Updated: Feb 16
What a couple of years it has been! A journey full of lessons that I can’t wait to share with you! Some small, some large, some cheap, some expensive, some, well, very expensive…here we go…
A few years back, my mom and I began operating our remote luxury fix and flip business out in western PA, with a plan to expand into other markets. Over the past 3 years we have successfully raised nearly $4,000,000 of private money from our investor base around the world and completed over 40 projects in cities throughout the county. We have paid our investors an average return of almost 12% on their private money loans. We are involved in several LP positions in multi-million-dollar syndications and have helped raise capital for 5 multi-family syndication deals throughout the US. But there is always the side of the story you do not hear when things didn’t go exactly as planned. Just as we started scaling the business, COVID happened…the ultimate unforeseen circumstance, even though we planned for all potential unforeseen factors, or so we thought! So how were the first 60 days of the pandemic? No problem. Projects did shut down, but they were on the brink of reopening so we should have been cruising along, smooth as eggs…
Lessons 1 & 2:
That’s right, you guessed it, we hit another roadblock: a contractor that just couldn’t seem to finish a job, and not just one, but three jobs. At this point we were months behind and over budget, so what did I do? I jumped in the truck and drove all the way from San Diego, CA, to Pittsburgh, PA, to see what was really going on. No more pictures, no more stories, no more excuses, what’s the deal? I show up to house number one expecting to put out planter boxes and schedule the stager, at this house I started OVER A YEAR earlier…and what do I find? A total nightmare – not done, not nearly done, and not nearly done right! And this one was the furthest along, already months behind schedule. Then I go to house number two, completion date was supposed to be pre-Covid…still down to the studs, still not done right. House number three, same state as house number two, started a full year later. Let’s just say, sh** hit the fan…
We had no choice but to sue the so-called contractor, and unfortunately, due to pending litigation, I will not disclose details about the lawsuit, but I will share a number with you: nearly half a million dollars. That’s what it took to correct these three projects. Everything we saved, everything we had, every card we could max out, we did. Although we dug out of the hole (mostly), that was a brutal lesson to learn, especially after our previous mentor and partner stiffed us on several projects (but that’s another story for another time…).
So what are the lessons?
#1. TRUST BUT VERIFY – We had a contractor who we thought we could trust, who had a good track record and came referred. We had a team on the ground checking in on the projects, as we were unable to verify his progress ourselves due to the pandemic. Unfortunately, that wasn’t enough. Luckily, we caught him before the houses were completed and we were able to correct the hack job and successfully exit all three homes.
#2. ALWAYS GET IT IN WRITING – This we did do, and that’s the only reason we will be able to recover this massive loss. Contracts are key! Don’t be afraid to lay out a few dollars and have a real estate attorney write up your docs. That few hundred we spent on legal fees will end up saving us nearly half a million dollars!
What does this have to do with multi-family investing?
Well, we needed a tipping point before the shift could happen. We needed to find a way to make some cash in the meantime, to keep food on the table, and find another way besides flipping houses to survive. With home prices reaching record highs, material costs skyrocketing, and a labor shortage, flipping houses was no longer economically sustainable in our core market. So I found myself at a meetup in La Jolla, CA, at this beautiful property. I saw a couple buddies out on the glass deck (bougie) and we got to talking about what I do. Obviously, I flipped houses, but what they didn’t know was that we raised capital from investors throughout the world to do so. So one of them said: “You’re doing what I do, just on a smaller scale.” “Hmmm, that’s interesting” I thought. “What are you doing?” I asked. “Syndicating multi-family deals,” he replied. I turned my head like a confused dog. He explained the process, and I thought to myself, that’s it – that’s the shift we’ve been looking for.
Lessons 3 & 4:
A couple of weeks go by and then we get a message from our broker friend with an amazing opportunity in Pittsburgh – right in our niche market – that could be a home run if we play it right. A 10,000+ sq. ft. warehouse that’s primed and ready for a condo conversion. WHAT A DEAL! Obviously, we jumped at the opportunity and decided to put it under contract. I went in with the mentality that if it was a good deal, investors would come, which they did. But what I didn’t anticipate was the extreme downfall of the project…COVID. We were lined up: the architect was making drawings, contractors with multiple bids were pricing everything out, designers were starting the process, engineering was done, survey was done, inspections were done, insurance lined up, permits ready to be pulled, attorney had drawn up docs, and a private lender ready to close…closing time…BOMB!!! My lender passed away 3 days before the closing, lost to COVID. His family was naturally distraught, obviously not going to invest at that time, and I certainly didn’t expect them to after their tragedy.
Okay, we got this. Plan B, pay the current mortgage so the seller is not burdened with the extended closing time until we find another lender, easy enough, right? It’s a good deal! A month or so goes by, and we got another lender lined up ready to close, proof of funds in hand. Closing time…GHOSTED!!! We were left sitting at the closing table with no wire coming in. The lender had been scammed, all her money was gone, and she could no longer invest.
Okay, we still got this, the deal will sell itself! Finally, another investor, who is involved in many asset classes, agreed to the deal, but there was a catch: a personal guarantee with a confession of judgement. In other words, everything I own and everything my mom owns to secure the loan. That’s a tough pill to swallow, all our assets to secure one loan on a deal, leaving us nothing to leverage on future deals. We made the right decision, we pulled out of the deal. $60,000 later and we were back at square one. No deal, just a deeper hole in our pockets. Looking back on it, the market was not ready for that deal, as the luxury space proceeded to drop nearly 15% and days on market at that price range skyrocketed.
So what are the lessons?
#3. LEARN WHEN TO WALK AWAY – Now that seems simple enough, but it’s emotional when you have $60,000 tied up in a deal. We could’ve stopped the bleeding by letting it go after lender 2, but instead we kept trying to force it, and cost ourselves another $20,000 in legal and professional fees.
#4. DON’T FORCE THE DEAL – There will always be more deals and there will always be more opportunities. Perhaps one day we will do this deal (if it’s still available), but for now, it sticks as a lesson learned.
Lessons 5, 6 & 7:
Fast forward a couple more months, my friend who syndicates calls me with a last-minute raise that they needed help with: $250k in 24 hours to close a 20-unit deal in San Diego. I got this, one of my good friends and fellow investors just so happened to be looking for multi-family opportunities and had $190k (7.6% of the equity raise) cash ready to help close. Perfect! So I called him up, explained the deal, the numbers looked good (killer deal btw) and boom, they close. Then I was waiting, wondering, what happens next? What do I get for my efforts, for sharing a trusted friend and client to my other friend doing a deal? At this time, I knew nothing about syndication, I just really started diving into Grant Cardone’s free trainings. I didn’t know about acquisition fees, equity splits, or waterfalls. I just thought, well, he’ll send over a referral fee, right? WRONG! Nothing. All I got was a, “thanks, I owe you a steak dinner.” 7 months later…still no steak.
I thought, maybe this is just a way for me to break into the industry and now they’ll want to partner. So, I wait for another deal. A 92-unit comes along in Kansas City. Okay, I got this, let me make a call and see what I can do. Quick call later, my clients are wiring in $50k (2% of the equity raise). Nice! They will certainly take care of me this time, right? Nope, nothing…again. Wow, maybe this isn’t the group to work with if they can’t even share a little scrap from the table. Next group, next deal, another $50k (1.1% of the equity raise) into 145 units in North Carolina, another round of waiting and nothing. Okay, next group, 50k (10% of the equity raise) for a deal in Tennessee…again, nothing. Okay there must be something to this, because everyone seems to be eating, while I’m trying to catch the bus to dinner. Finally, my good buddy sits me down and starts explaining how this really works. He tells me about acquisition fees (1-2%), asset management fees (1-2%), disposition fees (2%), and waterfalls (10-30% equity splits). You mean this whole time, everyone else was getting paid off of my connections, who I spent 4-5 years cultivating relationships with and helping them increase their net worth?! Yes. Finally, here was someone who was truly trying to help me, someone who wasn’t just trying to shark me for another client. Don’t get me wrong, I have referred investors to many deals throughout my 13-year career that were not mine, with no expectation of a return. I believe what you put out comes back to you eventually. But this was different. These people KNEW I was trying to get into this side of real estate, they KNEW I was having problems on the single-family side, and they KNEW we didn’t know exactly how it all worked. Instead of coaching us along the way, they made a decision to keep me in the dark. So, for all the equity I raised for others’ deals, only one let me eat too. Only one made a side agreement to help me out, paying me out of his share of the deal. Only one decided to coach me and truly help me into the game. And now this is someone I can trust to work with for the rest of my life!
What are the lessons here?
#5. YOU MUST EDUCATE YOURSELF FIRST – Know how the deal works, how the partnership works, how the equity works, how the waterfall works, etc. Don’t be afraid to spend money on education. Over our 13+ years of investing, we have spent close to $150,000 on education and coaching for a 10-fold return.
#6. PICK YOUR TEAM WISELY – Partner with the right people, and you will never have to beg for their scraps. Multi-family is a team sport, and we all win and lose together. You are going to be working with these people for many years to come. It’s not like single family with a 6-month flip and you never have to work with a bad client or partner again. Some of these deals are 10+ years!
#7. PAY IT FORWARD – Bring others up, never take advantage of those who don’t know. Education is a power that you can spread with as little as a conversation over lunch, a phone call, or a webinar. No better feeling than watching people become successful who you have helped somewhere along their journey. Always pay it forward!
Lessons 8, 9, 10
Fast forward to the present. I meet another syndicator who has a screaming deal in the always popular market of Houston. Wow does this seem like a home run, 134-unit value add with a huge repositioning opportunity. The numbers look good on paper, the deal looks good from my analytical standpoint, the neighborhood is up and coming, there are others doing the same business plan on the same block, what could be wrong? Nothing, right? So, time to pitch this thing. Who better to pitch the deal to than my new team of fellow investors and the one and only Grant Cardone! I spent a week underwriting, another week putting together the perfect pitch deck, another week practicing and answering every possible question Uncle G could ask me. Okay, today is the day, I am pitching this thing and we are going to get this deal backfilled! For those of you who don’t know what that means, sometimes investors close deals with their own cash to close on time, and then raise the remaining equity after. Anyway, here comes the pitch…start out smooth, talking about the team, our experience, the area, the business plan, and all of a sudden, I am cut off mid pitch, Uncle G starts rapid firing some questions that I didn’t prepare for:
· Why is the capex per door so high?
· Why are the rents so low?
· Why is the occupancy that low with that low of rents?
· What’s the property look like?
· What’s the neighborhood look like?
· Why is the Preferred return so high?
· Why is the manager also a GP?
The list kept going….
Well, here’s the thing. I had never been to the property. One simple response from Grant left me speechless. “Well, if you couldn’t be bothered to fly there and check out the deal, why on earth would I or anyone else invest in that deal?” Then it hit me, why would they? Why would they trust me if I have never been there? Why would they put their money on the line if I didn’t spend $500 to fly there and check out the deal?
So here I am, sitting in a hotel in Houston, finally walked my first deal opportunity as a GP. Wow, seeing this in person and seeing the neighborhood really changed my perspective. I still think the deal will be successful, but as it turns out, the deal really is not for us. I think there are deals out there that will have much better returns, with much less risk, and a much shorter timeline to reach that point. I would’ve never come to that conclusion unless I came to see the deal. I also wouldn’t have discovered a couple other red flags that Grant brought up unless I pitched a deal to begin with. The only way you are ever going to really learn is by doing, so take action now!
Here are a couple more lessons for you:
#8. DON’T PITCH A DEAL YOU DON’T KNOW EVERYTHING ABOUT – You need to know that property inside and out. That neighborhood inside and out. The underwriting, the team operating the deal, the management, the tenants, EVERYTHING! Otherwise, you might find yourself face to face with Grant Cardone on zoom with nothing to say but “uhhh, ummm, uhhh…” KNOW THE DEAL!
#9. DON’T JOIN A DEAL ALREADY IN PROGRESS – My good friend I mentioned earlier brought this up to me. How am I supposed to get the full GP experience if I never am part of the deal until after it’s closed, months after they first had it under contract? That’s not something that would provide a lot of value to me, or to my investors. I know I am more on the investor relations side of the GP, but in order to really be part of the deal, I need to have the full experience. Otherwise, I am once again just the capital guy, instead of having the opportunity to add tremendous value to the team during underwriting, especially with all my experience in residential redevelopment.
#10. ALWAYS WALK THE DEAL – How are you going to pitch something you have never set eyes on, in an area you have never been to? Simple as that, walk the deal, the neighborhood, and the comps.
BONUS Lesson :
So what now? Well, time to find another deal! That’s honestly the final lesson learned: perseverance. Keep going! Eventually we will find the right deal, in the right market, and have the right people in place.
#11. NEVER GIVE UP – Just because you run into roadblocks doesn’t mean you should give up. If that were the case, I would be back to working a 9-5 that I left in 2018 and only living for the weekends. I wouldn’t have the freedom of time that real estate investing full time has given me. I wouldn’t have the vision and drive to see that there are bigger and better things on the horizon. I would probably be sitting on a couch, binge watching Netflix, instead of heading to Miami to meet GC and 160 or so investors who are all ready to partner with each other to close deals!
Now, I didn’t write this for a pity party, there are always ups and downs in real estate and in life. I wrote this to help someone hopefully avoid the mistakes I made. If just one person takes something of value from this, it’s worth the time to share the story. You have a choice to look at everything that happens in a positive light, and to learn lifelong lessons that you will never forget from the not-so-good things in life. Take that negative experience and learn from it, engrain it into your mind so you never make the same mistake twice. I am sure I am going to have great success in the multi-family space, and there will be some downfalls along the way, but that is the great thing about life. Every morning you wake up, you have another opportunity to do something great! Always fail forward and never give up on your dreams, or you’ll spend the next 30-50 years building someone else’s.
To learn more about JSJ and what we do visit our website at investwithjsj.com
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