Back to doing what I love most

Have spent the past few months mostly focused on securing a pool of capital for us to invest during 2019. As you probably know, I’m getting better at fund-raising, but it’s not my favorite part of the business.

Anyway, now that I have capital to deploy, have turned my attention back to finding interesting properties in which to invest. But what, exactly, does that entail?

Well, besides waiting for one of the brokers with whom we’ve done a ton of business to bring us something tasty off-market, it’s mainly about scouring the public listings, looking for something that’s been overlooked.

But I don’t look at listings in the same way that normal buyers do. I don’t care about the existing cap rate or GRM, because we’re in the business of radically changing the buildings we buy. And I ignore price per unit, because it’s a pretty stupid way to look at apartment buildings (why would you use a number that treats studios the same as three beds?).

Instead, I’m looking closely at the buildings themselves and asking myself three simple, related questions:

  1. What can this building become?
  2. What rents will the renovated building generate? and
  3. How much will it cost to make the existing building into the new building?

Obviously, you could spend hours and hours doing this exercise for deals where the numbers will never make sense. So, in real life, I basically pattern-match; in other words, I look for deals that look very much like the 80 or so deals that have worked out well for us in the past.

And, when I find one, I pounce.

An amazing real estate story

Apologies for the slow posting; it’s been a very busy few weeks.
Heard an amazing story from one of our management clients over the weekend and want to share with you all, to let you know what’s possible with a ton of hard work, risk acceptance, and good luck.

For ease of storytelling, am going to call this guy G, but that’s not really his initial.

We’ve managed several buildings for G for a long time, but we had never had a really in-depth conversation about his business until the other night. To be honest, I had always assumed he got his start with a big slug of family money, since he didn’t appear to use outside investor capital.

Turns out I was wrong, and that G built a veritable empire of Los Angeles apartments, starting from ~$90k in cash and a home equity line on his mother’s house of ~$80k.

G got his start after signing up for a real estate class on a whim around 2003. His instructor, who later became his mentor, recommended to the students that they buy Los Angeles real estate, and specifically 4plexes.
His argument was that 4plexes maximize the number of units you can buy and still get a 30 year, fixed rate mortgage. And, over decades, he had noticed that 4plexes in LA double in value approximately every 10 years.

Unlike probably every other student in the class, G went out and followed the teacher’s advice. He cobbled together some savings plus a bit of his mother’s home equity line, and bought his first 4plex.

Over time, he and his brother used their incomes, and cashflow from the original building, to pay down the line of credit. During the same period, the 4plex appreciated, and G was able to refinance it, pull out more money, then buy another.

Loans were incredibly easy to get in 2004, 2005, and 2006, and G managed to get his hands on ton of buildings. But he was extremely highly leveraged.

You can guess what happened in 2008-9. Rents and values cratered, and G was massively under-water. For most people in similar positions, all across the country, this was the end. They gave their buildings back to the banks and went on to do other things with their lives.

But G was not an ordinary person and he did not give up. For years, 2008-2012 or so, G fought and fought and fought some more with the banks, getting loan modifications and forgiveness. During that entire, horrific period, G only lost a single building (ironically, the original 4plex, via short-sale).

Obviously, G is a tenacious person. But he had something else going for him: His buildings were in Los Angeles. And, beginning in 2011 or so, the rents and values began to creep back up. In the beginning, the recovery was kind of slow, but it rapidly accelerated, such that, by 2013 or 2014, he was all the way back. And the values kept going, allowing him to begin refinancing and buying again. 

At this point, he has approximately 100 units, all in very interesting neighborhoods. I didn’t ask him and he didn’t say, but my very rough guess is that we’re talking about a portfolio worth $30-40MM, though obviously there’s a ton of debt against it.

I don’t want to make it sound like accumulating that portfolio was easy. Doing what G has done required a ton of brains, guts, pain tolerance, and, frankly, luck. But G did it; he took like $160k, approximately half of it borrowed, and parlayed it into a gigantic empire. 

What a story, right?

On my way to IMN Winter Forum

Apologies for the light posting. Have been tied up with investor calls, emails and meetings for the last few weeks.

In any event, am heading down to the IMN conference in Laguna Beach today.

Will be speaking on the Emerging Manager Panel at 11:45AM tomorrow (Thursday, 1/17/19).

Hope to run into some of you there.

Looking for an intern

Am in the market for a new intern, and figured I’d see if you people can help.

I hired my last intern, David, maybe four years ago. He worked for us part time during college, then came on full-time immediately after graduating.

At first, he was just my assistant. Over time, as he gained experience and I gained trust in his competence, I gave him more and more responsibility. At this point, he is extremely knowledgable about the business and handles important, complicated projects for me. I hope he’s with us forever.

Because David has grown into such an important contributor, I find myself wanting to try to repeat the process with another young person.

The role is very fluid, running the gamut from assistant-type stuff, to research, to looking at potential deals, to coordinating appraisals and insurance inspections… in short, whatever needs to get done on a given day.

Because the job is so varied and, more importantly, because I’m hoping to grow this person into another key contributor, I’m looking for:

  • Interest in real estate
  • Smarts, both book and, importantly, street smarts (a ton of what we do involves quickly identifying the incentives of different parties in a situation and figuring out how to create win-wins)
  • Energy (this is an underrated attribute in life, generally – give me an energetic 7 over a lazy 10 any day)
  • Some knowledge of business / contract / insurance law – even just a few classes would help
  • A sharp memory
  • Personal integrity (I have structured my life so as to spend literally zero time with people I distrust)

We can create a schedule that fits around school. And we will pay something reasonable (I hate the idea of people working for free, ever).

So, if you or someone you know is a college kid who fits the above criteria, that person should reach out to me.

Doing things backwards

Just had an interesting exchange on a call with the other people participating in my panel at IMN’s Winter Opportunities conference.

Our moderator, an attorney experienced in putting together large real estate funds, asked the panel about our experience transitioning from raising capital on a deal by deal basis to raising commingled funds.

I piped up that, actually, we haven’t made that transition at all. Instead, our commingled funds act almost like marketing vehicles for our much larger joint-venture business.

That’s really unusual for our business, where everyone wants to get on the gravy train of raising larger and larger funds and collecting that tasty 1-2% / year management fee. So, of course, our moderator wanted to know why we are doing things backwards.

The answer is pretty simple. Through a fund, we can commingle the capital of lots of investors writing checks for $500k-1MM, then use that money to buy a small portfolio of projects.

A really rich family can write a check for $500k or $1MM without negotiating the docs, doing much diligence, etc., since, even in an absolute disaster scenario, the loss would not affect them in a meaningful way.

So, that kind of family can invest in a fund and then, once they’ve seen us operate, get comfortable with writing a $3-10MM check for a joint venture with us, where they provide all the capital and we do the work.

Obviously, this is not the normal way real estate private equity businesses develop. But nothing about how we operate is normal, so what’s new?