specializing in cardiac and transplant anesthesia. He’s based in Colleyville, Texas there in the DFW area. Cardiac transplant anesthesia just isn’t stressful enough already, is it? You need to be doing these large real estate deals too, don’t you, Chander?

Chander Mishra: Yes. They are the fun part.

Slocomb Reed:  How long have you been involved in multifamily real estate?

Chander Mishra: I’ve been involved in multifamily real estate since 2015, actively.

Slocomb Reed:  Actively since 2015. Gotcha. When you say actively, do you mean that that’s when you started being a general partner and putting together your own deals?

Chander Mishra: Actively means that’s when I started learning this, engaging, networking doing it, so on and so forth, and started investing, signing on loans as a KP, and becoming an LP on other deals.

Slocomb Reed:  Got you. So you started being a key partner, as well as doing other things, in 2015. Nice. You said you focus on primary markets, currently Dallas Fort Worth. Tell me about the property you most recently bought.

Chander Mishra: So I live in Colleyville, and it’s right next to North Richland Hills. I have been wanting to buy a smaller property, because when I started into this, the first syndication I did was 170 units; so I always wanted to buy this small boutique property. I got the opportunity to buy the 68-unit, which was like 15 minutes from my home, and to use it as my like experiment ground in a way to kind of do certain renovation, see its impact, and have a lot of that kind of control on it, so we can use that as a prototype on the rest of the portfolio. That was kind of like one of the most exciting recent acquisitions which we closed recently, end of December… December 20th.

Slocomb Reed:  Nice. Tell me more about your plans for that property.

Chander Mishra: In fact, I was glad to get on this call, we were having PM call on it. Rents in Dallas, Fort Worth are kind of going crazy. This certain area is seeing like 21% rent growth, so — we cannot keep up with the rent growth, because there’s a time of implementation of that rent growth. Our projections of whatever the rent growth we had projected are already kind of implemented. And now we are looking to improve the common areas, all those bits are in, we’re deciding on the paint colors, and so on and so forth, which is always exciting. We only have two units available, which has already kind of renovated and leased out. So it’s basically off the bat, you have a 100% leased property. So the only opportunity we have right now is to complete our exterior renovations and amenities add which we have planned in the business plan. That’s what is going into action right now.

Slocomb Reed:  Got you. You focused on primary markets like Dallas Fort Worth; where else are you investing?

Chander Mishra: I am invested in Houston and we also have properties in El Paso. But the advantage of me focusing in Dallas, Fort Worth has been that we have a little bit more of a cohesive team. Some of the challenges which COVID puts us through, like somebody getting sick, or the team member not being available, or someone leaving the job, or even just accessing contractors and the base of people who make you kind of successful, in general – you need a whole team of people. I think that work has become a lot easier by being focused in a more concentrated area.

Slocomb Reed:  Do you hire third-party property managers, or do you manage in-house?

Chander Mishra: We do hire third-party property managers. The key in my experience is having a relationship. If you can have a relationship with the PM company and the stakeholders of the PM company, you can have a conversation. No relationship is perfect, but you can have a conversation, that helps move the properties forward much quicker.

Slocomb Reed: That makes a lot of sense. GP on 1,800 doors… What is the average property size in your portfolio?

Chander Mishra: On average, the property size will be above 120. I think our lowest property is 150-some-odd units, but we do have two properties like the one I told you about, the 68 units we just purchased. There was another one, we had like 87 units… But mostly, I think our lowest count will be 159.

Slocomb Reed: Outside of those two. Gotcha. Your portfolio by door count is larger than most of the people that I interview, and you are focused on markets that are pretty competitive. There are a lot of syndicators who are, for lack of a better term, pushed out of markets like DFW, because the competition is so hot to get those properties. Within areas like Dallas-Fort Worth where you’re concentrated, Chander, what size property are you focused on acquiring now? And what other aspects of the property do you target? What is it that you specialize in?

Chander Mishra: I’m mostly looking for value-add, B plus, C plus assets. Right now, we are under contract for a 273-unit portfolio which will be closing end of this month, or with an extension sometime in February. That’s the focus, mostly being a little opportunistic and digging deeper. That’s the advantage of keeping the market small, because I can kind of leverage the knowledge base of those particular markets, and use that to my strength, like “Okay, this is where the rents are in this market, this is where we can push it, this is where the population is.” This is what it has done over a period of time. I think that helps a lot in deciding and paying a fair price to the seller… Because that’s the key. The competition is there, but at the same time, there’s value in relationships, and so on and so forth. So you build those relationships, and then it’s not about competition, but more about execution and making it easier for the seller to sell the property to you. It goes a long way.

Slocomb Reed: You specialize in your partnerships; are you actively involved in the offer and LOI process?

Chander Mishra: Yes, that’s where we roll. Yeah.

Slocomb Reed: Okay. Chander, I’m asking you a couple of questions to build up to something that I hope will add a lot of value to our Best Ever listeners… For the number of LOIs that you get accepted, how many LOIs do you end up writing, on a ratio?

Chander Mishra: I think people look at it differently. The best ratio will be — I would say, if I’m going after a property, I try to do my homework, and talk to the broker. Not a lot of LOIs are written that would just go into like a waste. There’s no fun in just unnecessarily bidding on something. I would say we have a one to three or a one to four ratio. But we go in, we have a pricing, we want to overbid on the property – those are the properties we will lose. But if there is a kind of like an understanding with the seller, trying to get into that understanding with the broker and the seller that this is where you want to sell the property, “Hey, I’m going to send you this offer. If this is something you’re interested in, I’ll send it. If not, there is no use of going and wasting the time over it.” I think it’s just being very discreet in your approach – it makes a bigger difference – rather than just sending LOIs and underwriting deals like crazy.

Slocomb Reed: Focusing on your relationships with brokers is not only helping you get the right deals, but it’s also helping you save time and not writing on the wrong deals, not having to analyze the wrong deals, and not spending a lot of time on deals where you know that you wouldn’t have the winning bid based on your relationship with the broker. Is that what you’re saying?

Chander Mishra: Yes. And also the expectations. The broker may be a friend, but on the other hand, if the seller has an expectation that he’s going to capture 50% of what he will end up making over the hold of the property in his sale price, then most probably that’s something we will not go for, because then that puts me at very high risk.

Slocomb Reed:  Gotcha. Explain that further to me.

Chander Mishra: Let’s suppose there’s a property at $10 million, based on the NOI and stuff. There are a lot of products selling at a cap rate of 3.1%. A few days ago, I got a call, “Hey, I’ve got an off-market deal.” I’m like, “Okay, tell me more about it.” I started looking at it in detail and I’m like, “Hey, this is not even penciling in at 3.16% of cap rate on a Class B property which is ’80s built.” We [unintelligible [00:13:57].12] contract on it on 20% of the asset. This broker is a good friend of mine and we started having this conversation. I’m like, “Yes. I would like this property. But on the other hand, I cannot do justice at this pricing, because that’s the seller’s expectation to get their pricing.” And I didn’t proceed with it.

Slocomb Reed: Did you say that your seller’s expectation on the pricing was based on a percentage of how much you all would make after you bought it?

Chander Mishra: Yeah, because everything is on the proforma. If the proforma is unrealistic… Because they will be looking at the proforma, and the proforma is based upon you implementing those things there, at that particular property, and not taking… If you don’t take your implementation time into those criteria, that becomes very difficult. If the proforma is assuming that you’re going to get a $120 rent bump on the first day, you are not including the rehab time. That becomes a very complicated issue.

Break: [00:14:53][00:17:03]

Slocomb Reed: You’re using your relationship with brokers to make sure you’re not wasting your time pursuing the wrong opportunities or spending too much time on the wrong properties. I imagine the deals that you win, the contracts that you win, are still competitive. As highly analytical of a space as you operate in, Chander, with properties in that 200+ unit space, is there a particular aspect of your underwriting, your analysis? Is there something that you’re seeing that other operators and GPs in that space are not seeing, that is allowing you to write the offer that gets accepted?

Chander Mishra: That’s a very good question. The big portion would be just looking at a deal more closely. Walking the deal, understanding the deal, going to the comps, seeing what’s around it, seeing what’s driving it, looking at all the data sources that are available to you in that particular market. Understanding the tapestry of that, the population which lives there, and what drives that. That kind of thing, which if you focus on it, there’s a lot of data available nowadays. CCIM has a site to do business, and there are other data sources all across the market. If you get into the data and look at where the data should be — CoStar nowadays, the recent changes, they have property-level data, because of their access to the CMBS database. That can allow you to look at “Okay, this is where the property is performing and this is where it can be compared to other properties.” That’s where the leverage is.

Slocomb Reed: Gotcha. That makes a lot of sense. That’s very helpful to think about. The level of analysis that you’re doing gives you the opportunity to write more competitive offers on the right properties that you know you’ll be able to execute on. Chander, you’re a general partner in almost 2,000 doors, while also keeping a profession outside of the real estate industry. I know a lot of people who get into this are doing it so they can leave their careers. You and I were talking before the recording about some mission work I believe that you were doing around your profession as a cardiac anesthesiologist. I know that it’s something you’re passionate about, and I know that there are a lot of listeners who want to be able to balance their real estate business as it grows to be like yours, while keeping their career. What advice do you have to people with regards to maintaining that balance, so that they can continue to do something they love outside of real estate, while still building a portfolio?

Chander Mishra: I think the best, Slocomb, is to know yourself. Whether you do real estate or you do any other job, it’s no different. Getting into real estate asset management thinking that you’re going to have an easy job is kind of like a misnomer. Real estate asset management, especially the multifamily space, is a very time-consuming and very resource intensive. It’s just like any other job, sometimes more stressful than any other job, because you’re responsible for so many other people’s investments, there’s always dealing with so many lives, whether they are living in your community, or they’re part of your PM group, or they’re part of your team. I think you can do anything based on what kind of teams you structure and what you’re passionate about. It does take a certain amount of dedication, it does take a certain amount of support, creating the teams, having the right partners, having an appropriate VA or virtual assistant, or somebody else which you can hire as your team grows… I think it’s very useful in making things work over a period of time.

Slocomb Reed: Having a team gives you the opportunity to delegate the tasks that don’t have to be done by you. Thinking about you balancing your medical career with other endeavors and thinking back to Brandon Turner’s talk at the 2021 Best Ever Conference… He talks about the Dr. Oz cut, meaning that – I don’t have all the details, Brandon did, and I’m just going off of his talk. But Dr. Oz was a heart surgeon, right? And there was one particular incision that he was particularly capable of doing, that he was just focused on doing that one cut. Do you know him personally, Chander?

Chander Mishra: No, I don’t. [laughs]

Slocomb Reed: Okay. But people in professions like yours are doing everything they possibly can to prepare Dr. Oz to do the one cut that he can do. And having a team in real estate and being able to delegate the tasks that you don’t do yourself, or that don’t need to be done by yourself, is critical to that. It’s also critical to living a balanced life. You’re obviously doing that in your real estate profession when it comes to building a team and delegating all the tasks that don’t need to be done by you, or that don’t bring you joy. Are you finding opportunities to do that as well in your medical career?

Chander Mishra: That’s a little bit tougher, because a medical career is based upon one-on-one interactions largely. A lot of the time, anesthesia — these are kind of like the services which are delivered to one person at one time. That’s kind of like always that. Most of the time the services which are built by that particular physician are based upon the services you personally provided. I do run a bigger team, I’m in charge of a larger hospital, and we have over 10 physicians and 30 nurse anesthetists who work with me in that division. The way you get that leverage and team approach is about looking at a larger perspective; not just on the anesthesia purposes, but looking at the larger perspective delivery of care. Ultimately, you’re delivering care to a human being who is going to be there in any care setting. It’s just like delivering a kind of like an experience, a person who lives in your apartment homes. Similarly, you have different facets of the team. There is a larger role which I play in the hospital arena, and there is also a specific role I play that I am providing that one-on-one care to the patients. Some aspects of it get implemented when I’m providing care at a larger level, so that’s when I’m looking at a global delivery of something. How do we improve this process? How do we take care of these quality metrics? How do we deliver safer care? And so on and so forth. So it’s just like delivering that similar operational excellence in real estate.

Slocomb Reed: Awesome. That’s really helpful. Chander, are you ready for our Best Ever lightning round?

Chander Mishra: Oh, yeah. Tell me about it.

Slocomb Reed: Chander, what is your Best Ever way to give back?

Chander Mishra: To talk to a person one on one.

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

Chander Mishra: I read so many books. Shawn Achor’s book about happiness.

Slocomb Reed: The title is About Happiness?

Chander Mishra: No. It had to do with something with your happiness. I don’t remember the title.

Slocomb Reed: That happens to me with audiobooks as well.

Chander Mishra: It just disappears, because I listen to so many of them.

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

Chander Mishra: My best advice is to know yourself. It’s called The Happiness Advantage.

Slocomb Reed: The Best Ever book is The Happiness Advantage by Shawn Achor. The Best Ever advice is to know yourself. Do you want to expound on that?

Chander Mishra: Spend some time with yourself. Our mind is so active; it’s like having two iPhones with us, one outside and one inside your brain. When both of those are going, the person who has those gets lost somewhere. Sometimes when we are running after different things, whether it is a career, a business, or everything else, you have to kind of stop and see who is running, who that is, and what they want ultimately.

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

Chander Mishra: They can reach me on my Facebook and on my email. My website is www.bluoceancap.com You have all my social media and everything there; of course, my email, and my phone number, everything is on that.

Slocomb Reed: Best Ever listeners, thank you for tuning in. If you enjoyed our conversation, please follow and subscribe to the podcast, leave us a five-star review, and share this with someone who you think could benefit from what Chander has shared with us about his apartment investing, about balancing his career in the medical profession with his real estate investing, and his day-to-day life. Thank you and have a Best Ever day.

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JF2701: Uncover the Value-Add Potential in Class-A Properties with Jonathan Nichols

For many commercial real estate investors, C-Class and B-Class properties are almost synonymous with the term “value-add.” But for Jonathan Nichols, he’s found that there’s still value-add opportunities in Class-A properties that investors might otherwise miss. In this episode, Jonathan reviews his recent deals, including a Class-A student housing property, and why value-adds can also apply to Class-A properties.

Jonathan Nichols | 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 Jonathan Nichols with us. How are you doing Jonathan?

Jonathan Nichols: Great, Slocomb. Thanks for having me on the podcast today. Excited to be here.

Slocomb Reed: Jonathan is a full-time syndicator at Apogee Capital, which helps people passively invest in value-add multifamily real estate. He is the GP on 200 multifamily units, 18 short-term rentals, and LP on 250 units. He worked for 10 years as an aerospace engineer and went full-time in real estate in October of 2021, just a few months ago. He’s based in Arlington, Texas. Jonathan, reading your bio, I have to ask, your 18 short-term rentals – is that a deal that you syndicated?

Jonathan Nichols: Well, it’s actually a mix. We have a few different genres of short-term rentals; we have some residential properties that my wife and I own, which is how we got started in real estate several years back. We have a few arbitrage units which is where we rent and then re-rent the units on Airbnb. And then finally, this past year, we did an eight-unit JV property. Not a syndication, but a JV property; that’s short-term rentals. That’s kind of our hybrid between multifamily and short-term.

Slocomb Reed: Gotcha. What does your joint venture look like on that eight-unit with STRs?

Jonathan Nichols: My wife and I, as we started scaling up in short-term rentals, we really spent a lot of time developing our team, our business structure, and stuff and got it to where it was fairly efficient. So I had this idea, “Hey, I’m jumping into multifamily world, doing syndications, JVs, and stuff like that now with multifamily. What if I could buy a small multifamily property and convert it to a short-term rental, and thereby get higher cash flow, higher returns for the folks on the deal?” I had a few partners who were on other multifamily deals with me that were interested in that business model. Basically, I took over the role of managing… Rather, my company took over the role of managing the short-term rental side of the project. Of course, I put together the deal itself as far as… Not the syndication, but just the transaction, the rehab, and all that necessary to start doing short-term rental.

Slocomb Reed: The other deals that you have syndicated, those 200 units – where are they?

Jonathan Nichols: We have one deal, which was the first deal that we were co-GPS on, up in Tulsa, Oklahoma. We did that one early part of last year, and it’s taken off and doing very well. Then we have another deal that we just closed on in College Station, Texas towards the end of last year; it’s actually an A-class student housing type project. We were the lead syndicators on that deal.

Slocomb Reed: Tell me more about that class A student housing syndication. You said you bought it late last year. What did that property look like when you were proposing it to potential investors?

Jonathan Nichols: It was really interesting, because the first question that I got asked of it is, “Okay, it’s A-class, so there’s no value-add; it’s not a value-add deal.” Well, in fact, it is a value-add, because value comes in a lot of different ways. The story behind this property is that it had been owned by a mom-and-pop owner for quite a good bit of time. Their primary interest in the property was just having it 100% occupied and easy to manage. So while they took good care of the property, they didn’t necessarily push it to its potential. We took over the property; it’s only eight or nine years old, it doesn’t need any type of major rehab on the units as of now, and basically, we’re starting to implement professional management, professional marketing that will drive rents up to market, in a tertiary market in Texas that’s actually rather strong.

So  the value on this is just a management play where we’re able to hit market rents that the previous owner was not seeing on that particular property. So far, it’s off to a good start; we’re really excited about it. But it’s definitely a little bit different than a lot of the typical C-class value-add syndications that probably investors are used to coming across.

Slocomb Reed: Yeah. C-class and, to some degree, B-class has kind of become synonymous with that term, value-add. Let’s talk about value-add for a moment… Because when you boil down the definition of value-add, you’re talking about increasing the value of the property, which at the end of the day comes down to one of two variables, or both. Value-add is either increasing the NOI, or decreasing the cap rate. And there’s no reason why that can’t be done in A-class the same way it can be in B or C-class. Yes, a higher percentage of the operators in an A-class situation are going to already be performing optimally to the market. But you’re talking about an ownership situation that is very familiar to C-class operators, the mom-and-pop who wanted to be stable and safe and low hassle, instead of pushing income. They were primarily concerned with a lifestyle for themselves that resulted from the property more so than the NOI, which left an opportunity for you to increase the value and syndicate an A-class student housing deal. Am I missing anything here?

Jonathan Nichols: No, I don’t think you are. Honestly, I think your best point is just that flaw that a lot of people have tied value-add specifically to B and C class. Most of what I look at, to be clear, is B and C class properties, like everyone. But I get a lot of deals across my table that are C-class, and it’ll be marketed as a “C-class value-add deal.” Well, really what it is, is another syndicator who bought it five years ago, they’ve taken most of the value out of it, and it’s a turnkey property. And there’s nothing wrong with that at all; there is a right buyer for that property, but it’s no longer a value-add deal, because most of that’s been squeezed out.

By the same token, you go look at an A-class that has value-add on it; it’s going to look a little bit different as far as the return structure and such, but the reason that A-class typically sells for higher is because it’s lower risk. When we are talking to investors, one thing we explain to them is “You probably can go find 10 C-class deals that would have a lot higher returns than this deal. But this is going to be a lot lower risk deal, that’s more likely to appreciate.” On top of that, we’re in a market that has strong economics behind it, so I do really believe in this project. Of course, that’s not even considering the tax benefits that went along with it.

Break: [00:08:00][00:09:38]

Slocomb Reed: Are the tax benefits anything beyond the ordinary?

Jonathan Nichols: I would say not, because the property by itself, yes. But if you have a true C-class with value-add on it, you’re going to get a lot of tax benefits from that value-add if it’s executed properly and all that. So you’re not going to see as much of that. So it’s probably pretty much in line with what you see on most syndications. We definitely had investors who, because we’re approaching the end of 2021, are concerned about their tax bill in the upcoming year, and said “We need to put money in a good project.” So we had a low-risk project with great returns and the normal cost-tax benefits, so they were sold.

Slocomb Reed: College Station, Texas makes me think of the Aggies. Are there any other major employers in College Station outside of Texas A&M?

Jonathan Nichols: That’s a great question. First of all, my wife and I – we both went to Texas A&M, that’s where we met. So we’re very familiar with the market, because we’ve lived there for several years. Historically, Bryan-College Station has been, I would say, outside of the school, somewhat of a flat market. But in recent years, there are a number of large, well-known companies that are putting tremendous amounts of money, in the order of hundreds of millions of dollars, in a market with a quarter million people. So the job growth that you see, the employment growth, the population growth outside of the growth of the school itself – it hits all the metrics that most syndicators look for in a solid market. That’s something that’s come to play, I would say, in the last two to three years, particularly. I think it’s a market that’s well positioned for success in the near future.

Slocomb Reed: I am in Cincinnati, Ohio. We have a couple of great universities here, and very solid student housing markets within Cincinnati, but I’m not in them yet. When you were evaluating this deal in College Station… I say that because I’m really asking out of curiosity here… College Station, a quarter million people, relatively flat outside of the university… When you are underwriting the area, knowing that this is going to be dedicated student housing, are you weighing the growth of the university against the other economic factors affecting the market?

Jonathan Nichols: Well, that’s a good question. First of all, historically a bit of a flat market; now it’s actually growing rather rapidly. So outside of the university there’s population growth, because of these new employers that have come in the market.

So when it comes to the student housing side of it, you do want to look at the university as well. The largest public university, the largest university in Texas, the student population growth is extremely high, and has been for a number of years. So I think it bodes well with property performance.

This particular property, once again, remembering that my wife and I are very familiar with the town, it’s really an impeccable location. It’s very desirable for students who want to live, because it’s within biking distance, walking distance of the university… And for anyone who’s familiar with very large universities, not every school that you have the ability to live and walk to your university. In some of the larger schools, you may be riding a bus for a while, or have to drive, etc. So that benefit of the locational alone was something that we took into consideration.

But really, at the end of the day, there were two things that we were evaluating in order for us to feel comfortable signing the PSA on this property. One, what was the lending environment? Who was willing to lend on the project? We found a couple different good options, and one that we were particularly happy with. And two, who was going to manage it? To back up a step, I have folks come to me on the short-term rental side of things all the time and ask me questions about buying a short-term rental. The first question I’ll ask them is the same, which is who’s going to manage it? You need someone that is a professional in that specific type of environment, so we found a local management company who is headquartered in College Station, has been there for 20 years; it does not only student housing, but also manages a few hotels as well. So when it comes to the intensity that comes with the turnovers and the schedule that you see with that, they were very well prepared to take on this project. So those were kind of the two things that led us to believe we were going to be successful in this project.

Slocomb Reed: Jonathan, I want to ask you a little more about the debt that you got for this deal. But first, a frame of reference for the debt conversation. How big is this property? How many units? How much did you pay? How much were you looking to get? Did you have a value-add budget?

Jonathan Nichols: The property itself is 75 units, they’re all townhome style, so the units are very large.

Slocomb Reed: Is it a rent by the bedroom situation?

Jonathan Nichols: It is not. That’s another thing that made us comfortable with it. It’s not rent by the bedroom, and it’s also 12-month leases. So while the percentage of students living on the property officially made it a student housing project from a lending perspective, we do have a lot of full-time professionals that live on the property. Professors, or even graduate students pursuing PhDs that are going to be there for a long time. It’s really a lot different than a straight student housing project, to be honest with you. So there’s a component of both in there. But it’s 75 units and… What else did you ask me about it particularly?

Slocomb Reed: How much did you pay for it and what was your projected rental budget?

Jonathan Nichols: It was an 8.5-million-dollar property, which was like a 5.5 cap for this market, which is really incredible for A-class, honestly. The rental budget – there’s really nothing on the interiors that needs an upgrade. It’s a new enough property that just the finishings, the flooring etc., is all in great condition. It’s more of just kind of minor exterior things. We had a pretty light budget just for a little bit of deferred maintenance on the outside. But I wouldn’t even call it a full CapEx budget, to be honest. It’s probably what most people would just put into reserves. But it’s stuff that we identified going into the project was going to need to be repaired.

Slocomb Reed: What kind of rent growth potential did it have when you bought it? This doesn’t sound like something that’s going to get a big bump in rents… But like you said, previous mom-and-pop owners who cared more about making things easy than profitable. What were you looking at?

Jonathan Nichols: What we needed was to be able to get 5% to 7% rent growth in the first year in order to hit our proforma. What we’re seeing is that we’re somewhere around 10% to 12% below market rents as of today. What’s interesting is that Texas A&M is home to a Real Estate Research Center in Texas. So they do research on real estate all across the state, and obviously, are well versed in their local market as well. They released an article here within the last month or so basically stating that 2021 properties had seen 10% to 15% rent growth nominally across the board. So we’re talking properties that were already at market rent seeing those kinds of rents…

Slocomb Reed: This is at College Station?

Jonathan Nichols: That’s correct. And they’re expecting that again in 2022. So for us going into this project, that was something that really made us comfortable with it. Because the rents that we were needing to hit to hit our proforma were well below what’s projected just from nominal rent growth, outside of properties that are at below market as is.

Slocomb Reed: Yeah. The rising tide lifts all ships, for sure. It’s a good time to be taking advantage of what’s happening in the market when it comes to rent rates. So 75 townhome units, technically classified as student housing, but you have a mix there of tenants, professional as well as student. 75 doors, 8.5 million, pretty stable, a little bit of rent growth potential… This sounds like a dream for most lenders. What kind of debt structure were you looking at?

Jonathan Nichols: One of the things important to our team was to find non-recourse lending. That was probably the most challenging. You have to go back to the history of the market there, in College Station. Agency was not particularly interested in this project, because one, they’re not big fans of anything that they would identify student housing. But more so, if you look back at the history of the market several years back, there was a lot of development of new A-class student housing between, let’s say, 2012 to around 2016 in this market. And for a brief time period, the market was even a bit oversupplied on student housing. So I think that some of the lenders were concerned about that, and not looking at some of the metrics… Because what really matters in a market, if I tell you, “Hey, Slocomb, I’m going to buy a property in Austin.” You immediately think, “Oh, that’s a great market.” But why do you think that? Likely, it’s due to what it’s done in the past.

Slocomb Reed: It’s because of how many people say Austin all the time. You hear it everywhere.

Jonathan Nichols: Exactly. But what we really care about is what is the market going to do in the future. So while we don’t have a crystal ball, there is a lot of research and data that can give us an idea of what it’s going to do in the future. Some of that I already mentioned. Companies coming in and investing enormous amounts of money, job growth, population growth, low unemployment. Particular to this property, a university that also has population growth, a subset of students who have no issues paying rent… Presenting all that to the lenders, once we’ve found a group of lenders who were interested a) in student housing, and b) in non-recourse lending, it was actually a pretty easy sell. So it’s just finding the people who are interested in that kind of project.

Slocomb Reed: What terms did you get?

Jonathan Nichols: We were able to get 75 LTV, which is pretty right down the fairway, I would say, in Texas. Don’t need any CapEx money, because the repairs are minimal, so that’s not really much of a concern. 30-year AM, low DSCR… So it all worked out pretty good, honestly, in the end. A lot of it was just really being clear on our business plan, on providing evidence of the property’s current performance… As I said, because it was a mom-and-pop owner, they had done all the right things as far as screening tenants and running the business well, but it just wasn’t the most organized. So we as the sponsors of the team had to do a lot of that organization and then present that information to the lender. So at the end of the day, you think that the lender is trying to sell you a product, but it’s really you trying to sell them a property. You have to approach it in that manner if you want to be successful.

Slocomb Reed: Yeah. I know that 30-year amortization is going to help your cash flow a bunch.

Break: [00:20:45][00:23:41]

Slocomb Reed: Did you underwrite this to the five-year hold? Is that the plan?

Jonathan Nichols: That is the plan. We’re seeing in the Texas markets a lot of sponsors are choosing not to hold properties for five years. Just when you look at cap rate compression, combined with rent growth, a lot of them are not having to hold properties that long to hit the equity multiples that they’re projecting to investors. My hope would be that we would see something similar on this project, because it’s more of a management play than a rehab play. It won’t take us long to implement our value-add strategy on this project. But at the end of the day, we want to be conservative. It’s a five-year business plan, it’s a five-year note, so that’s what we’ve underwritten it as.

Slocomb Reed: Awesome. Well, Jonathan, are you ready for our Best Ever lightning round?

Jonathan Nichols: Better now than never. Yup. Ready to go.

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

Jonathan Nichols: Well, that’s a great question. I’m going to name a non-real estate related book and say The One Thing. The reason I like that book is that when I was trying to lock down our first multifamily project, it really helped me with just not only the mindset, but the organization behind trying to accomplish what to me seemed like a very large goal. So for any listeners that have a big goal going into 2022 and haven’t read that book, I would definitely recommend it.

Slocomb Reed: The One Thing, it’s phenomenal, for sure. What is your Best Ever way to give back?

Jonathan Nichols: That’s an incredible question. A couple of years back, actually several years back, my wife and I were privileged enough to go on a trip to Tijuana, Mexico and build a house there for a family over an extended weekend. Then we made it basically a family tradition of ours to go back every year up until COVID hit. Honestly, it’s been one of the most impactful things that I’ve had the opportunity to participate in. So we’re hoping to get back into that this year, but I really enjoyed that a lot.

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

Jonathan Nichols: It sounds really generic, but what I would say, especially to newer real estate investors, is just to have that never-quit mentality. It amazes me how many people come into this industry with maybe minimal experience or a resume that doesn’t seem to suggest that they’re going to be successful, but then they wind up being incredibly successful. I think the one thing that ties the people that succeed is that they all are very committed to the outcome. It’s not about saying, “Well, I’m going to give this amount of effort. If it doesn’t work, then whatever.” They just have this attitude that they’re willing to write a blank check, and whatever it takes, they’re going to get it done. That would be my advice, is figure out what it takes and work hard until you succeed.

Slocomb Reed: That’s awesome. Jonathan, where can people get in touch with you?

Jonathan Nichols: As you already mentioned, the name of our company, my wife and I’s syndication company is Apogee Capital. We have a really great website, which my wife actually built, called apogeemfc –as in multifamily capital– .com. It’s got all kinds of resources, typically targeted towards passive investors who are interested in multifamily commercial real estate. We have a free eBook. So that’s definitely a great way to get in contact with us. Also, I’m rather active on LinkedIn. If you search for me there, I’d love to connect with you if you have any questions or just want an introduction.

Slocomb Reed: That’s great. Jonathan, thank you, and Best Ever listeners, thank you for tuning in. If you enjoyed this episode, please subscribe to the podcast, leave us a five-star review, and share this with someone who could benefit from what Jonathan shared with us. Thank you and have a Best Ever day.

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JF2700: 4 Signs You’re Being Misled on a Multifamily Deal with K. Trevor Thompson

When K. Trevor Thompson joined as a Limited Partner on a 170-unit deal, it turned out that he’d been misled about the property and the investment plan. Between mislabeling the class of the property to poor financial decisions, Trevor quickly realized it was inevitable that the deal would go south. In this episode, Trevor reviews his recent deals, how he transitioned from passive to active investing, and the lessons he’s learned on how to vet multifamily deals.

Trevor Thompson | 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 Trevor Thompson with us. How are you doing, Trevor?

Trevor Thompson: I’m doing awesome. Thanks for having me.

Slocomb Reed: Trevor is the founder of Niagara Investments LLC, which focuses on apartment syndications. As a GP, he has 240 doors, he’s an LP on 17 syndicated deals. He’s based in Austin, Texas. Trevor, tell us more about your real estate investing.

Trevor Thompson: Yeah, so I started passively investing a little more than four years ago, and started doing different types of investments as well. I’m mostly focused on multifamily, but I’ve been a little more diverse, so retail, medical center, single-family home fund… So quite a bit of different asset classes, just trying to continue to learn.

Slocomb Reed: You started passively. When did you start?

Trevor Thompson: About four and a half years ago, I invested in several deals.

Slocomb Reed: What were you doing before that?

Trevor Thompson: I worked for iFLY Indoor Skydiving. I had the coolest job in the world. I worked for them for 20 years. If you can imagine, at our first team meeting, we were all given a copy of Rich Dad Poor Dad.

Slocomb Reed: That’s awesome.

Trevor Thompson: Fortunately, I did what a lot of people do, I put it on my shelf and went on living my life, forgetting about real estate. Big mistake, start early.

Slocomb Reed: Part of my Rich Dad Poor Dad story is that I read it right before I got married. I ended up giving a copy of Rich Dad Poor Dad to each of my groomsmen and saying, “Hey, you’re getting a tie, but this is a real groomsmen gift. I’m going to do this. I don’t know how yet, but I’m going to do this and I want you to come with me.”

Trevor Thompson: That’s awesome.

Slocomb Reed: Yeah. Fast-forward several years later, here I am, one of the hosts of this awesome podcast.

Trevor Thompson: That’s amazing.

Slocomb Reed: When did you decide to become a GP?

Trevor Thompson: It was always sort of in the cards. I wanted to start passively investing, learn a little bit more, try to figure out what was the right thing to do, and the wrong things to do… Then I decided I was going to become active. Then, of course, this lovely thing called COVID came along, and I got furloughed and eventually let go, and I said, “Well, the world just made the decision for me. I’m going to go do this full-time now.” So I dove in full-time and started looking for properties.

Slocomb Reed: So it was early 2020 then that you–

Trevor Thompson: Yeah. 2020 I started doing it full-time. Then I started looking for properties and trying to find a deal. I finally now got on one, we’re just closing this month actually, and I’m very excited about that.

Slocomb Reed: Is this your first deal as a general partner?

Trevor Thompson: That’s correct. Yes.

Slocomb Reed: Got you. So this is 240 doors?

Trevor Thompson: It is, yes. A nice place to start. I did get some experience before. One of the passive investments I was in, which was 176 doors – they were in trouble and they were stretched a bit. So while I was furloughed, I volunteered as an asset manager to help their asset manager. Then they fired the asset manager, fired the property manager, so here I am, self-managing at deep value-add, 176 doors in the middle of a pandemic.

Slocomb Reed: Oh man, we’ve got to start there, Trevor. We’ve got to start there. So you say that they were in a bit of trouble. First of all, 170 doors. Where is this?

Trevor Thompson: That was in San Antonio.

Slocomb Reed: In San Antonio. That was a deal that you went into as a limited partner. What was being pitched to you when you decided to invest? What was the trouble and then how did you get out of it?

Trevor Thompson: What had happened was, I’ll be honest, they underfunded their capital expenditure. They thought they would be able to get out of a particular loan product and into another loan product, and when those two things happened and didn’t happen… And then of course, during the pandemic, we had some skips and some other things that happened, and we ended up having to renovate more units than we thought we were to try to stabilize… So it was a very challenging time, but at the end of the day, I couldn’t have paid for education like that I got. I was on the property pretty much every other day, and I was a property manager, so I learned a ton. It was very exciting.

Slocomb Reed: Oh, so you were actively involved in property management as well?

Trevor Thompson: Yeah, because they fired the property manager, so we self-managed. So here I am, a passive investor who volunteered to help, and now I’m running a property, with five team members on the staff…

Slocomb Reed: How is it performing now?

Trevor Thompson: It’s sold now. Unfortunately, it’s sold; but we didn’t make any money, but we didn’t lose any money. Again, it was a rough deal; regular phone calls to the police, and we had actually armed security for three weeks… You can learn a lot of lessons when you have a property like that. But I loved turning it around. Without the pandemic, I think we would have been successful.

Break: [00:06:03][00:07:42]

Slocomb Reed: Trevor, it sounds like you were able to swoop in and take a deal that was going into the red, and bring it back to breakeven by getting involved as an asset manager, and then as a property manager for a deal that was tanking, in part due to COVID. You were looking to transition into becoming a GP, so this could have been a great experience for you. It seems like the most limited partner’s absolute worst nightmare. They want to invest passively. So the idea of getting called into something like this – they wouldn’t do it. But based on your experience on the limited partner side in this deal, is there anything about this deal that, in hindsight, you realize it wasn’t going to go well when you got in?

Trevor Thompson: When we first got in, it looked like everything was going well. We got a couple of distributions at the beginning, and it was chugging along, and they were giving positive reports. But once I got there and started digging into exactly what was happening, it became apparent that we were being misinformed, which is part of the reason why the asset manager was no longer there, and then eventually the property management company – they were showing skips and still occupied, and just a few different things that you don’t normally think of as a passive investor. But of course, now that I became active, that’s all I thought about.

Slocomb Reed: So did the GPs hire a third-party asset manager, or was it someone among them?

Trevor Thompson: It was someone who worked for them in an employee-type position. They had about 11 properties spread across Texas, so they had someone on their payroll as part of their structure to take care of it.

Slocomb Reed: Gotcha. So was any of this foreseeable, now that we’re looking back at it in hindsight?

Trevor Thompson: Definitely. From what I know now, they should have had more money in their CapEx budget to continue the lift. It was a heavy lift, and they just didn’t have some money. And I think they spent some money at the wrong place. They bought a really bad property and tried to make the back entrance the main entrance, so they spent a bunch of money fixing up the back entrance, but nobody ever came in the back entrance. So it really didn’t change… They weren’t fooling anybody that this was a different property. So that was part of it. But the rest of it was, I think they underestimated just how big of a lift it was going to be.

Slocomb Reed: Got you. Is there anything now that you realize you could have seen in their prospectus?

Trevor Thompson: Definitely questioned that it was a C-class property. I believe it was a D; they clearly said it was a C. And again, that’s a fine line. There’s no magic formula to that fine line. Now when I look at new PPMs and I look at new deals that I’ve been on, I know a lot more. When I first invested in this and somebody said, “We’re going to spend $4,000 a door,” I thought, “Oh, that’s a lot of money.” But I found out that on a deep value-add, $4,000 is not a lot money…

Slocomb Reed: That’s nothing.

Trevor Thompson: …almost a light turn.

Slocomb Reed: That’s barely a labor bid with no materials.

Trevor Thompson: Yeah. It was interesting because I had another reaction, actually. The next investment I made was an A-plus property, because I thought, “Okay, I’m not going to do this again.” That one I actually got to do some volunteer work… And remember, I asked for all of this, I volunteered, I begged; I really wanted to learn, and I had this opportunity with a schedule that was fluid, and then being furloughed… So I really wanted to take advantage of it. Even on the A-class property – they bought it and it wasn’t a smart community, so I spent my own time and energy researching to convert it to a smart community with the locks, thermostats, and access points.

My theory always was as a passive investor that I wanted to earn and learn. It’s part of the reason why I’m invested in several different types of asset classes. Here in Austin, we’re converting apartments to condominiums and selling them. The same story – go buy an underperforming apartment complex, start your plan, it’s going great until there’s an eviction moratorium, and now you can evict. But thank goodness, the real estate market in Austin’s insane, and that saved that project. They’re getting almost 40% more per unit when they’re turning the apartments down into condos than they were pre-pandemic.

Slocomb Reed: When did you get actively involved in the San Antonio deal, the 170-unit?

Trevor Thompson: January 15, 2020.

Slocomb Reed: That’s when you went active, so that was pre-COVID.

Trevor Thompson: Yeah. I was in the deal for about 13 months before that. The deal has been going along for about 13 months, and we’d received a couple of dividend payments. They weren’t substantial, but there was some cash flow coming there. Again, then I wanted to become more active, so I started that in January. Shortly thereafter, I was full property manager, I had a flexible schedule, and then all of sudden I got furloughed, so I had a very flexible schedule and was able to do more.

Slocomb Reed: Trevor, thinking about you more actively as an asset manager and a property manager, the boots on the ground – how did your team react to all of the changing variables that came with COVID? I’m thinking specifically mid-March, you have the stock market pick up, and then it’s labeled a pandemic by the World Health Organization… I know in Ohio our shelter in place started on March 27. So right there in that mid to late March and moving forward, how did you guys react and adapt to the challenges posed by COVID?

Trevor Thompson: It was very interesting. In the beginning, just like everybody, we froze, “Okay, we’ll kind of freeze for a month, close the office, forward the telephones, have a mailbox for rents, and it’s going to all end.” Once we realized that wasn’t going to end and we started running other things, I would stop on the drive from Austin to San Antonio at every Target or Walmart to see if I could buy disinfectants. Then we put the glass shields up in the office right away, we did a lot of things, we started —

Slocomb Reed: Trevor, I know as an owner-operator, my thought at this time… Especially when the idea of an eviction moratorium came looming… I had some C-class properties at the time, I still do. And I remember thinking to myself that a bunch of my tenants are getting laid off, and they’re all learning from the news that if they don’t pay rent, they won’t get evicted. Plus, the stimulus payments and things like that had not yet come into effect; they were just being spoken about by politicians, but no people were getting any of that money yet. Particular to that circumstance, how did you guys adapt?

Trevor Thompson: What we tried to do was work with the people that were trying to pay. We would really work with the people that were trying to pay. A couple of people maybe were three months behind, so we would say this, “If you could pay this much, we would forgive this much.” So we started out with $100 discount, and then a $200 discount. For people that were trying, we started accepting 50, 60, 75 cents on the dollar, depending on what we thought we could get, just to keep the cash flow coming in. And then of course, once rent relief came, it fixed that problem a lot. It’s an interesting story though, because the mindset of these tenants is completely different. So when the big relief checks came, I actually counted 28 big screen TV boxes at the dumpster. 28 people that probably weren’t paying their rent went and bought a big 60-inch TV. It was mind-boggling.

Break: [00:15:38][00:18:34]

Slocomb Reed: I’ve been a landlord for coming on eight years now. At every point that I have been a landlord and the owner of my tenant’s apartments, I’ve had at least one tenant with a nicer car and more than half of my tenants have a nicer TV than I do, to your point. The vast majority of Best Ever listeners, Trevor, are not actively involved in the day-to-day property management in their deals, because they’re either LPs or their GPs operating on finding deals, formulating business plans, and then hiring a PM to do those things. That’s a perspective that a lot of our listeners don’t have, is having to be the boots on the ground in a moment like that. Not that anything like that is coming soon and no one’s projecting another new pandemic in 2022 or anything like that, but it’s still a helpful thing for people to hear. Let’s hear more about the deal. You said you’re about to close on the 240 doors. Where’s that?

Trevor Thompson: That’s also in San Antonio, a much better location within the city, and a much better asset. It’s a strong B asset. With a little bit more love and care, it can be a really solid property in the area. I’m very excited to be able to be part of that deal. I think it’s going to be a little more fun, because we’re well funded, we’ve got a good CapEx budget, we’ve got a realistic plan, and the property – we want to take to the next level. It’s stuck in the ’80s and it needs just that freshen up. So I’m very excited to be able to do another property like this, that I can see in my mind the success happening, because it’s pretty easy to turn little funny yellow buildings into a really nice place to stay. They don’t have a dog park, they don’t have a barbecue, and they have in-apartment washers and dryers, but with much nicer ones., we can provide a really good experience for the tenants, a nice place to live.

Slocomb Reed: That’s awesome. You said this was going to be a fun deal. You definitely sound like someone who’s having fun, Trevor.

Trevor Thompson: Yeah. I love what I do. It’s very interesting. My whole life I’ve been able to be, what I’m going to refer to as passion projects. I worked for Ripley’s Believe It or Not, Guinness World Records, and iFLY Indoor Skydiving. How many people have that kind of an exotic, bizarre upbringing? And I’m so passionate about it now. I’m really excited to be able to go to a place and make it a better place to live for people. It just oddly excites me so much that I just can’t wait to have it happen.

Slocomb Reed: Yeah. Apartment investing feels a lot like my job, but real estate’s also my hobby. I have a big project I’m working on, but I also end up having a couple of little projects that will be lucrative but are also for fun. I totally get where you’re coming from. So let me ask, you already have experience as an asset and property manager in San Antonio, are you going to do it yourself this time?

Trevor Thompson: I won’t do it all. I’m the asset manager, I’m the one partner that is in Texas. And that was a role I sought out, that’s what I want to do. I’m a strange guy, that loves running businesses and I love incremental improvements. That’s all an asset manager is. My whole life I opened new businesses or took over businesses, improved them, and made them a better place for customers to be, for people to work at… And the end result, of course, is great returns for investors when you do the first few right.

Slocomb Reed: That’s awesome. Trevor, what do you particularly excel at? What do you thrive at doing?

Trevor Thompson: I’m a networker and a connector. I love networking and connecting with people. As I said, the strange thing is that I love incremental improvements. I’m okay with half a percent that week, a quarter percent a week. Because if you keep up that pressure… Someone once told me if you could be 1% better every day, at the end of the year you’re 365% better. Again, what is property asset management other than that? It’s just every day making something a little bit better, and being happy with those small wins, because they compound like crazy.

Slocomb Reed: Totally. I know. I’ve had some shifting within my own management company, so I’m doing all of my own showings now, temporarily. And it’s hard to remember when you’re getting no-showed at a C-class apartment that your occupancy rate is actually improving, on a deal that you bought that was a value-add… It is really powerful to see that incremental growth, for sure. Trevor, are you ready for our Best Ever lightning round?

Trevor Thompson: Okay, I’m ready.

Slocomb Reed: Awesome. What is the best of a book you’ve recently read?

Trevor Thompson: The Best Ever Apartment Syndication Book. In fact, I got it on Audible about four years ago and I listen to it twice a year, because it’s that good.

Slocomb Reed: Yeah. There’s so much in it.

Trevor Thompson: There’s so much in it. I’ve been doing a lot, and learning a lot. Every time I listened to it, I learn something, every time.

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

Trevor Thompson: I like to find people that are new in the space and just started in real estate. I look for those kinds of people, and then try to connect them to other people. I love connecting and helping people that are also passionate about learning about real estate.

Slocomb Reed: What is your Best Ever advice?

Trevor Thompson: My Best Ever advice is when you meet people, do not think about what can they do for me, but what can you do for them. Do things for other people. There’s a book called The Giver, and it’s an amazing book. It just talks about paying everything forward.

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

Trevor Thompson: The best thing is that my email address, ktt@niagara-investments.com. The Niagara is because I’m originally from Niagara Falls, Canada. Canadian originally. I guess I’m still a Canadian.

Slocomb Reed: Right. Well, Best Ever listeners, thanks for tuning in. If you enjoyed this episode, please subscribe to the show, leave us a five-star review, and share this with someone who you believe needs the best real estate investing advice ever. Thank you and have a Best Ever day.

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JF2692: 6 Marketing Tactics to Find Multifamily Deals with Nick Love

There are a plethora of marketing tools you can use to find real estate deals, but which ones work best in the multifamily space? In this episode, marketing expert Nick Love shares how you can source multifamily deals through strategic marketing.

Nick Love | 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, Nick Love. Nick is joining us from Dallas, Texas. He is the acquisitions and marketing manager at Hazel Equity, a firm that purchases Class A and B value-add multifamily properties in Texas. Nick also educates other multifamily operators on marketing and social media strategies. Nick, thank you for joining us and how are you today?

Nick Love: Hey, Ash, I’m doing good. Thank you for having me on the show. I really appreciate it.

Ash Patel: It’s our pleasure, Nick. Hey, Nick, 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?

Nick Love: Yeah, absolutely. I’m 24 years old right now, turning 25 this year. I have a big background inside of real estate finance. I got a finance degree here in Dallas, Texas, up in Denton, actually, where I also studied real estate and marketing. So a lot of information, a lot of things going on. And while I was in school, I was also going out to different meetups, different groups, the real estate club, all these things, because real estate was a large interest of mine. I didn’t realize it was a passion until I really got into it, started talking with people, and put my thumb inside of a zag which was the marketing side, and really dived deep inside of marketing, specifically for multifamily real estate, where I realized that that’s where I like to be in the marketing side, and also just on the investment and buy side. So I kept trying to really pursue down that route, and purchase deals, and fine-tune my marketing skills, and try to be where I am now. So now it’s just looking forward and trying to pursue more multifamily deals and grow my brand.

Ash Patel: What does your portfolio look like today?

Nick Love: Right now, we actually just closed on the third property, literally on December 31st, a 262-unit, the largest one that we ever did. Now I got, I think, it’s 491 units now, not including the house.

Ash Patel: Congratulations. What was your first real estate deal?

Nick Love: The first one was a smaller multifamily deal. It was a 56-unit inside of Oklahoma City. So a little bit outside of what I look at now, which is inside of the Texas MSAs. But at the time, it was a great cash-flowing deal that also had a commercial unit attached to it. A colleague of mine that I was working with ended up bringing the deal, it was a great one that I helped raise money and manage that. That was the first one, I think now it’s about two and a half years ago, close to three.

Ash Patel: Alright. You knew you wanted to go into marketing, you knew you wanted to go into real estate, you bypassed everything, and got a 56 unit as your first acquisition. How did you find that deal? How did you finance it? Give me the whole story.

Nick Love: Well, the 56-unit ended up coming out because a colleague of mine brought that over to me. I was underwriting that deal while I was also working for a multifamily appraisal company at the same time that I was in school. I was underwriting and looking at deals left and right. So whenever that one came across, I loved the underwriting and just the projections that were going out for that deal. And that sub-market piqued my interest and I wanted to move forward with a partner on that deal. Then I just kept trying to move up, and talk, and network with people to try to do more and more deals. Now I think more of my focus is inside of the Texas MSAs and properties that are more in the B and A class.

Ash Patel: Nick, what was your role, and what was the role of your partner on that deal?

Nick Love: I was more on the marketing side, so trying to create those marketing documents, which was kind of a little bit of an advantage of mine, and then also helping raise capital for the deal, and then just management post-acquisition was a smaller side with that, too. Then my other partner is pretty much everything else.

Ash Patel: Is your partner an experienced multifamily syndicator?

Nick Love: At the time, not as experienced, just like myself. But as things went on, yeah, everybody got more experience. But he was more expensive than I was.

Ash Patel: So he was new?

Nick Love: Yes.

Ash Patel: Got it.

Nick Love: Yeah. I was definitely new, but I knew a lot about the process.

Ash Patel: Where in Texas are you looking for deals now?

Nick Love: As of right now, it’s Dallas, Texas, and Fort Worth, Texas and Houston. That may branch out to maybe inside of San Antonio, but now it’s Dallas and Houston.

Ash Patel: Nick, what do you say to all those people that say those markets are too competitive, there are no big deals out there?

Nick Love: I think it depends on who it comes from. There are always going to be good deals; I think that now it’s just about adapting or dying. You’ve either got to be creative, whether that’s inside of your offer or inside of the relationship. I think that whenever people are saying that the market is competitive, is that a bad thing or is that a good thing? If people are looking out there, there’s obviously a reason. It makes things more difficult to purchase deals in a competitive market. Obviously, this is not my crazy experience opinion, but just what I see as my own, that these markets like Dallas and Houston just have a ridiculous amount of growth, whether that’s on the rent side, whether that’s on population, or just employers, and things like that… And whenever we’re talking about real estate and looking at five and 10-year outlooks, I would rather be looking at something competitive than none, I guess, even if that’s in more tertiary markets of the metro.

Ash Patel: Do you use social media? What marketing tactics do you use to find deals?

Nick Love: Yes, 100%, I use social media. I think that has a couple of different aspects for you to be able to utilize, whether that’s on exposure, or on advertising, or different things like that. But social media is going to be where so many things can be seen or be heard, or you’re trying to show social proof to an investor or potential client, or anything like that. What was your other question?

Ash Patel: What marketing tactics do you use to find deals?

Nick Love: Well, for me specifically, I don’t use any type of off-market tactics, whether that’s going inside mailers, or trying to talk with more off-market brokers or anything like that. I think a lot of my marketing per se, if you would like to call it, is talking with broker relationships, using email, and making sure that the organization is there for deal flow, underwriting, and things like that. So 90% of my time is working with broker relationships for deals; I think there’s plenty out there.

Ash Patel: Just some solid networking.

Nick Love: Solid networking; it’s down to the basics, I guess. I do know some people that are doing cold calling, they’re putting in direct mail, and they’re trying to look for those off-market opportunities that they can capture. But that’s a very limited and very small amount of deals that you’ll probably see. For me, on-market deals, I can look at 100 a month, at least. You may be lucky to get a few potentially just to look at somebody that wants to sell. It’s really in a long game for some of these marketing tactics for deals specifically, which isn’t a bad thing. You just have to understand that you won’t just put one mailer out there and get a deal. It’s a long-term thing.

Ash Patel: Nick, a lot of successful real estate investors that don’t do anything on social media – what would be your game plan for them to ramp up their social media presence?

Nick Love: Great question. I think that there are a lot of different people in different stages of their online presence or their social media presence. It all comes down to the basics and understanding of why use social media, why you have different things and how you want to use it.

An easy example – a multifamily investor that is going to be trying to put out content on social media, whether that’s on LinkedIn, Instagram, or different places like that, the end goal, obviously, is to capture the audience that you’re trying to look for. So if there’s somebody that’s a coach, they’re looking to create content for other multifamily operators. And if it’s an operator, they’re trying to either gain more exposure to try to gain more passive investors – then that’s just kind of where you have to start and think about. So then your content should be answering questions that those people are asking, and it should be creative and personal to the brand that you want to put out there. I think a lot of things that people do wrong is that they’re very robotic with their content. It’s just like data, or it’s just market, or it’s just a question.

I think that moving into the new year and the next years going on, what you’re going to see more success of – and if you look at some of these larger brands that are out there on social media, you’ll see that so much of their personality shines through on their social presence. That kind of makes you more of a person and authentic in people that connect to you. That’s part of the pillars that we talked about, the know, like, and trust. To know somebody, you have to understand who they are, what they value, and things like that. But the end goal is obviously to gain exposure on social media and then traffic it somewhere – on your website, or to lead magnet your email list, etc, etc. So whenever you’re posting out content, you need to make sure that you have a way to capture the traffic that you’re getting. Your website should obviously be optimized, and continually optimized, in the sense that you shouldn’t just have one lead magnet. You should have blogs that you post out there that you’ll have more options for people to download more documents, or set up calls, or do whatever you want to do. Then you can have email automations in place to help further that know, like, and trust factor and make sure that you stay top of mind with your investment base for your target audience.

Ash Patel: So focus on your audience and your end goals.

Nick Love: 100%.

Ash Patel: What are your thoughts on people that outsource their social media?

Nick Love: I don’t think it’s a bad thing. I think it can be a bad thing if you outsource your social media right from the start, unless you’re a huge firm that can pay a lot of money to have very professional social media. You may be better off doing it on your own, with less content or less type of distribution in the beginning, than paying somebody off. Because if we’re talking about multifamily investing specifically, it is a very specific industry… And coming from experience as well, the kind of content that you put out there, whenever you start hiring out companies to do this kind of thing, unless you’re paying a lot of money, it will be very low-level. It won’t be specific, it won’t get exposure, and you’ll just start wasting months of time and thousands of dollars just to not end up getting a goal, and you won’t even understand where the good exposure is, where the good traffic comes from, if things are working well, or they’re not.

So I think that whenever you want to hire out a marketing company, you should be in a certain state of acquisitions or income that comes in, because you should be reinvesting into marketing. That’s where you’ll get a lot of ROI from. But you have to understand it first; you’ve got to be trying to put out content, maybe even have a solid presence first. Because what I tell a lot of people is that social media specifically, and even marketing in general – it’s a long-term mindset with a short-term work ethic. It’s day in and day out, posting content, and you’ll get the end goal that you want if you stay consistent with it, day in and day out.

Break: [00:11:40][00:13:18]

Ash Patel: That makes a lot of sense. Because if you outsource it, they can’t really get to know you, so they can’t get to know, like, and trust you. So in that regard, should people be promoting their company or themselves?

Nick Love: That’s a great question. That is a really great question. To that, I would say — whenever I work with people, sometimes their personal brand and their company brand may be one thing, or it could be something that’s separate. I think that that’s something that you have to choose on your own. I’ll give you different reasons for that.

Let’s say you separate that – you have Nick personal brand, and then you have Nick Company. My Nick personal brand would be me, maybe other passions outside of business and real estate. I can still post some things in there, but that’s more personality things. That’s my fitness, that’s morning routines, that’s things that I’m working on or are trying to put out there. And then more the company would be maybe even a little bit more professional, maybe talk more about real estate, but still some personality. So you think about it – if you have a separation, that personal brand would be like 75% talking about me, and 25% talking about the company. The company brand would be the opposite – 75% talking about the company and the real estate, investing, and 25% on the personality.

I think you can have just one meld, let’s say. It’s all about how you kind of want to put yourself out there. Because let’s say I made Nick Real Estate Company; then I would be limited — even if I had a large team, people would see it still as just Nick Real Estate Company. They don’t look at me, they look at things that I do. And even if you want to scale that, if people have this kind of mindset to scale it larger and larger, I think you’ll end up becoming limited if you end up trying to put your name out there that’s cohesive with your brand. That’s kind of how I see it.

Ash Patel: That’s great advice. What do you see most often that people do wrong on social media?

Nick Love: I think that time in and time out, whenever people try to create content, I see a couple of different problems. One is that they’ll look at larger brands and what they’re doing and try to copy that, maybe even down to a tee, and it ends up coming across as inauthentic, because it’s something that either they’ve already seen before, is boring, or doesn’t work.

Then also, the new year comes around, they want to build their social media presence, and I’m like, “Okay, I want to post four times a week for the whole year to try to get towards my social media goals.” And while that’s not a bad thing, it can be a bad thing, because you end up hurting yourself in the sense that you overwhelm what you can actually do, especially in the beginning.

So my advice for something like that is instead of doing it that way, I would look at it the opposite – I would underwhelm myself. Maybe I’ll just post once a week, and I’ll try to learn to enjoy it, learn to enjoy making content, putting it out there, and trying to have the mindset of “I’m making this to actually give people advice, give them value” and just do it once a week, because you’ll end up trying to become addicted to it, and you can always do more by starting out less. I think that’s a great thing and things I see wrong, because you have to be consistent with this stuff. If you overwhelm yourself, you’ll end up just falling off and hurting yourself.

Ash Patel: Your strategy makes you come across a lot more authentic, because it’s truly thought-out content. One of the things that I see a lot of – my whole feed is full of real estate people – it’s “Just closed on this five-million-unit property in Dallas,” and that’s it. Like, “Hey, I did this. I did that.” How do you fix that? I’ll give you my opinion, but I want to hear yours first. How do you fix that? When someone’s just bragging about what they did and not coming across as humble, grateful… What do you think when you see posts like that?

Nick Love: I think there are different cases. If that’s the only thing that I see somebody post – maybe inside of equity placement you’ll normally see that, somebody is just constantly posting out, “We placed equity here, we did this,” or even on the institutional side… It becomes numb to the mind, for one. I don’t see the kind of work that went into that anymore, it’s just more just a post now. I don’t see that gratitude from them, or the importance inside that. To get rid of that, I would say that you should start posting more of the process. Okay, maybe you are putting out, let’s just say once a month, something that you closed. Well, there’s a whole month before that that you’re putting so much work into, that you could easily take a picture on the property tour, or you’re taking a picture while you’re doing underwriting, or you’re out at a lunch with your partners, or you just have a thought on “Hey, this is where my value-add came from,” and you just like make a video from that.

There’s a stupid process, a stupid amount of time and energy that goes into, deal by deal… And then people think that just posting the close and you actually accomplished this one deal is supposed to satisfy the social content that you put out there… And it comes not negative because it’s looking at numbers. We’re not just numbers now inside the industry. We want to see personality, we want to see brand, because every single company in the entire world can post out a closed content.

Ash Patel: Yeah, record sales year.

Nick Love: Record sales. Yeah.

Ash Patel: Yeah, I agree with everything you said. But if you do have to tout your success, thank other people that were involved in it, talk about some of the pain that went into it, but definitely be humble, and if there’s any way you can add value – “Hey, closed on this 300-unit property. My biggest lesson learned was to have two lenders, make sure your lender is constantly talking to the title company…”, whatever it is. It takes the boasting out a little bit, and people can construe it as “Awesome, thanks for adding value.”

Nick Love: Right, and tell a story. You literally were just talking about that. People connect to stories or carousels or things. To your point – okay, yeah, you close the deal, and this is what I learned, this is the biggest takeaway that I took from the biggest deal I’ve ever done, this is my biggest takeaway. Immediately, you want to hear what that is or what things are going like then; it doesn’t even have to be a video.

We’re seeing some people, or if you look up Brandon Turner, like his types of content now are literally just him writing out a lesson or things that he thinks about with his logo, and it’s something that people connect to, because that’s his advice, from him as a father, as a person, as a businessman. Because everybody has an opinion, and maybe part of it is some people don’t want to put their authentic opinion out there, because they’re afraid of rejection or that it won’t look good… But to that, a lot of times with social media, you just have to get over the fear factor. That’s why it’s so important to just consistently post, because not only do you get over the fear of putting out an authentic version of yourself, but then you start to realize how authentic you actually can be with your brand, and it’s almost empowering.

Ash Patel: I love what you said about telling a story, and I want to reiterate that for the Best Ever listeners. It’s something that I learned much later than I should have. Little things like if I have a deal and I bring it to my lender, even though it’s a slam dunk deal, I know they’re going to fund it, not a problem – still, have a narrative, have a story. When you talk to your investors and you want to raise capital, don’t just give them the numbers, give them the entire story. Pitch it, give them the narrative. Always, always have that story. When you talk to your tenants, when you talk to a broker, don’t just say, “Hey, can you tell me about this deal?” Say “Hey, listen. I’ve been a commercial real estate investor for 10 plus years. These are the asset classes that I buy. I’ve actually got a property close by. Can you tell me about this listing that you have?” That narrative is so important.

Nick Love: And that’s in all aspects of life, like you’re saying. That’s whenever you’re communicating, that’s whenever you’re creating content, that’s when you put out an email… If you start to think things in terms of beginning, middle, and end, you capture people’s attention more, and that is very important. That’s why in social media, you’ll see a big title and then there’s the meat, and then there’s a summary. People kind of connect with that, because either they get hooked in the beginning, or they read good information, or at the end, you kind of summarize what you talked about and what they should take away, if they didn’t get it in the beginning. Even that in a conversation, let’s say me and you just get on this meeting, and I just start talking about marketing statistics or whatever it is, as opposed to me getting on and saying, “Hey, let me tell you about the biggest marketing mistake I’ve ever had and how I fixed it,” or something like that. Immediately you…

Ash Patel: What a great segue. What is the biggest marketing mistake you ever made?

Nick Love: I think one that I still even struggle with is perfectionism. Oh, my goodness. That’s such a huge problem, especially with myself, that I try to put myself up on this huge ladder of everything needs to be perfect before it goes out. It’s something that you have to get over, where you will be so much better off even adapting by putting something out there and just constantly working on it.

For example, let’s say you’re putting out a newsletter every month for your investment base, but you think “Well, maybe I’ll put out in three months so that I can work on it and make it perfect.” That ends up hurting you, because you could just build it maybe in a few weeks, put out that first month, send out that email, then get feedback, and then you put out a second one, then you get feedback, and you work on it again… And by the third newsletter, it’s 10 times better than what you could have made on your own. So I think that a huge problem is that perfectionism that we end up coming out to – I think that’s a huge problem that I had, and still kind of have.

Ash Patel: I would imagine a lot of people have that, because the whole world’s going to see what you put out, and it’s there for everybody. Nick, let’s go back to your 262-unit property. How did you find that?

Nick Love:  It was an on-market deal actually.

Ash Patel: Wait a minute, whoa, whoa, whoa. Explain that, because there’s no good deals out there.

Nick Love: [laughs] Well, I don’t think there’s not that many great deals; I think there’s a lot of good deals out there, but finding the value in that. So I think it was pretty typical, in the sense – you get the deal, you underwrite, you take a look at it… But what was different, and the thing that I was really shown to and thought about was – there’s always going to be that other guy that’s bidding against you, whenever you talk with brokers, or something like that. Whether that’s a sales tactic, whether that’s true or not, who knows. And how do you combat this other competitive buyer that’s going to be going against you?

So the deal – let’s say they were asking… I think it ended up coming out to like 21 million for the deal, or 22 million. And there was this institutional buyer that was supposed to come out and tour the deal that was apparently going to bid them 23 and a half, or something ridiculous, over the purchase price, that almost us as private equity investors have no power over, because there’s somebody that’s going to come in – maybe their returns are going to be much lower than what we require, and you just kind of have to learn to either be patient with the process in there, or try to figure out how we can adapt our offer, how we can win, etc, etc.

So in the sense of that, that made the deal different, because it was almost a longer process on getting under contract, and even before that, just getting our LOI accepted. So that was a big thing that I had to realize, and not getting emotionally attached to the deal, and those kinds of things. But other than that, it was pretty typical, and it was a loan assumption deal, so that was a little bit different than what we were doing beforehand, too.

Break: [00:24:58][00:27:55]

Ash Patel: How did you win the deal against a hedge fund coming out with a 23 million dollar offer?

Nick Love: Right. I didn’t know who the institution was, but they were out of the country actually, out of the US. It was going to be the first deal that they would do in the US. And they had this lingering offer, I guess, it’s kind of how it was. Just to sum it up, their offer just ended up fizzling out, and they just didn’t want the deal anymore, so we were second in line, right there, ready to attack it. But we were literally on the second property tour out there maybe, and talking with the broker about how they were going to get the deal anyway, because they were pretty serious… But ended up flaking out. So you can never really know. So what do you do in that situation? You either be patient, or you move on. It’s kind of the thing that I thought about. Something you just can’t control.

Ash Patel: Patient and persistent. What asset classes is this – B, C?

Nick Love: It’s a B minus.

Ash Patel: Okay. What’s your value-add plan?

Nick Love: Pretty typical. There was already about 2 million in CapEx that was done on the exterior side, so a lot of our play was going to be on the interior renovations… A lot in the management; they don’t really run a lot of the property very well, just in general… Whether that’s on renewals, or on just the actual happiness of the tenant base, and things like that.

So a lot of it was on implementing more value-add strategies on the other income side, with the washer dryers, and just typical things like that, and then implementing more renovations on the units, and then just better management. That’s kind of the gist, and just other little stuff like that. But that’s kind of how it was.

Ash Patel: You assumed the loan on this. What was that loan amount?

Nick Love: Yes. The loan amount, which I remember, is 15 million and 50,000. It ended up coming out to 66%, something along those lines. But it had practically no interest leftover. But it was assumption only, so that’s the terms that we had to do.

Ash Patel: So you had to raise 6 million to close, and then did you also raise money for the CAPEX?

Nick Love: Yes. I think the total raise was 8,5, I think.

Ash Patel: And what’s the return to investors projected at?

Nick Love: A little bit over 8% average annual member distribution, and then 102% total.

Ash Patel: Over five years?

Nick Love: Yes.

Ash Patel: How did you find the investors for this deal?

Nick Love: This was an effort with our group and then a couple of other general partners that we brought in to help raise… Because it was the biggest deal that we’d ever done, and we brought in a few partners. And then we had a decent amount of people in our email list already that we are ready to market out to… But other than that, it was a pretty typical structure; whenever we had the deal out, try to gauge interest, get as many people beforehand as we can, go through multiple emails or webinar sequences beforehand, and then just to have a destination date for the actual raise, and just going from there. But I think we ended up raising everything within — I think it was about two and a half weeks. So it really wasn’t too much of an issue.

Ash Patel: And when you bring another GP into a deal, what does that individual get for bringing capital with him?

Nick Love: So I think it depends on the operator. I think that there’s a good direct proportion between how much money people raise, and how much they’ll end up receiving on the general partnership side, and then just helping, obviously, inside of the asset management post-acquisition, which is important, obviously, inside of legality and SEC terms. So with that, I think there’s a minimum and a cap on what you’re trying to do with a general partnership and just having that upfront and forward, whenever you’re talking with people, just making that known.

Ash Patel: Do you have defined roles for what the individual GPs will have to do?

Nick Love: It’s a little bit open, I would say, but more so than others. I think people just play to their strengths. But yes, it is. Obviously, we’ll be taking most of the asset management and most of the roles with partnerships coming into play as their strengths are needed.

Ash Patel: What’s the bottleneck for you moving forward? What’s your biggest challenge?

Nick Love: For this deal or just in general?

Ash Patel: In general, for you to continue to grow?

Nick Love: I think it’s being able to learn and have the mindset of trying to grow past this typical multifamily operator model. Because only speaking for myself and our team and things where we want to grow – we want to be a lot bigger, I think, than most want to be at. Let’s say, for example – I’m not saying this is where I want to go – if you want to have 10 billion in multifamily assets, that’s a much different thought process as far as a 10-year outlook than just trying to do two or three deals a year… Which you’ll get plenty of money and plenty of deals going on, but I think that in that route, if you’re trying to just do two to three deals a year, which is totally fine, you still kind of keep the operator, and the deal raise, and working on a typical structure. But whenever we’re trying to create a real brand and a real company that wants to grow, maybe even up to the institutional style, how do you get up to that point? How do you constantly optimize your acquisition process? How do you do more deals constantly? Every year we want to be exponential, and I think that that’s going to be difficult just moving forward, because it seems like so much the advice or so much information out there is not about an exponential factor, but just like a staggering, going up very slowly and consistently almost.

Ash Patel: I’m going to challenge you for a second… Why not look at other asset classes? We all know is very competitive, a lot of institutional money… Why not look at mobile homes, storage, retail, office?

Nick Love: It’s a good question. Maybe at some point, maybe diversifying in more asset classes will yield more deal flow, which is very true… But I think in the beginning I can’t have that mindset. If I’m looking at so many different asset classes with so many different deals, I have no expertise in one area right now. Whereas if I just focus on one area, of multifamily right now, let’s say for the next couple of years, and grow a foundation for the company, then I could diversify out. I don’t think it’s outside the realm of possibility, but it definitely is right now, because there should be no reason for me to diversify assets when I barely have enough deals as it is.

Ash Patel: Got it. Nick, what is your best real estate investing advice ever?

Nick Love: Put the people first. Put your investment base first, your team first. I’m really big on creating an experience over just the investment type. If we want to have better retention on our investors, or on our team, or on any type of exposure that we get, I think that treating people even better than people – you want to treat them like your leaders, or people that you partner up with, and giving them maybe even awards, or contacting left and right, and not looking at people as numbers… I see that a lot inside of this industry; not naming anybody, but just seeing somebody as another person on your email list – I think that’s probably some of the best advice I can say. It’s just really getting to know the people that you do have and consistently talking with them. I think that’ll yield a much better relationship.

Ash Patel: Yeah. Like, and trust, as you mentioned earlier. Nick, are you ready for the Best Ever lightning round?

Nick Love: Yes.

Ash Patel: Alright. Take a deep breath. Nick, what’s the Best Ever book you’ve recently read?

Nick Love: I recently read How to Legally Raise Capital. That was a great book that just came out about just raising capital and private securities and things. It’s a great book to look into, very short.

Ash Patel: What was your biggest takeaway from that?

Nick Love: The biggest takeaway was trying to understand the kind of realm that people go down and the differences inside crowdfunding and actually using the syndication model, or how we think of syndication as the multifamily space, and syndication in raising money for a multifamily deal, but really, it’s a syndicate, in the sense where it can be used in many different realms of business. I think that opened my eyes, because I feel like I was tunnel vision inside of syndication is just for real estate, when it’s really not. That was probably one of the biggest ones.

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

Nick Love: To be honest with you, I want to give back more. I’ve been looking a lot more into Habitat for Humanity. I think they have great programs that we can give back inside of that. But normally, we do a lot of picking up trash, picking up trash on the oceans, the beaches, and highways, things like that. That’s one of the best ways I like to physically see inside of giving back. But I think that I want to go more of the Habitat for Humanity.

Ash Patel: Nick, how can the best listeners reach out to you?

Nick Love: You can email me at nick@hazelequity.com. Or you can actually go to a new website I just made. It’s called therealmarketers.com, which is just marketing for multifamily investors specifically. That’s going to be a great platform that I’m gonna be growing this year.

Ash Patel: Nick, thank you so much for taking time out of your day and joining us today. At the age of 24 you knew what you’re going to get into with the marketing background, the finance degree, working in real estate while you’re in college, and recently closing on 262 units. Congratulations on all your success. Thank you again.

Nick Love: Thank you, Ash. I really appreciate it.

Ash Patel: It’s our pleasure. Best Ever listeners, thank you so much 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.

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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JF2689: Scale from LP to GP with These 3 Tips with Joel Fine

Starting out as a Limited Partner, Joel Fine did everything he could to learn about multifamily syndication: he read books, listened to podcasts, and even asked to be part of a weekly GP meeting on one of his passive deals. In this episode, Joel discusses how he scaled from being a Limited Partner to a General Partner.

Joel Fine | 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, Joel Fine. Joel is joining us from Austin, Texas. He is a multifamily investor and syndicator that buys undervalued assets, improves them, and then sells them. Joel’s portfolio includes over 1000 doors as a GP and over 5000 doors as an LP. Joel, thank you so much for joining us today and how are you?

Joel Fine: I’m great, Ash. Thank you very much for having me.

Ash Patel: It’s our pleasure.

Joel Fine: Really appreciate getting to talk to you.

Ash Patel: Yeah. Joel, 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?

Joel Fine: Absolutely, yeah. I originally went to college to learn to be an engineer. I worked as an engineer for many years, then as a project manager, and a program manager. Back then I was living in California. I started doing real estate on the side, but only did real estate outside of California. I didn’t like the characteristics of the California market; no cash flow at all, we were just counting on the appreciation. As it turns out, in hindsight, the appreciation was great, but I didn’t want to take that risk on buying properties that didn’t cash flow.

But eventually, I came around to learning about other markets that do cash flow. I bought a single-family house in Texas, and then some duplexes and triplexes and other small stuff in Ohio. I learned about syndication and started getting involved with syndications, first as a limited partner in a passive capacity, and then later, as an active general partner or sponsor. About the time I was starting to invest more heavily in real estate and ready to make the transition from passive to active, my wife and I moved from California to Texas; we moved about a year and a half ago, right in the middle of COVID. That was a kind of an exciting story in itself. At the same time, I left my W2 job and decided to go full-time into real estate. And at that time, that’s when I decided I want to pursue the active side of syndications, the active side of large-scale commercial multifamily… And I haven’t looked back since.

Ash Patel: So you moved to Austin right when it was popping?

Joel Fine: Yeah. In fact, I think I beat the flood by about a month. We moved in May of 2020, and within a few months, things just went crazy here.

Ash Patel: So Joel, for all those years that you invested as an LP, what were some of the things that you learned that GPS do well and that they don’t do so well?

Joel Fine: Let’s see. Things that GPS do well – first off, when they’re putting together a transaction, the assumptions they make about the transaction are absolutely essential. They can make assumptions that really can affect the apparent quality and value of a deal. For example, one of the assumptions you make is how quickly rents might rise over a period of time. If you move that a little bit, let’s say from 2% per year to 4% or 5% per year, it doesn’t sound like a big difference, but that can make a huge difference in the apparent outcome of the deal. So you have to look carefully at what kind of assumptions the GPs are making.

Beyond that, I love to see GPs that are transparent, that share a lot of information about what’s going on, both before the deal is closed, then after the deal is closed, and while they’re operating the property. Sharing the good and the bad. When things go well, and when the plan is being executed properly, but also when things aren’t going so well.

Sometimes you might have higher delinquencies than you anticipated, it might be a little more challenging to get renovations done, and so forth. So when things aren’t going well, it’s important to share that with the passive investors. They’re really not in control of the investment; most of my passive investors are remote, they don’t live in the Austin area. Likewise, when I was a passive investor, I didn’t live near the properties I was investing in. So there was really no way for me to make any first-hand observations about the property, so I was dependent on the general partners sharing information about the property. For me, that was really critical, this transparency. And then just diligence, making sure that they’re paying attention to the other properties operating, focusing on the key metrics, managing the property manager effectively; just good, high-quality execution.

Ash Patel: What made you transition from being an LP to wanting to become a GP.

Joel Fine: So when I first became an LP, it was sort of with the intent of, “Okay, I’m going to learn about this enough that I can decide if I want to be a GP or not.” I was content buying the small stuff, the duplexes, triplexes, and quads. But I felt like scaling up might be a good way to go. And as I learned about syndications and about how to go about investing in commercial multifamily, I realized that being on the active side is a much more effective way of scaling up. It gives me an element of control that I don’t have as a passive investor, and I’m willing to put in the time to do it.

As I said, when I moved from California to Texas, I left my W2 job to do this full-time. So I figured, “Okay. If I’m going to do it full time, I want to do it in the most effective, most scalable way possible.” For me, that was being on the sponsorship side over the general partnerships.

Ash Patel: Joel, what was your first deal as a GP?

Joel Fine: Let’s see… The first one was 42 doors in Austin; it’s a 1983 property, mostly untouched. The exterior looked pretty good, the interiors were pretty much what we call classic, which means they really hadn’t been renovated, they hadn’t been updated since the property was built in the ’80s. So there was a lot of opportunities there to improve the property, mostly cosmetically, which is really the ideal situation. A lot of properties, they’ll have issues like maybe foundation issues, or they’ll need a new roof. Things like that, you’ve got to do the repairs, but they aren’t going to really improve the top line, the rent you can get. A potential tenant isn’t going to come to a property and say, “That’s a beautiful new roof. I’m willing to pay an extra 50 bucks a month in rent to live here.”

On the other hand, if you swap out the interior components, if you repaint, put in new cabinets, countertops, new flooring, new plumbing fixtures, and lighting, that can really improve the property, not only from the perspective of the potential tenants, but also from the top line. Tenants are willing to pay more to live in a place that looks better. So anyway, that’s one of the characteristics of this property. Again, it’s 42 doors. As it happens, a few months later we bought the property next door that had 44 doors. Combining them, that’s 86 doors, and they’re literally next door to each other; they share a fence. We’re now running it as a single property.

That’s really important, because a 42-unit deal has challenges in terms of its scale. Below about 70 to 75 units, it’s really hard to manage effectively, because you can’t really afford an onsite property manager full-time. But once you go above 70 to 75, you can afford a full-time property manager and maybe even a full-time maintenance tech. That’s what happened with these properties – we combined them, a 42 and a 44 to 86. Now we’re running them as a more efficient property.

Break: [00:07:24][00:09:02]

Ash Patel: Joel, on the 42 units, how much did you raise for that deal?

Joel Fine: Let’s see. I think that was 1.9 million, purchase price was 4.4 million.

Ash Patel: The whole time that you were an LP knowing your end goal was to become a GP, were you prepping investors, gathering emails? Or did you wait until you found the deal?

Joel Fine: No. In fact, I started letting people know that I was involved in real estate, focused on real estate, and planning to syndicate. One of the things I did was I updated my LinkedIn profile to make it clear that I was no longer in the high-tech engineering IT field, I was now full-time in real estate, and I talked about the deals that I was a passive in. Because even as a passive, that’s a great learning opportunity to find out what syndication is all about, how the industry operates, how people manage their assets. In fact, in my first LP deal, I got the general partners to allow me to dial in to their weekly property management calls. I would dial in every week and just go on mute and listen. That was a terrific learning experience for me because I got to hear what kinds of problems they were having, how they addressed those problems, the problems that lingered and were difficult to solve so I used that as a learning experience. Then I communicated that kind of information to friends, family, acquaintances, people I knew, I attended lots and lots of meetups. I had been attending meetups in California. When I moved to Austin, I attended as many meetups so that I could hear, meet locals, just get to know the real estate community, and hopefully have them know me as a potential investment partner.

Ash Patel: Can you walk us through raising that 1.9 million?

Joel Fine: Yeah. I have to backup before the raise actually. My partners in this deal, there were three of us. My apprentice actually found the deal, got it under contract, and then brought me in to help out. We agreed that we would share the responsibilities of the capital raise. So we did the underwriting, reviewed the property, we wrote up a pitch deck, developed information that we could share with potential investors, and then we put together a webinar where we presented information about the deal. In that webinar, we shared all kinds of information. Again, transparency is important to me. We talked about not only the property itself and the business plan about the property, like what we wanted to do to the property to improve it, but we also talked about the markets, what was the neighborhood like, what’s the Austin market doing. We talked about what sort of comparable properties were in the area and why the behavior of those comparable properties justified the numbers we were putting together. We laid out our expectations of, “Hey, if we do the following upgrades to the units, we think we can get this much in additional rent, we think we can improve the net operating income, and so forth.”

We put that information together in a pitch deck, in a PowerPoint slide deck, presented that in a webinar. I think we had, I don’t know, at least 40 people attend. From there, it was actually fairly straightforward. It took us about two weeks to get all the commitments we needed to fund the deal. At that point, it was just a matter of going through the rest of the purchase process, including due diligence and getting the lender approval, getting the appraisal done, and so forth. It actually was very smooth. I think Austin is a very, what I would call a sexy market. When you tell people you have a deal in Austin, there’s a lot of interest in it. They know that Austin’s a fast appreciation market, it’s a place where jobs are growing, people are moving to Austin, so the demand is high. There’s a shortage of housing here so people are inclined, are attuned to invest in Austin. I think that was part of what made it relatively easy for us to raise the money. But within two weeks, we had the money and ready to go.

Ash Patel: What do you say to those people in New York, Austin, and Southern Florida, that say there’s no good deals here?

Joel Fine: Well, it’s very challenging to find deals, there’s no question about that. I have to give credit to my partners, they’re the ones that found that deal, and they found a couple of other deals since then that I participated in. It’s really all about relationships, getting to know brokers, getting to know sellers, getting to know lenders who might have access to deals. When you find deals, you underwrite them, and you have to be ready to move quickly. It can be challenging to get a deal to underwrite, to get a deal to look like it’s going to do well. But if you’ve got your ducks in a row, if you understand the market well, you know where the rents maybe are under market, and you have a good sense of what you can do to a property to improve it, there are opportunities. We’ve done two deals already in Austin, we’re in contract on numbers three and four. I’ve also done a couple of land deals here that are very promising.

Ash Patel: That’s incredible. Joel, in my experience, engineers make some of the best real estate investors because of all the systems and processes they employ. What’s one of the biggest mistakes you’ve made so far in your real estate investing career?

Joel Fine: Ooh, a mistake that I’ve made. I guess I would say one big mistake that I made was early on. One of the first properties I bought was a quad in Cleveland, Ohio. That was before I was really doing any syndications. In fact, I think it was even before I started being a limited partner. But this particular property was four units, it was in a suburb of Cleveland called East Cleveland. For folks who aren’t familiar with Cleveland, East Cleveland has a very poor reputation. It’s kind of the hood. This particular property was in a pocket of East Cleveland that was isolated from the rest of the city by a big park. It was right next to a much nicer suburb called Cleveland Heights. I was really optimistic about that. I convinced myself that my property, because of its location, was going to attract Cleveland Heights type tenants and not East Cleveland tenants. In hindsight, I was wrong. Bought it for 145,000, I did about $80,000 worth of renovations to it, it really needed a lot of work, rented it out for a couple of years. While I was renting it out, I had a property manager running it, but it consumed a lot of my time. Between vandalism, there were delinquent tenants, there were fistfights on the property, broken windows, broken lights. I finally gave up. I sold it for a little bit more than I paid for it, but much less than I put in, including the renovations. I probably lost about 60k on it. In hindsight, I suppose it was a good learning experience. I’ve heard folks call that expensive seminar.

Ash Patel: Just time and money.

Joel Fine: Exactly. It did help me on my journey. If I hadn’t bought that quad then I wouldn’t have bought other things I did buy in Cleveland that worked out much better. I wouldn’t say I regret it but it was certainly, in hindsight, a mistake.

Ash Patel: Yeah, thanks for sharing that. With your investors on the 42 unit and a 44 unit. What’s their projected return in such a competitive market?

Joel Fine: On that one, when we underwrote it, we were projecting 16% to 17% internal rate of return, IRR, with I think it was 10% cash on cash return. We had an 8% pref, we’ve been operating the property for a little less than a year, I think nine months now. When we bought the property, the units were almost all one-bedroom. The units were getting 950 to 975 a month, we underwrote for 1100 a month. We said, “Okay, we think after the renovations we do, we can get 1100 a month.” We did the renovations on a handful of units and tenants were willing to pay 1250 a month. We went from 1100 a month in our expectation to 1250 a month. We expect to beat our forecasts substantially. We haven’t quantified that, I don’t know what the number will work out to be. But we’re feeling really good about it. It’s like I said, the rent is higher than we anticipated that we put in our spreadsheets and so that’s just really good news for us and our investors.

Break: [00:16:43][00:19:40]

Ash Patel: Did you have appreciation as part of your proforma?

Joel Fine: Well, with commercial multifamily, the appreciation is embedded in the improvement to net operating income. It’s different from single families where appreciation is all about the comparable sales. If you’ve got a three-bedroom two-bath and your neighbor has a three-bedroom two-bath, you’re not going to get much more than your neighbor no matter what you do to the property, no matter how much rent you can get. But on a commercial multifamily property, if you can increase the rents and increase the net operating income, you can increase the value of the property, it’s almost linear. If you double the NOI, the net operating income, you can almost double the value of the property. For us, that’s what it’s all about. We can force appreciation by improving the property, by renovating, upgrading the tenant base, increasing rents, and thereby increasing the net operating income. That creates the appreciation so we don’t have to count on market appreciation. What we’re counting on is our ability to force that appreciation and then derive the benefits from it.

Ash Patel: Was your exit cap rate lower than your entrance cap rate?

Joel Fine: No. We always underwrite for a higher exit cap rate. It’s a more conservative thing to do. That particular property, I think we bought it 4.25% cap rate, which isn’t bad for Austin. In Austin, three and a half is not uncommon. But we bought it at 4.25 and I think we underwrote for 4.75% cap rate. It works out to about point 1% per year, which is roughly where we like to be.

Ash Patel: It’s very conservative underwriting. Good for you on that. Do you have a waterfall structure? If let’s say the cap rate is even lower when you exit and the appreciation is just through the roof.

Joel Fine: We haven’t put a waterfall structure on any of our multifamily value-adds. But the one land deal that I syndicated, I did put a waterfall again. That one, we have a 10% pref and then I think it’s something like 70/30 up to 20%, and then 50/50 after 20%. We figured, if we can deliver a 20% IRR to our investors, that’s pretty awesome. We all can be dancing in the streets. At that point, we’ll take a little bit more of the top-line as an incentive, as a reward for all of us for doing better than that.

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

Joel Fine: Best advice. I would say if you’re trying to get into the business, be ready to partner up. One of my limiting beliefs that took me a while to get over was I thought I had to do things on my own. When I was buying the little stuff, the duplexes and triplexes, I thought, “Okay, whatever I’m going to buy, I have to be able to afford to buy on my own.” Now I was dealing with debt, I was getting bank loans, but for everything I bought, I would have to come up with 25% of the purchase price. Once I broke through that limiting belief and decided I could partner up, suddenly I could buy much bigger assets, because I didn’t have to come in with 25% of the purchase price. I could come in with a much smaller number, maybe one or 2%. My other co-sponsors would come up with a little bit of it and then my passive investors would come up with the rest of the down payment, that would get us to 25 or 30%, the bank would do the rest. But the key thing is, by partnering up, both with other sponsors and limited partners, that enabled me to scale up substantially and buy a very different class of properties.

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

Joel Fine: Absolutely. Bring it on.

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

Joel Fine: Well, let’s see. There are two of them, I want to give a shout-out to. These are actually for passive investors. I love it when people read these books and then have a conversation with me as potential passive investors because it makes them much more knowledgeable. One of them is called The Hands-Off Investor by Brian Burke and the other one is Passive Investing in Commercial Real Estate by James Kandasamy. They’re similar in terms of the content they present, but slightly different angles on the content. But the key is, they’re really great for people who are thinking about investing passively and just want to understand how to get into that, and how to do their due diligence since they can’t necessarily visit properties, they can’t necessarily look through the books the way general partners do. They’ve got to rely on a lot of information that the general partners are feeding them. Those books are really excellent resources for passive investors to learn about the business.

Ash Patel: What’s the best type of way you like to give back?

Joel Fine: A couple of things. One is, giving back for me is a kind of an interesting phrase because I think what I do on a daily basis improves lives. For me, that’s what’s giving back. When I buy a property and I renovate it and improve it, I’m improving the lives of my tenants, I’m giving them a better home to live in. That’s important to me. I’m also improving the lives of my investors by giving them a great return on their investment, by giving them good risk reward trade-off that allows them to diversify their portfolio and buy into asset classes that they might not otherwise be able to. I also run a meetup locally in Austin. I love to have people who want to learn about syndication and multifamily investing. Join me in my meetup. The education of other investors is important to me. When I was in California, I actually ran an educational nonprofit that focused on social and political education. I did that as a way to give back. I haven’t run across a charity organization in Texas just yet, but I’m hoping to find one that I can participate in.

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

Joel Fine: Well, they can go to my website, lakelineproperties.com, or they can email me joel@lakelineproperties.com.

Ash Patel: Joel, thank you so much for joining us today, sharing your story, going to college, becoming an engineer, and getting into LP investments knowing your end goal was to be a GP. Congratulations on your success.

Joel Fine: Thank you very much. I appreciate the time.

Ash Patel: Best Ever listeners, thank you so much for joining us 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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JF2687: How to Find First GP Deal with Melissa Elizondo

Melissa Elizondo wanted to branch out from her marketing firm and looked to add commercial real estate investments to her portfolio. In this episode, Melissa shares her current business strategy and analyzes her methods for closing on her first GP deal.

Melissa Elizondo | Real Estate Background

  • Partner at 1 Vision Capital which is a syndication group focused on converting existing landlords with single family portfolios into LPs on multifamily deals.
  • Portfolio: Limited Partner for 118-unit in Savannah, GA.
  • Full-time career as owner of marketing firm, Heartwood Marketing Solutions.
  • Based in: New Braunfels, Texas
  • Say hi to her at: 1visioncapital.com | Facebook and Instagram: @therealmelissaelizondo
  • Best Ever Book: The Energy of Money by Maria Nemeth Ph.D.

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JF2686: The Key to Direct to Seller Marketing for Self-Storage Deals with TJ Konsen

TJ Konsen got his start in real estate with single-family flips. Now, he’s expanded to rehabs, wholesales, and wholetails, including in the multifamily and self-storage space. In this episode, TJ shares his expertise on direct to seller marketing and how it has helped sourced his self-storage deals. 

TJ Konsen | 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 TJ Kosen with us. How are you doing TJ?

TJ Kosen: Pretty good. Thanks for having me on. I appreciate it.

Slocomb Reed: Glad to have you. TJ is the founder of Sherlock Houses and Platinum Real Estate Mastermind. The company specializes in direct-to-seller marketing, high volume of flips, rehabs, wholesales, and wholetails. He currently has a portfolio of over 200 multifamily units, 15 years of real estate experience, and he’s based in Dallas, Texas. TJ, tell us about yourself. What got you into real estate?

TJ Kosen: Oh, dude, bad decisions and nothing else to do. I got into real estate actually in 2006, so way back in the day. I did loans for a little while, that was fun. So in California, doing loans, you saw some of the stuff that was getting worked through; we didn’t do any not good loans ourselves to speak of, but you kind of saw it in selling the products where it’s like, “Well, I don’t know if it’s sustainable.” So I saw that from the West Coast perspective and thought, “Well, let’s get into real estate investing… Not in California, because prices are high and things are tough to do.” So I went and bought a bunch of apartments in Memphis, Tennessee as my first investment deal. It was 112 units, a big value-add property; I went out there, managed it, leased it up, did a lot of capital improvement. It was an interesting first deal. From there…

Slocomb Reed: You started by moving to Memphis from California and owner-operating a 112-unit space?

TJ Kosen: Yeah, and they were distressed. They’re about 10% occupied, 15% occupied when we got them. I’m good in sales, a smart guy. [laughs] I said that this was my first deal.

Slocomb Reed: Well, we haven’t talked about the results of your first deal yet. We can decide whether you’re smart when we get to the end. I’ve bought distressed assets before, I know what it’s like to look crazy at the beginning and look like a genius a few years later. Tell us first, what spurred you into 112 units with 100 units or so vacant, almost completely across the country as your first investment deal?

TJ Kosen: We looked at a bunch of different markets that we thought made sense. And for cash flow, for upside potential, it looked like a pretty good deal at the time, so we figured, what the heck? The price per unit was actually, at the time, pretty reasonable.

Slocomb Reed: How much did you pay?

TJ Kosen: 8k a unit, something like that. 850k, 860k.

Slocomb Reed: Okay. Was this ’06, or was this during the recession?

TJ Kosen: Yeah, ’06. To fill in on that – the outcome of that particular property maybe wasn’t so good, because what we didn’t know in 2006 was that 2008 was right around the corner. If you knew at the time, then you were smarter than pretty much everyone that was in the market. But it was a fun first deal and I like to say that the project itself was very successful in terms of pretty much everything, from financing, to rehab, to stabilization. And when the market hit, we had a severe drop in rents, and had a kind of a market shifting dynamic which really caught a lot of people off guard. So So that was fun at the time. But from there, we were buying and selling a bunch of houses and kept going.

Slocomb Reed: So how did this 112-unit in Memphis come to fruition? How did it end? Do you still own it? Did you sell it?

TJ Kosen: We sold it, we cashed out. We took a loss on it, but we cashed some of our equity out, so it wasn’t catastrophic. Again, the thing about that particular property – big value-add, so the construction ended up being about 15k a unit, so not bad. We needed new ACs, new water heaters, most of the units needed new bathrooms and kitchens, but we got such bold pricing at the time that we just kind of blew through and did pretty well with it.

The lease-up was pretty good, but we found ourselves in 2009, ’10, because we were kind of trailing I think, in terms of what was going on with the economy… We found ourselves when we bought being the worst property in a pretty good neighborhood, and when we sold, I remember going back in 2010-ish and being the best property in a neighborhood where the houses were still pretty stabilized, but a lot of the multifamily units were on the downward spiral.

So I think it was an overbuilt submarket where people that were in maybe a B-ish subdivision would drop their rents to keep the tenant base up. This means our properties which were definitely at that price point would see an outflux of tenants and would see a decrease in the rent, and even the potential rent. So I kind of saw that; I didn’t really see it coming probably as early as it would have been nice. But I said, “You know what? I don’t think we want to try to weather this.”

Slocomb Reed: Looking back on it now, is there anything foreseeable that you guys did wrong before you went into the recession? Or is it just the bubble burst, it hit everyone in your space hard… Because like you said, B rents went down, so C tenants trade it up. Did you just get caught with a sinking tide? Or is there something foreseeable a lesson that can be learned here?

TJ Kosen: Well, I’m not sure. The lesson is, I guess, be cautious of the C-, D+ plus product space, especially value-add. But that’s always a lesson in anything. That’s a lesson with single-family house flips, if you’re putting in nice new appliances in a C-, D neighborhood, make sure they don’t walk off. So that’s always a bit of a lesson.

In terms of the property itself, I think the only real thing that we didn’t realize as well as we could have – and I’m not sure how we could have realized it better – was the excess inventory of apartments in that particular sub-market. That’s a tough thing; at least at the time anyhow, it was a tough thing to kind of get a good gauge on, because the house prices in the area were 70, 80, $90,000, and now 16 years later, they’re not significantly higher than that, but it hasn’t gone downhill.

It was just an interesting little mix where there were a lot of extra apartment units in that area that were tough to manage and tough to kind of negotiate the process on. Since then, a lot of complexes have actually been taken out of the unit mix. A couple got condemned or taken back by the city. And again, in a subdivision or a sub-market where the houses are about 100 grand, so it’s just kind of a weird little balancing act. Obviously, we did our homework on the front end with property comps. Things were selling in the low 30s a unit at the time we fixed up — so on the surface, our numbers look pretty good. But again, I don’t think anyone saw that kind of catastrophic 2008, 2009 thing happen, at least not in that space.

Break: [00:07:15][00:08:54]

Slocomb Reed: So you decide to sell, go ahead and get out, cut bait, you transition to single-family house flips…?

TJ Kosen: Yeah. From San Diego, went back there, took a little bit of time off, went surfing… Because, man, that was exhausting. And then just started buying and selling a lot of houses. We did a ton in Southern California back in the day. We did one or two small multifamily – one was nine units, one was six – in San Diego at the time, and made some money on them.

Slocomb Reed: San Diego just made more sense to invest in when all the property values tanked?

TJ Kosen: Yeah, I think so. You know, it’s interesting… I remember at the time – I still have contacts out in Memphis, obviously… And I was doing stuff in San Diego and I’d call them up every now and then and ask about buying cash flows or rental single families out there. And their numbers at the time were not that much better in terms of gross cash flow than properties in San Diego that were buying. So I kind of scratched my head go “Well, I can buy stuff in the east of Los Angeles, like Riverside County, for 40k, 50k, 60k and it’s cash-flowing really, really well. Why do I want to go halfway across the country in this market?” It was a weird market kind of evening out at the time, at least in the single-family space that I then found myself playing in.

Slocomb Reed: Gotcha. It seems like a no-brainer if you’re getting the same cash flow in California and in the Los Angeles area or San Diego area.

TJ Kosen: It’s very different now.

Slocomb Reed: Absolutely. But also, if you’re still holding anything that you bought 10 years ago in one of those spaces, you’re probably pretty happy about it. You then transitioned out of the single-family flips back into buying multifamily just as the economy improved?

TJ Kosen: We have a decent number of rentals and we have some self-storage. We don’t have any apartments right now in the portfolio. We have some self-storage and a bunch of houses. So we’ve bought and sold a couple of multifamily over the years. Since then, nothing quite as crazy as 112 units again, I think, both technically.

Slocomb Reed: Gotcha. So single families and self-storage… Is that serving two different purposes within your business plan, or they’re basically just both cash flow plays?

TJ Kosen: We do all the above. So we cherry-pick… Our main core competencies in the company is the direct-to-seller marketing that we do. So we do the PPC, we do the calling, we do all that stuff to find deals… And then we kind of take a deal-first perspective on what makes the most sense. We’re not one of the guys that want to do 30 wholesale deals a month all around the country. That sounds like too much of an operational headache for me, with margins that are too small. And by operational headache, I mean in terms of just the infrastructure that you have to have in your own company. We have most of that, but I don’t want the size to make that necessary. When we can do the volume and the margins that I like, by really a deal-first perspective on the houses.

So we find the house, and what makes sense for this house? Does it make sense to wholesale because it doesn’t fit our buy box? Does it make sense to maybe wholetail and do a light dust-off and put it on the market as is? Or does it make sense, based on what we bought it at, to just blow it out and flip it? Wholesale and flip have been our biggest profit generators, gross profit this year, for sure. And then for depreciation and for cash flow, we’ll pick up a couple of rentals, we’ll pick up the self-storage that we picked up last year, and we’ll play with that.

Slocomb Reed: So you’re going direct-to-seller to buy self-storage right now?

TJ Kosen: Yeah, that’s where I found it.

Slocomb Reed: Got you. What size self-storage facilities are you finding doing this?

TJ Kosen: For us, kind of a midsize. What we seem to be able to attract is the owner-operator. That’s kind of a similar space to the distressed landlord space, I guess, where there’s an owner-operator who probably lives in town, that’s doing a lot of the stuff himself, and then doesn’t want to deal with… If it’s a B- or C property, they have names for the tenants, right? They don’t want to deal with Jane [unintelligible [00:12:38].09] because she keeps saying she’s going to pay but she doesn’t, and all that stuff.

Slocomb Reed: Sure. Do you have a monthly or annual revenue or a unit count that you’re finding these owner-operators in?

TJ Kosen: I’m not sure if we have enough volume to have a good number on that, but the 100 units to 150 units — there are advantages and disadvantages. They’re easier to find but they’re harder to manage once you have them, because they take a lot of capacity to manage, especially in-house. So you kind of have to devote a lot of internal resources to it. But once you get a streamline, it’s really not that bad.

Slocomb Reed: Got you. By what means are you getting direct-to-seller for these self-storage owner-operators? It doesn’t seem like a Facebook ad is going to find you a bunch of owner-operator self-storage guys.

TJ Kosen: I don’t know, I’ve never tried that. Direct mail, old school, and conversations. So we all like to talk about real estate being a relationship game, but then we do mass marketing and call everyone that’s an absentee landlord in the city… And you’re making 10,000 calls a freaking month with just one VA, and then you get a bunch of VAs and you’re making however many more you’re making. But we find a better response rate based on a more personal, “Hey Tim and Sarah, we’re buying stuff in the area, small investors, kind of like you, younger…”, something that’s relatable to them. Then they’re like, “Okay. Well, I’m maybe kind of tired of it. Let’s have a conversation and see what we can do.”

Slocomb Reed: Nice. And you said that’s mostly direct mail and conversations. Is that a specific kind of networking that you’re doing to find these guys?

TJ Kosen: No, no, no. Once the lead’s inbound, then it’s something that I’ll take, instead of one of the team members. A team member might qualify it on a really base level, but then it’s just me talking to them, seeing what their goals are, and what their objectives are. It’s not that dissimilar from an inbound lead really with a distressed house, it’s just more complex in terms of the information you’re trying to gather.

Slocomb Reed: Yeah. So you send a letter, they call in, eventually, it gets to you, and you nurture the relationship until they’re ready to sell at a number that works for you?

TJ Kosen: Yeah.

Slocomb Reed: That’s a play that’s been run quite a few times over many years. It’s good to know that works in self-storage, that’s awesome. What kinds of returns are you seeing on your self-storage right now?

TJ Kosen: It kind of depends. The one we bought in a secondary or tertiary market, I’m not really sure what the cutoff is for that. [unintelligible [00:14:47].08] about 100,000 people, so it’s definitely a stabilized town with an increasing population growth. We’re not trying to buy stuff that’s rural in the sticks, that side of the highway kind of stuff. To be honest, I don’t really understand that product. And it’s 81 units, I think, with a warehouse and an apartment. Not a huge moneymaker, but its gross income potential is about six grand or something like that, and we bought it for 150k, 160k, so it’s not bad, it pays the bills.

Slocomb Reed: Nice. How long ago did you buy it?

TJ Kosen: That one, in January or February this year, I think.

Slocomb Reed: Nice. And how distressed was it when you got it?

TJ Kosen: It wasn’t pretty. You’ve got some folks living hanging out in the units, you have no fence around it, that kind of thing. Controlled access, not very good… In terms of the security of the units, unit security is pretty decent. Grounds were kept up pretty well, but it was an owner-operator thing. It was a guy, I think he had declining health, I think he had some lung issues or something. He’d been managing it forever, had a bunch of residential rentals, and then he said “You know, I don’t really want to deal with it anymore. What will you give me for it?” I said, “I don’t know. What do you want for it?” He gave us a number, and we said that number is pretty close but let’s get a little farther down. We settled on, I think, 160k. I think we closed on that, but I don’t remember exactly.

Break: [00:16:01][00:18:58]

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

TJ Kosen: Best Ever advice, I think depends on who’s asking… But the most important one I think is to focus on your objective and set your objectives about 10% to 15% beyond your current abilities, instead of too many people getting scatterbrained and trying to focus on too many different things. The deep dark secret is all that stuff probably works. You can probably make it work for yourself, especially if you’re pretty diligent with it. But if you’re not focusing on one or two straightforward tasks, then it becomes really hard to do a bunch of different things.

Slocomb Reed: That’s good stuff. Awesome. TJ, are you ready for the Best Ever lightning round?

TJ Kosen: Yeah, let’s do it. I’m down.

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

TJ Kosen: I do a lot of education, a lot of free events. Obviously, there’s a lot of money in that space, but the gratification part that we get with the events and with the helping bring other people up in the industry, I think, is huge. We’d like to see that people that want to improve themselves take action and see positive results from that action. Honestly, it’s more gratifying than walking houses. My whole reason for building a team was I don’t want to talk to sellers. It’s more fun to talk to people that want to better their position.

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

TJ Kosen: A little unconventional, I guess… 12 Rules For Life by Jordan Peterson. Pretty good book. I don’t read a lot of real estate books.

Slocomb Reed: What’s the most money you’ve lost on a deal?

TJ Kosen: Probably 1.5 million.

Slocomb Reed: That you personally lost in one deal?

TJ Kosen: Well, not personally, but that’s what the deal lost.

Slocomb Reed: Gotcha. Is that the apartment building in Memphis?

TJ Kosen: No, that was a different apartment building. We didn’t get into that one.

Slocomb Reed: Well, tell me about it real quick… What happened there?

TJ Kosen: Kind of the same story, I guess. Don’t buy stuff in 2007 either. It was less than a value-add, and it was the negative part of leverage. It was 70% occupied. We bought it with assuming a hard money loan. There was actually prime plus two at the time.

Slocomb Reed: That’s 17% occupied?

TJ Kosen: No, about 70% occupied.

Slocomb Reed: 70%?

TJ Kosen: Yeah, about 70% occupied. We bought it, we assumed a hard money loan at prime plus two, so the rate was pretty good, and it was adjustable. So its prime was going down and it got even better. I think the sellers did a 200k second. We came up with a down payment, and then we actually refinanced out of it a couple of months later. But it ended up being in an even less desirable neighborhood when 2010 hit.

Slocomb Reed: In Memphis?

TJ Kosen: Yeah. If the other property was kind of a C-ish, this was unquestionably a D.  There are no ifs, ands, or buts about it being a D. So it just wasn’t economically feasible. We actually ended up short selling that one, which it is what it is, I guess. The ironic thing is, the guy that got bought from us ended up losing money also. So it wasn’t just a situation of us not being able to operate it, it was a case of the market which is very different than it is now.

Slocomb Reed: Specific to buying in a D market in Memphis right before the recession, this may become freshened again if we see another economic crisis. It sounds like your D market apartments in Memphis got hit harder than your C, C minus apartments in Memphis when the recession hit. Tell me about the difference, tell me what happened.

TJ Kosen: I think — and again, this is probably 14-year-old information, really, so I would take it with a grain of salt, especially talking about these particular markets.

Slocomb Reed: Yeah, of course.

TJ Kosen: Because I think they’re very different now. It was more overbuilt, with a more vacant inventory. So even though our property is relatively stabilized, we were across the street from a property that was a similar size, I think 90 units or something like that, that was 100% vacant. So there’s more of that over there. We bought it as a stabilized just cash-flowing thing; it was making some money when we did, and we figured we could up it as we went along. We did for a while.

It was one of the only zip codes in the whole US, I guess, that didn’t appreciate from 2011 to 2015-ish. That’s kind of a weird situation ,where everything else was going like this. It actually had, I think about a… I don’t remember, it’s been a couple of years since I looked. Maybe an 8% to 10% deflation in that zip code. But again, here’s where the grain of salt comes in… Right now, houses in that area, in the city, have actually gone up about 20% to 30% in the past three or four years. So it is going up, and I think it’s going up for a lot of probably good fundamental reasons. But it’s just a very different market.

So the biggest issue in my experience with D and C properties, as opposed to the couple of smaller A properties that we’ve done, is if your rent rate is 600 bucks, I guess at the time, for a two-bedroom, a water heater still costs 1,200 bucks. A water heater costs 1,200 bucks if your rent rate is 1,500 bucks. So just the gross expenses can be higher even on a stabilized property, even if you’re managing it well. That’s where the cap rate always comes in, as people think that a cap rate is an indication of the risk profile, without understanding what the actual risk profile is. If you’re buying into this market, I guess, if you’re buying at a seven cap, you think you’re a rock star, but you’re buying there because maybe some of the fundamentals of the property are — even once your water heater goes out, even if you put new ones in, it goes back out again in 10 years. Well, then your rent is not going to cover it as well. Does that make sense?

Slocomb Reed: It does. You’ve shared some very helpful information here, TJ, and it’s good to know that you are seeing some success now through single families and your self-storage. Good to know that you’re willing to share from your failures, but that you’re also succeeding now. Where can people get in touch with you?

TJ Kosen: Absolutely. All over Facebook, on Instagram, both @TJKosen, Instagram also @tjkosen, and the website, – really creative with this one – tjkosen.com, you can find me there. We do, again, a lot of single families, a lot of self-storage in North Texas, and pretty much North Texas. That’s pretty much it.

Slocomb Reed: That’s awesome. Well, TJ, thank you again for being on our podcast today. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.

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JF2678: The Key to Funding Your Retirement Through Multifamily Syndication with Elijah Vo

Elijah Vo went from working full-time in the Air Force to becoming a full-time active investor. In this episode, he shares how he got into multifamily syndication and how he finds deals that will fund his retirement income.

Elijah Vo | Real Estate Background

  • Partner at Atlas Multifamily Group, who help investors build generational wealth as a passive investor in multifamily real estate syndication.
  • Portfolio: Operates 700 doors
  • Used to work full-time in the Air Force, but after retirement, he began to do CRE full-time as of October 2021.
  • Based in: DFW, Texas
  • Say hi to him at: https://www.investwithamg.com/
  • Best Ever Book: The Laws of Human Nature by Robert Greene

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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 Elijah Vo with us. How are you doing Eli?

Elijah Vo: I’m doing great. Hey, if I sound kind of strange, I’m coming off a head cold. I feel fine, but I’m just a little bit [unintelligible [00:01:25].11] up. But otherwise, I’m great and happy to be here.

Slocomb Reed: Great. I know the feeling. I just got the COVID booster shot a few days ago and it put me in bed for a while. Eli is a partner at Atlas Multifamily Group. They help investors build generational wealth passively in multifamily real estate syndications. In the current portfolio, they operate 700 doors. Eli used to work full-time in the Air Force, but after retirement, he began to do commercial real estate full-time, and that’s as of October 21. Eli’s based in the Dallas-Fort Worth area. Eli, tell us about yourself. You were in the Air Force; what got you into real estate?

Elijah Vo: Sure. I’ve been in the military for over 20 years so it was always kind of my mentality to work for the government for 20 to 30 years, and then one day I’ll retire happily on a beach somewhere.

Slocomb Reed: Sure.

Elijah Vo: So I think about halfway through my career, that mentality wouldn’t sit right with me, because I really want to [unintelligible [02:26] our government. I was always interested in real estate so, at that time, my wife and I started buying up small family rentals, went through a couple of them, did pretty good with them… But at that point, I looked back at our goals and was like, “Okay, well by time I go to retire, this income won’t replace my current income.” So we had to find a way to scale more efficiently a lot quicker.

I remember driving around town one day over here in Fort Worth and I saw an apartment complex. I was like “Man, who owns those things? Who buys these?” Because it would probably be way more efficient to own one of those rather than 20, 30, 40 houses spread across town. So I started out working, getting educated on how this whole space works. Around 2018, I ended up joining a mentorship group, and that following year, we ended up…

Slocomb Reed: Which group did you join?

Elijah Vo: It was Think Multifamily.

Slocomb Reed: Think Multifamily.

Elijah Vo: There’s a bunch all over, a lot here in DFW. We’ve got Think, and a bunch of other ones.

Slocomb Reed: Nice. So you joined the mastermind, and what’s next?

Elijah Vo: We started hunting around for deals. That first year, we picked up two deals, about 360 units; those were in Atlanta. Then, about two years ago, our two current partners, we opened our firm, Atlas Multifamily Group. Now we own 700, and we actually have another 115 under contract that will close next month.

Slocomb Reed: That’s exciting. So you jumped in in 2018, it sounds, into multifamily syndication.

Elijah Vo: Yeah. Around 2017 or 2018. I started also doing passive investments first. So we did a couple of passives and then I joined Think mastermind in 2018.

Slocomb Reed: Awesome. So you were picking up some rentals on the side of working in the Air Force and then started investing passively, wanting to get in on the GP side of things. Thinking that you were replacing your military income with real estate, what made syndicating the right fit for you?

Elijah Vo: It was interesting, for sure. I enjoy the fact that on the GP side, I like being the front-runner in these things; because you’re not really buying real estate, you’re buying a business. I find it fascinating and very interesting that we’re able to come in and quarterback these deals, and you have a whole team that you build around you. It’s an entire process of all kinds of different people and partners. I think that’s probably what spoke to me the most, aside from the fact that you can invest in something that can return something like that back to you. You build communities too, you’re giving back and you’re building communities for other families, because you’re coming in and in rehabbing these places, like the exteriors and interiors. You’re making everything better. I enjoy the fact that I’m kind of like the main quarterback here, and we’re also at the same time giving back at the same time.

Slocomb Reed: Financially speaking, understanding that there are other routes that you can take to be in real estate investing full time, you did some passive investing… That’s a very popular way to replace an income going into retirement, because it allows you to act retired. Financially speaking, what is it that compelled you to get into syndication as opposed to some other active model of investing? Is it specific to the numbers? What was it about syndicating?

Elijah Vo: I don’t think I really had the income to invest enough to be a full passive investor. If I have $100 million or more than I could put in and get an 8% 10% return annually, that’d be fine. But on an Air Force income, we really didn’t have that. So I had to find more after ways to make income. I think that was part of it. And then the fact that — I do enjoy the mailbox money, that’s great. But I wanted more control, I wanted more involvement in the deal. I want to be able to go out there and find my own deals, build my own empire, build my own income, and then eventually I’ll get to a place where… [unintelligible [00:06:21].10] I’m sure, maybe. I enjoy it now but over time, I’ll get another I can passively invest. But I love it now.

Break: [00:06:29][00:08:08]

Slocomb Reed: I saw that you have a goal of helping investors build generational wealth while investing passively. Are you underwriting for the five-year hold? Are you planning to hold the properties that you syndicate long-term, longer than five years?

Elijah Vo: I would love to do a long-term, like a 20-year hold, that would be awesome. I think right now, the industry, they’re so focused on those five or six-year holds. It’s hard to find investors who want to do a 20 to 30-year hold, plus that you’d be holding on to, I guess — you’d be partnered with people for 20 years. But I would love having generational wealth, I wouldn’t mind it. We are playing with a new, almost a new model. But we’re doing a three-year hold, where we’re returning 70% to 80% return over three years, rather than do 100% return over six years. Our investors can hit about 74% return in three, and then pick up money and do another one,