How I quit worrying and learned to love raising capital

All the capital for my second through 12th deals came from one of my best friends from highschool.

Once he forced me to start raising money from other people, I remember complaining to him that I hated raising capital.

You should have seen the stupefied look on his face, right before he said: “You realize you’re in the most capital-intensive business in the world, right?”

I admit that I had not realized that until that conversation. Not my finest hour.

I bumbled along, asking close friends and family for money, but doing little to expand my network. I adopted this totally self-defeating mindset, where I felt like our results were so good that people should be falling all over themselves to invest with us, and that, if they didn’t it was because they were stupid. And I refused to do the type of things that other capital-raisers do, like quoting IRRs and ROIs, because I felt like doing so was totally dishonest.

If you’ve ever run any kind of business, you can spot the problem right away: I needed customers (that’s what capital providers are: very special, highly-valued customers), but I wasn’t doing anything to find them and tell them our story. This is conceptually stupid, and the results bore that out: Adaptive Realty Fund 3 boasted a whopping ~$2.3MM in investor equity.

Anyway, over the past few years, I have radically re-shaped my approach to raising capital.

First, I really examined my own weird, defeatist nonsense. No magic fairy was going to descend from the heavens to Historic Filipinotown and shower me with capital. I needed to take ownership of this process and get good at it.

Second, I realized that I wasn’t trying to get people to do something bad. We do really good deals. The numbers are great. Smart people who really pay attention invest with us once, then do it over and over again, because what we do makes sense. So telling prospective capital partners about what we do isn’t like being a sketchy used car salesman – it’s doing them a favor.

Third, I figured out a way to tell our story that doesn’t make me feel gross. We’re not sellers, I’m not going to quote IRRs and ROIs, and I’m not ashamed of it. That turns off the majority of potential investors and that’s fine. Instead, I focus on educating people about how we think about the world. There are enough weirdos with money who like to hold real estate forever to allow us to build a business. I just focus on those people and forget about everyone else.

Third, I realized that capital-raising isn’t really about sales, anyway. You’re not going to convince someone who doesn’t want to invest with you to change her mind. Instead, it’s about telling our story, over and over and over again, in blog posts, meetings, at conferences, over dinner or drinks, whatever, to as many relevant people as I could. Not in an annoying way (no one likes being cornered and bored to tears). But in an open, helpful way that meets people where they are and educates them about an opportunity that might be great for them.

Is capital-raising ever going to be my favorite part of the business? Nope… there’s just nothing that matches the thrill of finding the right building, seeing in my mind what it can become (physically, and then, as a result, economically), and then working with my partner and our team to actualize that vision.

But capital-raising is now something I enjoy. And that means I’m happy to do it, which has translated into major growth for our business. Which is what I should have known would happen, all along!

Connecting the generations with real estate

Years ago, when we were still working on the Better Dwellings portfolio, before we started Adaptive, I remember having a conversation which I now realize contributed to my bias towards holding real estate permanently.

Can’t remember who it was, but the person told me about checks he receives each quarter.

The source of the funds? Apartment syndications in Hollywood in which his grandparents invested in the 1980s.

He told me that, over the years, his family has received many, many multiples of the capital his grandparents invested. (Of course, I’d love to have access to detailed records to calculate rates of return, etc., but I don’t!)

What appeals to me about this story?

Regular readers know I’m fascinated by the concept of capital as a means of tying a family together through the generations. (The capital for my first deal came from the sale of a building my great-grandfather bought in New York decades before I was born, capital which passed through the hands of my grandfather and mother before coming to me, and eventually, to my children.)

I love the idea that, by investing with some syndicator, the grandparents helped provide for their grandchildren and, presumably, the generations beyond, long after their own time on earth passed.

And I love that, in some of our deals, there are members with names like “Trust for [Person X]”, where the trustee making the capital allocation is a grandparent and “Person X” is a grandchild I’ve never met, but who will benefit from that investment, long after the grandparent is gone.

My hope is that, when those grandchildren receive the checks, they pause for just a second and think of their grandparents, the way that guy I met thinks of his.

Going into lease-up on a big project

We’re in lease-up on a wonderful complex in East Hollywood.

Have posted some pics below.

If you’re interested in a beautiful 2 bedroom apartment walking distance to Sunset Junction and the Red Line with parking and private outdoor space, reach out to Krystal [at] adaptiverealty [dot] com.

Why we’re sticking to our knitting

Regularly get asked the following questions: Are you planning to venture out to other cities? Start doing other product types (office, retail, etc.)?

The answer to both is that I would love to branch out. Aside from the intellectual stimulation that comes from learning new things, expanding the pool of potential projects would allow us to put more capital to work, which would be good for Adaptive.

But we’re pretty unlikely to expand to other cities or product types any time soon.


It comes down to “circle of competence”, the range of potential deals were our existing skills and knowledge give us an advantage over competitors.

When it comes to fixing up apartment buildings in Los Angeles, I can say, with no exaggeration, that our organization is the best. We know, with great certainty, how much we can pay, what we’ll do with a building, where the potential pit-falls lie, what kind of rents we can expect, how to finance the deals, etc.

Are we perfect? No way. This stuff is really hard and we make plenty of mistakes. But I’m confident, because we’ve fixed up ~80 buildings over the past 10 years, we know what we’re doing.

This is utterly not the case when it comes to buildings in, say, Austin. Or office buildings, even in the submarkets we know well.

Now, if we were in the midst of a down-cycle, when everything gets cheap and you can depend on subsequent rent / price increases to bail you out if you screw up, I would absolutely be looking to try new cities and/or product types.

But, since we’re in a pretty hot market, where we need to pay top dollar for assets, we’re going to stick with the type of deals we truly understand, even if it means I get a little bored of looking at hundreds of apartment buildings every day.

Finishing up a five unit

Just finished a cool five unit building in an area we know really, really well. It’s actually the third building we’ve done on the same block!

To be honest, we knew this deal was a great one the moment we got it under contract… it was so good that the broker tried to chase us out of the deal during escrow (presumably because he had so many other buyers willing to pay more).

It’s one thing to go under contract on a deal that feels like a home-run on the numbers. It’s another to actually execute.

In this instance, Jon had to wrestle with structures that were were built prior to the imposition in LA of recognizably modern building codes in the 1920s. This means designing around an asymmetric building, which meant that all the units had to be unique.

That meant more work for him… but I the units came out pretty well, though, right?

(Note: Unlike a bunch of buildings I’ve seen lately, these ceilings were done with permits… which requires a whole bunch of specialized engineering, structural and roof work.)