David McIlwaine is the founder and CEO of MAC Assets, which syndicates B- and C-class value-add properties. In this episode, he tells us how one seminar changed his entire career trajectory, the first steps he took to start scaling his real estate business, and the hard lesson he learned when a deal fell through during his honeymoon.
David McIlwaine | Real Estate Background
- Founder and CEO of MAC Assets, which syndicates B- and C-class value-add properties.
- GP of 1,000 doors
- LP of 200 doors
- Based in: Denver, CO
- Say hi to him at:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don't get into any of that fluffy stuff. With us today, David McIlwaine. How are you doing, David?
David McIlwaine: I'm great. Good to be on. Thanks for having me. I appreciate it.
Joe Fairless: Well, I'm glad to hear it, and it's my pleasure, and looking forward to our conversation. A little bit about David - he is the founder and CEO of Mac Assets. They syndicate B and C value-add properties. He is a general partner in about 1,000 doors, and he's a limited partner in about 200 or so doors. He is based in Denver, Colorado. So with that being said, David, do you want to get the Best Ever listeners a little bit more about your background and your current focus?
David McIlwaine: Sure. So I came to real estate via divorce in 2014, when I became a single dad, and I could no longer do my corporate W-2 job. Previously, I was an executive for a division of Viacom and I lived on an airplane. And when I got divorced, I realized I had to stay home. My kids were far more important to me than income. So I became a realtor by default, because I was going to flip houses. In the market in 2014, I decided that the flipping market wasn't sufficient to take the risk of the capital that I was going to put in the marketplace. A $200,000 buy for 30k return was insufficient to me. So I decided to become a seller, as opposed to a flipper. And from there, I evolved.
One day I was in a seminar at the local real estate system, and a guy talked about going big, fast, and scale. And it hit me like a Mack truck. In my previous world in selling advertising, I would sell 100 markets or 70 markets for the same work as I would sell one market. And when it hit me that I could go into multifamily and do the same thing the world opened. And literally, I sat down, heard the guy's pitch. Three minutes later, I changed my entire career focus. It's one of those moments...
Joe Fairless: Just so I'm clear, 2014, didn't want to flip, numbers didn't make sense, so you became a seller instead of a flipper?
David McIlwaine: A broker. I became a broker.
Joe Fairless: Okay, so you were representing buyers as a broker.
David McIlwaine: Yeah, I became a broker, an agent.
Joe Fairless: Okay, I'm following. Cool.
David McIlwaine: Yeah. And then 2019 I had the epiphany. I had five years of being a broker and being bored with it, and it wasn't exciting or engaging to me... And I figured out the scale thing multifamily made immediate sense to me, because that's where I had made my money and my living in the past, was on scale. And so I absolutely changed my entire business model, and I've been very happy doing that.
Joe Fairless: Okay. That seminar was a major turning point for you. What did you do immediately thereafter? What were some of your first steps?
David McIlwaine: Well, the first thing I did is I went and took an underwriting course. And the underwriting course was fascinating, because I really learned some fundamentals that I hadn't known before. I'd done a lot of underwriting as a residential agent working with small-time investors, single-family stuff, and I went and I walked through what the underwriting differences were between macro and micro deals. And the short answer is it's just zeros. If you're going to underwrite a single-family house, you're going to underwrite a multifamily property with this very similar skill set.
Joe Fairless: There's a lot of nuances to multifamily in underwriting than the single family, though...
David McIlwaine: There are...
Joe Fairless: It's not just zeroes...
David McIlwaine: But if you think about it, you've got insurance costs, you've got operational costs, you've got scale on it; there are subtle variances, but in the macro, what you're doing is you're working through your financing, you're working through your rent projections, you're working through your operating expenses, you're working through all of the risks you have. And they're less a risk, because the zeros are greater, right? That's the thought process that I see from it, is that yeah, you can make mistakes, they're bigger, but at the same time, it's the same premise. You look at it, you figure out what your risks are, and you mitigate those risks.
Joe Fairless: What underwriting course did you take?
David McIlwaine: I went through a thing with Think Multifamily and how they did their underwriting structure, and then I did some work with some other people that were -- like Neal Bawa's stuff, and I'm working through Rob Beardsley stuff... And I did a lot of reps, I did a ton of reps. And during the course of that period of time, I actually had my house flooded while I was out of town for a week, so I had to move into a basement, my girlfriend's house, who's now my wife, with my kids, while going through this. And I had to do an entire six-figure renovation on my house.
Joe Fairless: It made you hungrier...
David McIlwaine: It made me want a nice view, right? But I did a lot of reps, and pressure0tested the learning; a great deal of pressure testing. And then I just rolled up my sleeves and went at it.
Joe Fairless: Alright, so let's talk about that. So you at this point don't have any deals as a general partner or limited partner... True?
David McIlwaine: [unintelligible 00:05:29.13] Oh, yes.
Joe Fairless: No, at this point in the story. You're in your girlfriend's basement with your kids.
David McIlwaine: I'm in the basement, I moved back into my house... Thank God I got the renovation done...
Joe Fairless: You had no deals... Okay, so what is the first deal that you do?
David McIlwaine: The first deal I do is a multifamily deal in Montgomery, Alabama for 400 units. I found some partners that I really enjoyed and trusted, spent some time doing some due diligence with them. One of the partners had done about 1,800 doors at the time, another had been a director at Fannie Mae for HUD for 20 years, doing a lot of HUD buyouts and renovations... So I had some guys that could teach me a couple things.
Joe Fairless: How'd you meet those partners?
David McIlwaine: At networking events.
Joe Fairless: Which one?
David McIlwaine: I was actually at -- it was one of them down in Dallas. I don't remember the name of it right now. Sorry about that. I was looking through all the [unintelligible 00:06:18.14]
Joe Fairless: [unintelligible 00:06:20.18]
David McIlwaine: It was one of those guys. So I went down to Dallas and I met him and we started talking and we created a relationship. And I dug in. And then I started raising capital with these guys, went on some due diligence tours with them, went through a takeover with them... Raised two times my multiple that I expected to raise for the first deal...
Joe Fairless: How much did you raise?
David McIlwaine: I raised about $500,000 on that first deal?
Joe Fairless: Nice.
David McIlwaine: Yeah, it was a good start.
Joe Fairless: From the point that you met these gentlemen to when you sent out that first email to your investors about the deal, about how much time in between?
David McIlwaine: Three to four months. I met them late third quarter, and we closed in January, and I started raising money in mid fourth quarter of 2019... 2020.
Joe Fairless: So I heard the background on the partners... What, in addition to that, gave you the comfort level for this to be your first deal with people who you met three to four months prior?
David McIlwaine: Great question. So a couple things. One, the guys, I spent probably 20-30 hours with them, one-on-one talking with them, working through the underwriting... I vetted their paperwork, I vetted the vendors, I vetted the underwriting...
Joe Fairless: There was a property management company, or...
David McIlwaine: Yeah, I talked to everybody. I did my due diligence. In my previous world, I ran [unintelligible 00:07:46.09] remotely, so I've had a lot of time and experience interviewing people, and learning where there's fluff and where there's substance. So I did my same thing - I went in, I talked to them, I decided that the team had a lot of sound background... I liked the project, I liked the market... It was a really interesting off market deal where - I loved the story. The story was that the previous owner had abandoned it mid-project, so 200 units that were contiguous to 200 other had been abandoned, and they'd become kind of a crackhouse.
So it was a heavylift... We had a very heavy lift; a lot of risk in this thing, right? Also a lot of return. And the guys had a construction background, they had done this before, they managed it remotely... The vendors had teams that literally moved into the property and worked on it. We had a lot of hiccups along the way, and I knew we would, but I was looking at was who were the horses, or who was the jockey, not the horse. And the jockey really was these guys that I figured out knew what they were doing. They weren't 20-year-old kids. These were both grown adults that were in their 30s and 40s, and had done remote work before. And that was the key. If you've never done remote work before, you don't know how to manage people remotely. But if you have, and you have that skill set, it's not that hard. And it's a matter of asking how the questions are done.
So that was the answer. It's not a magic bullet to it, but it's trust. And it's your gut. And a lot of real estate, I've discovered, is your gut. Sometimes it's great, sometimes it's not.
Joe Fairless: That was that first deal, and that was around 2019-2020...?
David McIlwaine: Early 2019, 2020, because the year turned [unintelligible 00:09:26.20] in the middle. We were supposed to close prior to year end, and it kicked in Q1 of 2020.
Joe Fairless: You got in right before COVID, huh?
David McIlwaine: You're right. Yeah. It was 2021, my bad.
Joe Fairless: Early 2020...
David McIlwaine: 2021. I'm off by a year.
Joe Fairless: Oh, this is 2021?
David McIlwaine: Yeah. I'm off by a year. 2021.
Joe Fairless: I was gonna say... [unintelligible 00:09:41.12]
David McIlwaine: So the COVID year I was in the basement, doing underwriting, trying to figure out what to do [unintelligible 00:09:47.18] was changing.
Joe Fairless: Fair enough. Imagine - and I want you to sleep tonight, so don't imagine this too much... But imagine if you had closed on this 400-unit property with 200 units being vacant, or at least zero economic occupancy on the 200 units... It sounds like they were occupied, but there's zero economic occupancy. Imagine closing on that in February of 2020, and then you can't do anything with those 200 units that are vacant...
David McIlwaine: You bleed for a long time.
Joe Fairless: Oh, man... That gets my heart beating. Okay, so you closed on it early 2021, and...
David McIlwaine: I spent the rest of '21 doing fundraising for general partners.
Joe Fairless: Okay. So let's talk about that 400 units. What's the latest?
David McIlwaine: We're under contract to liquidate it before the end of this year at our five-year proforma in 24 months.
Joe Fairless: Wonderful.
David McIlwaine: So it'll be a good return.
Joe Fairless: What's the occupancy?
David McIlwaine: The last time I saw it, we're somewhere in the 80% range. So it's been rehabbed, it's been productive, we've finished the construction on it, we're in a lease-up stage now, we're delivering about 20 units a month... New buyers, more concerned with the construction than with the economic occupancy... And we're gonna take a 15% to 20% IRR back to our investors in 24 months. It's not a home run, but it's a good, solid double. It's a good solid double, right?
Joe Fairless: Hey, 15% to 20% IRR... I'd say the 20% is a home run in my book, but...
David McIlwaine: Right. If we get to 20%. It's somewhere in the 15% to 20%. We don't quite know yet. So if we're at 15%, it's a stand-up double. If we get to 20%, we're a home run.
Joe Fairless: And I'm curious, why don't you have a better idea of that if it's under contract? What's it contingent on?
David McIlwaine: Well, I don't know what the final expenses are going to be for the next couple months. So that's the question mark.
Joe Fairless: Fair enough.
David McIlwaine: I try very hard to never over-promise...
Joe Fairless: Yeah, that will bite you.
David McIlwaine: Because I can get $100,000 invoice that I don't see coming, that -- I'm not the day to day guy on this one, so I don't know all the day to day minutia of it. So there could be something coming out that could change the return from 18& to 17.5%, and then I'm sitting there with the egg on my face because my investors were looking for an 18%.
Joe Fairless: Yep. Then all of a sudden, the 17.5% is not impressive.
David McIlwaine: It doesn't feel good then.
Joe Fairless: Yeah, even though if you had said 16.5% and then you hit 17.5%, 17.5% is impressive. And that has nothing to do with investing, that has to do with human psychology, and that's how we're all wired. So there's nothing wrong with that...
David McIlwaine: Yeah, that's 25 years of corporate sales in America teach you real quickly to never over promise, because it's always going to come back to you in a painful way.
Joe Fairless: Yep. Virtually no upside to that. I agree.
David McIlwaine: Right.
Break: [00:12:44.01] to [00:13:51.19]
Joe Fairless: You're in how many deals as an LP?
David McIlwaine: Three.
Joe Fairless: Three deals as an LP.
David McIlwaine: Yeah. I got out of the LP business really fast, because I have a finite amount of capital. I wanted to be an operator. Being an LP -- I had been an LP in my corporate world, and I've liquidated all those holdings during my divorce, and I kind of knew that game... And I didn't want to put capital in the LP process. I wanted to put capital in things that I was putting my money in with my fellow investors and being GP; so I didn't spend much energy in the LP side.
Joe Fairless: Okay, but when you put money in on the deals where you are a GP, that would be considered an LP, right?
David McIlwaine: Yes, it would be, but I don't think about it like that, because my skin's in the game, and if my skin's in the game, I'm thinking about it from a general partner point of view. Yeah, I have returns as a limited partner, and technically I'm both, but I really look at it as I've got chips on the table and I'm gonna push them hard.
Joe Fairless: Fair enough. So have you exited those three deals that you're not a general partner on with the money?
David McIlwaine: One of them is supposed to exit this year. I don't know where we are in that process yet; the other two are not ready for that timeframe.
Joe Fairless: Alright. I heard you, you're no longer focused on this, but I'm curious - because we have a decent amount of passive investors, LPs who listen to the show - how did you decide which group or groups to invest with passively?
David McIlwaine: Great question. So I go back to my process, and my process might not be the right process for everybody, but the process is, "Have they been there and done that? How are they going to manage through problems?" And then, "Are their assumptions believable to me?" And if all those are yeses, then I go into "What's the track record show me?" And from there I go into the property at the bottom. Do I like the market? Do I believe in the property? Do I think that the property is going to continue to return positive, and are the dynamics and whatever that property is that will put wind in the sails if there's a major screw-up?
Joe Fairless: Okay. Have they been there and done that, which seems like basically the track record, right?
David McIlwaine: Yeah, right. But been there done that could be different. I don't have the 30-year track record in real estate of operating for everybody else, but I have a 30-year track record of operating people and companies and teams, and so I know how to handle problems. So that's why I say "Been there, done that." A lot of skills are interchangeable from property A or market A or problem A to problem B. So if you have that skill set, it's transferable.
Joe Fairless: Okay. And then how will they manage problems? How do you vet that when you're looking at which general
partner to invest with?
David McIlwaine: I think there are a couple things. I asked people that have been in there before, so I'm looking for referrals. Then I may ask to read previous reports, to see how they report to their investors. I may just ask them point blank, if I'm talking to them in a conference, "What do you do if...?" It's kinda like an interview question, right?
Joe Fairless: What would be a question? What do you if...? What would you ask there?
David McIlwaine: So you just ask questions like "What do you do if COVID strikes and you've got 50% vacancy, and you're in the middle of construction rehab?" "What do I do then?" Well, okay, first, we're going to circle the wagons, then we're going to figure out what is legal, then we're going to figure out what our financing implications are... And you start asking and learning, like you do in any interview process, what is the person's domino effect of decision-making gonna be? And if the guy is like, "Oh, my God, I'd panic..."
Joe Fairless: Would they say that...?
David McIlwaine: No, they wouldn't say that. But then you've got your BS meter, like, "Oh, that guy's lying to me. I know he's lying to me. I'm out." So if the guy doesn't mention calling his insurance agent to talk about loss of income, if he has that policy in place, that's something I ask about. "Would you consider this?" Now, not every policy is going to have that, but that's an illustration of, "Are you paying attention to problems? Are you looking for revenue sources that are not normal?"
Or if the guy never mentioned looking at what are the Housing Authority systems in place. You don't know the answers right now, but that's a great, extreme illustration. Or "Hey, what's your system and what's your process when a hot water heater bursts?" And you learn what kind of operator they are, right? So it can be really simple or really complex. It kind of depends on what the conversation I'm having with the person is.
Joe Fairless: I like that, that's helpful. Thank you.
David McIlwaine: Yeah. We're interviewing people. Ask questions.
Joe Fairless: Yup. Ask questions, but then thankfully, you went into some specifics for which questions to ask, right? It's about quality questions.
David McIlwaine: Right. And maybe a question is something like, "Hey, if you're doing due diligence, how many sewer lines do you scope? Do you actually go up on roofs and inspect them, or do you have a drone fly over?" A lot of drone fly-overs these days. What's that tell us? Good questions, right?
Joe Fairless: Good questions. What is something that hasn't gone right?
David McIlwaine: [laughs] Well, I've had three deals term this year. So two of them have gotten busted during due diligence, and one of them we failed to close while I was on my honeymoon, at the end of early August. So it's still pretty raw, but I lost a whole lot of EMD because we had a 1031 exchange not materialize, and we lost the closing date, and the seller would not extend.
Joe Fairless: How much did you lose?
David McIlwaine: 150k.
Joe Fairless: Wow. And what happened? I heard you, you were on your honeymoon, but...
David McIlwaine: Talk about doing a post-mortem...
Joe Fairless: Yeah. Hindsight is always 20/20...
David McIlwaine: And I'd love to hear your feedback on this. I still don't quite have an answer as to what I did wrong to learn from it, other than - I've been thinking about this for a long time. Capital was really tight. We had a 1031 commit for a very large percentage of the raise; about 30% of the raise.
Joe Fairless: And was it 1031 money from one of your deals, or an outside 1031?
David McIlwaine: Actually, 1031 money from a partner of mine on a different deal that I wasn't party to. So I had a very deep relationship.
Joe Fairless: Got is. Sure. Fair enough.
David McIlwaine: And the 1031 had closed, and this property had been identified, and we'd gone through all the machinations. It turns out there was 1031 member who refused to commingle their funds, and the 1031 fell apart, and would not go to this property because all three people did not agree, and didn't know that at the time. And we learned that two days before closing, and we had already had a couple extensions...
Joe Fairless: So there's the issue right there, that documents weren't signed 30 days before closing, where all partners
had signed off on it.
David McIlwaine: Yeah, and that's a great point. It wasn't executed far enough out prior to closing; it came down to the wire. And I think I appreciate that, because that's what I hadn't put on my list. So thanks for teaching me some.
Joe Fairless: Yeah... We've all had an expensive lessons. I'm in your report for the expensive lessons.
Joe Fairless: Yeah. And those lessons really focus the brain.
Joe Fairless: Yeah. This lesson is such a nuanced lesson if we let it be, because it's like, "Alright, well, this is dealing with a 1031 exchange from an outside party, although be it as partner of yours, but it's an outside deal... And it's probably not going to happen to me." And I'm not talking to you, by the way...
David McIlwaine: No, you're talking to your listeners.
Joe Fairless: Everyone, yeah. The takeaway is to have someone, ideally your attorney, who has been through the process before, outline all of the milestones that need to take place in order to make it happen, and then know what the lead dominoes are and what could blow up the transaction.
David McIlwaine: Right, and where it can fall off the rails, for sure. That was the delta point. And when I got on the plane on my honeymoon, and we were all set and good to go, and I got back from the honeymoon and it was shot...
Joe Fairless: Oh, man... You didn't even get some time to decompress and ease out of the honeymoon stage into reality...
David McIlwaine: First phone call back. The good news was my honeymoon I had no cell service, so I didn't have it ruined.
Joe Fairless: Thank goodness... Yeah, you were losing 150k either way, so you might as well [unintelligible 00:22:23.15]
David McIlwaine: Either way. Why ruin the fishing day, right? Why ruin the good mood and the lovely connection to my wife.
Joe Fairless: Well, taking a step back, what's your best real estate investing advice ever?
David McIlwaine: When you fall, get up, and this is not easy. And scale is better than single.
Joe Fairless: When you fall, get up. That's something that I repeat over and over to - you're gonna laugh; I'm not dismissing your advice, because I repeat it to myself and others, but I also repeat it to my three and a half year old daughter.
David McIlwaine: I told my 19-year-old daughter this yesterday.
Joe Fairless: It's not about if you fall, it's you get back up. Besides telling people this - and I truly want to know, because I say it, as I mentioned... But how can we bring that to life more with our loved ones, or those we care about, or the listeners? What is there? Maybe an example of that, that you have, or how can we do that?
David McIlwaine: Great wondering question there. I don't know that I have a solution for that, because I'm not the deity, right? But what I would say is that it's telling people what you fell on, how you fell. Like, losing 150k, and you just gave me a great piece of knowledge by being open about it, by being transparent, right? So I had not processed the idea that I could have had the doc signed 30 days in advance. I don't know why I didn't process it. I've been doing this for a long time from a contracting point of view; you get your contracts done, but the challenge there is getting your attorneys to get ahead of deadline, and getting attorneys to get ahead of deadline. But the reality is that's the solution. And that would have prevented it.
So the fall there was I just lost a big amount of money. I've got four kids in college right now, so that hurts. So then you think about "Okay, that's a simple solution, and the transparency is what helps, so someone else can learn from it."
Joe Fairless: That's a vulnerability.
David McIlwaine: Vulnerability and transparency.
Joe Fairless: Being okay with being vulnerable, and knowing that this is a messy world that we live in; none of us are perfect, so we might as well let our guard down and show people who we are and what we've got. Because the more we do that, the more magnetic we become, the more we become real people to others... Because we are real people, but some of us have our guard up, some of us are concerned about looking dumb, or looking less than perfect to others.
David McIlwaine: And we're not. We're not.
Joe Fairless: Every single person has stuff that they're challenged with, and mistakes that they've made... So yeah, that's a great point.
David McIlwaine: And if they don't talk about them, we don't learn from it. So I actually was looking forward to picking your brain on the 1031 mistake, so I'm really happy to I got a piece of knowledge today. It's an expensive tuition, but okay... It's just tuition.
Joe Fairless: That's right. Unfortunately, we're in a business where the business model is solid and profitable for all. So we've just got to smooth out the path as we drive down it.
David McIlwaine: Exactly.
Joe Fairless: We're gonna do a lightning round. Are you ready for the best ever lightning round?
David McIlwaine: Fire away.
Joe Fairless: Best ever way you like to give back to the community.
David McIlwaine: I really kind of keep this private, because it's between me and my wife and my friends and family, but I like to give back to kids and I like to give back to charities that I support and trust, and I don't want it to be part of my business, because I think it's personal. But I will say that I love swinging a hammer for Habitat for Humanity when I have time.
Joe Fairless: How can the Best Ever listeners learn more about what you're doing?
David McIlwaine: MacAssets.com.
Joe Fairless: Easy enough. David, thank you for being on the show. I thoroughly enjoyed our conversation. I hope you have a best ever day, and we'll talk to you again soon.
David McIlwaine: Likewise. Have a wonderful day.
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