What I learned at adult nerd camp

Last week, a fellow investing geek and I journeyed to Columbia, MO to take part in the inaugural Capital Camp, a three day meeting of vaguely weird people like us.

Aside from various tornado-related travel snafus, the trip was excellent. It turns out there is a small but vibrant community of finance geeks, mainly to be found on Twitter and a bunch of small investing podcasts, who are thinking about new strategies, investment structures, asset classes, etc.

For example: We heard a talk by two guys who are providing very high cost debt to, among others, a private equity shop that buys catalogues of digital assets (sort of like buying music publishing rights).

Another example: We heard from several people who are out there buying small ($1-3MM EBITDA) companies, on the premise that there are loads of Baby Boomers retiring and you can buy their companies for 3-4x EBITDA (in real estate terms, that equates to 25-33% cap rates!).

For me, though, the most important realization at Capital Camp was that our boring old business of buying dilapidated apartment buildings in Los Angeles, fixing them up, refinancing them using reasonable leverage, and holding them forever is, if not the best, one of the best businesses you could be in.

So, yeah, I’m going back next year, because it’s fascinating to hear from people on the cutting edge of investing. But I’m more convinced than ever that our model is the one I want to bet on for my career.

Strategic clarity, at last

Probably the most important job for the leader of any organization is to establish and communicate a simple strategy for that organization.

Maybe that’s easy for other leaders. But I like to “Hamlet” things… go back and forth, see the positives and negatives of different courses of action, and generally fail to be decisive. So, defining exactly what it is that we’re trying to do at Adaptive has not been easy for me (just ask Jon!).

But, over the past few weeks, in conversations with Jon, our strategy has come into focus. Adaptive seeks to:

  1. Grow our permanent assets under management by buying and renovating well-located apartment buildings where the post-stabilization levered yield exceeds the preferred return we owe our investors; and
  2. Grow the number of high quality apartments managed by our management company at a responsible pace (ie one that does not imperil our ability to deliver good service to our existing tenants and owners).

That’s it. We’re not going to start renovating hotels or office space. We’re not going to build ground up (at least, not until the numbers change to make the yields more appealing).

We will, however, systematically review all of our options for numbers 1 & 2 above. And then we will test the new ideas that seem most likely to yield the outcomes we’re looking for, cull the ones that fail, and pour our resources into the ones that gain traction.

Why I’m nice to cold-calling brokers

Just like everyone else who owns property, my phone rings off the hook every day with brokers calling me, trying to get me to list my properties for sale.

No one likes receiving cold marketing calls, including me. But I do my best to be kind to the people calling. Why?

I’m not a seller, so there’s zero chance these people are getting a listing out of me. But brokers are the actors in the market who are out there, every day, matching buyers and sellers… in other words, making deals happen.

So, instead of angrily hanging up on them, I try to use each call as an opportunity to let that broker know what I want to buy (beat-up, old apartment buildings in LA) and how (all cash, with a quick close).

By doing this, patiently, every day, I hope to continue to grow my reputation as the kind of buyer to whom brokers want to sell buildings.

Managing a network of capital providers

Pretty much everyone who gets into doing real estate deals starts with a single deal that looks good to her.

If she manages to raise the money, close the deal, and execute, she probably gets opportunities to do more deals, and that’s how a career in real estate deal-making is born.

But one of the interesting things about how that kind of career progresses is that doing good deals is really only part of the work.

There’s a whole other piece that has to do with managing relationships with capital providers, work that is complicated, (sometimes) thankless, and absolutely critical to success.

It’s about figuring out who to go to for capital, managing conflicts between sources of capital, keeping the accounting straight, prioritizing time and attention among deals, and always, always communicating about what’s going right, what’s going wrong, what you’re planning for the future, what you’re worrying about, etc.

None of this stuff can really be taught in school. It’s all about judgment, personal accountability, and emotional intelligence (the latter of which I’ve been accused of lacking a few times in my life!). And you learn it by getting yourself into complicated situations with people with conflicting priorities, then figuring out how to navigate through those situations in ways that make everyone feel fairly-treated.

In my life, I’ve often found that experience is over-rated. For example, in hiring, I’ve done very well by prioritizing energy, honesty and intelligence over “been there, done that”. But, when it comes to building and managing a network of capital providers, there is no substitute for learning by doing.

Carrying the weight

Recently, a guy I see almost every day asked me about potentially investing with us. To be nice, he caveated his request by making it clear he would understand if I preferred not to take money from someone I have to see all the time, in case things go wrong.

Because I’ve never solicited capital from anyone in the particular context in which he and I interact, he kind of threw me for a loop, and I had to pause to really consider whether I was, indeed, confident I was willing to take his money.

The conversation went on and eventually finished, but I kept chewing over what he had said. It wasn’t until the next day that I had the following realization: Ever since my second deal, which was funded by my best friend from highschool, I have been responsible for acting as a steward of my friends’ and family’s capital.

To illustrate, here’s a breakdown of the capital in Adaptive Realty Fund 1:

Member%age
Close friend from Andover9.80%
Close friend from Andover14.01%
Close friend from Andover7.00%
Parent of close friend from Andover and Princeton2.80%
Close friend from Princeton3.50%
Close friend from Princeton4.20%
Me2.80%
Friend of close friend from Princeton2.80%
Friend of close friend from Princeton1.40%
Friend of close friend from Princeton1.40%
Jon (my business partner)0.28%
Family office introduced by my accountant50.00%
Total100.00%

In other words, I have been living with this weight since the beginning. Here is how:

  1. I have only ever taken capital from people who can afford to lose all of it without any change to their standard of living; and
  2. I have warned them before they invested, both verbally and in writing, that there is a chance they could lose all their money; and
  3. I have worked my ass off, in every way I know how, to ensure that I did not lose their money

So far, so good.