Background & Preparation to Invest

10 Jun

Posted at 14:42h in Background & Preparation to Invest, My First Deal Series, Real Estate Psychology, Transitioning to a Career In Real Estate
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This is a story about Stephanie McConnon's experience in real estate investing:  How she got started, what she worked on, setbacks, marketing methods, and strategy changes. Stephanie writes: It was the design and construction aspect of buildings that attracted me the most to residential real estate at an early age. I had watched my father build additions to our home and was fascinated by the process of creating new living spaces, and the way that each change lifted the value of the home. In my free time in high school, I read every real estate investing-related book I could get my hands on. I was particularly attracted to residential renovations and multi-family value-add opportunities. Short term profits or “get rich quick” schemes never had allure for me. However, I was definitely attracted to the thought of setting aside money slowly over time to invest. I was interested in renovating assets that I planned to hold long-term for passive income and financial security. Developing a Set of Investment Principles Through my reading, I chose investment principles or ideologies that made sense to me, and when I was older, I was able to invest using those same principles. Today, the list has grown, but more or less includes the following: Purchase assets at “below-market” prices. In a stable market, it is my job to find opportunities for arbitrage and purchase below market. Perhaps there is a certain asset class at a specific price point, sitting on bank books, that nobody else is interested in buying. Perhaps larger investors are staying out of tertiary markets. Perhaps one market is going through a total meltdown (this year, I’m thinking of Flint, MI).Whatever the opportunity for arbitrage may be, it is my job to identify it and act upon it. This concept applies to commercial assets as well, and obviously my preference is to purchase assets when real estate values are down in the dumps. (Of course, this is also when capital/funding sources dry up). Invest in a good deal or do not invest at all. If I cannot find the arbitrage opportunity that I am looking for, I won’t invest. Period. I do not need to create an artificial timeline that pushes me to spend investor money or personal money when I am struggling to find deals. I would rather not invest than get involved in a bad deal. There is an investment strategy that works in every market during every phase of a real estate cycle. The fun and interesting part of real estate investing is figuring out what works, when, where, and being ready for it. Sometimes the strategy I really WANT to follow doesn’t turn out the be the strategy that works in a particular market, and I am forced to choose an alternative strategy (it happened to me in 2015). Applying the Principles to Single Family Home Deals With those principles in mind, I began working on residential real estate projects after high school, mostly with a relative. We purchased single family homes in Florida well below market, and many of them were sold at peak prices leading up the financial crisis in 2008. Almost all of these opportunities were identified by sending out direct mail to absentee property owners. During peak months, 30,000+ letters went out to property owners. We also tried sign advertisements, direct phone calls, door knocking, and expired listings from the MLS. Most of our transactions were borne out of direct mail, and our letters simply stated we were looking for properties to buy in their neighborhood. (Note: I am most happy to share the templates/mailers/methods for marketing with anyone who requests it via email). Most people who responded to our advertising wanted to sell at retail (full) price, so we weren’t interested. Sometimes, however, we received callbacks from sellers who were selling at a discount. Most of those types of sellers were those who needed to sell their property “yesterday.” On average, properties were purchased for less than $20-50k, renovated for $10-25k, and sold for upwards of $100-300k. After working on about 30 transactions, we wrapped up the Florida property portfolio and went on with our lives. At that time, our arbitrage opportunities for our strategy were dried up. I spent a few years on other pursuits, including opening a business and finishing my undergraduate degree. Then, in 2012, I came to NYC, like many, seeking opportunity. I wanted to become a more sophisticated real estate investor by working on larger transactions and expanding to additional markets. I was very open minded to opportunities, and I knew two things: Success on a larger scale would require raising money from others. Thoroughly understanding due diligence, legal, and title in transactions would become a necessity. Trial, Error, and An Overheated Multifamily Market As a result, I took on a job role that would help with the fundraising and investor relations aspect of using OPM. This lasted for two years. I worked for a company that handled major real estate transactions nationwide to help me understand the due diligence, title, and legal aspects of real estate. This also lasted for two years. I also used this time to earn an MS in Real Estate Finance from NYU. During my time at NYU, I received my first exposure to the sophisticated investment techniques used by larger players in the industry. I got together with a long-term trusted friend, and we started a company. We began putting out bids for multi-family assets and apartment complexes. From a marketing perspective, we tried lots of things, including: targeted USPS letters to apartment complex owners direct phone calls to owners door knocking networking and reaching out to brokers landlord/property owner associations targeted internet advertising Again, I received the best response through direct mail, with handwritten envelopes and physical stamps on each envelope. Getting potential apartment complex deals in the pipeline was the easy part, and soon we were bombarded. We had properties to underwrite, investment committee meetings to attend, lender pitches to present, and vendor meetings. I put my absolute best bids out on several large assets over the course of a year-and-a-half leading into 2016. They were not junk bids; each was carefully planned, conservatively financed, and had excellent long-term potential for myself and my investors. However, in every case, I was outbid by at least three other purchasers. Given the prices I saw other investors paying, I knew they were underwriting based on highly optimistic, best-case scenario numbers that were not impossible to achieve, but could potentially put the property at risk if anything went wrong, such as: a change in the real estate markets an operational mistake a slight decrease in demand a lag getting new tenants moved in any host of other potential problems While I respect the fact that every investor has their own personal risk tolerance, slicing thin margins and teetering on default in tough times are not the types of risks I like to take. This applies especially to someone who does not yet own an apartment complex, like me, and who is using equity funding from professionals who have worked long, hard hours for years to earn their investment dollars. Though I wished to invest in those apartment complexes, I knew the right thing to do was wait for the market to cool off. In the meantime, where have I found opportunity? I am working on a portfolio of pre-fabricated homes that were bank-foreclosed. I can purchase them below-market in bulk, renovate, and sell them above market by financing my residents. This is a high-margin, low asset value strategy that gives a second chance to both the homes and the people who live inside them. Still, I plan to work in the commercial value-add and opportunistic space in the coming years. As for the right strategy, in the right market, at the right time? You’ll have to get out your crystal ball for that. View my real estate portfolio: www.stephaniemcconnon.com....

28 Mar

Posted at 08:33h in Background & Preparation to Invest, My First Deal Series, Transitioning to a Career In Real Estate
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This time our, guest post is from the successful investor and real estate blogger, Joe Stampone.  Joe discusses how a family business led him to a career as a real estate entrepreneur.   Here's his story: Like many real estate professionals, my initial exposure to the business was through a family member. My Dad, an attorney by trade, and a few partners started buying large tracts of undeveloped land throughout Florida in 2005. They would put in the proper infrastructure, get the entitlement, then flip the land to single-family home developers. It was a great business, until it wasn’t, and in 2008 (after the market crashed) they were left with a lot of value-less land, debt, and personal recourse. Being loosely involved, I learned a lot about the complexity and expertise required to be successful in real estate. It was then that I sought out to become a student of the real estate game. Breaking into the real estate business was an entirely separate animal. I graduated from undergrad in 2008, a challenging time to enter the real estate profession, to the say the least. Using my friends and family network, I was able to join a family-friend who was doing small scale development projects in a growing neighborhood in downtown Philadelphia. It provided a great ‘hands-on’ exposure to the real estate business, but when the projects dried up, I sought more of an institutional exposure to the real estate business. I enrolled in NYU Schack’s Masters in Real Estate Program and moved to NYC. I spent my first year taking classes full-time, learning as much as possible, and meeting up with anyone willing to share a few minutes of their time. Through my various networking activities I met with two fellow Tufts alums who were finishing up grad school at Columbia and on the cusp of launching their own firm. I remained in touch with them throughout grad school and when I graduated in May 2011, I joined them as they began to grow Atlas Real Estate Partners. Over the past 5+ years we’ve done 38 deals, totaling over $600M in total deal value. It’s been a wild ride. Joining a small entrepreneurial shop like Atlas wasn’t my goal entering grad school, but by being open to all opportunities, it turned out to be an amazing chance to join a growing firm on the ground floor. It was the best career decision I ever made. If it didn’t work out, I still would have learned something and been right back to where I was, just a little bit smarter. When starting your real estate career, don’t get caught up on the brand name firm or your title. Just start. Get your foot in the door somewhere and begin your journey as a student of the real estate game. If you'd like to know more about Joe and his business, please subscribe to his excellent real estate blog, A Student of the Real Estate Game....

18 Mar

Posted at 09:24h in Background & Preparation to Invest, My First Deal Series, Transitioning to a Career In Real Estate
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In installment No. 3 of our series on how real estate investors got their first deals, we hear from Alex Franks, a full-time real estate investor who went from personal trainer to single-family home wholesaler to buyer of 100+ unit multifamily deals backed by foreign investors who teaches real estate investment to others.  An inspiring story! An Incredible Story My story has taken me on a incredible journey in the last 16 years. I never thought I would be in multiple states and countries teaching real estate education. I was involved in single family investing, building credit, fixing individual's financial picture, and building real estate portfolios one house at time. So here we go.  Back in 2000, I was going to be a wholesaler learning the ropes, including the ins and outs of real estate. A friend I met at the gym (I was personal trainer at the time) got me interested in real estate. The first six (6) years was nothing but wholesaling properties.  It really was the easiest money to make back then. My wholesaling career took off. I wanted to be the best and that what I set out to do. Finding the deals and learning to farm areas. Making sure any deal that was out or coming out- I wanted to be the first one to know. This was going great until I got the bug to start rehabbing homes myself. My goal was to buy 4 at time, flip 3 of the homes and keep one free and clear as a rental. Man, I was heading to the big time now or so I thought. I then made the leap to the million dollar homes. Now I had made it! I got my self into the right group and this was it. I was making 1{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} of the deal up front and 20{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} on the backend. I was set and after 2 years of this I should be good to go. Then, in 2007 and 2008 things started to crash and burn along with my business. I was stuck in loans and could not get out. I owed on mortgages because we refinanced everything at 90{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61}. At the time the banks had told me it was okay to do this. Hitting Bottom In 2009 I took a job for a very short term. I sat in a chair working for a debt collection agency, trying to shake down college kids for money they owed. I had to be in my seat at 8 am and ready to work. That lasted all but 2 days before I came home and told my wife, "I can go and make real estate work again.  I know I can." Now we had lost every rental we owned from 2008 -2009 . No one was paying and I could not make the payments. There was something that told me never again.  But I guess something in you tells you that you either believe in yourself or you don't.  And I was not going to accept the 8 to 5 gig. It was just not in my blood, or chemical make up. I wanted more and more for my wife and family. Still in 2009 we were rebuilding. I took on a partner who was my main competitor in town. We slowly climbed back and starting buying cash flow rentals again. I have always been good at speaking just did not know that the seminars would be some thing I would be doing. Totally by accident how that came about. In 2009, we finally got back to flipping 3 to 4 houses month. A radio show in LA contacted us back and asked if we could provide turn key properties to their investors. So we started with one seminar in the Anaheim stadium press area. After that the wheels were greased and things started moving again. We are buying up to 20 houses a month in Atlanta, Ga.; Sarasota, Florida; and Charlotte, NC. Between 2010 and 2013 we were one of the largest turnkey groups in Charlotte. We were doing seminar in LA, San Francisco, Singapore, and Malaysia. We were raising money from international hedge funds. Our office had 21 people working for us. Our construction company had over 20 people at the time. Pivoting In Response to New Competition in the Market Then, when we could not get any bigger and things were going great, the hedge funds came to town.  Overnight, the Blackstone fund Invitation Homes destroyed the single family flip market. They took over the market, purchasing over 7,000 homes in Charlotte alone. We survived on a few flips to clients, but they were few and far between. The money hose now was just a trickle, barely enough to pay the bills. Right around that time, we found a 102-unit apartment shell in Gaffney, SC on an auction site. We decided to try and buy it. No idea why we did it, because I was totally against it. Lo and behold, one of our international investors had a friend who was looking for projects in the U.S. So he came on board. We took from December 2013 to August 2014 to complete the project. What a learning experience that was! We then leased the units to Limestone College in Gaffney. Things started to make much more sense to me. Why flip 200 houses? Why not just buy one 200 unit apartment? We build up a good network. It was just a matter of finding the projects. We then went on to purchase a 55-unit deal in Gaffney, and we are bulldozing that to build 122 condo units. Then we picked up 136-unit property in Gastonia, NC., which was purchased for $1.2 million and flipped for $2m in 6 months. (We did gut the units and get everything ready for the new buyer, with contractors lined up and such.)  So, from 2013  to 2015, that kept us busy. Our profit off the 136 unit was $400k -- much better then flipping turn key for about $8k to $10k a deal! What the Future Holds for Alex Franks So after that, I decided my 2016 goal is to not partner on another apartment deal, but to buy my next deal for my company. So today I am working on my financial picture, getting ready to buy 100 or 200 unit in either NC and SC. If we can afford more, we will buy more. My goal is to acquire 500 units. I know some people want more, but I don't. I want roughly $30k a month free and clear, with a few apartments that are paid off and will stay in my family for years to come. I can see the light at the end of the tunnel now, where before I was blinded by what I thought was being busy. It's a simple concept:  why buy 250 homes, and have 250 headaches, when I can buy 250 units apartment and be close to being done? I know it won't be that easy and will be a lot more work. There are not that many good deals out there. Just like I taught single family investors how to buy SFH, I am using that knowledge to help market and make offers on apartment buildings close to where I live. That my story.  I hope it helps people understand that apartment investing is a much better route to success than single family rentals. If you're interested in contacting Alex and learning more about his story, you can find him here....

09 Mar

Posted at 13:49h in Background & Preparation to Invest, My First Deal Series, Transitioning to a Career In Real Estate
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The "My First Deal" series explores how successful self-made multifamily real estate investors got their first deal done and took their first step toward escaping the corporate grind.  In the second installment of this series, we meet engineer turned real estate investor, Reed Goossens: I went from a structural engineer to a real estate investor, and moved from Australia to the United States – all at the same time. So my story isn’t just about my first deal; it’s about my journey. Is This All There Is?! Rewind to 6 years ago: I am 24 years old, and I had just spent the previous two years living and working in London as a structural engineer. As my time abroad ended, I moved back to Brisbane, Australia and quickly found another job, when reality hit me. My travels were over, and this is what it seemed I was supposed to be doing for the next 40 years of my life - sitting in a cubicle answering to a boss that answers to a board of directors. I remember thinking to myself “This can’t be it? What have I got myself into?” I knew that I didn’t want to work for ‘the man’ in a 9-5 job for 365 days of the year for the next 40 years; I wanted more. I needed to find something that supplied me with enough income so that I wouldn’t need to work for that long, especially for someone else. I furiously began searching wealth and entrepreneurship on Google. The first two things that popped up were stock market investing and real estate investing. Being an engineer, my day job exposed me to large-scale commercial developments, so I felt a connection to real estate. Also, my dad had a few small successes in the Australian market, so I thought that it was a perfect fit. I started Googling as much as I could about real estate investing and within the first week, I had a copy of the best seller Rich Dad Poor Dad. That little purple booked opened my eyes to understanding financial freedom and long-term wealth, which is what I craved so much. I could take control of my life and ESCAPE the rat race. Big Apple, Here We Come! I devoted all of my spare time to researching real estate investing and increasing my financial IQ. I attended as many different real estate networking events as I could, and surrounded myself with other successful real estate entrepreneurs for about 18 months. At the same time I wanted to move to NYC with my American girlfriend; so we decided to pack up our lives and move half way across the globe in pursuit of an adventure to live and work in the BIG APPLE! Once we settled in to the New York way of life I began educating myself on everything related to investing in the U.S. market, from understanding the U.S. investing lingo, to advanced topics that you would pay top dollar to a ‘guru’ in Australia, yet were readily available and free at the real estate investment clubs in Manhattan. At this point, I still hadn’t done a deal. I spent a solid year getting to know the lay-of-the-land. This was 2012 and there were plenty of cheap properties out there, and I now knew enough about cash-flow properties to get involved. I started focusing on upstate New York (Buffalo, Syracuse, Rochester). These places were within driving distance and were within my price range. Over a period of 6 months I developed a team on the ground and I finally purchased my first triplex all cash for $40K. I had no U.S. credit at the time. Being a landlord quickly taught me the power of cash flow and repositioning; buy a property needing some work, do it up, increase rents and increase cash flow. This forces appreciation in the property. Before I knew it, I was at the bank asking for a small refinance to buy another deal. I successfully closed on another duplex and have since continued to grow my portfolio. From the first deal until now, there was a huge learning curve that real estate seminars couldn’t have taught me. The Power of Connections A year later, I met a mate for a drink, and I was boasting about the small properties I own in upstate New York. I was telling him about the cash flow, and the great tax benefits associated with owning real estate. I thought I was really selling this guy! He then turns to me and says, “That’s awesome mate - I just closed on an 80 unit property in Canada.” My mouth dropped. “…what?” I said. He repeated the sentence, but I couldn’t believe it. He went on to explain the power of NOI and forcing appreciation in commercial real estate. This was the second “ah-ha” moment in my life. I told myself I need to up my game and get involved in larger commercial multifamily apartment buildings. I went out and found a great mentor/real estate coach to help guide me to that next level on my journey. In 2014 he helped me develop my personal brand. I developed a website, worked on my pitch and my professionalism, and I started looking at larger multi family deals. Underwriting 10-20 deals a week for months. At this time, my girlfriend and I decided to move to warmer weather in LA. Again we packed our bags and moved across the country. Again, I rocked up without a job. As soon as we moved to LA I started a meetup group to increase my exposure to other investors. We meet once a month in Downtown LA at a bar and discuss all things related to real estate investing. After a few months, at one of my events, I met an investor, Frank, who was desperately trying to close on his first large multifamily deal. I was still underwriting deals and trying to find as many investors as possible. Frank had good deal flow, but he didn’t have investors to invest in the deal. I connected Frank with my mentor, who offered to bring capital to the table if I found a cracking deal, and boy did I find a cracking deal! One Deal Done and More to Come! We got a 250 unit under contract ($14M deal) and frantically started raising capital from as many investors as possible. Two months later we closed. It wasn’t without massive heartache and a huge learning experience, but we got it done! I am skimming over the details but it was a massive effort! We raised $3.3 million in 2 months! The property is now performing extremely well; above what we had projected. Currently I am raising capital for another 155 unit deal, just down the road from the first one. Now by no means have I “made it.” This is just the start of a long successfully career investing in U.S. real estate, and still I have a lot to learn. The year 2016 is going to be massive! More deals to come, and I am also increasing my reach via my new podcast and looking to release a book by the end of the year, which will cover the fundamentals of investing in U.S. real estate as a foreign investor. Watch this space! Happy Investing! Reed Goossens is founder of RSN Property Group in Los Angeles.  His podcast, which focuses on how to invest in U.S. property from as a foreign investor, can be found here.  We will check back in with Reed in the future to learn about his progress growing a real estate empire from scratch....

26 Feb

Posted at 09:06h in Background & Preparation to Invest, Jonathan Twombly, My First Deal Series
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Closing your first deal is critical. Before you've done it, most brokers, investors, and lenders won't work with you. Once you've closed a deal, everything becomes easier. But if no one will work with you until you've closed a deal, how can you ever close a deal? It's a Catch-22 situation. New investors, struggling to get over that first-deal hurdle, spend thousands of hours every day on sites like Bigger Pockets, hoping to learn the "secret" to getting the first deal. They seek out investors like me for advice or mentoring. Some even invest thousands of dollars on courses promising to teach them "shortcuts" to real estate riches. There are no "shortcuts." The only "secret" is to hustle. To focus your hustling and reduce wasted time and effort, you should learn from experienced investors. Model what they did. To help you, starting today, The Mortar will post a periodic series entitled "My First Deal." Here, experienced investors will tell you the story behind their breakthrough. We'll start with mine. My First Deal:  A Three-Year Ordeal I've written about how I went from miserable lawyer to full-time real estate investor. Getting my first deal was a three-year ordeal. Here's what happened. My first partner and I focused on apartments in Louisiana and Texas. We spent 2011 sorting through the leftovers that brokers show new, unproven investors. In 2012, we finally bid successfully on a property in Houma, Louisiana. We'd seen the deal before, but the owner had cut the price enough for the deal to work. Soon we had a second property under contract with the same seller. We lined up our equity investors, a co-signatory for the debt, and a lender. Then the lender inexplicably dropped out of the deal. We got skittish and canceled the second deal. We were out of pocket thousands of dollars, not to mention the months of effort wasted. Ultimately, we dissolved the partnership. But while we were still riding high, we were looking at other markets to enter in the future. Being a data dork, I was poring over the numbers from the recently-released 2010 United States Census, trying to find the most attractive markets. I decided to look only at markets growing faster than the U.S. as a whole. That eliminated the Northeast and most of the midwest. I cut off everything west of the Mississippi River because it was too far to manage. Florida's big booms and busts scared me, so it was out, too. The Carolinas, Virginia, and Georgia were left. Charleston jumped out as a fast-growing area. I loved the city, and I had good friends in it. So I decided to start there. I knew reaching out cold to brokers wouldn't work. I decided to use my network, knowing Charleston was small enough that everyone knew everyone else. I asked my friends -- a doctor and a lawyer -- if they could introduce me to any commercial brokers in town. Both came through. But my friend Abby really hit a homer. She introduced me to her best friend's husband, Chris, a successful broker and developer in the area. Chris's partner, Tyler, had led acquisitions for a multifamily investment fund for 15 years. He knew everything about the industry and all the players in the region. After my first partner and I dissolved our business, at the end of 2012, I formed Two Bridges Asset Management LLC. Now on my own, I wanted to focus on the Southeast. Just about the first call I made was to Tyler. He became our exclusive representative in the Carolinas. Adding Tyler to my team changed the game for me. But not right away. It still took time to land that first deal. Tyler called his old broker contacts, looking for our first property to buy. We saw many markets and looked at dozens of deals, criss-crossing South Carolina in Tyler's truck.  But, as a new, unknown group from out of town, we were still not seeing the good deals -- the "pocket" listings that brokers only show to their best clients. Finally, Tyler asked a favor of one of his partners in development deals. The daughter of one of his close friends, Kay, was a successful commercial real estate broker in Greenville. Greenville was far from Charleston, but it a fast-growing area, and on my short list. With the benefit of a personal introduction, Kay met us at her office. We first discussed our investment strategy. Then Kay mentioned a new listing that might fit, in nearby Spartanburg. We'd be the first to see it. We immediately left the office, drove to Spartanburg, and viewed the property. It was located at the intersection of two Interstate highways, within minutes of thousands of jobs. Few cars were in the lot at midday -- tenants were working -- and the ones that were there were newer, nicer ones. The complex had a good feel. A few days later, after running the numbers, we made an offer. Kay convinced the seller to accept it without taking the property to market. Soon we were in contract. Someday I will write about the struggles we went through to close the deal. I've already written about how the deal nearly tanked after we closed it. But the point here is that we closed it. We got our first deal. We were in business. Three Takeaways for New Investors So what should you take away from my story? First:  be persistent. Nearly three years elapsed between starting in real estate and closing my first deal. I did not give up, and I ultimately found success. Don't quit too soon. Your goal may be just ahead! Second:  if there's a "secret" weapon in this business, it's your friends and family. I asked Abby for introductions to brokers, and she introduced me to her best friend's husband, Chris. Chris introduced me to Tyler, a multifamily pro. Tyler used personal connections to get us introduced to Kay. We've now done several deals with Kay and her team. Your friends and family do not need to be in real estate. Abby wasn't. I didn't know if she knew anyone in the field. But I asked, and she did. You will never find out who your friends know unless you ask them. It's actually better that Abby was not in real estate. Her contacts were more likely to meet me because they were personal friends, not professional contacts. And they were more likely to take me seriously because of the personal connection with Abby. Third:  persistence and relationships together will lead to a break. Keep pushing forward and keep using your network to meet new people. The next new person you meet may be able to help you. Over time, if you persist and build solid relationships, opportunities will come your way. But relationships and reputations take time to build. You must be patient and build them right....

19 Feb

Posted at 11:30h in Background & Preparation to Invest, Jonathan Twombly, Managing Rental Properties, Real Estate Psychology, Transitioning to a Career In Real Estate, Uncategorized
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You’ve finally closed your first deal. What do you do now? Yeah, I didn’t know either. And it nearly caused me to blow my first deal. Then I got serious.   I went pro. On Top of the World During due diligence on my first deal, I decided not to hire the seller’s onsite property manager (PM) after closing. The property started operations with our management company’s transition team. The regional manager (RM) was to hire a new PM. Hiring a PM took months. Numerous candidates turned down the position before one finally accepted. Her background was in affordable housing, not market-rate property like ours. It didn’t sound quite right to me, but the RM believed she could learn the PM role quickly. Anyway, who was I to say? I was a newbie. I still felt like an amateur. The RM was the professional. I deferred to her judgment. Operations started off very well. By the end of the Second Quarter, the property was fully occupied and outperforming our financial projections. I sent a nice fat dividend check to the investor. He had just invested in our second deal, too. I felt on top of the world. Whoops!  Not So Fast . . . Almost immediately, though, things started going wrong. Occupancy started trending down in the weekly reports. We were experiencing very high rent delinquency rates and had to evict several tenants. I brought it up with the RM on our weekly property calls. Each week, she assured me that everything was under control.  I kept my mouth shut. But by early fall occupancy dropped to about 90 percent, and operating profits fell. Eviction expenses and apartment turn costs were rising. We would miss the Third Quarter distribution. And, then, black mold was found in a vacant unit. Then another. Then a third. All three units had to be gutted to the studs. The RM kept assuring me everything was under control, we’d start seeing improvement soon. I deferred to her. I said nothing. The property was in free-fall. The PM and RM were not doing their jobs. The professionals were failing, and I did not know what to do. I felt paralyzed. Turning Pro When occupancy fell below 90 percent, something in me snapped. I realized, for the first time, that the hard work started when we closed the deal. I was an asset manager now. Someone had invested more than $1,000,000 of his family’s money in this deal. I owed him a duty to fix things. I had to take action fast, even though I was not really sure what to do. I made a decision. I would stop assuming the RM and PM knew more than me. I would stop deferring to their judgment.   I would take charge. I would captain the ship. That moment, I turned pro. I emailed the management company’s top executives. The company was managing our second property, too, and was in the middle of due diligence on our third and fourth deals. We had been discussing a long-term relationship as we built our portfolio. I told them that they would straighten out the first property right away, or I would terminate all their management contracts. That email got action, fast. The CEO and other executives flew in to meet with me. The PM returned to her old job in affordable housing before she could be fired, and the RM took direct control over the property. The company assigned one of its best asset managers to oversee the RM, and he drafted a recovery plan for the property. After a few months, a new executive manager took over our entire portfolio, replacing the RM. Taking Stock and Facing Facts We also made sure to get to the bottom of what happened, to avoid making the same mistakes ever again. We dug in and discovered that: The PM was used to filling vacancies from a waiting list. She could not adjust to a market-rate property that required constant marketing to maintain occupancy. She did not check vacant units for problems. She was unaware until it was too late that moisture issues had caused mold in three vacant units. She set qualifications too low in the tenant evaluation software, causing her to rent to unqualified tenants who fell behind on rent and had to be evicted. She entered invoices into the accounting software improperly. The property looked more profitable than it was, because expenses were not being booked. The PM said the property lacked operating cash to turn vacant units to be re-rented. But she never told her superiors. We could have advanced money from corporate to help, but were never informed of the problem. The RM was not paying attention to any of these matters. Nor were her superiors. And I faced up to the fact that, as the sponsor and asset manager, I was ultimately responsible for the situation. And I made some rookie mistakes too: Ignoring my gut and deferring to the RM’s assurances that everything was fine. I should have spoken to the management company’s executives the moment I felt that what the RM was telling me was inconsistent with the numbers I was seeing. Distributing too much cash too soon, depriving the property of operating funds, because I wanted to look good to the investor. I should have distributed only what was needed to meet the preferred return and waited for the property to stabilize. After we brought in the new management team and implemented the recovery plan, the property’s position improved dramatically. And our other three properties, which were already performing well, benefitted too. But significant damage had been done at the first property: The property fell behind on payables to vendors. Vendors did not want to work at the property. We had to fund accounts payable from corporate, and it took months to catch up and restore the property’s credit with vendors. The property fell below the lender’s required debt-service coverage ratio, and the bank took control of the property’s bank accounts for two calendar quarters. Most important, the investor did not receive distributions for more than a year. There were negative consequences for our company, too: We, as the sponsor, could not participate in any profits until the investor’s preferred return deficit was made up. We waived our asset management fee until distributions resumed. Our contract did not require it, and the investor did not ask us to do it, but it was the right thing to do. As a result, we received no compensation from the property that required more time and effort and caused more stress and sleepless nights than any other we own. Lessons Learned So, what can a new investor take away from this experience? Once you close, you are in charge of the deal. If things are not going right, it’s your responsibility to fix it. Strong property-level staff is vital to the success of your business. If you see any signs of incompetence, you must address it immediately. Require your management company to hire property-level staff with direct experience with your property type. Different property types require different skills. Hiring a manager without the right skill set could destroy your business. The situation at a property can unravel very quickly. It can take years to restore the property to its full potential. You must take swift action at the first sign of trouble. Don’t be afraid to speak up. If your gut tells you something is wrong, it’s your responsibility to demand that the management company fix the problem. The problems with this property caused me to lose many a night’s sleep. But, taking a long view, I’m grateful this situation arose early in my career. It taught me how to be an asset manager. This property forced me to become a pro at what I do....

09 Feb

Posted at 08:42h in Background & Preparation to Invest, Real Estate Psychology, Transitioning to a Career In Real Estate
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Guest Blogger:  Joe Stampone of A Student of the Real Estate Game I spend a lot of time talking with real estate entrepreneurs who have successfully closed a few deals and built their company infrastructure. While they knew it would be difficult, they’re always surprised by what it takes to build a company. The ability to source, underwrite, and execute real estate transactions is a small piece of running a real estate investment firm. Based on the countless conversations I’ve had and from my own experience with Atlas, here are 10 things you need to do before doing your first deal. This list was also inspired by the advice from my latest eBook, what 20 real estate operators wish they knew when starting their firm. Cultivate a support network: Going off on your own is going to be an emotional roller coaster for the first few years. You give up your steady salary and come out of pocket for start-up business expenses, and you’re going to have to skip those after-work happy hours and weekend dinners. You won’t be able to go on that west coast ski trip this year or do a summer share in the Hamptons. Make sure to have a network in place of people who understand what you’re going through and can offer advice/support. It’s going to be a grind for a long time, but it will be worth it in the long-run. Create a board of advisors: One of the most challenging aspects of doing your first deal is winning the deal with no track record. Why should an owner/broker award you the deal instead of the group with a big balance sheet and a history of executing deals? Yes, you can show the track record of deals you’ve been involved with at your previous shop, but I recommend you form a board of advisors who can provide advice and who have a track record you can piggyback off of. Understand the holes in your skill set: Before going after that first deal, spend some time with your partner(s) analyzing what “holes” there are in your combined skill-sets and personality traits, the biggest potential risks to your business model, and what a downside scenario might look like. Once these issues/risks are identified, it’s a good idea to take it one step further and think through potential ways to mitigate these issues upfront, or how to best address them if they do arise in the future. Devise and business plan and understand your competitive advantage: As a new firm, you have to differentiate yourself and give a client or investor a reason to work with you as opposed to with an established player. That requires you to form a strategy or viewpoint that might be contrarian or showcases your expertise executing a specific strategy. Early investors will be betting on you as well as your specific strategy. Work with an established attorney and accountant: When working with service providers you typically get what you pay for. If you can afford it, find a quality attorney and accountant who can help you get your business set up, put proper systems in place, and ensure you’re doing things the right way. It’s a lot easier to do it now rather than later on down the road. You can use a service such as LegalZoom to save on costs. Cultivate a network of investors: One of the fallacies I hear most often in real estate is “you can always find the money if you have the right deal”, a phrase that may hold true for established investment firms, but couldn’t be further from reality for rookie investors. Call everyone in your professional and personal networks and tell them about your new idea and how you will create value while mitigating risk for your investors – key points which we forget to emphasize while we’re stuck digging through the weeds of the acquisition. You can start to build your investor database by contacting your CPA’s, lawyers, existing clients, RIA’S and wealth managers, lenders, and friends and family of means, all of whom are seeking to allocate capital or have clients seeking to allocate capital in real estate. Understand your company culture: Even with just two or three people at the company, you should be talking about culture. You should be very deliberate on creating culture every day. You cannot go back in time once you are a successful business and “make up a new culture or establish one for the first time.” Culture is born and grows and lives, just like your business, and you need to put it in place at the beginning.” Partner with a good 3rd party marketing firm: When starting out you need a company name, logo, business cards, and a website. You can save on costs by using sites like 99Designs or finding freelancers, but I recommend working with a high-quality 3rd party marketing firm that has done work with other real estate investment firms. I have worked with several groups that are affordable and understand the real estate space – feel free to reach out if you’d like an introduction. Find a partner with capital if you don’t have any: It’s going to be impossible to cover start-up costs, fund deposits, and sign on debt without a net worth. If you don’t have capital, find a partner who does. This is probably this biggest barrier to successfully execute your first deal and the reason many investors start with bite-sized deals. Get your first deal done: Ignore everything I just said and execute! Get your first deal done and use it to learn, put processes in place, and build your track record. This list is in no way exhaustive, but provides a good sense of things you should be thinking about as you prepare to go off on your own and do your own deals. What else would you add to this list?  Enter your thoughts in the comments section below....

29 Jan

Posted at 12:41h in Background & Preparation to Invest, Jonathan Twombly, Transitioning to a Career In Real Estate
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Going from lawyer to full-time real estate entrepreneur was tough.  Here's how I did it. Trading My Life for Money I practiced law for 12 years. I worked 14-hour days, ate every meal at my desk, and worked most weekends. Sometimes I went a month without a day off. I ate terribly, got fat, and felt miserable. I hardly dated or saw friends. My life consisted of eating, working, and sleeping (very little). The money was good. But my “Sunday night blues” started on Friday night. I wasn’t just trading time for money, I was trading away my life. Why was I working so hard? So my faceless billion-dollar corporate could fight over millions of dollars with another faceless billion-dollar corporation. And, right before trial, they'd always exchange some money and settle.  The client would go right back to doing business with the enemy.  I'd have just wasted three years of my life. And, for what? To make partner? Yeah, right. Law firm partners don’t like to dilute their profits. And even if you make partner, then what? You work just as hard as the associates, except now you have to bring in business too. The pressure never stops.  You have to feed the machine clients or it stops dead. I tried to escape several times. I walked off the job with no plan. I just needed out. But, with no plan, I would drift back into law. I even went back to school for two years. Then I met my wife and returned to law for the money. But law firm life nearly destroyed my marriage. In 2008, the Great Recession hit. I was grateful to have a job. But the work dried up, and as it did, my stress level rose. I surfed the Internet all day, dreading a knock on the door that meant someone was firing me or bringing me work. I could not decide which was worse. Breaking In Nearly Broke Me In early 2011, my firm got tired of paying me to surf the Internet and let me go. I was more relieved than upset. But the idea of interviewing for another law job made my stomach turn. I had to make a change. I’d always been interested in real estate. A friend and I had looked at properties together but had not made any offers. I started looking into real estate as a career. But, because of the recession, I was competing with guys out on the street with years of experience. I stood no chance. One day, a very experienced real estate hand sat me down over coffee. “Look,” he said. “I’ll tell it to you straight. At your age [42], and with your background, no one in this city is going to hire you. The only way you’re going to break into this field is if someone just takes a liking to you and offers to make you their partner.” Unbelievably, a few weeks later, that happened. I had been networking with everyone I could in real estate. I met a woman who owned property with her husband and wanted make real estate a business. She asked me to join her. “This isn’t rocket science. You’re smart. You can learn it,” she told me. “And, you have integrity. I can trust you. That’s most important.” She also thought I could raise money. She must have had some kind of second-sight. I was not sure whether to accept her offer, so I asked some close friends for advice. Two of them told me that, if I accepted the offer, they would invest money with us. And the amounts they mentioned were substantial. So, having a partnership offer and two investors in hand, I decided to go for it. It was not easy. It took us more than a year to find our first deal. Then we found another from the same seller. But after we had spent money on due diligence costs, travel, legal fees, lender fees, etc., the lender backed out of one deal and we terminated the other. We lost months of work and tens of thousands of dollars each. And I was supporting my family out of savings at the time. We decided to break up the partnership. We’d had some disagreements over strategy and decided at this point it was best to go our separate ways. After Three Tough Years, Success at Last Now what? I wondered. A few weeks later, I was having dinner with one of my investors. I said I might have to go back into law. He said not to be hasty and then suggested that we form our own venture. In early 2013, we founded Two Bridges Asset Management LLC. It took a year to get any traction. But by 2015, we had four properties in our portfolio, comprising 404 apartments, worth nearly $20 million.  Now we're planning to raise our first investment fund. What enabled me to leap from miserable lawyer to full-time real estate entrepreneur? I exercised a high degree of professionalism, which I learned as a lawyer I established a reputation for intelligence, integrity and trustworthiness I networked actively with people in the industry and followed their advice I absorbed the losses personally when our deals went bad, rather than look to our investors, demonstrating integrity and commitment to the business I kept moving forward in the face of setbacks I said yes to opportunity when it came my way If you are committed to a career in real estate, and you develop these traits, too, you can free yourself from the corporate grind. I did it. So can you....

14 Nov

Posted at 12:06h in Background & Preparation to Invest, Real Estate Psychology
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Everyone who has successfully broken into multifamily real estate (MFRE) investing will agree on one thing: Your first deal is the most important. Why? Because brokers, sellers and lenders will not take you seriously if you’ve never owned multifamily property. You’re a newbie, a tire kicker, a waste of their time. This situation presents a real problem: no one will do business with you when you’ve never closed an MFRE deal, and you can’t close a deal when no one will do business with you. In a very difficult profession, getting your first deal could be the biggest obstacle of all.  But you can overcome it. The Problem: Newbies are Risky Very few MFRE professionals want to do business with new investors because most newbies will waste the professional’s time, money or both. The risk for a seller is that a property goes into contract but the deal does not close. Once a deal goes to contract, a seller must expend significant time and effort providing due diligence materials to the buyer, lender, and third parties such as surveyors, title insurance companies, and appraisers. It must deal with irate tenants upset over disruptions caused by the inspection process. The seller will incur unrecoverable expenses connected to the transaction, like legal fees. And, most importantly, the market may move against the seller while the property was off the market during the contract period. Thus, sellers are wary of new investors, who may not have the resources or qualifications to close the transaction. For this reason, a seller may reject a higher offer from a new investor in favor of a lower offer from a buyer with a history of closing deals. For brokers, the buyer’s ability to close trumps everything else. Brokers spend significant amounts of time and money preparing and marketing a property for sale. Once a deal goes under contract, they will also spend significant time helping the seller provide due diligence materials to the buyer. Most importantly, brokers are only paid if a deal closes. And almost as importantly, brokers risk their reputations with their clients, the sellers, if they bring unqualified buyers to the table. Lenders also see significant risks in dealing with new investors. A very important consideration for them is the buyer’s ability to operate the asset properly and maintains its value as collateral for the loan. Lenders favor buyers with a history of successfully operating multifamily properties, and some lenders will even require a borrower to have two or more years of prior operational experience, regardless of the deal’s inherent attractiveness or the buyer’s creditworthiness. Sellers and brokers also know it may be tough for new investors to qualify for mortgage financing, and for this reason as well, they may be resist doing business with them. In reality, sellers and brokers have very few ways of determining whether an investor really has the resources and qualifications to close the deal. (Lenders will get your balance sheet, so they will know.) So, sellers and brokers have nothing else to go on but your past history. Even though closing prior deals is no guarantee that a buyer will be able to close this deal, sellers and brokers usually feel that a buyer with a track record is less of a risk than a new investor, whose ability to close is unknown. The Solution: Build Your Credibility With Stakeholders Just because you have no history of closing deals and running MFRE properties, don’t give up hope! Everyone in the business got past this hurdle. So can you. The key is to develop credibility as an investor even though you don't have a track record. These steps will help. You’re An Investor: Own It A typical mistake new investors make is not to believe they are investors until they close a deal. If you don't believe you are really an investor neither will anyone else. If you are devoting substantial time and effort to learning this business, then you are an investor.   Believe it, be it, and own it. Doubt yourself, and so will they. Develop Your Knowledge and Learn the Lingo For anyone to believe you are an investor, you must sound like one. You must master the essential concepts of multifamily investing and understand the profession’s vocabulary. If you don’t know the meaning of “cap rate” or “economic vacancy,” you had better learn now. Fortunately, many educational resources are available, from books to websites to full-blown certification courses like CCIM. Broker packages are an excellent overlooked resource. Many brokerages allow anyone to register on their site and receive all of their offering materials. These materials are a treasure trove of information about how brokers and investors think. And while broker materials should be seen for what they are – sales materials – they are a terrific resource for helping you learn the lingo. Leverage Your Own Credibility Just because you don't have a background in MFRE doesn’t mean that your background is irrelevant. In fact, it can greatly enhance your credibility with people in the real estate field. Did you graduate from a well-know university? Do you have an advanced degree? Do you have a prestigious professional job such as doctor, lawyer, banker, consultant, etc.? Have you successfully built a business in another field? Have you already built a portfolio of single-family homes? Whatever your background, you can mine it for elements that make you stand out as professional and accomplished, and these elements will help you establish credibility with people in the MFRE business. Build A Team If you really want to build your credibility before you go out and try to find deals, you must build a team of professionals. In addition to the management company, you will need a real estate lawyer to help you negotiate the purchase contract and close the deal and the loan; a real estate accounting firm to prepare tax returns and prepare financial statements; a surveyor; a title insurance company; and, if you are using investor money, a corporate and securities lawyer to prepare the proper legal documentation for investors. Having these professionals in place in advance will show brokers, bankers, sellers, and investors that, even though you are new, you are well prepared and serious about this business. It will enhance your credibility, as well as make it much easier to close the deals you do find. Cloak Yourself in Others’ Credibility If all these steps fail, you still might be able to gain credibility by borrowing the credibility of an experienced partner or mentor. If you can show deep knowledge and real dedication, you may be able to find a veteran who is willing to help you. But be forewarned: this is not easy. Most newbies know nothing, are unreliable, and frankly are more trouble than they are worth. And an experienced investor will be very reluctant to risk their reputation on you. So you will have a great obstacle in convincing someone to mentor you. At the very least, you will have to do all the hard work on the deal and give away a very large piece of the upside. You might even be left with only a tiny sliver of the equity in your own deal. But, if you can pull this off, the mentoring, experience, and credibility you receive along the way – and getting that all-important first deal done – will more than make up for it. Cultivate Relationships with Brokers Ahead of Time Brokers are the gatekeepers in the business, as well as enormous sources of information, and you must make them your allies before you actually need them. Brokers are like everyone else: they prefer dealing with people they know. Build relationships with brokers before you start looking seriously at properties, so when you’re ready to buy they are already on your side. If you can, meet brokers through personal introductions. Ask your network if anyone knows a commercial broker. An introduction from the broker’s business acquaintance is helpful, but an introduction from a mutual friend outside the business is even better. Either will provide you with a level of credibility that a cold call never can. Do your homework before you meet a broker. Make sure you speak the language of the business. Google the broker, learn about his background, and study his current listing materials thoroughly. Demonstrating deep knowledge of him and his business will help you overcome any resistance he has to working with you. Once you’ve met a broker, don’t wait until you need a deal to call him again. Build the relationship now! Take him to lunch or coffee periodically. Tell him about your plans and demonstrate that you understand the business and the market. Most importantly, show a personal interest in him. Learn about his family, interests, and personal problems you may be able to help solve. It’s Networking 101, and works with brokers too. If you show interest in their success, they will take an interest in yours. Try to solve a lingering business problem. Ask the broker to show you old deals that never got any offers or fell out of contract – in short, deals he had given up ever making money on. Even if he’s not yet willing to trust you with one of his sweet deals, he may take a chance on you with one of the dogs. Put together a creative offer that shows you understand the difficulties of a dead deal; if it’s good enough, he will become your advocate with the seller. And, if you close the deal and make him money he never thought he’d make, you will become a go-to client. Don’t waste the broker’s time! Don’t overstay your welcome and make them think you are a time-sucker. Keep your meetings short. Leave the broker wanting more. Demonstrate Your Credibility to the Seller with Proof of Funds A seller may refuse to deal with you if he doubts your ability to close the deal. One way to overcome this doubt is with “proof of funds.” If you, your partners, or your investors have the funds available for the equity portion of the purchase price, offer to get a letter from an accountant or bank attesting to this fact.   If a seller sees proof of funds, it may put their doubts about dealing with you at rest. Demonstrate Your Credibility to Lenders With A Professional Management Company in Place Having the right team in place can help you overcome lender resistance as well. Lenders may feel it’s too risky to lend to a new investor with no experience running a multifamily property. One way to overcome this is by having a partner with experience operating properties. Another way is to install an approved professional third-party management company to run the property’s day-to-day operations. If the lender knows that the asset is in professional hands, it may be more likely to lend on your first deal. Depending on the size of the property, you will have to pay somewhere between three to ten percent of revenue to hire a qualified manager, but on the other hand you won’t need to take the 3:00 am calls about backed up toilets.  A Word About Lenders and Your Personal Net Worth Another issue faced by multifamily investors is qualifying for a mortgage. MFRE is considered commercial property, and, unlike residential mortgage lenders, commercial lenders require a borrower to have a net worth equal to or greater than the size of the loan they’re making, regardless of the value of the deal. If you’re seeking a $500,000 loan, you will need a net worth of at least that much to qualify. If you do not have the requisite net worth, then you will need a partner who does. You will have to share equity in the deal, but bringing on such a partner will help you get the deal done. You will need to have financially strong partners in all your deals, and give them equity, until your net worth has grown to the point where banks will lend to you on your own. In the End, It All Comes Down to Networks and Teams You’ve probably heard it before, but real estate truly is a relationship business. If you are serious about investing in MFRE, then you must spend the time and effort in developing a team of professionals and a network of brokers, bankers, and potential investors in advance. The time and effort you invest in building your network and your team will not only help you find that first deal, but it will also help you to close it, finance it and operate it successfully....