TLP20 Transcript
EPISODE 20
[INTRODUCTION]
00:00:01
Announcer: The limited partner shares in the potential outsized returns of a well-planned and executed investment. But as a passive investor with no day-to-day operating requirements, whose liability is limited to the extent of their share of ownership, the limited partner has the maximum leverage on their most precious asset their time. Now, they say you're the average of the people you surround yourself with. Are you looking to elevate your network, and connect with individuals that bring your average up? The limited partner is more than just a podcast. It's a community to learn, to participate, to connect. There's no other community out there like this. We're limited partners. So, subscribe to the podcast, but most importantly, join the community yet the limited partner.com.
Welcome to the podcast with your host, Jake Wiley.
[INTERVIEW]
00:00:49
Jake Wiley (JW): Welcome partners. This is your host, Jake Wiley. This week, I'm joined by Paul Moore. He's the managing partner of Wellings Capital. Paul, thank you for being on the show.
00:00:58
Paul Moore (PM): Hey, you're welcome. It's great to be here.
00:01:00
JW: Paul, I think this is gonna be an action-packed half-hour here. And you've got a really great background, you've got funds, you're investing in multiple asset classes, which I think is going to be really interesting in the show. But let me turn it over to you to give us a little bit of background. Let's give our listeners a little bit of background on who you are and how you got to where you are today.
00:01:16
PM: Yeah, you bet. Let’s see, I had an engineering degree, which was my first mistake, and then I got an MBA, went to Ford Motor Company, had my own company for five years, and sold that to a public firm in ‘97. And then I was kind of lost, you know, for everybody who thinks you know how great it would be to retire at your mid-30s. It wasn't in fact, I thought I was gonna be a great father, husband, and friend. And I think I became the worst version of myself. I was this high-energy entrepreneur in my mid-30s with some money and so I began to invest. That was a lot of fun. I actually started flipping houses then flipping waterfront lots at Smith Mountain Lake in Virginia, I started building some houses, I did a small subdivision or two. And I learned that if you don't know how to tighten the doorknob on your own house, you probably shouldn't build a house. That's a free takeaway right there. And anyway, seriously, over the years, I was always curious about commercial real estate, but I didn't know how to get in. I didn't know where the on-ramp was. It seemed like it was you know, a lot bigger than anything I'd ever looked at. And but I invested in oil and gas deal in North Dakota in 2010. And that led us to find out that there was a massive housing shortage in North Dakota. There was tens of thousands of oil workers and executives and folks descending on these towns of like three or 4000 people and they didn't have housing. So, we quickly built a multifamily facility that we operated as a long-term furnished hotel if you will, and then we built another one. Then my partner built a high-end hotel. I decided to stay in the multifamily side, I wrote a book called The Perfect Investment About Multifamily Investing. But the perfect investment is not perfect if you can't find deals that make sense on paper. And so, we decided to expand into self-storage and mobile home parks. And we've done five funds for investors in those arenas since then.
00:03:11
JW: That's a really interesting story. And I want to go back and ask you, how did you find out about the oil deal in the Dakotas?
00:03:17
PM: Yeah, I have never shared this on a podcast, I don't think but actually, I was really pretty down about real estate. I actually had, you know, millions of dollars in my bank account in the late 90s. And exactly 10 years later to the month I had two and a half million dollars in debt. And I was actually thinking about leaving real estate. I kept my real estate business going. But I was studying marketing copywriting and I studied under some of the top copywriters in the US. And during that time, I was thinking back to my engineering degree, which was in petroleum engineering, oil and gas. And so, I started looking for a way to merge copywriting with oil and gas. And I found this incredible exploratory oil deal where a bunch of friends of mine and I dumped over a million dollars in a hole in the ground and expected 50 times as much oil to come out and nothing came out.
00:04:09
JW: I don't know if this is a direct parallel, but you know, they talked about the gold rush and they say like, if you wanted to make money in the Gold Rush, it's you're not the Prospector. You're the guy that's sitting on the sidelines selling to all the flurry of people coming in and it sounds like you made that transition. Is that kind of how it happened. Like where you got into the housing side or like.
00:04:27
PM: Yeah, let's talk about that for a second. in the gold rush, you know, something like 100,000 people in the Yukon Gold Rush, that was the more difficult one in the 1890s in Alaska. They went there about 30,000 arrived it was extremely difficult. They said stuff cost 10 times as much as it would back home that was from according to a gold prospector there and I would say that the boring people, the people selling dry goods and providing transportation and hardware and picks and shovels and housing actually made it out like a bandit, and they had more fun in the end. And so, I'm proposing to the world that to invest in a gold rush, be a boring investor, don't chase the latest crypto deal, although those are fun, you know, on the side, but don't make that your life's ambition. Invest in boring assets like self-storage. And that's the best way in my mind to invest during a gold rush. And that's what we did exactly.
00:05:25
JW: I was actually recording a podcast yesterday. And it was really evident that, you know, when you think about investing strategies, there's a lot of flashy things out there, right. There's a lot of people that are marketing, probably people that came from your marketing copywriting course, trying to get people into something else. And I think what’s kind of interesting is that it's a very gold rushy type thing where the folks that are like prospecting for you, like they're clearly not making millions of dollars doing this investment, but they're trying to sell you something so that you think that you can make that investment. And I think that the tried-and-true assets to your point, I guess, the boring things that people just will always need, tangible, boring things that you will always need is a fundamental way to look at your investing strategy. And it doesn't seem exciting. You know, it's not to your point, the latest thing, which is crypto, but you know, multifamily people always need housing, and there's a housing shortage now, and the population is continuing to grow centers around communities are changing and how that's going to work. But I am curious, so you started in multifamily. And then you made a move into self-storage? Why did you make that move?
00:06:30
PM: You know, we were beating our head up against the wall for years looking for apartments looking for multifamily assets. And you know, every year, the prices kept going up. And every year for that time in history, you know, whether it was 2014, or 16, or 18, the math didn't work for us. You know, as I got older, I got more and more conservative and less wanted to be a speculator and it felt to me like we were near the top of the cycle. And Howard Marks and Warren Buffett tell us, you know that if you're near the top of the cycle, that's the last time you want to be paying top dollar for an asset, the math is clear. And so, we finally got frustrated and decided we wanted to look for assets that had a lot more Mom and Pop owners, a lot of owners, you know, mom and pops, they typically don't have the desire or the resources or the knowledge to increase income to maximize value. And as a result, they're often leaving a lot of meat on the bone for a professional operator to come in and improve. Basically, its intrinsic value, they have this all this value, potential value, I should say tied up in their facility or in their asset, and they're not tapping into it. And a pro can tap into that. So, a pro can pay them top dollar in their mind for what they have and go in and significantly increase the income. I mean, I can take the rest of the next two podcasts telling you stories about how we've invested in deals like that. Here's a summary of one recent one acquired a mobile home park where the owner hadn't even visited from several states away for five or more years, the rates hadn't gone up in probably that long, there was a lot of vacancies, the owner was paying for everyone's utilities if you can imagine that still in a 300 plus unit mobile home park going in, he paid $7.1 million, which was really a great price for that owner and 10 months later sold it after making some, not even all, of those improvements sold it for 15 million, there was three and a half million of our and other people's equity in that deal. And that three and a half million going in came out as about 10 and a half million within a year.
00:08:38
JW: That's a great story just to kind of dumb this down a little bit for me, and maybe my listeners as well as we think about like, how are these properties valued, right, so what you're talking about as unlocking net operating income from these properties, it exists, it's there, it just hasn't been tapped. And so, let's just say that there's a cap rate on a property and it's a 10 cap, which make these numbers super easy. And the value of the property is 100 bucks, every time you increase the net operating income, you're getting it 10 times multiple on that income. So even if you just increase it by $1, right, the net operating income by $1, you've increased the value of that property by $10. That's the magic of what you're saying is when you find the right operators that know how to unlock the value of an asset that already exists. You know, maybe there's some value-add plays, you can do some extraordinary things. And I think what I love about your story is that you found a demographic in these Mom and Pop operators where generally speaking, they don't know how to maximize the value, or they don't really care or like, hey, this thing's been kicking off cash flow for forever, and we're just totally happy with that. Right?
00:09:42
PM: They don't know or care, typically. Part of the reason is cap rate compression. You just mentioned a 10% cap rate. Well, cap rates were running around 10% For a long time, but now they're running closer to let's say 5% which means now if you add $1 of income, you're adding $10 of value or adding $20 of value. Here's a quick example, if you don't mind, let's back up and talk about the value. If you flip a house, let's say you put $100,000 in the house, but you do everything to the max on the upgrades and you put 300,000 and upgrades in it, which I've seen done, and now you got 400,000 in this house. But if it's in a $250,000 neighborhood, the comps won't support that value. Because residential real estate is based on the neighborhoods, based on comps. Commercial real estate is entirely different. It's based on math; it's based on a value formula. And that value formula to your point earlier, the value is the income divided by the rate of return, or specifically the net operating income divided by the cap rate, the capitalization rate. And so, this math allows, when you add leverage to that, it just juices it even further. And so this is just one simple example, let's say you bought a self-storage facility for $2 million. And let's say you had 75% leverage on it, which I wouldn't necessarily want to invest in that. But let's just say it was 75% leverage, you had 500,000 in cash in that deal, and 1.5 million in debt. Now let's say you decide as quickly as possible to add some income before you go out and build more units or gravel that field to turn it into RV and boat storage all of which are very good things to do. Let's say you wanted to get a quick hit, you go down to U haul and you sign a contract with them. And you put a U-haul, U-hauls, or Penske trucks in front of your facility. I've got a friend in Rockledge, Florida who did this and he makes $5,000 extra per month using an employee who's already on staff anyway, so I'm not adding any costs for him. But let's say you can just add $3,000 a month from U-haul commission 3000 a month is $36,000 A year $36,000. Now we're going to the value formula 36,000 divided by A, that's the NOI, the net operating income increase, at least divide that by a cap rate of 6% to be conservative, let's say .06, 36,000 divided by point zero sticks is $600,000. Wait a minute, you only have $500,000 in cash in this deal, you just more than doubled the value of your equity by signing a contract with U-haul and starting to lease out U-haul trucks. And so, this is the type of value-add that provides explosive returns to investors.
00:12:26
JW: It's a great story when a tie back to something you're talking about in multifamily earlier is, you know, when you were looking at the deals and you couldn't find numbers that made sense. And you were able to make a pivot into something that did make sense. And there's a way to juice the returns get the value add, I think that there's a lot of risk, right, as a limited partner. If you're looking at an operator, some of these operators live off of doing deals, right, acquisition fees, and other things that they get on the front side. So, they're going out and they're just going to do a deal. Maybe they count that do 10, 12 deals a year, sometimes those deals don't really make a lot of sense. But for them to keep the lights on, they've got to keep doing deals, right? They've got to get those transaction fees in the door. And I think that that's something to look out for if you're investing with an operating partner or a general partner that they have their head on their shoulders correctly, right. And there's not some disincentive for them to do a transaction for you to be a part of is that a fair statement?
00:13:19
PM: Yeah, that's absolutely true that some of the syndicators and fund managers either they make money from fees. And here's a dirty little secret, I think, and that is that the acquisition fee on the front end can be much more painful than investors really think through. So, let's say an acquisition fee, let's say they're buying a multifamily off for $10 million, and they have a 1% acquisition fee. Typically, I've seen the range between one and 3%. Let's actually use three. So, let's say they have a 3% acquisition fee. Well, that's 3% of $10 million. I believe that is $300,000. It is. So that's a $300,000 acquisition fee. Seems fair. These people did a lot of work to get there. They really did. That's a lot of work. 3%. Okay, so the investor thinks I invest $100,000. They basically get 3000 of it from the acquisition fee right up front, oh, there's also property management fees, asset management fees, lending fees, all these other things, but they got 3%, what's not really three if they have 75% leverage on that property. That means there's only 2.5 million in equity 300,000 divided by 2.5 million is actually if I'm not mistaken, 12 or 12 and a half percent, that's a big cost to the equity. Think about that. If they can do many deals like that per year, even if they don't turn out well. They got paid really well on the front end and the investors suffered for that.
00:14:47
JW: You did make a point that there is a lot of effort that goes into putting these deals together. There's a lot of due diligence. There's a lot of costs that are covered by these investors. So, I don't want to shy away from a deal because there's an acquisition fee but I would say that like, you need to understand the model, you know, what asset type or when? Because I mean, we're talking, we're in a situation now it's early January 2022. You know, cap rates on multifamily is in decent, you know, areas they’re 3%, right? Like they're way compressed that could go wrong. Now, there's a lot of upside and a value add, as we demonstrated, you know, the lower the cap rate, you know, the higher the, I guess, increase in value of the property because of the net income. But there's a lot of risk when it comes to cash flow. If you're working with a group, I think you need to understand like, do they have their fundamentals right? Or are they working for acquisition fees to keep the lights on even in a market where maybe it doesn't make sense. And I think there is some value to working with a partner that understands different asset classes that is able to pivot and or diversify the portfolio in such a way to say, well, multifamily doesn't work for us right now, because of this self-storage, mobile homes office, right, office is a weird one now where the cap rates are higher, because nobody really understands what the future of the office looks like.
00:16:01
PM: Right. So, there's a risk premium built in.
00:16:04
JW: That's right. Well, tell me this for our limited partner audience here. What are some of the biggest mistakes you've seen folks make when investing?
00:16:11
PM: Well, I've actually written about this recently, in BiggerPockets, there are a lot of mistakes you can make. The biggest one, though, is I think, not carefully vetting the operator. Some people, you know, that they're sort of entrepreneurial, they're sort of eager, and they hear about commercial real estate from their friend on Sunday, and they go look it up, they go skim a few websites, they get invited to a webinar on Monday, and by Wednesday, they're wiring money. And that might work out okay, a rising tide has, you know, raised all boats for the last decade. But Warren Buffett tells us that someday that tide is gonna go out, and we'll see who's skinny dipping. And so, finding the right operator is really critical. And then Brian Burke, who wrote The Hands-Off Investor has a 300 Plus page book that's specifically geared toward limited partners, it's specifically not geared to the syndicator. But to the limited partners to be able to help the operator and help them get a deal. You want an operator who's been around a long time, you want an operator who treats his employees, his spouse, the waiter at the restaurant really well, you want somebody that you want to be in trouble with for 10 years, because there could be trouble on a deal? Do you trust them to take care of your money and guard it like their own, you want to check the debt, you want to check the type of debt and when it'll refinance? You know what the interest rate is? And is it floating or fixed, you want to check a background, do reference checks, criminal checks on these folks, there's a lot to do to find the right operator, and you shouldn't just jump in quickly, with the first one you've seen, you want to see how much skin they have in the game. That's another big one.
00:17:52
JW: I think all of those are really great points. And it's there is work to be done right. Being a hands-off investor, you still have work to do. But I also think this ties back to the point you made earlier, like not just getting in what's flashing hot right now, when you do the work and you find the right partners, you know, one, the partners are looking for folks that will invest over and over with them. And you're looking for places where you can invest again and again. And you don't have to do this every time you're looking to put money to work if you find the right partner. And I think it just behooves you as an investor to get out there and do the work and find the right people and not just jump in because it is very different than your typical mutual fund relationship where you're like, alright, well, you're qualified, here's my money, like put it in some funds. And like, we'll see how it goes. That's how it works. We're working with a partner on a specific property, you aren't going to be connected to them five, seven, 10 years. And it's not always going to be you know, rainbows and sunshine.
00:18:47
PM: You got to decide, do you really trust these people? And like I said, assume there's going to be trouble. There's not always trouble. But there could be and you want to say, you know, do I really want to be closely intertwined with this person who is going to determine my family's financial destiny, at least with regard to this investment for the next five,10, 15 years? And the good news is about being a limited partner, of course, is that you can't lose more than you’ve invested. But let's all face it, you can lose what you’ve invested.
00:19:18
JW: It's right. What would be your advice is the first step to trying to find the right operators.
00:19:22
PM: Honestly, there's a couple resources that I don't have access to. That might sound funny. A couple of them are one is Ian Ippolito, Ian Ippolito is a tech he sold a tech company in 2013, I think, and he started investing in these types of deals and he asked the exact same question that you did. He asked how do I find out who the best operators are? How do I really vet these deals and where can I get some honest feedback from people? Well, he didn't find us so he created it probably a misnomer, but he called it the Real Estate Crowdfunding Review and in there, there are, I would presume thousands of investors who give honest feedback on these forums about these different operators and these different deals and the pretty gut-level honest from what I've heard, and it is impossible for a syndicator an operator, a fund manager like me to get in and look at it unless I wanted to create a fake identity or something, which I wouldn’t do. If you're a member of their group, you can get in there and find all kinds of real information from real investors. That's one thing I would do. A second thing, of course, would be to get Brian Burke's book on vetting operators. Third, I go to places like BiggerPockets or left field investors and just see what they have to say about these different operators.
00:20:43
JW: Awesome advice. Paul, this has been a great conversation, I always like to end the show with a bit of gratitude. None of us get to where we are by ourselves. And I'd like to give you an opportunity to who would you like to give a shout out to you for giving you a leg up along the way?
00:20:56
PM: Yeah, a couple people. First of all, my wife, she's extremely risk-averse. And we had been married about six years. And honestly, it wasn't going very well. We had really hard, difficult challenges to work through. And now we've been married almost 35 years. And it's been great that we work through those early challenges. But I told her I wanted to quit this security and the benefits of the life I had at Ford Motor Company and be an entrepreneur with no certain income or future. And she really had to work hard to get to a yes, but she did. And so, I really want to thank her for this long rollercoaster journey that we've been on up and down through many years of entrepreneurship, losing money, making money, not sure, not being sure how to pay the mortgage next month, and then having enough money in the account, you know, a few months later to pay the house off. So, it's been a crazy journey. I also want to thank God because He gave me this life and breath and everything I have and the entrepreneurial abilities I have and opportunities I have are all from him.
00:21:57
JW: Paul, I think those are great. Thank you so much for being on the show.
00:22:00
PM: Thanks, Jake. It was really an honor to be here. Man. This is a great show. And I know your listeners are gonna get a lot out of this in the coming years.
00:22:08
JW: Awesome. Thanks again.
00:22:08
JW: I hope you've enjoyed this episode of the limited partner podcast, please subscribe and leave a review. If there's any reason you would leave us a five-star review, please email me directly at JW at Jake wiley.com. Your feedback is always appreciated. Now the show is just the tip of the iceberg in terms of the limited partner community. It's a community where limited partners can come together. Learn about what best in class looks like opportunities, and most importantly, a place to connect. There is nothing out there like this. So, head over to limited partner.com and sign up. We'll see you next time.
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