Episode 016: Knowledge Without Action Is Useless Information
What’s the most important thing to do when starting a Multi-Family Business? Listen in as David talks to Brian Burke and Bill Johnston about how they got started. What were their biggest mistakes!
Speaker 1: Welcome to the multifamily deal lab podcast, where we dissect a deal before your eyes and ears. So you can discover the strategies and tactics that got each deal to the finish line strategies and tactics that you can put in your own toolbox to get you to the closing table from sourcing the deal, raising due diligence to the property takeover. Multi-family deal lab shows how you too can get the deal done. And now here’s your host. David Lindahl, everybody. Welcome to multi-family deal lab. I’m your host, Dave Lindahl, and I’m with Brian
Speaker 2: Mark. Brian wants to tell everybody who you are, where you’re from. my name is Brian Burke. I’m from Santa Rosa, California. I’m the managing director at Praxis capital real estate, private equity firm paced North of San Francisco. I’ll talk about the latest deal that you did. Is this your first deal or is this, this is one of some, I’ve got, 700 under my belt now, but nice. So 700, 700 properties, but, the, on the multi-family side, I’ve done, just under a half a dozen deals now on a multifamily, just approaching a thousand units. Nice. Excellent. How long did it take you to get through a thousand it took me about six years. I think I took your apartment house class in about 2008 and that’s when I started in large multifamily. Before that I had a 16 unit, a bunch of fourplexes duplexes and that kind of thing.
Speaker 2: All right, good. So then what was your first deal after your first larger one after you left the bootcamp You know, it’s funny. I actually closed it while I was at the bootcamp. I had a 60 unit deal that, I had, in contract just before the bootcamp when I repeated it. So I took the class the first time and learned what I needed to learn. And then I got a deal on contract when I repeated the class, I closed it while I was at the class. So what was the, what was the acquisition fee the acquisition fee was 3% of about a million and a half. So it was 30, 40 grand, 45,000. So anywhere between 2000 to 4,000, depending on what you paid in the bootcamp, the prices differ and you made 45,000. Is that deal then I think it worked out.
Speaker 2: So talk about how you got that very first deal, that 60 units, the larger one, it started to look out at California for, for real estate and started looking into Texas because California’s market was totally overheated. So, in my searches around Texas, I decided that if I’m going to go that far, I wanted to do something larger and not look for a single family house and look for multi-family. So, I just started looking on a LoopNet to figure out who the brokers are, that were getting deals done. And it was a tip that I picked up from you out of the first round, I went to the bootcamp and, you know, I kind of learned who was getting it done and talk to everyone, find out what they had. and, I landed this one, you know, one of the brokers said, we’ve got this one, take a look at it. I did.
Speaker 3: How long did it take you for that broker to get you a deal Cause everybody’s always wondering how long has it taken after I talked to a broker the first time
Speaker 2: Yeah. You know, it’s funny. It probably took, maybe six months. It was, it was a while, you know, it’s, I had been pitched a lot of deals and looked at a lot of them, but you know, just trying to be very conservative. this was the first one I could get to work.
Speaker 3: It takes a while to get you, get your foundation built when you first
Speaker 2: It does. Yeah. Well, you gotta, you gotta build trust with them. They gotta know that you’re real, that you can get it done. And and they test you, you know, they’ll throw you a bad deal to see if you bite on it. And, you know, they want to know if you’re, if you’re a sucker for smart.
Speaker 3: Yeah, absolutely. All right. So then you progressed to this latest deal that you did a 276 units,
Speaker 2: 276 units. Yeah. And we’ve done a couple in between, you know, I’ve done a 54 unit that we bought fixed and resold, and then we bought a call of 140 unit deals.
Speaker 3: How much did you make on the one you resold So you bought, did you buy it in the purpose of fixing it up and reselling it quickly Or did you hold it for a few years or what happened with that one
Speaker 2: Well, what happened was, I, I, it was 54 units in Austin, Texas, and we bought it with the purpose of holding it for five years. But what ended up happening is after 18 months, we looked at the income and realized we’d hit our targets for year five. And we just said, you know what We could sell now and really maximize our investor’s IRR. We doubled our investors’ money in 21 months, start to finish, and made a, you know, a really nice profit for ourselves. So it was, it was just one of those things where, you know, sometimes you get out early.
Speaker 3: Yeah, absolutely. It’s sometimes the smartest decision to make is to, is to move on
Speaker 2: Over eight 50 or 800,000 and sold it for 2.6 million. we put about 700,000, fixing it up,
Speaker 3: Sweet. Those investors with us been pretty happy. They were very happy. I’m sure they’re with you on these newer deals as well.
Speaker 2: They are. And I think that’s, that’s what makes that’s what fuels your growth. You know, when you can produce a result for an investor, they’re going to come back and invest in you again and again and again. And that’s how we built our investor base. I’ve raised $25 million since I took your syndication bootcamp. And it’s all been organic growth through word of mouth and investors coming back.
Speaker 3: Nice. Congratulations. All right. So let’s talk about this bigger deal. 276 units, how’d you come across it where where’s it located
Speaker 2: It’s located, just North of Houston, Texas, right near the Exxon mobile campus, which is the largest construction project in North America. we’re about three exits from that project. I’ve been looking, we sold a 140 unit property, not too far from here, earlier this year. And, I I’ve been looking for another one and, all the brokers knew it and I was, you know, my goal was to underwrite one deal a day. And you know, if I, under my average is if I can underwrite a hundred deals, make on about 10 of them, I can buy one. it took me about 140 deals underwriting to find this one, but it totally blew away all of my, proforma. And, we got a great deal on it and it just took a lot of time and a lot of service.
Speaker 3: That’s quite a commitment and definitely discipline because it definitely takes discipline to do this business. You gotta to do a little bit today. all right. So 276 unit, what was the purchase price 12.2 million 1.2. What was the raise
Speaker 2: 5 million, three 50. And I raised it in two weeks.
Speaker 3: Well, with the results you get from your other deals, I can see why that’s good. We are investors bringing their friends into the deal as well.
Speaker 2: They were a, a lot of the investors were ones that had cycled out of previous deals, but half of the investors were brand new and first-time investors that were referred by other investors or by word of mouth referrals. They’d seen us in the press or whatever it may be. but, out of the raise, even though half of the investors were existing investors, they brought three quarters of the money because, you know, they had each time the investors would invest in the next deal. They would invest more than they did in the first.
Speaker 3: Yeah. They don’t tell you how much money they have until you perform for them. And then all of a sudden they have a lot more money. That’s right. It’s funny how that works. So w w where do you find your investors What did you take out of that syndication bootcamp that, allowed you to go out and get $25 million worth of investors
Speaker 2: Well, it started out with just friends and family and, you know, just kind of going out well, more friends than family because my family didn’t have any money. so just kind of going out there. And, actually I was, I left a law enforcement career just before I, I took that, syndication bootcamp. And, I, I kind of told everybody, at the station house I’m putting in my two weeks notice and you all need to come to this room. I’m going to hold a little seminar on what I’m doing with my real estate business. And, I went in there and told everybody what I was doing. And I walked out of the room with $500,000 and 28 investors with guns.
Speaker 3: That’s pretty smart.
Speaker 2: So that, that was kind of where it got started. And from there, it was just a matter of utilizing those funds to produce a track record, produce results, get noticed by people that saw that track record and results. And it just, it grew completely organically over time.
Speaker 3: Nice. Because, not only did you get them in good, good quality deals, but I’m sure you communicated with them on a regular basis.
Speaker 2: Communication is key, absolutely communication and performance. If you can do those two things, you can raise them.
Speaker 3: Yep. Absolutely. All right. So 276 units, 12.2 million $5.2 million raise or something like that, any value, add
Speaker 2: A lot of value, add we’re putting in almost $3 million.
Speaker 3: Wow. So that means you’re going to be all in it like 15 to,
Speaker 2: Yeah, it’ll be just under, I think our all in it’s going to be around 14, eight, somewhere 14, nine. and then we’ve got, you know, we’re doing a complete exterior renovation and complete every interior needed to be upgraded. we’ve the deal since, since July, we’ve already completely recited all 276 units, exterior paints in process, landscaping parking lot, you know, full interior. We’ve got about 28 done so far and 200 and something to go. What was, what was the occupancy occupancy going in was 92.
Speaker 3: So you found a performing yet tired asset. And is it a, B or C
Speaker 2: It’s a C ish, C plus ish. We’re going to make it a B minus.
Speaker 3: So it must be, it
Speaker 2: Is it’s in a, B plus a area, actually. It’s surrounded by, a properties and office.
Speaker 3: Okay. So going in, what were your numbers, what was your cash on cash return
Speaker 2: Going in we’re expecting year one to be relatively flat, as we implement the value add, but, going up over time, it’s going to hit about seven to 8% actual distributions to the investors by year two. and then, an overall average of about 14% cash on cash,
Speaker 3: annualized when the deal is done, average of cash and cash.
Speaker 2: Okay.
Speaker 3: Yep. All right. So what do you think is going to be worth in a three to five years
Speaker 2: I think it’s
Speaker 3: Nice. So that’s a healthy profit. What does that 30 rrr or annual, in a way to return
Speaker 2: just about 18% if we exit in 10 years, but it could be a lot more if we exited year three. And so what I do is I tend to underwrite with a tenure, horizon, because we don’t know if we’re going to enter into an adverse cycle at some point during our hold period. So we want to be able to plan out for a long-term play, but really what we do is we fix it up. And then now we’re looking for the right exit point. And that right exit point might be in two years after we’ve upgraded half the property and boosted the income where it might be in three, four or five years. And so obviously if we can hit that 20 million price point earlier, that IRR goes up substantially.
Speaker 3: Yeah, absolutely. So what, what advice would you give to someone that’s just starting out
Speaker 2: I, I think, the best advice I can give is to actually get started, get something under your belt, even if it’s a single family deal. If you’ve never done a real estate deal, do something so that you can start to build a track record and show people that you can actually execute. I think that, getting funds from outside investors is key because, you know, even if you’re starting small and getting 20 grand from someone to help you with a house split, you know, when you, when you go to do your next deal, they might have more money or have more friends. And, and really that’s how you grow is through that organic process. And if you don’t get started and actually do a deal that organic process has never allowed to happen,
Speaker 3: It was a big mistake you made, that you want to share with everybody so that they don’t make it as well. Cause every, every deal or every, every career has mistakes. So what did you encounter that you didn’t expect
Speaker 2: slow stark. I didn’t expect that, you know, I bought my first real estate investment 25 years ago. I, I really started off very, very slow. I didn’t do a lot in the first 10 years and I really wish I had, I think if I would have got educated a lot earlier in my career, it would’ve helped me, get a jumpstart. instead I, I forced myself to educate myself through the school of hard knocks and that takes a long time.
Speaker 3: Well, a lot of books from Amazon and in the school of hard knocks.
Speaker 2: Yeah, exactly.
Speaker 3: All right. Great. Well, I appreciate you taking the time to do
Speaker 2: Well. Thanks for the invitation, Dave. I really appreciate it. And thanks for all that you’ve done for me and for others. And, you know, I certainly appreciated the educational boost that I got and helped me get where I am today.
Speaker 3: Yeah, you’re welcome. And thank you for taking action because, you know, we can teach all we want, but people don’t go out and use it, then it’s, you know, it’s useless information. So thank you.
Now let’s listen to David interview, Bill Johnston.
So how many deals have you done
Speaker 4: I bought, I went, I started in Austin in 2010 and I just, you know, based on, you know, what I learned from you, I, you know, I, I searched a couple of towns. I went to Raleigh, North Carolina. I went to Austin, I did, where else did I go Ended up in Austin And on my first trip there, I saw a 16 unit place. I wasn’t planning to buy and I ended up buying it. And, and I met a woman who was, working as a manager for the owner, and she actually had owned some other apartments and she was looking for extra work and she was keen to manage it. So, so now I had a manager. I was because at the, at the time was tough in Austin. they’d been overbuilt a few years ago, so it was really tough.
Speaker 4: There were distressed properties. And so I got seller financing for like 85% and, ended up in hindsight paying way too much. But, that was fine. I was in the market. I was learning and this woman, the manager was very helpful. Then the property next door came available about eight months later, quite a bit cheaper, another 16 unit place and a, another chance of in a pretty high leverage seller financing. And, I then said, I put, so I got ahead a credit line on, my home year. And I took some money from there and a lot that, and then that went, so that was in June, 2011. That was a good time to be buying, but it was still sleepy there. And the people were very excited. They were still feeling burnt out by 2008 and nine and burnt out by they crashed earlier.
Speaker 4: Cause they’d overbuilt so much. Yeah. So it kind of poked along for a couple of years. And I was talking to friend who asked me what I was doing. And he, he had some money from some sort of buyout and I told him, he said, well, you know, if you ever looking for an investor, I, you know, I’d be interested. So I showed him some of the math of how it would work. And he said, well, show me something when you’ve got something. So I sent him a couple of things and the third thing was a 70 unit placed in Austin again and, looked at it. And, he was interested in, we made a joint venture arrangement and a lot of then Austin kind of started creeping up. All of a sudden rents were going up and, and was very much, the buyers started to come to town.
Speaker 4: And so, you know, we kind of did upgrades and, you know, these are, these were C, C minus properties. So there were all sorts of little issues. And I learned a lot. I’ll tell ya. Yeah. but, by middle of 2014, it was just, yeah, it was soaring in Austin. And I decided that now’s the time to sell. don’t wait. And, so I started looking for another market and, one of the things that’s been invaluable to me, is your monthly newsletter. I’ve had been getting it for two or three years. I always look at your little emerging market notes and they were always my lead ideas of places to go. So that was really valuable. And that’s a really good magazine, a really good magazine. Thanks. And, so I started thinking about where to go, if I can find something that made sense.
Speaker 4: And I, I went, I flew down to Atlanta, you know, I looked at some properties there. I went to Tampa, I looked at property there, but by the time I got to Atlanta, it had, it was a year too late. I could tell already it started to move again. I looked at Denver, but I didn’t go out there, no Boulder. And then I didn’t grow up there. And then, you had a couple of things over a year on Columbus, so it wasn’t like this is gangbusters, but then I started, you featured it twice. And I liked the fact that it was in Toronto. I could get in my car and drive. That seemed nice change after applying to Texas and connecting all the time. So, but the prices were really low and the per door, and there was still distressed properties. And, I saw, one of the place I had been using with LoopNet, just, just to see what as sold and what had happened.
Speaker 4: And that’s a good way to find agents. I found with LoopNet, at least you can see agents who sold properties like you might want to buy. Yeah. So I I’ve found that it’s been a great way to find these good agents in their phone numbers. And, I saw a phone, this one agent said, I saw you sold this big package of 640 units. And I said, that looked amazing. He said, well, I’ll leave it at that deal fell through two days ago. And so there’s, it’s all been broken up into four different apartments. And so I said, Oh, well, he said, then I said, this will look kind of interesting. He said, well, they’re now available. And so I got in the car next morning and drove down and looked at them. So it would look good. there is, but then I had to get bank financing, but my investor was interested in rolling over, selling the properties in Texas.
Speaker 4: So, we put in an offer or a guide on under contract, but had to hold it awhile, but they weren’t, they weren’t too worried about having to hold it so we could sell in Texas. And, we ended up getting 270 units. They’re nice. Yeah. And now, now I’m working, and you know, I got, I’ve done your course on managing the manager, which is really great because I’m using a man, but I also had your course on management because before I was just working with a hired manager, now I’m working with a management company and that course is really good. Managing the manager. There was a couple of times I consulted with Jeanie and there was one other manager you had working with you. I can’t remember who was, you know, I consult with and we’re fantastic. And at one point early on, they were going to look like there was a couple of bumps. They would, you know, for, obviously for a fee, they would come to the property and help work through the problems. So that’s a really good resource if you offer, for sure. Especially if people in the early years of trying to manage things and make sure it’s going as well as it should. Yeah. So, but now I’m working with a management company and it’s odd. It costs more for sure. But there’s no question
Speaker 5: You factor that into the deal. Oh my God. It’s so much easier. Yeah. So let me ask you a question. what advice would you give to somebody that was just starting out
Speaker 4: I’d say to read your book for one, what’s a good book. Just, it’s a good primer on understanding the basic principles of emerging markets. Yeah. Nobody else touched on that. So I have read the book and it’s got all the resources in your book of how to get to the next level with, with you, which is your, all your fantastic workshops, your literature, your online resources, everything else. So I think that’s what I would say for it. It’s just, you want to understand, get a primer on how to judge, emerging markets and when you should, or should not be buying and everything else. And so with that knowledge, then you can really enter your, your world and feel that you’re not like complete neophyte. So, and then, if you haven’t got any money, then you’re going to have to get involved with you and how to help you figure out how to work with investors and sell investors and pitch investors and everything else, which isn’t very valuable.
Speaker 4: But if you’ve got a little money of your own, which I did, that helped me get my first property. And then once you’re in the market, you really things start to change. You really, you know, when you start, you know, when you go down, I was going down every month at the beginning and every second month after awhile, but then I’d always go out with the agents that I’ve met and through her property to see what was happening at a sense. And then, yeah, you’d be sent the listings with this. Fantastic. Yeah. You know what, this one investor I had, you know, if the deal looked good, he was, he was good to go with it. So what was the, what would you say was the biggest surprise that came up during your deals that you didn’t expect Is there one thing that jumps out whoever’s managing your property is really, really important key.
Speaker 4: That is, that is everything. So, you know, we had some bumps, the, the woman I had in Texas was a brilliant manager. On one hand, she, the units were always full, even when Austin was a little soft on, they could see, she always had the full people, always wanted to be in her buildings cause she liked to build community, which was fantastic, but she was horrible on the inside, like horrible. She was like, when I discovered this about a few months in that she was struggling and Xcel to kind of keep the books that would like so that, you know, it’s, it’s really important to try and learn and understand the new offer those resources, but people could really understand the nuts and bolts of management. You need to know what the managers know. You don’t have to be efficient at it, but you need to know what they need to know in order to run your property so you can ask them, it makes such a difference.
Speaker 4: I mean, you could just trust somebody, but you’re not going to do nearly as well. And you know, I think the, the fear of everybody and I, I’m sure you’ve probably over all your deals is with, if it ever starts a negative cash flow, that’s a scary, scary time. So it’s really important to be as educated as you can. And it’s just the best business in the world. If you’re, you’ve got the knowledge and you you’re, you’re careful, but you’ve got the guts to kind of just go out and do the first one. And, I think the other thing somehow somewhere have some cash reserves have some credit line, always there for an emergency, ideally that I would say that, yeah, you can do that. Some people might be listening, thinking, how am I going to do that I’m broke, you know, but you can do that by raising, raising out inside of the what from your private money.
Speaker 4: Cool. Absolutely. The day of, I, I came in and started to get a sense of the private money at the, your bootcamp in San Diego. Yeah. What’s this fantastic. I, my son’s working with me a bit and if I’m just, if he’s got the energy, we may start doing some of that now, but, with 207 units. So we’re just a lot of kind of startup stuff going on. And, but, yeah, for sure from the private camp is a really important thing. And I I’ve met some people who have watched because I’m on their mailing list and you would know them. I can’t remember the name who, I think out of that camp in, San Diego, I’ve done really well. A couple of them, I did some really good mailings from them or electronic mailings, and you can see what they’re doing and you see what they’re putting together.
Speaker 4: You can see they’re a really good sense of how they’re working with investors and successful idea. Yeah, absolutely. Very exciting. It all starts with education, educating yourself and set yourself somehow a pleasure, Dave, and I’ll tell you what, I’m glad I met you. And I would have done none of this if I hadn’t gotten connected with you. None. I appreciate that. I appreciate that. I appreciate you, you know, taking action steps and, and, and, you know, moving forward. Cause that’s, what’s all about, you know, you can educate yourself, but you don’t take action and then nothing happens. And the key is take the first step though. I don’t care how small it is. Somehow just take a chance, you know, an educated, an educated risk. Absolutely. All right, my friend, thanks for coming on. I really appreciate it.
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