Discover the secrets of structuring successful real estate deals and securing profitable investments with our guest, Joel Florek of JFH Capital. In this episode, Joel shares his incredible journey from Marquette, Michigan, where he first developed his passion for real estate by working on home renovations alongside his parents. Joel's academic path took a turn from mechanical engineering to finance, leading him to entrepreneurial success. You’ll learn about his first investment in a four-unit building and how these early experiences laid the foundation for his impressive career.
Joel dives into the intricacies of structuring real estate deals for maximum returns, recounting his early success with a syndication that netted a 20% annual return for investors. He explains how performance-based hurdles can keep investors engaged longer, ensuring a win-win situation for all parties involved. Joel also provides a detailed look into the strategic decisions behind the sale of a 48-unit complex and the acquisition of an 80-unit property, highlighting the multifamily market’s challenges and opportunities.
Finally, Joel opens up about navigating the real estate financing landscape, from securing loans to negotiating favorable terms. He emphasizes the importance of reaching out to multiple lenders and understanding every detail of loan agreements to avoid pitfalls. His recent experience with an 80-unit project showcases the benefits of working with a specialized mortgage broker and implementing strategies like incremental refinancing. Don’t miss out on Joel's invaluable insights and the opportunity to connect with him for future investment possibilities.
Reach out to Joel
Joel@jfhcapital.com
www.jfhcapital.com
To learn more about Tony Johnson and Timeless visit us at:
https://timelessci.com/
https://timelessco.com/
https://www.linkedin.com/in/tonytimeless/
If you would like to discuss investing in Commercial Properties create a profile and schedule a call:
https://timelessci.investnext.com/
Reach out to us directly at:
info@timelessci.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Tony (00:00):
Welcome to another episode of Carolina Commercial Real
Estate Connection.
Today we have Joel Florek withus.
Joel, thank you so much forjoining us.
How are you doing today?
Joel (00:08):
Hey, tony, thanks so much for having me.
Tony (00:10):
Yes, sir, joel is the owner and operator of JFH
Capital.
He's up in the Midwest.
And, joel, could you tell us abit about your story?
I know right now you're inIndiana.
Where did you grow up?
Joel (00:28):
Yeah, I grew up originally in the Upper Peninsula of
Michigan, up in Marquette on theshores of Lake Superior, grew
up with parents that about everyyear or every other year we
would move into a new home, werenovate it while we lived in it
and then after a year or twothey'd either sell it or we'd
(00:50):
move on, and they'd occasionallyhang on to property as a rental
.
And that's where I firststarted learning the basic
skills of what it meant to, atthat point, take care of real
estate, laying hardwood floors.
At eight years old and um gethome from school and would have
a bag of parts from the hardwarestore and a note from my dad
(01:12):
saying you know, here's thejoist hangers.
You know, put them up on allthe joists in the deck and I,
you know, have a nice bruised upthumb as I figured out how to
use a hammer bruised up thumb asI figured out how to use a
hammer.
But yeah, I was certainlyblessed with parents that were
very hands-on.
They never scaled up their realestate investing, but I
(01:34):
certainly got a front row seatto what it meant to take
responsibility for real estateassets, to have rentals.
They never really had more thantwo or three units at a time,
but yeah, that's ultimately theroots of my investing.
And then ended up going up toMichigan Tech University, got a
(01:56):
degree in finance up there andwhen I started my first job in
Iron Mountain, michigan, Ibought a little four-unit
building, lived in one unit,rented out the rest your very
typical house hack biggerpockets book type real estate
business plan and the rest ishistory, as they say.
Tony (02:20):
That's awesome.
Let me dive in a bit on yourgrowing up in your childhood.
How many siblings did you havegrowing up?
Joel (02:26):
Just my brother and I.
Tony (02:28):
And was your brother?
Did he have this same?
You know, initiative and driveto doing this?
Not at all.
The one sibling is doingeverything.
The other one's over theresitting on their butt doing
nothing all day.
Joel (02:43):
You're working and doing all this ones over there sitting
on their butt doing nothing allday.
You're working and doing allthis.
Yeah, my, my brother, he was uhvery good hockey player, very
good hockey player.
He's had a wonderful career, uh, bouncing around in different
leagues, ahl, uh short debut inthe nhl, playing in europe for
about 10, 12 years.
Um.
So, you know, even from a youngage he was, he was very, you
know, even from a young age hewas, he was very much, you know,
(03:05):
focused on his hockey.
You know it's, you know, fouror five, six days a week kind of
thing, almost all year long.
Me, on the other hand, I waspretty squirrely kid.
You could never get me to, youknow, sit down and focus.
Going to quote unquote you know, sports practices was not my
thing.
(03:25):
I like the games, like thepractice part of it.
So I really enjoyed working withmy dad.
For me that was something thatI had a lot of fun with and,
yeah, I am certainly blessed tohave, you know, gotten that
experience.
I mean, you know, there was onehouse we lived in.
We we tore the second story offwhile we lived in it, so my
(03:49):
brother and I were in the livingroom.
The first floor was it was aliving room, kitchen and one
bedroom.
There wasn't even a bathroom onthe first floor, so there was
just a toilet sitting on thesecond story and you know, tarps
, blowing windows, windows.
We were framing it backtogether but I got to put
together there pretty quick butit was, uh, it was.
Tony (04:11):
It was a few weeks where it was like, yeah, this is, this
is pretty interesting yeah, nowI as well have family in the
upper peninsula and we would goto the camp and you know there
was no, there's no plumbing outthere, so we would go out.
It was just, you know, the oldstyle shack where you go into
the old porta potty sitting outthere and you're just taking
peas and poops in the dirt,basically oh yeah, oh yeah.
Joel (04:33):
Yep, I, I've got got plenty of friends with cap camps
out in the woods and, uh, haveenjoyed a lot of nights out in
the wilderness and that iscertainly part of the experience
.
I would not say a highlight,but it's part of the experience.
Tony (04:49):
Yeah.
Now when you went to MichiganTech, did you go with any
interest or intent of doing realestate?
Was that in your thoughtprocess, or what did you go to
school for?
Joel (05:04):
I actually started going to school for mechanical
engineering.
I really liked.
You know I've always enjoyedunderstanding how things work.
I wouldn't say I was like agearhead kind of kid.
I really enjoyed theconstruction and building side
of things.
But very quickly in the firstsemester of school I realized
that I would not be able tosurvive four years of some of
(05:26):
the mentality that theprofessors in the engineering
department had with respect tohow they felt about businesses
and people in the front officewho work very hard to try and
make the best decisions.
But but it's not always easyand clear cut.
So that kind of entrepreneurialmindset aspirations that I had
(05:52):
gravitated me towards thebusiness school.
So I ended up switching.
I felt it very important to geta technical degree and in the
world of business, in my opinion, finance and accounting are
going to be your two primarytechnical degrees that you can
get.
So I ended up choosing thefinance route.
(06:14):
Learning a big set of rules andmemorizing in the world of
accounting that's not my thing.
Bless the people who enjoy that.
My bookkeeper is a tremendouslyimportant part of my team
nowadays, but I wanted to gointo the finance side.
(06:34):
I really enjoyed the idea oftrying to distill down the basic
fundamentals of a businessthrough the financial statements
and then translating that intoreal world decision making,
whether you're trying to valuebusiness, value assets,
understand where it looks likethe trajectory of the market may
(06:57):
go, and that quantitativeanalysis translating to the
qualitative side of business and, you know, figuring out how to
merge those two things togetherto be able to make smart
decisions.
Tony (07:13):
That's pretty in-depth.
I also went and started inmechanical engineering.
I didn't really choose, I thinkI pretty much failed out of it
and then switched to businessand graduated with fun didn't
really choose, I think.
I pretty much failed out of itand then switched to business
and graduated with fun, so youknow.
But so it sounds like we did asimilar path on that front.
So once you got out and gotgoing, so you're saying your
first initial with real estatewas, you know, doing a house
(07:37):
hack and renting out a couple ofthe units.
And so once you saw that, yousaid you grew up and your
parents never really scaled.
So once you kind of gotinvolved, is your long-term
aspirations, it sounds like,were then more on figuring out a
way to scale this.
Am I right?
Joel (07:59):
Yeah, yeah, you know middle class parents.
Mom was a nurse.
You know dad was.
You know facilities maintenancesupervisor for our local.
You know town in charge ofwater, sewer departments.
And you know other facilities,parks, throughout the community.
You know financial stresscertainly a part of, I think,
every middle class American'slife at some point American's
(08:30):
life at some point.
And for me, I knew thatfinancial independence was
something that was tremendouslyimportant for me to try and
achieve as early as possible,given the background that I had,
working with my parents in whatthey did with real estate.
I certainly understood thephysical components.
With my college education Iunderstood a lot of the
financial components and I said,well, heck, let's start with
(08:50):
that four unit and let's try toscale it from there.
I'll try to build a basethrough multifamily as kind of
my core financial independencerock, if you will.
And what happens after that Idon't know.
So in my head it was like I need12 units and that was the big
(09:11):
thing that I was really shootingfor at that time.
And just to put it into context, after a little bit of trading
of some assets, selling andbuying of 185 units here in the
portfolio of multifamily assets,I also have a campground in the
portfolio with 220 pads as well.
(09:33):
So that's where the portfoliois today.
But, like I said, at the time,I had the mindset of 12 units
and that's what I was going towork hard to get to.
I bought that.
For 10 months later I ended upbuying a 16 unit.
So within my first year ofleaving college at 23 years old
(09:53):
I had 22 years old I had 20units in my portfolio that I had
owned, didn't have any partners.
I was like heck, this thing'seasy.
You know I'm going to have athousand units here in the next
next few years.
Got a nice dose of realitythere.
Tony (10:12):
That's awesome.
You set your initial goal right, so it's what you can envision.
And you set those initial goals, so you can envision the one.
You surpass the one, and thenit was sky's the limit.
So kind of walk us through whathappened.
What was the next thing?
So you got, got up to your 22units.
Did you feel a cash crunch?
(10:34):
Was you you were still ready tomove forward, or what?
What was the analysis onceyou're at the 22 units and now
you surpassed your goal, did?
Did you regroup, reset yourgoals and start again?
Joel (10:47):
Yeah, so this would have been kind of late.
2015 was when I bought my firstbuilding and, like I say, I had
picked up the four unit, 16unit about a year and a half
later, picked up a three unitand then picked up an eight unit
as well.
I'd moved from the UP down toIndiana where my wife is from,
(11:09):
as we started our family and Ihad 31 units at the time and I
had done it all through creativefinancing.
I mean, I was borrowing fromcredit cards, I was getting
seller finance, second positionnotes, getting the bank to
finance as much as I could.
I was the guy wearing every hatI didn't have.
(11:29):
I had worked for House Flipperon the side for a little bit,
but I didn't have a W-2 job.
I had left that pretty quickwhen I had moved down to Indiana
and didn't pick up another.
Tony (11:41):
So yeah, I mean to say I felt well, you, you're
creatively making things happen,which is awesome you know, but
I, you know, I was, I, I wasstuck right yeah, well, I mean
(12:02):
so when, once you got soinitially, when we're starting
so up to 32 units, you wereself-managing these properties,
so you were the, you were themaintenance guy doing everything
right.
Joel (12:14):
Yep, I was leasing agent.
I was the maintenance guy.
You know, painter, I throw mylawnmower on a trailer and drive
it around and, and you know,mow the properties.
But I barely had any equity,you know, in the deals because I
had borrowed every dollar zerodown and unless I wanted to go
(12:34):
pick up another job, I had to dosome of these things to at
least make enough to make endsmeet for for my young family, as
, as we were getting started.
So at that point I had decidedthat I really want to scale up
and do some larger deals.
It was getting really hard tofind anybody who was interested
(12:59):
in doing seller finance.
I was interested in gettinginto better quality assets.
The market was getting reallyhot in the late teens so I
decided to start bringing oninvestors into my projects with
the goal of being able to scaleand tackle projects without
being limited to whatevercapital I did or did not have at
(13:21):
the moment.
So I bought a 15 unit townhouseportfolio as my first
syndicated property, brought on12 investors who all came in
with $10,000 to $30,000 each tobe able to purchase that
property.
Tony (13:41):
I love that.
I love that idea.
A lot of people start with themassive project big investors.
I love to hear about that.
You've told me that before,where you brought in these
investors, small money, andcoupled a lot of people together
but raised this capital for thefirst time.
(14:03):
It sounds like you know, youare a no holds barred and just
have that analysis that once youset your mind to something,
you're going to accomplish it.
And bringing along 15 investorsthe first time you're
syndicating something and thislower range of investment amount
you must have just been dialing, dialing, dialing, dialing.
And people, obviously, you know, even if they didn't have a lot
(14:25):
of money, they're giving youeverything that they have
because they have faith in youand belief in you, which is
awesome.
So that's a lot harder thangetting money from somebody
who's got multi-millions ofdollars and you get a hundred
thousand from them right, justto get somebody who it's almost
everything that they've probablysaved up for and they're
willing to give it to you.
Joel (14:43):
Yeah, or at least that was that was my perception at the
time.
You know seemed like a lot andyou know that's what they said
they had.
But the reality is most of thepeople who invested with me on
that first project, as I've donesubsequent projects over the
year, those $10,000, $20,000,$30,000 checks have turned into
(15:07):
$50,000, $100,000, $200,000checks and we're starting to
work with those individuals'IRAs on them doing
self-directeds.
It's really expanded but webuilt that initial investing
relationship off of a muchsmaller check size.
(15:31):
I was still very young, in mymid-20s, when we did that first
syndicated deal.
So for a lot of these people Ithink for all of them it was the
first time any had gotteninvolved in a syndication.
Of them it was the first timeany had gotten involved in a
syndication.
So passively investing throughanother person into real estate
was a new experience for them.
It was a new experience for me.
(15:51):
So I think it worked reallywell in all things.
Considered the size deal that wetook down with the quality of
asset that we bought, in myopinion it was pretty darn low
risk for everybody and provedout to be a great situation.
Structured, that deal a littleuniquely had a buyout clause
(16:13):
with the investors built into it.
We all pre-agreed going into it.
So after three years I was ableto buy out all my investors.
They all achieved about a 20%average annual return over that
three-year hold period.
So, all things considered, avery, very good, respectable
return for those folks as apassive investment, and then for
(16:37):
myself and my brother who didget involved in that project as
well.
We now control that assetourselves and the original group
of passive investors are nolonger involved in that project.
Tony (16:52):
So can you tell me a little bit so just giving
somebody a little insiderinformation, if somebody's
looking at structuring, I lovethe idea of that and you've
spoken a couple different timesto me on other occasions about
how you structure your deals.
Could you give us a little morein-depth understanding of what
you're talking about, how youstructured the buyout clause and
(17:13):
what are some specific thingsyou're putting in these
agreements?
That is, making sure that youhave control of the asset and
can make the asset perform andare using what you're bringing
to the table to your advantage.
Joel (17:28):
Yeah, so I'll start out with the structure in the legal
documents.
So the way that I put thattogether was our buyout was
based off of an IRR internalrate of return.
So the general idea is, duringthe entire hold period we're
(17:48):
paying out cash flows.
I pay out cash flows on amonthly basis to investors and
then at some point we're goingto have a capital event.
So the challenge that you getinto and how you structure it is
what type of measure do you useto structure your buyout is
(18:08):
what type of measure do you useto structure your buyout If you
want to go through and have somesort of appraisal percentage of
the property?
That gets really messy, becauseI'm sure you've experienced it
Appraisers suck.
And I'm not saying that actualappraisers are bad at their job.
It's just the process of tryingto appraise a property is so
(18:29):
variable and opinionated thatyou get three appraisers who try
to value the exact same assetat the exact same time with the
exact same information.
They're going to put threedifferent values on it and it
could vary 25%, 30% in value.
It's very challenging job foran appraiser to figure out what
(18:50):
the market is at any given time.
So if you have a structure thatrequires an appraisal.
In my opinion, that's a recipefor failure.
Irr allows us to be veryspecific, so I structured an 18%
IRR buyout after three years,so we have a defined time
(19:11):
horizon that says I can't buyyou out before X date.
That way, people feel liketheir money was working for them
for a long enough period, andthen we have an IRR measure,
which allows us to factor in thetime value money associated
with those monthly payments thatare varying amounts, and then
(19:31):
that final capital event.
It's a very clean approach todetermining how shares are going
to be valued at some point inthe future.
Ultimately, though, everybodyhas to agree on that, going into
it Super disclosed is.
This is the business plan.
This is how we're doing it.
(19:52):
What I did find, though, is,ultimately, while it was
certainly a great project forinvestors, they all would have
loved to have stayed in the deal.
A great project for investors.
They all would have loved tohave stayed in the deal, and it
was pretty disheartening fromtheir standpoint to have exited
(20:13):
the deal before it went fullcycle.
So, moving forward, my goal isto structure deals that maybe
have hurdles associated withbetter performance, that allow
me to get additional benefits asI execute a deal you know
extremely well, but allowing myinvestors to stay in and
(20:34):
participate more fully over time.
So that type of yeah, go ahead.
Tony (20:41):
Give me an example of some structured hurdle that you've
put forward that they, that youcould basically be rewarded, but
keep them in the deal so peopleunderstand what you're talking
about.
Joel (20:53):
Yeah.
So there's a deal that weactually restructured when we
decided to do an eight unittownhouse development onto the
existing apartment complex aneight unit townhouse development
onto the existing apartmentcomplex.
So when we restructured thatdeal, the way it was set up was
the initial.
(21:14):
The first hurdle was a 70, 30split 70% to investors, 30% to
the general partners and afterwe have a full return of capital
, then all cash flows get split50-50 and all future capital
events are split 50-50 as well.
(21:38):
The idea with that structure waswe were looking to do a cash
out refi after we finished theconstruction and then hang on to
that asset over the long term.
The goal there was that I, asthe primary general partner
who's putting in the sweatequity, doing all the work
(21:58):
associated with that,structuring that new
construction and getting thatproject to fruition, that I
would be able to see strongercashflow over the hold period.
All of my investors would havegotten their principal back to
achieve that hurdle.
So from an investor'sperspective, they put money in a
project, get cashflows for awhile, they get all of their
(22:20):
original capital back and thenthey continue to cashflow and
then they get you know whateversplit in this case 50, 50 of you
know any future capital eventskind of thing.
So, um, that's something thatwe ended up putting in into that
deal and everyone was waspretty excited, uh, to you know,
to be able to participate andget involved with that new
(22:41):
structure.
Tony (22:43):
Yeah, that's awesome.
That's, that's structure.
It's a great structure andyou're exactly right.
So it's rewarding you.
So you know, in that initialinvestment period where the
investors have all their moneyin, they're getting 70% of the
return.
You're getting 30% for all ofyour work.
Then, once you're able to fullygive them back their initial
capital and basically neitherone of you are fully invested in
(23:05):
the deal then you're nowsplitting 50-50 and they're able
to still reap the benefits ofthe project and you're able to
reap more of the rewards of theproject for all that work you
put in.
So that's a great structure.
It's a win-win for everybody.
Pretty common, but veryattractive for a passive
investor because once they'vegot all their money back,
(23:26):
they're still able to be in thisdeal and really you know
understandably.
So all these people are doingare putting in their money.
You're the one that's workingblood, sweat and tears in this
every day, and so then you'regoing to get that benefit of the
rewards only once they fullyrecoup their initial investment,
which makes it, like I wassaying, a win-win.
So awesome structure and thanksso much for walking us through
(23:47):
that.
So tell us a little bit aboutwhat you're after these days.
So I know the market hasshifted from that timeframe to
now and so kind of walk usthrough where you're at right
now.
What are you working on doingright now?
Exiting deals, having new deals?
Are you looking at otherpursuits?
(24:09):
Where are you at?
Joel (24:11):
Yeah, so right now I am selling a 48 unit apartment
complex that we've had for thelast three and a half years.
As I briefly mentioned, thatwas a project that originally
purchased it was 40 units.
We added eight units to it andnow we're selling it off as a 48
unit apartment complex.
We were looking at holding thatone, but I felt like there were
(24:35):
some opportunities that may becoming to the market this year
and felt like getting all of ourcapital out was going to be
advantageous.
And it just so happens thatabout a week after we got that
48 unit under contract to sellended up having an 80 unit that
(24:56):
we got an accepted LOI on andare currently under contract on
to purchase and are currentlyunder contract on to purchase.
So that 80 unit is going tohave a very similar business
plan, where there was plans fora future phase and the property
was designed for that futurephase.
So we've got roads stubbed outin the back.
(25:16):
We believe we can add 20 to 30townhouses in the back of that
property as well.
So we're going to purchase theexisting 80 units.
There's a huge value addcomponent associated with that
part of the project and thenthere's this additional
opportunity to add more units tothat community as well, to bump
(25:37):
it up to that 100, 110 unitcommunity.
So if we can execute that,definitely some really exciting
opportunity with that particularproject.
Tony (25:51):
That sounds awesome, and so that one you're also bringing
in passive investors, right.
Joel (25:57):
Correct Exactly, I'll be the largest Chuck writer, but
inevitably we'll bring in a nicepool of investors and pretty
much you know it's going to be.
You know a good list ofeveryone who's worked with us on
the past and a lot of folksrolling money over from the sale
that we're going to have.
So, yeah, fun times right inthe middle of transactions right
(26:20):
now.
So it feels, feels good it's.
It's been a, it's been a reallytough market.
I mean, we've seen a huge runup in the prices of multifamily
assets and with interest ratesrising as much as they did, as
quick as they did, you have thisreally big spread in many cases
between what owners of assetswould be willing to trade out
(26:44):
and what buyers need to see tobe able to get in.
And it's just hard when every30 days you see another 50 basis
point, 100 basis pointfluctuation in rates up and down
and up and down and a lot of up.
But it makes it very difficultfor us to predict what's going
(27:10):
on in the market.
So it's been a couple of yearssince I've actually closed a new
deal.
Thankfully, I had that newconstruction project to keep me
sane last year.
But 2024, after the races I isgoing to make things happen here
.
Tony (27:27):
So now one of the things that my market is starting to
see in multifamily is rentsoftening a bit, and we have had
a lot come online which I thinkis contributing to that.
Are you foreseeing anysoftening in the rental in your
area, the rental rates in yourarea, any?
Joel (27:45):
softening in the rental in your area, the rental rates in
your area?
Well, typically all thecommunities that I invest in, uh
, they don't have much for newsupply coming to market.
So, from that perspective, youknow, rents appreciating,
staying flat or depreciating isgenerally, it's basic economics.
(28:08):
It's a factor of supply anddemand, whether that's increased
demand from people moving intoa market or wanting to shift to
apartments, or it's shifts inmassive supply, multifamily as a
whole.
I just got back from a Marksand Millchap conference in
(28:29):
Chicago, and they had a reallygood discussion around what's
happening around the countrywith the multifamily market in
particular, and the apartmentmarket is bringing record
deliveries each year here to theUnited States, which, when you
(28:50):
talk about the idea ofaffordability crisis that is the
buzzword most people like touse that sounds fantastic.
What's actually happening,though, is the concentration of
that construction is in such asmall number of markets that,
(29:11):
frankly, the vast majority ofAmerica isn't seeing that big
ramp up in supply coming.
But the markets that aregetting that ramp up in supply
are getting hit very, very hard,and some are getting hit harder
than others.
We're seeing, in certaincommunities around the country,
rents declining by as much as10%, vacancies of 10% to 15% in
(29:38):
certain markets, so that'ssomething that investor beware,
buyer beware.
You really have to pay attentionto the supply factors
associated with the market.
How much supply is going to becoming to market, and those are
(30:00):
stats you can generally look up.
It's pretty widely understoodin each market how many units
are coming to market each year,how many have been approved, and
then there's typically somereally good data out there
associated with absorption rates.
What type of concessions arehaving to be offered one, two,
(30:23):
three months free rent?
Offered one, two, three monthsfree rent in some cases for
people to move into this brandnew product?
That hurts every single level A, b, c class apartments, because
there ends up being thisnatural shift of people from
poor quality assets up to betterquality assets, but everyone,
for the most part, gets hurtacross the board.
(30:45):
So a market as a whole might begreat, from a job growth, a
population growth, all sorts ofthings but too many developers
got excited about that marketand threw so many units, and
that's the boob and bust ofcapitalism, right?
(31:07):
I mean, that's just whathappens and that's okay.
It hurts the people who areinvesting for sure.
It's great for consumers,though, because they're seeing a
bunch of new product andthey're going to see rents going
down and they're going to havea lot more optionality and
apartment owners are going to befighting for those renters.
Those are going to be reallyhard markets to be in over the
(31:30):
next five plus years becausethat doesn't fix itself
overnight.
It takes time.
Now the markets that I'vehistorically invested in are
what some might call riskiermarkets because they're small
towns of 5,000, 10,000, 20,000,30,000, typically do 50,000
(31:50):
person population communities orless, and they've been in
Indiana or Michigan.
And the big thing for me is, aslong as there is stable
population and I don't seereally anything for new
(32:11):
apartment supply coming intomarket, I feel very comfortable
investing into those communities, especially if I'm investing
into assets that are up at ahigher level in the market,
because I know people always aregoing to want to choose the
better quality asset shouldprices remain equal.
(32:35):
So that's generally been mystrategy over time is to stay in
the slow and steady marketswhere I don't see this big up
and down and vacancies andconcessions and all sorts of
other games that other apartmentowners are experiencing having
to play right now.
Tony (32:55):
Yeah, I think that that's a sound strategy.
You know, the more people Ispeak to over and over again,
everybody's got, you know,different analysis for what they
, where they want to go, whatmarket they want to go in.
And, yeah, you know, you, you,a lot of people, are of the
mentality you know and I followthe crowd and I follow the crowd
, follow the crowd.
So when everyone's going intothis market this is the great
markets Then everyone floodsthose markets and then, yeah,
(33:21):
you get overexposure, then yougot absorption rates come into
play and then exactly whathappened is the dominoes start
to fall and that's where peoplestart to lose out.
When you're doing a strategylike you have, like it doesn't
really matter, you're not reallygoing through a boom and a bust
.
You're understanding thesesmaller markets.
You are looking in markets thatyou know.
You have historical knowledgeon the markets and so when
(33:44):
there's not a ton of newbuilding going on, it's a lot
less to be aware of these movingparts.
So when you're going in a verybusy market you want to develop
something, it's how restrictiveis that market?
Or when you're in developing amultifamily project, they
approve one right next door andthey're coming in at a lower
cost basis maybe than you, andall of a sudden you're screwed.
Joel (34:07):
Yeah, and an interesting thing that came out of the
conference is some of thelargest developers in the
country were up there speakingand pretty much unanimously, all
of them said that their cost tobuild is 10% 15% less today
than it was just a few years ago.
(34:27):
So, to your point, they'rebuilding brand new communities
today at a lower cost basis thanwhat they were building just a
few years ago.
So that adds fuel to the firefor some of these markets.
One of the challenges that youhave if you go after a strategy
like mine of going into thesesmaller communities that not
(34:52):
everybody's chasing, is a fewthings From a lending
perspective.
There are going to be fewerbanks that are going to be
interested in working because,for the same reason of what I'll
mention here with investors, ifa banker makes a mistake by
approving a project that goesbad in a small town, they're
(35:15):
going to be in trouble if, ifthey make a mistake and a
project goes bad in a majorcommunity, well, you know I
can't be in control of that,that's not my fault kind of
thing it's.
It's it's.
It's much more acceptable forfor things to go wrong in a
larger community and you tostill keep your job.
(35:38):
So there's going to be farfewer banks that are interested
in working in those smallercommunities.
So lending is more difficult.
But I have never had a problemgetting multiple banks to
compete for loans in any ofthese markets over the last nine
years.
The other side of the equationis capital, Institutional
(36:02):
capital, the big players.
They don't touch small markets,they only stay in primary
markets or secondary markets.
I mean you've got to be acommunity of you know two
300,000 people or more for thesemajor capital groups to be able
to invest money.
As you continue to work downthe ladder of capital type.
(36:29):
Again, you got to keep workingout of the chain before you get
people who are willing to investcapital into some of these
smaller markets.
So if you are raising money,it's going to be that much
harder to be able to raise moneyand then subsequently you're
going to have that many fewerinvestor groups who are
interested in buying your assetupon the exit.
(36:52):
Again, I've never had a problemthus far on the disposition side
on getting multiple competitiveoffers available, and in many
cases it's kind of like Ialready know who the three
people are that are probablygoing to buy this asset because
they're just that strong ofplayers in markets of that size
(37:15):
within my region.
So I just kind of know goinginto who's probably going to be
buying my asset and all the morereason to focus on buying stuff
that makes sense, kind ofnormal construction.
I don't like buying weird stuff, weird properties, weirdly
constructed properties just youknow those are things you see
sit on the market for a longtime.
(37:35):
So it's I want to try to buylike normal, constructed garden
style apartment complexes, plainJane, simple as possible.
Focus on improving the qualityof those assets, leave some meat
on the bone for the next guyand I have no problem.
On the disposition side, I'vebuilt up an investor pool,
starting with those small checks, building up now to larger
(37:57):
checks to where they feel verycomfortable on working with me
in any community that I put mystamp of approval on.
And now I've got a list ofbanks that have seen my
reputation for what I've beenable to do with projects, and it
makes it very easy for me to beable to get good competitive
term sheets whenever I have aproject that I'm bringing to the
(38:20):
lender markets.
Tony (38:22):
So let me ask you a little bit more on the bank and you
doing the competing with lenders.
So typically I'm in a smallermarket too Nine's not as small
as what we're talking about, buteven so in my small market.
So there's probably five or sixbanks that I could go to.
I typically will go to two onthe offset.
(38:44):
When you're talking about that,are you letting the banks know
that you're speaking to multiplebanks?
What's your approach with thebanks when you're going?
Joel (38:54):
Absolutely.
This is a competition and theyneed to compete to lend on your
deal.
So, you know, what I havealways done is typically and
there's probably a little betterway I should approach this but
the way I've always done it iswhenever I get a new deal that I
(39:15):
get assigned LOI on, or usually, like just before I even get to
that point, if I know that I'mgoing to have a pretty good shot
at getting a deal, I'll startthat conversation with those
couple banks that I haveexisting relationships with.
But then, once I have a signedLOI and we're in the PSA
negotiation process, I juststart picking up the phone and I
(39:38):
call every single lender that Ithink has an opportunity to
lend within that market, andthere might be five banks that
are primary players in yourmarket, but I guarantee there's
another dozen banks within yourstate that are more than willing
to extend into your market.
(40:00):
Typically, banks will lend upto two to three hours from their
closest branch.
So you can go to your statewebsite, pull up stats and
figure out who are the largestbanks.
You can see, ranked by asset,how many assets that bank holds
and you can see okay, yeah,these are the top 20 banks in my
(40:24):
state and I'm going to go callthose folks and start having the
conversation.
And then, within thoseconversations, it's very simple,
right?
Hey, here's my name, here'swhat I'm doing.
I've got this property that I'mlooking to purchase.
Here are the general terms forthe loan that I'm X, y, z.
(40:48):
You know, is this somethingthat you know you would be
interested in working with me on?
And you kind of pack that intolike a you know 30 second to 60
(41:11):
second snippet of of you know,here's who I am.
Here's the project that I'vegot going on.
Here's the terms that I'mlooking for.
Is this a project that you thinkyour bank might be interested
in working on us with?
And you know, kind of see ifthey fit within your buy box.
And then from there you eitherget a pretty quick nah, this
(41:36):
doesn't really fit well for us,or might it, might not.
I got to run it up the chainand you could put a little
question mark around that bank.
And then you find the folksthat are like, yeah, that's
right up our alley, that'ssomething that for sure fits our
bill.
We got to underwrite it, we'vegot to throw it through
(41:58):
committee, but then you can havea really good conversation
around it.
Again, in that initialconversation to you know, you
just let them know hey, here'ssome of the banks I've worked
with in the past.
I'm certainly giving them anopportunity to be able to, you
(42:19):
know, work on this deal with me.
But you know I'm looking forthe best terms and got Amelia
poking her head in here in theframe.
Tony (42:33):
Okay.
So when you're doing that one ofthe challenges that people have
come to me with and you know,just love your perspective to
put in on that A lot of guysthat are new to raising capital
or you know, they 'll go to abank and they'll say, yeah, I
want to get the loan on this,and you know the bank will be
okay, you have the, you knowmoney.
It's this much down payment.
(42:53):
Well, I'm going to raisecapital from others and you know
some banks are okay and peopleget a lot of very confused there
where you know maybe they'renot bringing all of the capital
to the deal themselves.
So you know, and then the bankas well, you know you need to
bring the money and who'ssigning on the debt then?
So walking through that, and soone quick hurdle is, you know,
(43:17):
for one specific investor, andif they're not going to be on
the debt, you don't want toraise more than 20% of the
equity from them.
That's one thing I want to runin, but I was wanting to see if
you could run through that kindof and have you had that hurdle
come up to you at any point?
Joel (43:35):
Yeah, so that is that is absolutely a great point.
Yeah, so that is absolutely agreat point.
Anytime anyone typically getsover that 20% threshold, they're
going to be required to sign onthe debt, and I just make that
clear to my investors.
So typically that's never aproblem anyways, when bringing a
(43:57):
pool of investors in myexperience where somebody isn't
going to be writing that big ofa problem anyways, when bringing
a pool of investors in myexperience where somebody isn't
going to be writing that big ofa check, but you just got to
make sure that if anybody is,you have that conversation
upfront of like it's going to bea requirement from the bank for
you to sign some sort of aadditional guarantee on this
note, so just be preparedyourself.
(44:21):
Be prepared to have thatconversation with any of your
key investors and plan ahead.
I've got a buddy of mine whohe's got a portfolio of four or
500 units and that is somethingthat is kind of a problem for
him.
His primary investors, who doprovide big checks to him, they
(44:44):
won't sign personal guarantees.
So he's very limited to thedebt that he can go get and
inevitably it limits him on thetype of deals that he can do
because he knows like, oh well,I can't get agency debt on this
project yet, it doesn't makesense, we really need to work
(45:04):
with a community bank.
But these guys aren't going tosign guarantees and he's just
like, well, I can't do the deal,it doesn't work for our
partnership and it's a challengefor him.
It's not a challenge for me.
I don't have a problem signingpersonal guarantees.
Yes, there's a whole extraadded layer of risk that I take
on as a general partner, butthat's also why I feel I'm very
(45:33):
conservative going into any ofmy deals and I make sure that
there's certainly more thanenough levers for me to go pull,
from an operation standpoint,that allow me to to move this
asset in direction that you knowkeeps everything above water
over, you know, over time putgood fixed rate debt on things
going into it.
So when you do sign those youknow guarantees, make sure that
(45:56):
you're being smart aboutunderstanding where your risks
are in the project and doingwhat you can to mitigate those
risks for your project over thelife cycle of it.
Tony (46:07):
Yeah, and one thing that's critical is you don't want to
save money here on a deal.
This is not where you savemoney.
You don't save money on notunderstanding the terms of the
loan that you're signing, right,so you know, don't?
This is where you can reallyrun into a mistake.
You know that you could havekind of hedged.
(46:28):
So go spend a grand, two grand,have an attorney, go through
any questions, make sure youunderstand the terms.
The banks might.
You know people are very quickto just look at a rate, down
payment amount and startcomparing through there.
But all of the nitty gritty isin the bank's terms.
So you know, that's just all.
(46:49):
That's like the shiny objectthere.
But the terms are what reallyeverything's going to come down
to.
Because once you sign and closeon that deal, you're beholden
to those terms unless you havenegotiated those prior, and most
people don't realize this.
But banks are willing tonegotiate those terms, but you
have to oh, for sure you have toread the terms and understand
(47:09):
what your terms you're signingup for in order to negotiate
them.
So that is critically importantfor any newer investor when
you're looking at deals isunderstand those terms.
Joel (47:20):
So can you give me some examples?
Tony (47:22):
of anything that you've gone through with that.
Joel (47:24):
Yeah, I've spent the last two weeks actually basically
playing two banks back and forthon pushing the terms with the
loan turn sheet that we're doingfor this 80-unit project.
So this is what I've beenliving and breathing here the
last handful of weeks.
I do want to step back just onesec.
(47:47):
I also might recommend that youfind a very good versed
mortgage broker and even if itmeans you have to pay them a fee
, if you want to go find yourown debt but you pay them a fee
to review the terms, that'ssomething you may be able to
find somebody who could do.
(48:08):
They might say thanks but nothanks, but those folks, in my
opinion, are going to likely bemore versed in understanding the
opportunities and risksassociated with the term sheet
on the loan package that you'regetting than an attorney.
Attorneys are often very goodat a lot of things.
(48:32):
There are some attorneys thatare very specific, but I do feel
if you can find someone who's aspecialist in working with term
sheets all day, every day, thatperson's going to have some
great insights.
You might have to pay a reducedpercentage fee of your loan or
a flat fee to have them review,but that's something that I
(48:54):
might recommend you add as apart of your deal team.
I might recommend you add as apart of your deal team With
respect to terms.
So something that we are goingto be doing here on this 80-unit
deal, we're buying at a verylow basis per door.
We're buying this new 80-unitat 55 a door and after we
execute our value out on justthe 80 units, we should be
(49:19):
looking at somewhere around like85 to 95 a door for what it's
going to be worth three to fiveyears from now.
So, with that said, we've got alot of room to grow, and one of
the things that I want to beable to do for my investors is
be able to return capital tothem as we improve the value of
(49:41):
the asset.
But I'm also very conscious ofnot getting into too short term
of debt.
I don't like one or two yeardebt.
I generally want to see thatI'm getting into an asset with
five year debt, because whoknows when the next pandemic is
going to come around?
Whatever's going to happen, Ican't predict the future in the
(50:13):
macroeconomic world and we cando it at the microeconomic level
, so the best thing we can do isput predictable framework
around our deal and move forward.
So what I was able to negotiateon this deal is we've got a bank
who's going to provide us theopportunity to do a swap.
I can choose three, four, five,six, seven-year swap.
So it'll be a fixed rate debtfor whatever length of term I
(50:34):
want want, and then, at 12, 24,and even 36 months, we got a 12
month period.
Every 12 months the bank willre-up our loan and they will add
an additional loan onto thepackage based on how much value
(50:56):
we've created.
So any appraisal will lastabout 18 months, and so the
first 12 months we'll be able touse the original appraisal.
But they'll look at where ourtrailing 12 month NOI is at and
they'll be able to say, okay, wecan move you now up to X for
meeting your you know 1.2 DSCR.
(51:16):
So you know we'll put two and ahalf million down and 12 months
in we should be able to getanother half million dollars
back, and then, 24 months in, weshould be able to get another
half to three quarters millionback and then, a year later, get
another chunk of money back.
So the cool thing from aninvestor's perspective is we get
this incremental refinance, ifyou will, throughout our project
(51:40):
Our interest rate will be ablended rate.
We'll have the original fixedrate and then, wherever the new
rates come in, those will all befixed off of the original
25-year amortization.
We're getting interest onlyperiod in there.
That was something that wasimportant for us to negotiate,
but this is a really coolstructure that allows us to get
(52:01):
into longer term fixed rate debtand still be able to get cash
out refis along the way.
We've pre-negotiated the termsthat those refinances are going
to end up happening.
Tony (52:18):
Now that's a value bomb.
That's a great nugget there foranybody listening.
So what you've negotiated insimple terms is you've got a
loan.
You're not having to leave thisbank, pay prep, create capital
events every year, every 18months, without completely going
(52:45):
through a prepayment penalty,closing out a loan, finding
another bank.
So all of these things in termsthat you've negotiated before
you've closed on the propertyare building in where you can
then create capital events foryour investors and for yourself
to recoup that capital invested.
That's a fantastic value bondfor people.
Rewind that.
(53:06):
Listen to that again, becausethat's about the most beneficial
thing that we've talked aboutPeople can do.
Actionable when negotiatingterms like this is looking
outside of the box, creatingsomething that works for you
will work for your investors andcreate a deal where there is a
deal and be able to do somethingwhere you're not worried about
what the market is doing Because, like you're saying, you're
(53:27):
going to have a blended rate.
So you've got that initial loanterm.
That's a fixed rate forwhatever you set it up for three
, five, nine, 10 years, whateverRight, so that one's fixed.
Then you having an additionalrate, which is whatever.
You know the bank and younegotiate based on the rates of
the day.
Each time you create thatcapital event which is then
(53:49):
going to blend your rates up,the rate starts dropping big
times.
Then that's going to lower yourblended rate.
Obviously, if it goes upsignificantly more now, even
though you've got that initialloan which is the majority all
locked in and you're able tocreate additional capital events
where you're just going to dealwith a blended rate and you
don't have to start all over,yeah.
Joel (54:08):
So we're going into this project at like 50, it'll
probably be like 52 LTV, likebasically 50 LTV, right, we're
bringing a lot of cash to thetable in this thing and that
allows us to achieve a 1.2 DSCRon a fully amortizing basis,
even though we do have an IOperiod.
(54:29):
But on a fully amortizing basiswe achieve a 1.2 DSCR based on
the trailing 12-month NOI.
So out of the gate we've got avery safe loan amount.
We've got to bring a lot ofcapital to the table and that's
not super attractive from beingable to get high returns.
But again, having that beingable to add those additional
(54:50):
loans onto this thing over thecoming years allows us to get to
that higher leverage withouthaving to be too risky out of
the gate.
So the flip side to that if youlook at a lot of the deals that
are going bad these days and wehear about keys getting handed
back to the banks and investorslosing their money it was folks
(55:14):
that went out and got bridgeloans, which are inherently
expensive debt out of the gate.
It's also floating rate debt.
Expensive debt out of the gate,it's also floating rate debt.
So that's a whole big issue.
That happened, as we saw 400plus point basis point increase.
So they got very high leverage.
You know some of it like 85loan to cost on deals.
(55:39):
So they were just crazy lowmoney down on these big
apartment complexes.
And the reality is that asrates went up, even on their
interest only payments, theywere like 0.5 or 0.6 DSCR, not
1.5 or 1.6,.
0.5 or 0.6, which means theyare burning cash every single
(56:02):
month by 0.6, which means theyare burning cash every single
month as they just approachhaving to hand the keys back if
they can't execute their plan.
So if those folks would haveput together a structure like
I've got on this deal, yeah, itwould have been a lot of cash to
bring to the table.
But the great thing when you areat a comfortable DSCR and you
(56:24):
have fixed rate debt is you havetime, and time is the most
valuable asset any of us can buy.
Who are structuring deals Right?
Because political environmentscalm down interest rate markets
figure out what the heck they'regoing to do.
You're able to get throughrecessionary periods.
(56:46):
You can deal with majoremployers shutting down and
trying to ramp up new jobs andthere's all sorts of stuff you
can deal with right.
You get a fire on your propertyyou get, I don't know, some bed
bug infestation and time.
Time gives you just such hugebenefits.
So putting together a loanpackage and an equity package
(57:09):
that balances giving you time aswell as being able to give you
those higher returns that youwant, that come with added
leverage, you know that's that'sa really great thing and, and
something in today's environmentthat I'm pretty excited about
and, you know, pretty proud thatwe're able to pull this
together as a structure for thisnew deal.
Tony (57:30):
Well, that's fantastic.
So I mean, what you'vebasically gone through, what
we've gone through, is theenvironment has completely
changed here.
And what you kind of hit on isyou know, when things were
flying all over the place,people were underwriting deals.
They're in a lot of trouble.
They weren't buying rate caps.
Their interest rate was nevergoing to go up.
There was never going to be abad day.
You know, and that's where allthe people get caught.
(57:53):
You, like you've said, it's beena long time since you found a
deal, because you're beingprudent, you know, staying key
to your principles and key toyour principles, and that's how
you're successful in this.
This is a marathon, not a quickrace.
So you have to be prudent, slow, slowly build up.
So real estate is not a quickmake money and churn.
Otherwise you're going toquickly make money and then
(58:13):
you're going to crash.
So, like with anything, youhave to be slow, methodical, and
you're going to build this overtime.
And real estate is appreciatingassets, tangible.
It will go up and you're goingto build this over time in real
estate as appreciating assetstangible.
It will go up, but you can'texpect it to go up like it did
for that short run, or you'renormally going to get burned.
So as long as you're looking atstuff prudently and with a
(58:34):
long-term vision, you'renormally going to be more
successful in the long run.
But, Joel, thank you so much fortaking the time to go through
everything with us today.
I want to kind of cut it andwe'll get you at another point.
I'd love to get you back onafter you close and do some work
on this new deal and find outif you close on it and start to
do some development plans.
I'd love to get you back andkind of walk that through with
(58:54):
everybody so they can keep intouch with you.
Now, if people are interestedin getting to know you more or
reach out to you about futureinvestment opportunities, what's
the best way to get in touchwith you?
Joel (59:05):
Yeah, I'm on LinkedIn.
I'm on Facebook.
Head to my website,jfhcapitalcom, and my email is
joel at jfhcapitalcom as well.
Tony (59:17):
And we'll put that in the show notes as well as a link to
him on LinkedIn, and pleasereach out to him.
Joel's a great guy and I thinkhe's going to have a really
bright future down the road, andso if anybody can get in touch
with somebody and they want toinvest, he's somebody I would
definitely recommend to reachout to.
So hey, joel, thanks so muchfor being on the show today and
(59:38):
hope to talk to you again soon.
Joel (59:39):
Hey, thanks, tony, appreciate it.
Welcome to another episode of Carolina Commercial Real
Estate Connection.
Today we have Joel Florek withus.
Joel, thank you so much forjoining us.
How are you doing today?
Joel (00:08):
Hey, tony, thanks so much for having me.
Tony (00:10):
Yes, sir, joel is the owner and operator of JFH
Capital.
He's up in the Midwest.
And, joel, could you tell us abit about your story?
I know right now you're inIndiana.
Where did you grow up?
Joel (00:28):
Yeah, I grew up originally in the Upper Peninsula of
Michigan, up in Marquette on theshores of Lake Superior, grew
up with parents that about everyyear or every other year we
would move into a new home, werenovate it while we lived in it
and then after a year or twothey'd either sell it or we'd
(00:50):
move on, and they'd occasionallyhang on to property as a rental
.
And that's where I firststarted learning the basic
skills of what it meant to, atthat point, take care of real
estate, laying hardwood floors.
At eight years old and um gethome from school and would have
a bag of parts from the hardwarestore and a note from my dad
(01:12):
saying you know, here's thejoist hangers.
You know, put them up on allthe joists in the deck and I,
you know, have a nice bruised upthumb as I figured out how to
use a hammer bruised up thumb asI figured out how to use a
hammer.
But yeah, I was certainlyblessed with parents that were
very hands-on.
They never scaled up their realestate investing, but I
(01:34):
certainly got a front row seatto what it meant to take
responsibility for real estateassets, to have rentals.
They never really had more thantwo or three units at a time,
but yeah, that's ultimately theroots of my investing.
And then ended up going up toMichigan Tech University, got a
(01:56):
degree in finance up there andwhen I started my first job in
Iron Mountain, michigan, Ibought a little four-unit
building, lived in one unit,rented out the rest your very
typical house hack biggerpockets book type real estate
business plan and the rest ishistory, as they say.
Tony (02:20):
That's awesome.
Let me dive in a bit on yourgrowing up in your childhood.
How many siblings did you havegrowing up?
Joel (02:26):
Just my brother and I.
Tony (02:28):
And was your brother?
Did he have this same?
You know, initiative and driveto doing this?
Not at all.
The one sibling is doingeverything.
The other one's over theresitting on their butt doing
nothing all day.
Joel (02:43):
You're working and doing all this ones over there sitting
on their butt doing nothing allday.
You're working and doing allthis.
Yeah, my, my brother, he was uhvery good hockey player, very
good hockey player.
He's had a wonderful career, uh, bouncing around in different
leagues, ahl, uh short debut inthe nhl, playing in europe for
about 10, 12 years.
Um.
So, you know, even from a youngage he was, he was very, you
know, even from a young age hewas, he was very much, you know,
(03:05):
focused on his hockey.
You know it's, you know, fouror five, six days a week kind of
thing, almost all year long.
Me, on the other hand, I waspretty squirrely kid.
You could never get me to, youknow, sit down and focus.
Going to quote unquote you know, sports practices was not my
thing.
(03:25):
I like the games, like thepractice part of it.
So I really enjoyed working withmy dad.
For me that was something thatI had a lot of fun with and,
yeah, I am certainly blessed tohave, you know, gotten that
experience.
I mean, you know, there was onehouse we lived in.
We we tore the second story offwhile we lived in it, so my
(03:49):
brother and I were in the livingroom.
The first floor was it was aliving room, kitchen and one
bedroom.
There wasn't even a bathroom onthe first floor, so there was
just a toilet sitting on thesecond story and you know, tarps
, blowing windows, windows.
We were framing it backtogether but I got to put
together there pretty quick butit was, uh, it was.
Tony (04:11):
It was a few weeks where it was like, yeah, this is, this
is pretty interesting yeah, nowI as well have family in the
upper peninsula and we would goto the camp and you know there
was no, there's no plumbing outthere, so we would go out.
It was just, you know, the oldstyle shack where you go into
the old porta potty sitting outthere and you're just taking
peas and poops in the dirt,basically oh yeah, oh yeah.
Joel (04:33):
Yep, I, I've got got plenty of friends with cap camps
out in the woods and, uh, haveenjoyed a lot of nights out in
the wilderness and that iscertainly part of the experience
.
I would not say a highlight,but it's part of the experience.
Tony (04:49):
Yeah.
Now when you went to MichiganTech, did you go with any
interest or intent of doing realestate?
Was that in your thoughtprocess, or what did you go to
school for?
Joel (05:04):
I actually started going to school for mechanical
engineering.
I really liked.
You know I've always enjoyedunderstanding how things work.
I wouldn't say I was like agearhead kind of kid.
I really enjoyed theconstruction and building side
of things.
But very quickly in the firstsemester of school I realized
that I would not be able tosurvive four years of some of
(05:26):
the mentality that theprofessors in the engineering
department had with respect tohow they felt about businesses
and people in the front officewho work very hard to try and
make the best decisions.
But but it's not always easyand clear cut.
So that kind of entrepreneurialmindset aspirations that I had
(05:52):
gravitated me towards thebusiness school.
So I ended up switching.
I felt it very important to geta technical degree and in the
world of business, in my opinion, finance and accounting are
going to be your two primarytechnical degrees that you can
get.
So I ended up choosing thefinance route.
(06:14):
Learning a big set of rules andmemorizing in the world of
accounting that's not my thing.
Bless the people who enjoy that.
My bookkeeper is a tremendouslyimportant part of my team
nowadays, but I wanted to gointo the finance side.
(06:34):
I really enjoyed the idea oftrying to distill down the basic
fundamentals of a businessthrough the financial statements
and then translating that intoreal world decision making,
whether you're trying to valuebusiness, value assets,
understand where it looks likethe trajectory of the market may
(06:57):
go, and that quantitativeanalysis translating to the
qualitative side of business and, you know, figuring out how to
merge those two things togetherto be able to make smart
decisions.
Tony (07:13):
That's pretty in-depth.
I also went and started inmechanical engineering.
I didn't really choose, I thinkI pretty much failed out of it
and then switched to businessand graduated with fun didn't
really choose, I think.
I pretty much failed out of itand then switched to business
and graduated with fun, so youknow.
But so it sounds like we did asimilar path on that front.
So once you got out and gotgoing, so you're saying your
first initial with real estatewas, you know, doing a house
(07:37):
hack and renting out a couple ofthe units.
And so once you saw that, yousaid you grew up and your
parents never really scaled.
So once you kind of gotinvolved, is your long-term
aspirations, it sounds like,were then more on figuring out a
way to scale this.
Am I right?
Joel (07:59):
Yeah, yeah, you know middle class parents.
Mom was a nurse.
You know dad was.
You know facilities maintenancesupervisor for our local.
You know town in charge ofwater, sewer departments.
And you know other facilities,parks, throughout the community.
You know financial stresscertainly a part of, I think,
every middle class American'slife at some point American's
(08:30):
life at some point.
And for me, I knew thatfinancial independence was
something that was tremendouslyimportant for me to try and
achieve as early as possible,given the background that I had,
working with my parents in whatthey did with real estate.
I certainly understood thephysical components.
With my college education Iunderstood a lot of the
financial components and I said,well, heck, let's start with
(08:50):
that four unit and let's try toscale it from there.
I'll try to build a basethrough multifamily as kind of
my core financial independencerock, if you will.
And what happens after that Idon't know.
So in my head it was like I need12 units and that was the big
(09:11):
thing that I was really shootingfor at that time.
And just to put it into context, after a little bit of trading
of some assets, selling andbuying of 185 units here in the
portfolio of multifamily assets,I also have a campground in the
portfolio with 220 pads as well.
(09:33):
So that's where the portfoliois today.
But, like I said, at the time,I had the mindset of 12 units
and that's what I was going towork hard to get to.
I bought that.
For 10 months later I ended upbuying a 16 unit.
So within my first year ofleaving college at 23 years old
(09:53):
I had 22 years old I had 20units in my portfolio that I had
owned, didn't have any partners.
I was like heck, this thing'seasy.
You know I'm going to have athousand units here in the next
next few years.
Got a nice dose of realitythere.
Tony (10:12):
That's awesome.
You set your initial goal right, so it's what you can envision.
And you set those initial goals, so you can envision the one.
You surpass the one, and thenit was sky's the limit.
So kind of walk us through whathappened.
What was the next thing?
So you got, got up to your 22units.
Did you feel a cash crunch?
(10:34):
Was you you were still ready tomove forward, or what?
What was the analysis onceyou're at the 22 units and now
you surpassed your goal, did?
Did you regroup, reset yourgoals and start again?
Joel (10:47):
Yeah, so this would have been kind of late.
2015 was when I bought my firstbuilding and, like I say, I had
picked up the four unit, 16unit about a year and a half
later, picked up a three unitand then picked up an eight unit
as well.
I'd moved from the UP down toIndiana where my wife is from,
(11:09):
as we started our family and Ihad 31 units at the time and I
had done it all through creativefinancing.
I mean, I was borrowing fromcredit cards, I was getting
seller finance, second positionnotes, getting the bank to
finance as much as I could.
I was the guy wearing every hatI didn't have.
(11:29):
I had worked for House Flipperon the side for a little bit,
but I didn't have a W-2 job.
I had left that pretty quickwhen I had moved down to Indiana
and didn't pick up another.
Tony (11:41):
So yeah, I mean to say I felt well, you, you're
creatively making things happen,which is awesome you know, but
I, you know, I was, I, I wasstuck right yeah, well, I mean
(12:02):
so when, once you got soinitially, when we're starting
so up to 32 units, you wereself-managing these properties,
so you were the, you were themaintenance guy doing everything
right.
Joel (12:14):
Yep, I was leasing agent.
I was the maintenance guy.
You know, painter, I throw mylawnmower on a trailer and drive
it around and, and you know,mow the properties.
But I barely had any equity,you know, in the deals because I
had borrowed every dollar zerodown and unless I wanted to go
(12:34):
pick up another job, I had to dosome of these things to at
least make enough to make endsmeet for for my young family, as
, as we were getting started.
So at that point I had decidedthat I really want to scale up
and do some larger deals.
It was getting really hard tofind anybody who was interested
(12:59):
in doing seller finance.
I was interested in gettinginto better quality assets.
The market was getting reallyhot in the late teens so I
decided to start bringing oninvestors into my projects with
the goal of being able to scaleand tackle projects without
being limited to whatevercapital I did or did not have at
(13:21):
the moment.
So I bought a 15 unit townhouseportfolio as my first
syndicated property, brought on12 investors who all came in
with $10,000 to $30,000 each tobe able to purchase that
property.
Tony (13:41):
I love that.
I love that idea.
A lot of people start with themassive project big investors.
I love to hear about that.
You've told me that before,where you brought in these
investors, small money, andcoupled a lot of people together
but raised this capital for thefirst time.
(14:03):
It sounds like you know, youare a no holds barred and just
have that analysis that once youset your mind to something,
you're going to accomplish it.
And bringing along 15 investorsthe first time you're
syndicating something and thislower range of investment amount
you must have just been dialing, dialing, dialing, dialing.
And people, obviously, you know, even if they didn't have a lot
(14:25):
of money, they're giving youeverything that they have
because they have faith in youand belief in you, which is
awesome.
So that's a lot harder thangetting money from somebody
who's got multi-millions ofdollars and you get a hundred
thousand from them right, justto get somebody who it's almost
everything that they've probablysaved up for and they're
willing to give it to you.
Joel (14:43):
Yeah, or at least that was that was my perception at the
time.
You know seemed like a lot andyou know that's what they said
they had.
But the reality is most of thepeople who invested with me on
that first project, as I've donesubsequent projects over the
year, those $10,000, $20,000,$30,000 checks have turned into
(15:07):
$50,000, $100,000, $200,000checks and we're starting to
work with those individuals'IRAs on them doing
self-directeds.
It's really expanded but webuilt that initial investing
relationship off of a muchsmaller check size.
(15:31):
I was still very young, in mymid-20s, when we did that first
syndicated deal.
So for a lot of these people Ithink for all of them it was the
first time any had gotteninvolved in a syndication.
Of them it was the first timeany had gotten involved in a
syndication.
So passively investing throughanother person into real estate
was a new experience for them.
It was a new experience for me.
(15:51):
So I think it worked reallywell in all things.
Considered the size deal that wetook down with the quality of
asset that we bought, in myopinion it was pretty darn low
risk for everybody and provedout to be a great situation.
Structured, that deal a littleuniquely had a buyout clause
(16:13):
with the investors built into it.
We all pre-agreed going into it.
So after three years I was ableto buy out all my investors.
They all achieved about a 20%average annual return over that
three-year hold period.
So, all things considered, avery, very good, respectable
return for those folks as apassive investment, and then for
(16:37):
myself and my brother who didget involved in that project as
well.
We now control that assetourselves and the original group
of passive investors are nolonger involved in that project.
Tony (16:52):
So can you tell me a little bit so just giving
somebody a little insiderinformation, if somebody's
looking at structuring, I lovethe idea of that and you've
spoken a couple different timesto me on other occasions about
how you structure your deals.
Could you give us a little morein-depth understanding of what
you're talking about, how youstructured the buyout clause and
(17:13):
what are some specific thingsyou're putting in these
agreements?
That is, making sure that youhave control of the asset and
can make the asset perform andare using what you're bringing
to the table to your advantage.
Joel (17:28):
Yeah, so I'll start out with the structure in the legal
documents.
So the way that I put thattogether was our buyout was
based off of an IRR internalrate of return.
So the general idea is, duringthe entire hold period we're
(17:48):
paying out cash flows.
I pay out cash flows on amonthly basis to investors and
then at some point we're goingto have a capital event.
So the challenge that you getinto and how you structure it is
what type of measure do you useto structure your buyout is
(18:08):
what type of measure do you useto structure your buyout If you
want to go through and have somesort of appraisal percentage of
the property?
That gets really messy, becauseI'm sure you've experienced it
Appraisers suck.
And I'm not saying that actualappraisers are bad at their job.
It's just the process of tryingto appraise a property is so
(18:29):
variable and opinionated thatyou get three appraisers who try
to value the exact same assetat the exact same time with the
exact same information.
They're going to put threedifferent values on it and it
could vary 25%, 30% in value.
It's very challenging job foran appraiser to figure out what
(18:50):
the market is at any given time.
So if you have a structure thatrequires an appraisal.
In my opinion, that's a recipefor failure.
Irr allows us to be veryspecific, so I structured an 18%
IRR buyout after three years,so we have a defined time
(19:11):
horizon that says I can't buyyou out before X date.
That way, people feel liketheir money was working for them
for a long enough period, andthen we have an IRR measure,
which allows us to factor in thetime value money associated
with those monthly payments thatare varying amounts, and then
(19:31):
that final capital event.
It's a very clean approach todetermining how shares are going
to be valued at some point inthe future.
Ultimately, though, everybodyhas to agree on that, going into
it Super disclosed is.
This is the business plan.
This is how we're doing it.
(19:52):
What I did find, though, is,ultimately, while it was
certainly a great project forinvestors, they all would have
loved to have stayed in the deal.
A great project for investors.
They all would have loved tohave stayed in the deal, and it
was pretty disheartening fromtheir standpoint to have exited
(20:13):
the deal before it went fullcycle.
So, moving forward, my goal isto structure deals that maybe
have hurdles associated withbetter performance, that allow
me to get additional benefits asI execute a deal you know
extremely well, but allowing myinvestors to stay in and
(20:34):
participate more fully over time.
So that type of yeah, go ahead.
Tony (20:41):
Give me an example of some structured hurdle that you've
put forward that they, that youcould basically be rewarded, but
keep them in the deal so peopleunderstand what you're talking
about.
Joel (20:53):
Yeah.
So there's a deal that weactually restructured when we
decided to do an eight unittownhouse development onto the
existing apartment complex aneight unit townhouse development
onto the existing apartmentcomplex.
So when we restructured thatdeal, the way it was set up was
the initial.
(21:14):
The first hurdle was a 70, 30split 70% to investors, 30% to
the general partners and afterwe have a full return of capital
, then all cash flows get split50-50 and all future capital
events are split 50-50 as well.
(21:38):
The idea with that structure waswe were looking to do a cash
out refi after we finished theconstruction and then hang on to
that asset over the long term.
The goal there was that I, asthe primary general partner
who's putting in the sweatequity, doing all the work
(21:58):
associated with that,structuring that new
construction and getting thatproject to fruition, that I
would be able to see strongercashflow over the hold period.
All of my investors would havegotten their principal back to
achieve that hurdle.
So from an investor'sperspective, they put money in a
project, get cashflows for awhile, they get all of their
(22:20):
original capital back and thenthey continue to cashflow and
then they get you know whateversplit in this case 50, 50 of you
know any future capital eventskind of thing.
So, um, that's something thatwe ended up putting in into that
deal and everyone was waspretty excited, uh, to you know,
to be able to participate andget involved with that new
(22:41):
structure.
Tony (22:43):
Yeah, that's awesome.
That's, that's structure.
It's a great structure andyou're exactly right.
So it's rewarding you.
So you know, in that initialinvestment period where the
investors have all their moneyin, they're getting 70% of the
return.
You're getting 30% for all ofyour work.
Then, once you're able to fullygive them back their initial
capital and basically neitherone of you are fully invested in
(23:05):
the deal then you're nowsplitting 50-50 and they're able
to still reap the benefits ofthe project and you're able to
reap more of the rewards of theproject for all that work you
put in.
So that's a great structure.
It's a win-win for everybody.
Pretty common, but veryattractive for a passive
investor because once they'vegot all their money back,
(23:26):
they're still able to be in thisdeal and really you know
understandably.
So all these people are doingare putting in their money.
You're the one that's workingblood, sweat and tears in this
every day, and so then you'regoing to get that benefit of the
rewards only once they fullyrecoup their initial investment,
which makes it, like I wassaying, a win-win.
So awesome structure and thanksso much for walking us through
(23:47):
that.
So tell us a little bit aboutwhat you're after these days.
So I know the market hasshifted from that timeframe to
now and so kind of walk usthrough where you're at right
now.
What are you working on doingright now?
Exiting deals, having new deals?
Are you looking at otherpursuits?
(24:09):
Where are you at?
Joel (24:11):
Yeah, so right now I am selling a 48 unit apartment
complex that we've had for thelast three and a half years.
As I briefly mentioned, thatwas a project that originally
purchased it was 40 units.
We added eight units to it andnow we're selling it off as a 48
unit apartment complex.
We were looking at holding thatone, but I felt like there were
(24:35):
some opportunities that may becoming to the market this year
and felt like getting all of ourcapital out was going to be
advantageous.
And it just so happens thatabout a week after we got that
48 unit under contract to sellended up having an 80 unit that
(24:56):
we got an accepted LOI on andare currently under contract on
to purchase and are currentlyunder contract on to purchase.
So that 80 unit is going tohave a very similar business
plan, where there was plans fora future phase and the property
was designed for that futurephase.
So we've got roads stubbed outin the back.
(25:16):
We believe we can add 20 to 30townhouses in the back of that
property as well.
So we're going to purchase theexisting 80 units.
There's a huge value addcomponent associated with that
part of the project and thenthere's this additional
opportunity to add more units tothat community as well, to bump
(25:37):
it up to that 100, 110 unitcommunity.
So if we can execute that,definitely some really exciting
opportunity with that particularproject.
Tony (25:51):
That sounds awesome, and so that one you're also bringing
in passive investors, right.
Joel (25:57):
Correct Exactly, I'll be the largest Chuck writer, but
inevitably we'll bring in a nicepool of investors and pretty
much you know it's going to be.
You know a good list ofeveryone who's worked with us on
the past and a lot of folksrolling money over from the sale
that we're going to have.
So, yeah, fun times right inthe middle of transactions right
(26:20):
now.
So it feels, feels good it's.
It's been a, it's been a reallytough market.
I mean, we've seen a huge runup in the prices of multifamily
assets and with interest ratesrising as much as they did, as
quick as they did, you have thisreally big spread in many cases
between what owners of assetswould be willing to trade out
(26:44):
and what buyers need to see tobe able to get in.
And it's just hard when every30 days you see another 50 basis
point, 100 basis pointfluctuation in rates up and down
and up and down and a lot of up.
But it makes it very difficultfor us to predict what's going
(27:10):
on in the market.
So it's been a couple of yearssince I've actually closed a new
deal.
Thankfully, I had that newconstruction project to keep me
sane last year.
But 2024, after the races I isgoing to make things happen here
.
Tony (27:27):
So now one of the things that my market is starting to
see in multifamily is rentsoftening a bit, and we have had
a lot come online which I thinkis contributing to that.
Are you foreseeing anysoftening in the rental in your
area, the rental rates in yourarea, any?
Joel (27:45):
softening in the rental in your area, the rental rates in
your area?
Well, typically all thecommunities that I invest in, uh
, they don't have much for newsupply coming to market.
So, from that perspective, youknow, rents appreciating,
staying flat or depreciating isgenerally, it's basic economics.
(28:08):
It's a factor of supply anddemand, whether that's increased
demand from people moving intoa market or wanting to shift to
apartments, or it's shifts inmassive supply, multifamily as a
whole.
I just got back from a Marksand Millchap conference in
(28:29):
Chicago, and they had a reallygood discussion around what's
happening around the countrywith the multifamily market in
particular, and the apartmentmarket is bringing record
deliveries each year here to theUnited States, which, when you
(28:50):
talk about the idea ofaffordability crisis that is the
buzzword most people like touse that sounds fantastic.
What's actually happening,though, is the concentration of
that construction is in such asmall number of markets that,
(29:11):
frankly, the vast majority ofAmerica isn't seeing that big
ramp up in supply coming.
But the markets that aregetting that ramp up in supply
are getting hit very, very hard,and some are getting hit harder
than others.
We're seeing, in certaincommunities around the country,
rents declining by as much as10%, vacancies of 10% to 15% in
(29:38):
certain markets, so that'ssomething that investor beware,
buyer beware.
You really have to pay attentionto the supply factors
associated with the market.
How much supply is going to becoming to market, and those are
(30:00):
stats you can generally look up.
It's pretty widely understoodin each market how many units
are coming to market each year,how many have been approved, and
then there's typically somereally good data out there
associated with absorption rates.
What type of concessions arehaving to be offered one, two,
(30:23):
three months free rent?
Offered one, two, three monthsfree rent in some cases for
people to move into this brandnew product?
That hurts every single level A, b, c class apartments, because
there ends up being thisnatural shift of people from
poor quality assets up to betterquality assets, but everyone,
for the most part, gets hurtacross the board.
(30:45):
So a market as a whole might begreat, from a job growth, a
population growth, all sorts ofthings but too many developers
got excited about that marketand threw so many units, and
that's the boob and bust ofcapitalism, right?
(31:07):
I mean, that's just whathappens and that's okay.
It hurts the people who areinvesting for sure.
It's great for consumers,though, because they're seeing a
bunch of new product andthey're going to see rents going
down and they're going to havea lot more optionality and
apartment owners are going to befighting for those renters.
Those are going to be reallyhard markets to be in over the
(31:30):
next five plus years becausethat doesn't fix itself
overnight.
It takes time.
Now the markets that I'vehistorically invested in are
what some might call riskiermarkets because they're small
towns of 5,000, 10,000, 20,000,30,000, typically do 50,000
(31:50):
person population communities orless, and they've been in
Indiana or Michigan.
And the big thing for me is, aslong as there is stable
population and I don't seereally anything for new
(32:11):
apartment supply coming intomarket, I feel very comfortable
investing into those communities, especially if I'm investing
into assets that are up at ahigher level in the market,
because I know people always aregoing to want to choose the
better quality asset shouldprices remain equal.
(32:35):
So that's generally been mystrategy over time is to stay in
the slow and steady marketswhere I don't see this big up
and down and vacancies andconcessions and all sorts of
other games that other apartmentowners are experiencing having
to play right now.
Tony (32:55):
Yeah, I think that that's a sound strategy.
You know, the more people Ispeak to over and over again,
everybody's got, you know,different analysis for what they
, where they want to go, whatmarket they want to go in.
And, yeah, you know, you, you,a lot of people, are of the
mentality you know and I followthe crowd and I follow the crowd
, follow the crowd.
So when everyone's going intothis market this is the great
markets Then everyone floodsthose markets and then, yeah,
(33:21):
you get overexposure, then yougot absorption rates come into
play and then exactly whathappened is the dominoes start
to fall and that's where peoplestart to lose out.
When you're doing a strategylike you have, like it doesn't
really matter, you're not reallygoing through a boom and a bust
.
You're understanding thesesmaller markets.
You are looking in markets thatyou know.
You have historical knowledgeon the markets and so when
(33:44):
there's not a ton of newbuilding going on, it's a lot
less to be aware of these movingparts.
So when you're going in a verybusy market you want to develop
something, it's how restrictiveis that market?
Or when you're in developing amultifamily project, they
approve one right next door andthey're coming in at a lower
cost basis maybe than you, andall of a sudden you're screwed.
Joel (34:07):
Yeah, and an interesting thing that came out of the
conference is some of thelargest developers in the
country were up there speakingand pretty much unanimously, all
of them said that their cost tobuild is 10% 15% less today
than it was just a few years ago.
(34:27):
So, to your point, they'rebuilding brand new communities
today at a lower cost basis thanwhat they were building just a
few years ago.
So that adds fuel to the firefor some of these markets.
One of the challenges that youhave if you go after a strategy
like mine of going into thesesmaller communities that not
(34:52):
everybody's chasing, is a fewthings From a lending
perspective.
There are going to be fewerbanks that are going to be
interested in working because,for the same reason of what I'll
mention here with investors, ifa banker makes a mistake by
approving a project that goesbad in a small town, they're
(35:15):
going to be in trouble if, ifthey make a mistake and a
project goes bad in a majorcommunity, well, you know I
can't be in control of that,that's not my fault kind of
thing it's.
It's it's.
It's much more acceptable forfor things to go wrong in a
larger community and you tostill keep your job.
(35:38):
So there's going to be farfewer banks that are interested
in working in those smallercommunities.
So lending is more difficult.
But I have never had a problemgetting multiple banks to
compete for loans in any ofthese markets over the last nine
years.
The other side of the equationis capital, Institutional
(36:02):
capital, the big players.
They don't touch small markets,they only stay in primary
markets or secondary markets.
I mean you've got to be acommunity of you know two
300,000 people or more for thesemajor capital groups to be able
to invest money.
As you continue to work downthe ladder of capital type.
(36:29):
Again, you got to keep workingout of the chain before you get
people who are willing to investcapital into some of these
smaller markets.
So if you are raising money,it's going to be that much
harder to be able to raise moneyand then subsequently you're
going to have that many fewerinvestor groups who are
interested in buying your assetupon the exit.
(36:52):
Again, I've never had a problemthus far on the disposition side
on getting multiple competitiveoffers available, and in many
cases it's kind of like Ialready know who the three
people are that are probablygoing to buy this asset because
they're just that strong ofplayers in markets of that size
(37:15):
within my region.
So I just kind of know goinginto who's probably going to be
buying my asset and all the morereason to focus on buying stuff
that makes sense, kind ofnormal construction.
I don't like buying weird stuff, weird properties, weirdly
constructed properties just youknow those are things you see
sit on the market for a longtime.
(37:35):
So it's I want to try to buylike normal, constructed garden
style apartment complexes, plainJane, simple as possible.
Focus on improving the qualityof those assets, leave some meat
on the bone for the next guyand I have no problem.
On the disposition side, I'vebuilt up an investor pool,
starting with those small checks, building up now to larger
(37:57):
checks to where they feel verycomfortable on working with me
in any community that I put mystamp of approval on.
And now I've got a list ofbanks that have seen my
reputation for what I've beenable to do with projects, and it
makes it very easy for me to beable to get good competitive
term sheets whenever I have aproject that I'm bringing to the
(38:20):
lender markets.
Tony (38:22):
So let me ask you a little bit more on the bank and you
doing the competing with lenders.
So typically I'm in a smallermarket too Nine's not as small
as what we're talking about, buteven so in my small market.
So there's probably five or sixbanks that I could go to.
I typically will go to two onthe offset.
(38:44):
When you're talking about that,are you letting the banks know
that you're speaking to multiplebanks?
What's your approach with thebanks when you're going?
Joel (38:54):
Absolutely.
This is a competition and theyneed to compete to lend on your
deal.
So, you know, what I havealways done is typically and
there's probably a little betterway I should approach this but
the way I've always done it iswhenever I get a new deal that I
(39:15):
get assigned LOI on, or usually, like just before I even get to
that point, if I know that I'mgoing to have a pretty good shot
at getting a deal, I'll startthat conversation with those
couple banks that I haveexisting relationships with.
But then, once I have a signedLOI and we're in the PSA
negotiation process, I juststart picking up the phone and I
(39:38):
call every single lender that Ithink has an opportunity to
lend within that market, andthere might be five banks that
are primary players in yourmarket, but I guarantee there's
another dozen banks within yourstate that are more than willing
to extend into your market.
(40:00):
Typically, banks will lend upto two to three hours from their
closest branch.
So you can go to your statewebsite, pull up stats and
figure out who are the largestbanks.
You can see, ranked by asset,how many assets that bank holds
and you can see okay, yeah,these are the top 20 banks in my
(40:24):
state and I'm going to go callthose folks and start having the
conversation.
And then, within thoseconversations, it's very simple,
right?
Hey, here's my name, here'swhat I'm doing.
I've got this property that I'mlooking to purchase.
Here are the general terms forthe loan that I'm X, y, z.
(40:48):
You know, is this somethingthat you know you would be
interested in working with me on?
And you kind of pack that intolike a you know 30 second to 60
(41:11):
second snippet of of you know,here's who I am.
Here's the project that I'vegot going on.
Here's the terms that I'mlooking for.
Is this a project that you thinkyour bank might be interested
in working on us with?
And you know, kind of see ifthey fit within your buy box.
And then from there you eitherget a pretty quick nah, this
(41:36):
doesn't really fit well for us,or might it, might not.
I got to run it up the chainand you could put a little
question mark around that bank.
And then you find the folksthat are like, yeah, that's
right up our alley, that'ssomething that for sure fits our
bill.
We got to underwrite it, we'vegot to throw it through
(41:58):
committee, but then you can havea really good conversation
around it.
Again, in that initialconversation to you know, you
just let them know hey, here'ssome of the banks I've worked
with in the past.
I'm certainly giving them anopportunity to be able to, you
(42:19):
know, work on this deal with me.
But you know I'm looking forthe best terms and got Amelia
poking her head in here in theframe.
Tony (42:33):
Okay.
So when you're doing that one ofthe challenges that people have
come to me with and you know,just love your perspective to
put in on that A lot of guysthat are new to raising capital
or you know, they 'll go to abank and they'll say, yeah, I
want to get the loan on this,and you know the bank will be
okay, you have the, you knowmoney.
It's this much down payment.
(42:53):
Well, I'm going to raisecapital from others and you know
some banks are okay and peopleget a lot of very confused there
where you know maybe they'renot bringing all of the capital
to the deal themselves.
So you know, and then the bankas well, you know you need to
bring the money and who'ssigning on the debt then?
So walking through that, and soone quick hurdle is, you know,
(43:17):
for one specific investor, andif they're not going to be on
the debt, you don't want toraise more than 20% of the
equity from them.
That's one thing I want to runin, but I was wanting to see if
you could run through that kindof and have you had that hurdle
come up to you at any point?
Joel (43:35):
Yeah, so that is that is absolutely a great point.
Yeah, so that is absolutely agreat point.
Anytime anyone typically getsover that 20% threshold, they're
going to be required to sign onthe debt, and I just make that
clear to my investors.
So typically that's never aproblem anyways, when bringing a
(43:57):
pool of investors in myexperience where somebody isn't
going to be writing that big ofa problem anyways, when bringing
a pool of investors in myexperience where somebody isn't
going to be writing that big ofa check, but you just got to
make sure that if anybody is,you have that conversation
upfront of like it's going to bea requirement from the bank for
you to sign some sort of aadditional guarantee on this
note, so just be preparedyourself.
(44:21):
Be prepared to have thatconversation with any of your
key investors and plan ahead.
I've got a buddy of mine whohe's got a portfolio of four or
500 units and that is somethingthat is kind of a problem for
him.
His primary investors, who doprovide big checks to him, they
(44:44):
won't sign personal guarantees.
So he's very limited to thedebt that he can go get and
inevitably it limits him on thetype of deals that he can do
because he knows like, oh well,I can't get agency debt on this
project yet, it doesn't makesense, we really need to work
(45:04):
with a community bank.
But these guys aren't going tosign guarantees and he's just
like, well, I can't do the deal,it doesn't work for our
partnership and it's a challengefor him.
It's not a challenge for me.
I don't have a problem signingpersonal guarantees.
Yes, there's a whole extraadded layer of risk that I take
on as a general partner, butthat's also why I feel I'm very
(45:33):
conservative going into any ofmy deals and I make sure that
there's certainly more thanenough levers for me to go pull,
from an operation standpoint,that allow me to to move this
asset in direction that you knowkeeps everything above water
over, you know, over time putgood fixed rate debt on things
going into it.
So when you do sign those youknow guarantees, make sure that
(45:56):
you're being smart aboutunderstanding where your risks
are in the project and doingwhat you can to mitigate those
risks for your project over thelife cycle of it.
Tony (46:07):
Yeah, and one thing that's critical is you don't want to
save money here on a deal.
This is not where you savemoney.
You don't save money on notunderstanding the terms of the
loan that you're signing, right,so you know, don't?
This is where you can reallyrun into a mistake.
You know that you could havekind of hedged.
(46:28):
So go spend a grand, two grand,have an attorney, go through
any questions, make sure youunderstand the terms.
The banks might.
You know people are very quickto just look at a rate, down
payment amount and startcomparing through there.
But all of the nitty gritty isin the bank's terms.
So you know, that's just all.
(46:49):
That's like the shiny objectthere.
But the terms are what reallyeverything's going to come down
to.
Because once you sign and closeon that deal, you're beholden
to those terms unless you havenegotiated those prior, and most
people don't realize this.
But banks are willing tonegotiate those terms, but you
have to oh, for sure you have toread the terms and understand
(47:09):
what your terms you're signingup for in order to negotiate
them.
So that is critically importantfor any newer investor when
you're looking at deals isunderstand those terms.
Joel (47:20):
So can you give me some examples?
Tony (47:22):
of anything that you've gone through with that.
Joel (47:24):
Yeah, I've spent the last two weeks actually basically
playing two banks back and forthon pushing the terms with the
loan turn sheet that we're doingfor this 80-unit project.
So this is what I've beenliving and breathing here the
last handful of weeks.
I do want to step back just onesec.
(47:47):
I also might recommend that youfind a very good versed
mortgage broker and even if itmeans you have to pay them a fee
, if you want to go find yourown debt but you pay them a fee
to review the terms, that'ssomething you may be able to
find somebody who could do.
(48:08):
They might say thanks but nothanks, but those folks, in my
opinion, are going to likely bemore versed in understanding the
opportunities and risksassociated with the term sheet
on the loan package that you'regetting than an attorney.
Attorneys are often very goodat a lot of things.
(48:32):
There are some attorneys thatare very specific, but I do feel
if you can find someone who's aspecialist in working with term
sheets all day, every day, thatperson's going to have some
great insights.
You might have to pay a reducedpercentage fee of your loan or
a flat fee to have them review,but that's something that I
(48:54):
might recommend you add as apart of your deal team.
I might recommend you add as apart of your deal team With
respect to terms.
So something that we are goingto be doing here on this 80-unit
deal, we're buying at a verylow basis per door.
We're buying this new 80-unitat 55 a door and after we
execute our value out on justthe 80 units, we should be
(49:19):
looking at somewhere around like85 to 95 a door for what it's
going to be worth three to fiveyears from now.
So, with that said, we've got alot of room to grow, and one of
the things that I want to beable to do for my investors is
be able to return capital tothem as we improve the value of
(49:41):
the asset.
But I'm also very conscious ofnot getting into too short term
of debt.
I don't like one or two yeardebt.
I generally want to see thatI'm getting into an asset with
five year debt, because whoknows when the next pandemic is
going to come around?
Whatever's going to happen, Ican't predict the future in the
(50:13):
macroeconomic world and we cando it at the microeconomic level
, so the best thing we can do isput predictable framework
around our deal and move forward.
So what I was able to negotiateon this deal is we've got a bank
who's going to provide us theopportunity to do a swap.
I can choose three, four, five,six, seven-year swap.
So it'll be a fixed rate debtfor whatever length of term I
(50:34):
want want, and then, at 12, 24,and even 36 months, we got a 12
month period.
Every 12 months the bank willre-up our loan and they will add
an additional loan onto thepackage based on how much value
(50:56):
we've created.
So any appraisal will lastabout 18 months, and so the
first 12 months we'll be able touse the original appraisal.
But they'll look at where ourtrailing 12 month NOI is at and
they'll be able to say, okay, wecan move you now up to X for
meeting your you know 1.2 DSCR.
(51:16):
So you know we'll put two and ahalf million down and 12 months
in we should be able to getanother half million dollars
back, and then, 24 months in, weshould be able to get another
half to three quarters millionback and then, a year later, get
another chunk of money back.
So the cool thing from aninvestor's perspective is we get
this incremental refinance, ifyou will, throughout our project
(51:40):
Our interest rate will be ablended rate.
We'll have the original fixedrate and then, wherever the new
rates come in, those will all befixed off of the original
25-year amortization.
We're getting interest onlyperiod in there.
That was something that wasimportant for us to negotiate,
but this is a really coolstructure that allows us to get
(52:01):
into longer term fixed rate debtand still be able to get cash
out refis along the way.
We've pre-negotiated the termsthat those refinances are going
to end up happening.
Tony (52:18):
Now that's a value bomb.
That's a great nugget there foranybody listening.
So what you've negotiated insimple terms is you've got a
loan.
You're not having to leave thisbank, pay prep, create capital
events every year, every 18months, without completely going
(52:45):
through a prepayment penalty,closing out a loan, finding
another bank.
So all of these things in termsthat you've negotiated before
you've closed on the propertyare building in where you can
then create capital events foryour investors and for yourself
to recoup that capital invested.
That's a fantastic value bondfor people.
Rewind that.
(53:06):
Listen to that again, becausethat's about the most beneficial
thing that we've talked aboutPeople can do.
Actionable when negotiatingterms like this is looking
outside of the box, creatingsomething that works for you
will work for your investors andcreate a deal where there is a
deal and be able to do somethingwhere you're not worried about
what the market is doing Because, like you're saying, you're
(53:27):
going to have a blended rate.
So you've got that initial loanterm.
That's a fixed rate forwhatever you set it up for three
, five, nine, 10 years, whateverRight, so that one's fixed.
Then you having an additionalrate, which is whatever.
You know the bank and younegotiate based on the rates of
the day.
Each time you create thatcapital event which is then
(53:49):
going to blend your rates up,the rate starts dropping big
times.
Then that's going to lower yourblended rate.
Obviously, if it goes upsignificantly more now, even
though you've got that initialloan which is the majority all
locked in and you're able tocreate additional capital events
where you're just going to dealwith a blended rate and you
don't have to start all over,yeah.
Joel (54:08):
So we're going into this project at like 50, it'll
probably be like 52 LTV, likebasically 50 LTV, right, we're
bringing a lot of cash to thetable in this thing and that
allows us to achieve a 1.2 DSCRon a fully amortizing basis,
even though we do have an IOperiod.
(54:29):
But on a fully amortizing basiswe achieve a 1.2 DSCR based on
the trailing 12-month NOI.
So out of the gate we've got avery safe loan amount.
We've got to bring a lot ofcapital to the table and that's
not super attractive from beingable to get high returns.
But again, having that beingable to add those additional
(54:50):
loans onto this thing over thecoming years allows us to get to
that higher leverage withouthaving to be too risky out of
the gate.
So the flip side to that if youlook at a lot of the deals that
are going bad these days and wehear about keys getting handed
back to the banks and investorslosing their money it was folks
(55:14):
that went out and got bridgeloans, which are inherently
expensive debt out of the gate.
It's also floating rate debt.
Expensive debt out of the gate,it's also floating rate debt.
So that's a whole big issue.
That happened, as we saw 400plus point basis point increase.
So they got very high leverage.
You know some of it like 85loan to cost on deals.
(55:39):
So they were just crazy lowmoney down on these big
apartment complexes.
And the reality is that asrates went up, even on their
interest only payments, theywere like 0.5 or 0.6 DSCR, not
1.5 or 1.6,.
0.5 or 0.6, which means theyare burning cash every single
(56:02):
month by 0.6, which means theyare burning cash every single
month as they just approachhaving to hand the keys back if
they can't execute their plan.
So if those folks would haveput together a structure like
I've got on this deal, yeah, itwould have been a lot of cash to
bring to the table.
But the great thing when you areat a comfortable DSCR and you
(56:24):
have fixed rate debt is you havetime, and time is the most
valuable asset any of us can buy.
Who are structuring deals Right?
Because political environmentscalm down interest rate markets
figure out what the heck they'regoing to do.
You're able to get throughrecessionary periods.
(56:46):
You can deal with majoremployers shutting down and
trying to ramp up new jobs andthere's all sorts of stuff you
can deal with right.
You get a fire on your propertyyou get, I don't know, some bed
bug infestation and time.
Time gives you just such hugebenefits.
So putting together a loanpackage and an equity package
(57:09):
that balances giving you time aswell as being able to give you
those higher returns that youwant, that come with added
leverage, you know that's that'sa really great thing and, and
something in today's environmentthat I'm pretty excited about
and, you know, pretty proud thatwe're able to pull this
together as a structure for thisnew deal.
Tony (57:30):
Well, that's fantastic.
So I mean, what you'vebasically gone through, what
we've gone through, is theenvironment has completely
changed here.
And what you kind of hit on isyou know, when things were
flying all over the place,people were underwriting deals.
They're in a lot of trouble.
They weren't buying rate caps.
Their interest rate was nevergoing to go up.
There was never going to be abad day.
You know, and that's where allthe people get caught.
(57:53):
You, like you've said, it's beena long time since you found a
deal, because you're beingprudent, you know, staying key
to your principles and key toyour principles, and that's how
you're successful in this.
This is a marathon, not a quickrace.
So you have to be prudent, slow, slowly build up.
So real estate is not a quickmake money and churn.
Otherwise you're going toquickly make money and then
(58:13):
you're going to crash.
So, like with anything, youhave to be slow, methodical, and
you're going to build this overtime.
And real estate is appreciatingassets, tangible.
It will go up and you're goingto build this over time in real
estate as appreciating assetstangible.
It will go up, but you can'texpect it to go up like it did
for that short run, or you'renormally going to get burned.
So as long as you're looking atstuff prudently and with a
(58:34):
long-term vision, you'renormally going to be more
successful in the long run.
But, Joel, thank you so much fortaking the time to go through
everything with us today.
I want to kind of cut it andwe'll get you at another point.
I'd love to get you back onafter you close and do some work
on this new deal and find outif you close on it and start to
do some development plans.
I'd love to get you back andkind of walk that through with
(58:54):
everybody so they can keep intouch with you.
Now, if people are interestedin getting to know you more or
reach out to you about futureinvestment opportunities, what's
the best way to get in touchwith you?
Joel (59:05):
Yeah, I'm on LinkedIn.
I'm on Facebook.
Head to my website,jfhcapitalcom, and my email is
joel at jfhcapitalcom as well.
Tony (59:17):
And we'll put that in the show notes as well as a link to
him on LinkedIn, and pleasereach out to him.
Joel's a great guy and I thinkhe's going to have a really
bright future down the road, andso if anybody can get in touch
with somebody and they want toinvest, he's somebody I would
definitely recommend to reachout to.
So hey, joel, thanks so muchfor being on the show today and
(59:38):
hope to talk to you again soon.
Joel (59:39):
Hey, thanks, tony, appreciate it.
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