May 2, 2023

JF3162: BEC Exclusive: Fireside Chat ft. Joe Fairless, Part II



At this year's Best Ever Conference in March, Matt Faircloth and Andrew Cushman sat down with Joe Fairless to discuss his path from real estate newbie to $2.7B AUM. In Part II of this two-part conversation, Joe shares tips on raising capital in an investor-hesitant market, the benefits of vertical integration as you scale, and his thoughts on what the commercial real estate market holds in 2023.


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Matt Faircloth: You and I talked about this... Some folks think that businesses grow in this linear line; I start at zero, and I grow to 12,000, and here we go. And it's just like this, and add I 1,000 units a year, and off we go, right? But the reality of that is it's not; it's this jagged line, where you end up plateauing for a little bit... And there's a concept I came up, with just glass ceilings, and breakthroughs. Business can grow to a point where you plateau. And then a thing needs to get adjusted to take things to the next level.

So fast-forward, you've met Frank, you guys are now doing better deals, and coming in better capitalized, and making the right decisions... And I think focusing on Dallas as your market after Cincinnati, right?

Joe Fairless: Yes.

Matt Faircloth: What was the glass ceiling that you recall Ashcroft hitting earlier in the game, that maybe stunted growth a little bit? Let's talk about what that was, and then what you did to move beyond it?

Joe Fairless: Well, Frank's incredibly talented... So we had good deal flow early on, but I couldn't keep up with it. So we could have purchased more deals early on if I was able to be better at bringing the capital to our deals. So that was one. And how we solve for that was - it's just time; doing things consistently... And we can get into specifics of certain things that have been helpful, but really, the number one way we get investors is through referrals, and word of mouth. Word of mouth has the highest likelihood of someone converting into an investor than anything else. So that would be the first thing to think of.

And then also, when we got to about - I wanna say about 7,000 units, we realized that the third-party property management companies weren't operating as well as we could likely operate. And Frank spearheaded that, I did not, but he built out the property management business. So we have our own in-house property management company, Birchstone Residential. And they do not manage anyone else's properties other than our properties. And when we're able to do that, it eliminates a lot of the red tape that's involved, as well as any potential price gouging that could take place with a third party property management company.

So integrating property management, integrating construction, buying our supplies overseas... To isolate the variable of cost going up, we just buy all of them at once, shipping to a warehouse that we lease in Dallas, we have a team that does renovation kits, and those renovation kits then get shipped out to each of the departments. So it's like a little mini Amazon warehouse.

So having vertical integration has been really beneficial and helped us scale, and be more efficient, which also helps us win more deals, because we're able to not be at risk of price increases for supplies, for example, because we've already bought them, and we already know what they are. So those are a couple things that come to mind.

Andrew Cushman: So you've mentioned about converting investors, and your best source is referrals, word of mouth, that kind of input. I think one of the challenges, even more so in today's market than a few years ago, is understanding how much you can raise.

So you mentioned you thought you could raise 500k, you ended up at 843k. We just completed a raise - it was one of the bigger ones we've ever tried... I candidly wasn't sure if we were gonna be able to hit it or not... And it sold out pretty quickly. But for any of us who are attempting to raise in this year environment, where things have changed, people are a little more cautious, a little more reticent to invest, or do things... A lot of people just want to sit on the sidelines... For both large and small syndicators or sponsors, how do you recommend we gauge how much we can go out and raise?

In the beginning I tell people "If you're doing your first deal, and you need a million, get commitments for 2 million." What would you say?

Joe Fairless: It depends on where you're at in your journey. If you are starting out, and we're talking about your immediate network, people who have known you for a very long time, then I've seen about a 20% conversion rate from those individuals. The challenge is as you continue to scale, and you do more deals, you'll need to expand outside of that immediate circle. And that's where you get down to a conversion rate of 5% to 10% of the individuals that are in your database and will actually be investing with you.
The three main variables that will determine if someone invest with you or not, or the likelihood of them investing with you - one is how well do they know you? Two is how well do they know real estate? And three is how well do they know the markets that you're investing in? I've found that if they know you, and they trust you, and they like you, and they are familiar with real estate, and they understand the high-level mechanics of it, and if they know the market that you're investing in, that will increase tremendously the conversion rate that you have with your investors.

So what you can do with that information is being intentional about where you go, and how you approach finding new investors. I'll use Bigger pockets as an example... It's not really much [unintelligible 00:06:49.05] for us now, but in the early days it was, because I was pretty active on Bigger Pockets. So people knew me already. And people are there to talk real estate; so it checks that box.

And then the market - we always invest in larger markets, so that's not really a challenge for us... But that's an example of, generally speaking, a source that checks those boxes and will help with higher conversion rate than, say, a physician's conference. A physicians conference - a lot of high net worth individuals, but they might not know you. If they don't know you, that's a challenge; you're having to immediately establish rapport. They might not know real estate, depending on their background. They may or may not know the market.

So it's a great conference to attend, and it's a great conference to start establishing those relationships. But then the follow-up becomes paramount, as it is with any relationship. But those are the three things that will help you shortcut things and get a higher conversion rate.

Matt Faircloth: So changing gears a bit... This is an awesome conversation, by the way. Guys, good conversation so far? Are you guys enjoying us? Alright. We've got a few more points we want to make, but there should be a mic getting setup. So if y'all in the audience have a best ever question for Joe that you want to ask him here, why don't you try and find the microphone? Derek should be helping set it up. I can't see it from these awesome lights here... But there should be mics for you guys to ask questions from. But before we get there, listen to our good friend and mad scientist Neal Bawa... He's got me ready to jump out a window with where this thing's going, and everything like that... So everything's right here, but we're actually here... Talking about how bad things could get in a market. And then I listen to the brokers that we buy properties from, and they were over here like, "What are you worried about? It's fine. Nothing's changed. Everything's good."

Joe Fairless: How do they get paid again?

Matt Faircloth: Right. Right, right, right. "We can still buy for a four-cap, no big deal. Right?" So where do you think things are going with regards to the market? What's your current investment philosophy with market conditions, and what do you recommend folks bear in mind with the market?

Joe Fairless: I'm not going to say anything revolutionary, because I get my information from the sources that most people get their information from. I'll speculate if we're talking about the future, but I think interest rates will continue to go up; we're preparing for it, saving for the rate caps that we'll need for our properties... We have paused distributions on some of our properties, because we need to save for those rate caps... And when you do that, it's a sickening feeling as a sponsor. But I've seen what could happen with that first property, and that's a devastating feeling.

So short-term pain, get through it, know that capital preservation is first and foremost... And it's a five-year plan. We're in a very small, relatively speaking, window of time. So continue to focus on operations, and continue to grow NOI, continuing to control things that are under your control. And that's where our heads are at.

I mentioned in my keynote, I agree with Neal; there's going to be operators - I don't know how many, but there's going to be operators that are going to need to sell, because they won't be able to psychologically come to grips with reality. And they won't want to have conversations with investors about capital calls. We've never done a capital call, but there will be groups that need to do a capital call, and they won't, therefore they will sell. Because psychologically, I think it's going to be easier for them to just say, "Hey, this isn't working out. We got to sell for a loss", compared to them saying, "Investors, this isn't working out. We're gonna have a capital call call. I'm gonna talk to you all about it, I'm gonna have separate conversations with each and every one of you..." They won't do it, even though it's in the best interest, perhaps - it depends on the situation - for them to do it.
So there will be buying opportunities, I believe, this fall and this winter, so we're preparing our investors for those buying opportunities, and we've got a fund that's ready to capitalize on those opportunities.

Break: [00:10:48.22]

Andrew Cushman: So it appears, at least to most people that we've heard and that we all listen to, consensus is we're probably trending down right now in terms of valuation, and there's probably going to be an increase in stress and distress... And that's going to lead to buying opportunities down the road. But right now, be cautious, be careful, raise reserves, do risk mitigation things... And in life and in business, there's often subtle clues. So if you're at a conference like this, and I'm walking into the restroom, and the guy coming out can't make eye contact with me, I know I'm in for it. So what subtle clues are you looking for, that the rest of us can pay attention to, to say "It's time to get aggressive again", and as Warren Buffett would say, be greedy, and to really start scaling up acquisitions?

Joe Fairless: It's just what are the expectations of the sellers, and what are your expectations to make the numbers pencil? And right now, they're not aligned. Sellers still are at the lower cap rates, and buyers are not. So it's just, whenever the sellers have enough pain associated to the deals that they own, and they see the writing on the wall, that's what you look for. So it's just cap rate alignment.

Andrew Cushman: Thank you. A few other [unintelligible 00:13:55.11] questions. So you've achieved the amount of success... What's next for Joe? Where's Joe at 5 years, 10 years from now? Hopefully, you and I are doing this five years from now maybe; I'd love that. But where do you want to be 5, 10, 15 years from now? In your growth. Do you want to move to Tahiti and sip MaiTais on the beach, or what's next in the future for you?

Joe Fairless: When I was in my 20s, my goal was to make $100,000 by the time I'm 30. So I did. And my starting salary was $30,000 when I got out of college. I don't have any monetary goals anymore. I don't care if I become a billionaire... It's not important to me. What's important is how I invest my time. And being with those who I care about, and I love, and enjoying what I do. That's what's important to me.

I'm in a mastermind with people who are in some cases literally 10 times wealthier than I am, and that's ultimately what it boils down to, how we spend our time. That's why I have a lot of respect for everyone in this room. And like I said in my keynote, you could be doing something else, but you're here, and you're investing in yourself. So I respect that a whole lot. I enjoy this. Ashcroft - we're gonna focus on operations, capital preservation, we'll grow, and we'll continue to do our thing. I'm not going anywhere. I'm living in Cincinnati...

Matt Faircloth: You're not gonna sell the whole joint to Blackrock any time soon, right?

Joe Fairless: We won't, no. We will recap deals. That's interesting, because for passive investors, it's just as good as a sale; it doesn't really matter to a passive investor. To the general partner, all you general partners out there - consider recapping deals, versus selling deals. Because when you recap deals, you're buying out your limited partners, they're getting the return, and they can 1031 into another deal of yours, just like if you sold it. But instead, from a general partner standpoint, you're recapping it with, say, Goldman Sachs and BlackRock, which we did this past June on nine of our deals... And we still own those nine deals. It's just with a different waterfall and ownership structure, with BlackRock and Goldman. So ideally, we don't sell any deal. We recap them all. Some deals don't fit the criteria of what those groups want, specifically older deals; they don't necessarily want to recap them, so we would sell those. But ideally, we just recap and continue.

Andrew Cushman: For those of us who aren't as familiar with it, and could maybe learn more about it as an additional option... Can you take one minute and explain exactly what a recap is? And how do you make that happen?

Joe Fairless: Yeah, it's basically initially you have 100 limited partners, and they get bought out by a different limited partner. But in this case, it's a hedge fund or a private equity firm, and they come in and they buy that position, they buy out the LPs. And from an LP standpoint, they get the returns that you would on the sale, and they can 1031, which is what we did this past summer, into a larger portfolio. And then you have a new LP. And that new LP is whichever group bought out your hundreds of other LPs in those deals.

As far as how you go about that process, I was not involved. My focus in the business is individual high net worth investors. We have Frank and a couple other people on our team have relationships with the hedge funds of the world. I have no interest in having relationships with them, because they haven't been -- I just prefer not to. I prefer these conversations.

Matt Faircloth: You look better in a flannel than in a suit.

Joe Fairless: Yeah, it's just not me... And I don't know much about it. I don't have the relation-- and I don't care to know much about it, because we have team members who do. So I stay in my lane.

Matt Faircloth: So let's start getting questions going from the audience, because people want to ask Joe... But I've got one that I want to throw out here. I closed a deal a couple of years ago, and I just put it on Facebook, that we had an offer accepted. That's what it was. And my wife and I were out for a walk, and a couple days later these beautiful little tumblers show up in the mail, with nothing. And the longest time, like "Man, who sent me these cool little things?" And you know who sent us those? It was you. And you've been a giving human being. I've heard a lot of the talks you've given, about your work with hospice, and you've been of a giving mindset; you've given to a lot of people here, and myself... There is a mantra for you, of giving, and I was wondering, do you want to comment on that briefly, about your giving mindset, and maybe where it comes from, or just what it's all about?

Joe Fairless: We do -- it's called the Thoughtful Project, and we identify people in my circle who have accomplishments, or if it's someone who we speak to on the phone, a potential investor, if some sort of life milestone happens, we make note of it and then we send something to them thoughtfully.

Matt Faircloth: Why?

Joe Fairless: Because it's unexpected. I don't send holiday cards, because that's expected. It gets lost in the clutter. But when you are thoughtful, and send something thoughtful and unexpected, it breaks through. And it's something that people appreciate. It goes back to those three quotes I mentioned earlier, my philosophy: the secret to living is giving, help enough people get what they want, and you'll get everything you want, and service to many leads to greatness. And it feels good. And it gives you perspective, too. Especially hospice, it gives you a lot of perspective.

Matt Faircloth: It's a way to unexpectedly make somebody feel great. And it did in that moment, what you did for me, and for many others here. Do we have a time -- there's a mic floating around...

Joe Fairless: Well, we've got like three minutes, so... Where's the mic?

Matt Faircloth: Yeah. We probably have time for one or two questions from the audience here. Just go ahead and toss them out.

Karl Krauskov: Hi. Wow, that's very loud. Sorry about that. Karl Krauskov from Seattle.

Matt Faircloth: Hi, Karl.

Karl Krauskov: Hey.

Matt Faircloth: What have you got?

Karl Krauskov: Thank you for putting on the Best Ever conference, and putting on the Best Ever Fireside Chat. First off, Joe, I am a huge Third Eye Blind fan.

Joe Fairless: [00:19:40.20]

Karl Krauskov: I drove nine hours without a ticket, ended up getting backstage passes. It was fantastic.

Joe Fairless: Wow.

Karl Krauskov: So I'm two years into the syndication space, full-time. In the last two years raised $4 million for all my own deals. Now, looking for the ability to scale up. Again, I live in Seattle, I invest in Seattle. Looking for that next market; the next market that could stand another syndicator coming in and growing a big company. What are some maybe three actionable steps to help identify what that next market would be?

Joe Fairless: Well, you identify markets, right?

Matt Faircloth: Yeah.

Joe Fairless: How do you approach it?

Matt Faircloth: Thank you, Joe.

Joe Fairless: So I can answer that question, but that's not the area I focus in. We have a director of acquisitions and the team of analysts.

Matt Faircloth: Here's what I'd say - you're likely putting that on your own shoulders, and you should maybe find yourself a phenomenal partner that can help you with that, that becomes a market expert. So we have an assessment outside of maybe what Joe's referring to; if you should scale your business on attracting more and more capital to yourself, while you also maybe attract somebody in this room that is a market expert; any market that has good fundamentals. And there's many, many markets in the US that have good fundamentals, that are likely going to be recession-proof, or lighter economy-proof. I would look for markets that have diverse job bases, and then find yourself a person that is an expert in that market, that can infiltrate it for you, and produce deals for you and your investors to enjoy without you having to be the one to go out there and do. Because you really just create more work for yourself and spreading yourself too thin if you're the one that finds the market. There's a book called "Who, not how", so I would apply the "Who, not how" concept to that.

Joe Fairless: It reminds me of when is a good time to invest in real estate, right? Now, and tomorrow, and yesterday. You can make money in any market. You can. And it's awesome that you live in Seattle, and you invest in Seattle, because you know Seattle. I was born in Flint, Michigan; my family moved from Flint to Houston when I was three, because unemployment went through the roof. So there are some markets you've got to be careful of. But the Sunbelt, by and large, you're going to be good. It's a matter of how do you execute in the market, and -- how do you find those deals, and how do you execute in the market. That's really where you're going to make the money. Because most of the large cities in the Sunbelt would work for you. It's what is your unique differentiator that allows you to have a competitive advantage in whatever city you pick?

Andrew Cushman: Karl, we've got an extensive screening process for picking markets, but I'll give you that the top four... Population growth, job growth - because jobs actually follows people - you want landlord and business friendly... And then also you want an area where rents are affordable, where you have room to grow, and people aren't going to be not paying rent because of inflation.

So we're already out of time, unfortunately... So Joe, you know, I have to ask you this question... For everyone sitting here in the audience today, what is your best real estate investing advice ever?

Matt Faircloth: Have you been asked that question? You've asked that question of thousands and thousands of people. Has anyone ever asked you that question?

Joe Fairless: Me? I don't know. I'm not sure. I would say my best advice is take all the free advice that you can get, then decide what you want to do with it.

Andrew Cushman: There you go. Well said.

Matt Faircloth: Guys, Joe Fairless, everyone. Let's give him a round of applause.

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