July 8, 2022

JF2866: Carving Out Your Own Multifamily Niche ft. John Okocha


John Okocha adopted an investor mindset when he was in high school after reading Rich Dad Poor Dad by Robert Kiyosaki. After starting out wholesaling, he became a realtor and then moved on to commercial real estate and multifamily acquisitions, working as the first hire for a company that scaled from 20 to more than 2,000 units in less than two years. 

Today, John has two areas of focus — serving as a debt and equity broker, and launching his own fund that will focus on value-add multifamily properties. In this episode, John discusses the niche that he’s establishing as a debt/equity broker and fund owner, the biggest thing that surprised him about scaling from 20 to 2,000 units, and what led him to launch his own fund.

 

1. Carving Out a Multifamily Niche

John serves as a capital contractor connecting sponsors to preferred and mezzanine equity sources. He specializes in the $1–$5M range specifically based on the huge need for it that he has seen throughout his career. “Everyone I talk to needs it,” he says. “Even the guys with large track records, because they might be partnered with a huge fund, but the minimum check size would be $7M. So there’s a huge need for it.”

 

2. Surprises when Scaling from 20 to 2,000 Units 

During his company’s rapid scaling process, John quickly learned that partnerships are key. When they only had 27 units and a minimal track record with brokers, they partnered with another group with over 2,000 units. 

“So when I would call brokers, since they were our partners and we had their permission to, we combined our schedule of real estate,” John explains. Brokers would see that high number and feel more comfortable sending John properties. “Being able to leverage other people’s resources I would say is key to being able to scale very, very quickly,” he says. 

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3. The Decision to Launch His Own Fund

John says he’s always had an itch for large, private equity real estate. He started volunteering to work events that gave him exposure to investors with billions of dollars under assets. “Just being in that environment and talking to people [who were] basically telling me like, hey — they’re nothing special. You can do it, too,” John says. “They just made me realize that it was all possible.”

John Okocha | Real Estate Background

  • Managing principal of Okocha Equity Partners, an alternative asset management firm focused on multifamily.
  • Portfolio: GP of over 1,600 units
  • Based in: Dallas, TX
  • Say hi to him at:
  • Greatest lesson: Build strong relationships.

 

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TRANSCRIPT

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever show. I'm Joe Fairless. 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 the fluffy stuff and we focus exclusively on, of course, real estate. With us today we've got a multifamily investor. How are you doing, John Okocha?

John Okocha: Doing amazing. How about yourself?

Joe Fairless: Well, I'm glad to hear that, and the same. I appreciate you asking. A little about John - he's a managing principal of Okocha Equity Partners, which is an alternative asset management firm focused on multifamily. His portfolio - well, he's a general partner of over 1,600 units based in Dallas, Texas. His website, okochaequitypartners.com. With that being said, John, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

John Okocha: Yeah. So it all started really when I was in high school. A good friend of mine recommended the book, Rich Dad Poor Dad. I read that book and it basically changed my mindset on money, finances, investing. I went to my first real estate conference, and I was the first guy back there. I was the first guy back there that bought the marketing materials in order to start my real estate journey. So I started on the wholesale side of things, then moved into being a realtor for investors, and then one of my investors actually asked me if I wanted to come do acquisitions for him. So I started doing acquisitions for him, I started working for another person on the commercial real estate side on the multifamily side, and we scaled from 20 units to over 2,000 units in less than two years.

Joe Fairless: Wow.

John Okocha: Yeah, it was a very, very exciting time. I was their first hire, and being the first hire, I got equity in the deals, and yeah, it was amazing. I had an amazing time there. I learned a lot. And while I was there, I noticed the huge need for preferred and mezzanine debt for smaller properties. I would notice that a lot of the sponsors I would know either had trouble raising that 1 to 5 million for the deposit, or they had a lot of investors but wanted to do more deals and wanted to scale. So what I did after that is I actually left the group, and right now I'm actually in the middle of working on having an advisory. So we'll be linking funds to sponsors, and I'm also going to be working on developing a fund myself. So those are the two things we're working on currently.

Joe Fairless: A lot to unpack there. Just so I'm clear on what you're currently focused on and then I want to backtrack back to some of the things that you mentioned... So what are you doing right now with-- you said you're working on advice... So you're creating a company that does what?

John Okocha: So basically, we're capital connectors. So we'll connect sponsors to preferred and mezzanine equity sources.

Joe Fairless: Got it. Okay. So preferred and mezzanine sources for the 1 to 5 million dollar ranges; this would be your specialty.

John Okocha: Yeah. We want to specialize in that range because we know there's a huge need for it, but we could go higher than that, for sure.

Joe Fairless: Is that just an equity broker? Is that basically what you are, or am I oversimplifying it?

John Okocha: Yeah, debt and equity broker would be the best way to describe it, but we're also getting together LPs in order to actually launch a fund as well. So we're actually going to be doing both.

Joe Fairless: Okay. Got it. So two areas of focus - one is being in debt and equity broker, and two is launching your own fund and raising money from your LPs. And what is your fund focused on?

John Okocha: It's going to be the same. We're going to be focused on the 1 to 5 million dollar cheque size for multifamily along the Southeastern part of the United States. We're going to be mainly focused on properties or value add properties and also development as well.

Joe Fairless: 1 to 5 million dollar cheque size... So are you saying that you're buying properties that require 1 to 5 million in equity?

John Okocha: That is correct.

Joe Fairless: Okay. So 3 to 15 million dollar purchase price properties?

John Okocha: Exactly, around that.

Joe Fairless: Okay. Okay, cool. That's an interesting niche that you're carving out, because I don't typically see someone doubling down on that size of properties, and I see the unique value proposition, your competitive edge by doing that, because you've already got the relationships with the people who can bridge the gap for those types of properties and fund that at scale through your debt and equity broker relationships.

John Okocha: Exactly. There's just a huge need for it. Everyone I talk to needs it; even the guys with large track records, because they might be partnered with a huge fund, but the minimum cheque size will be 7 million. So there's a huge need for it.

Joe Fairless: What type of terms should a syndicator expect or a general partner expect if they have a $10 million property that requires 3 million in equity, and they can raise about 500,000, but they need 2.5 million? And let's assume it's a property that's a value-add deal built in 1990, in a good area, somewhere in the Southeast.

John Okocha: It really depends. We definitely look at track record. That's something that we definitely look at. And also, like you said, we're very deal-specific. I would say, on the mezz side, this could be anywhere around the 9 to 10, really just depending on the sponsor. We're very, very sponsor-specific.

Joe Fairless: Okay. So a preferred return versus mezz-- I want to make sure I'm understanding this correctly, because I think you used both terms, preferred equity and mezzanine debt. In my mind, mezzanine debt is debt, and preferred equity is they're getting the upside, but they're not debt. First off, I'm tracking correctly, yes?

John Okocha: Basically, on the preferred equity side they would be getting a piece of the equity?

Joe Fairless: Yeah.

John Okocha: Yeah. Well, the way we're underwriting it on the preferred equity side is -- it's really very deal-specific, but maybe something like a 6 or 7 current, and then the rest would be accrued, maybe 6 or 7 current, 7 accrued, that sort of thing... So it's really equity structured like debt. That's how we're structuring it for the equity side.

Joe Fairless: So will you just elaborate? You said 6% current and 7% accrued, so it's 6% immediately, and then 7% on the back end when it sells?

John Okocha: Exactly.

Joe Fairless: Got it. To get them to a 13% for the total deal. So that's not too burdensome, they don't start at 13% out of the gate?

John Okocha: Exactly. And we're cheaper than most common equity in that aspect, because typically if someone was coming in on the common equity side, they might expect more of a return for the money that they put in.

Joe Fairless: Let's use that example. So preferred equity - if it's 6% at the beginning and then 7% accrued for a total 13%, what would that preferred equity group require of the general partner to co-invest, and what type of track record, at minimum, should they have?

John Okocha: That's a great question. Typically, we go to 85% to 90% of the total capital stack. So we're expecting them to bring in, typically, around that 10% into the deal. And as far as track record goes, we'd like to work with people that have at least, I'd say, a billion in transaction volume. We'd like to work with anywhere in that billion range. If they're a little bit off, maybe they're at 600 or 700, we'd be happy to work with them.

Joe Fairless: A billion with a B?

John Okocha: Yeah, in transaction volume.

Joe Fairless: How many operators need this who have a transaction volume of a billion?

John Okocha: You'd be surprised.

Joe Fairless: That would surprise me. I wasn't thinking that would be a qualification. I'm glad you told us that. So yeah, please elaborate.

John Okocha: You'd be surprised. There's a lot of people in that space that have investors that they can work with, but there's still more deals out there that they would like to do. And if they could find somebody they could work with, they could provide more equity for the properties that they're looking to do, that's less money that they have to ask for their individual investors. If they can find someone who can come in and write 1 to 5 deal by deal, that's more money that they can use in more deals.

Joe Fairless: So you come across sponsors who have at least done a billion dollars in transaction volume, but are purchasing properties worth approximately 10 to 15 million dollars, who need 1 to 5 million dollars in preferred equity?

John Okocha: Yes. So they'll purchase a property... It could be 50 million or 70 million as well. But for the smaller properties, let's say they'll have a guy that may be a family office or a hedge funds that they work with, that they do a lot of deals with; that fund will only write a cheque maybe maximum to around 7 million. So anything lower than that, they can't use that partner on. So that's why we try to stick under that 5 million, that 1 to 5 million.

Joe Fairless: Yeah, I totally get that. I get that there's a need. What I'm surprised about is that the need is coming from groups that have a billion dollars plus in transaction volume. I'm surprised that groups that have a billion dollars plus in transaction volume are buying 10 to 15 million dollar properties. And on top of that, not only are they buying these relatively small properties, they are seeking preferred equity to bridge a gap. That surprises me.

John Okocha: Yeah, for sure.

Joe Fairless: Huh. How many groups have you worked with like that?

John Okocha: There's one group out of Dallas, it's a huge group, and they've done multiple billions in transactions, and they told me, they're the ones who expressed that need as well. I've been to multiple of different events, talked to multiple investors and there's been a huge interest in it, and they've voiced the exact same thing.

Joe Fairless: Have you worked with any groups who have used [inaudible 00:12:24], or are you just launching it now, so no one's paid you for it yet?

John Okocha: No one has actually paid me for it yet.

Joe Fairless: Okay.

John Okocha: We are working on a deal right now that's not in that range. It's actually in that 25 million range that we're working on right now. But specifically in that 1 to 5 range, nothing yet.

Joe Fairless: Got it. Okay. It makes sense in my mind. Again, I could be off, but it makes sense the 25 million plus deals that these groups with at least a billion dollars in transaction volume would be seeking preferred equity to bridge a gap, but I can't think of any groups that I know, but I'm sure you know of more groups than me that would have that track record, but yet still be seeking the million to 5 million in preferred equity for a $15 million deal. If the qualifications were you have to have 50 million in transaction volume, then that would make more sense, but it's interesting.

You just talked about preferred equity, then on the mezzanine debt side you said 9% to 10% earlier. Will you just elaborate more on what is mezzanine debt and how is it different from preferred equity and why would someone choose mezzanine over preferred equity?

John Okocha: Yeah, definitely. On the mezz side, typically what it is - it's just a straight payment, so 9% over the course of the deal. So essentially, it's a second loan.

Joe Fairless: Got it. It's more expensive than preferred equity on the frontend, but not on the backend.

John Okocha: Exactly.

Joe Fairless: So what's the thought process that investors should think through when they're considering either mezzanine debt or preferred equity?

John Okocha: I would say looking at the cash flow of the property - is it able to support that 9%? If it is and it makes sense to do so, I'll definitely go for it. On the pref side, is the cash flow on your reserves - is that able to take care of that 6% on the pref side? And then when you go to refi the property, will you be able to cash out and buy out the preferred equity?

Joe Fairless: On the preferred equity, if the property is not generating 6%, and let's assume that it's 6% preferred out of the gate and then 7% accrued, like the example you used before, can part of that 6% be accrued to a later date?

John Okocha: That is possible, but it really just depends on the agreement. It really depends on the agreement between the sponsor and the investor. That's something that we're pretty flexible on. It really just depends on the relationship, I would say.

Joe Fairless: Got it. Is it common to accrue it? Because right now it's tough to find deals that are cash-flowing 6% out of the gate if they're value add deals. So I would imagine that would be fairly common now, but maybe not 10 years ago.

John Okocha: Yeah, that's something that we're seeing a lot now, especially on the development side.

Joe Fairless: Sure. Okay. Let's talk about your 20 units to 2000 units in less than two years as the first employee for the group. What type of properties were being purchased?

John Okocha: We were purchasing value add properties, multifamily properties in Texas and also in Oklahoma.

Joe Fairless: And what size range were those properties?

John Okocha: The first property that we bought - I was actually not with the group - it was 27 units. But as soon as I joined, I found a 206-unit property in Oklahoma, so we purchased that. And then we purchased a five property portfolio in Houston, which is about 1,250 units in Houston. So there was that, and then right after that, we purchased another property, I believe in Atlanta.

Joe Fairless: And that put you around the 2000 mark. What was something that surprised you about that experience, going from 20 units to 2000 units, like, "Oh, man, looking back on it..." It's not surprised as in interesting, just like, "Man, that was an a-ha..."

John Okocha: I would say partnerships are key. At the time when we had 27 units, so we didn't have a huge track record with brokers, so we partnered with somebody that had over 2000 units. So when I would call brokers, since they were our partners and we had the permission to, we combined our schedule of real estate, because we were buying deals together. So when I would send [unintelligible 00:16:48.02] real estate, they would see over 2000 doors on the schedule and feel more comfortable sending us properties. So being able to leverage other people's resources I would say is key to being able to scale very, very quickly. I really do think that's key in any business.

Joe Fairless: I love that. And what was the structure of that partnership?

John Okocha: As far as the partnership goes, it was on the loan, they raised most of the money, and then we would manage most of the construction.

Joe Fairless: And what was the split between them and your group?

John Okocha: It was an 80/20 split.

Joe Fairless: They got 20% or 80%?

John Okocha: They got 80%.

Joe Fairless: They got 80%. So they had the money and the balance sheet, and you all found the deal and executed.

John Okocha: Exactly, and then we handled the construction as well. So we got paid on the construction side as well.

Joe Fairless: When did you decide, "Hey, this has been great, but I'm ready to go move on to something else"?

John Okocha: So even before working for them, I had an itch for private equity, just large private equity real estate. And I would go to these events -- and I didn't have any money at the time, but I would figure out a way to go to these $3,000 events in New York and California, and what I would do is I would volunteer for them. And that gave me a lot of exposure, because I met people with billions under assets. I was talking to people that were like family offices, talking to different hedge funds... And it just made me realize that it was all possible. So just being in that environment and talking to people in that environment, and then basically telling me like, "Hey, they're not anything special. You can do it, too."

Joe Fairless: Yup.

John Okocha: That sort of thing. But I would say the thing that really got me was after we purchased the 200 units. So we had about maybe 220 units under management at the time, and I went to this event in LA and it was at the Omni -- I don't remember, there was a group of us that walked I think to the outside of the hotel and we were all having wine and stuff like that, and I just remember there was a lady sitting next to me and she looked like she was maybe about around 30 or something, and I was asking her about herself and she was like, "Well, I work for this group, and we raise capital, and we spun out of Blackstone." I was like, "Oh, really?" She's like, "Yeah, we spun out of Blackstone." And she was asking me about myself. "Oh, we purchase more value add multifamily B and C", and she's like, "Oh, no way. We just raised a billion dollars for a group just like that."

[laughter]

Joe Fairless: Oh, my...

John Okocha: [laughs] When I heard that, I just knew there was [inaudible 00:19:36].

Joe Fairless: Yeah.

John Okocha: Ever since then, I've always had my ears and eyes open. I've always wanted to have my own fund, but I took it more serious after hearing something like that. And then I started going to emerging manager programs and emerging manager events. I just came from an event about one or two months ago and Henry Kravis was up there from KKR. There was more than one billionaire in the room, just casually talking to people, and I'm like, "Okay, I want to be a billionaire, so I should be in this room." And I think the best way to scale to that would be to have a fund, so I've got to figure this thing out.

Joe Fairless: Yup, that's awesome. And then how soon after that initial conversation - was it a couple years after that? Because I know you ended up buying that larger portfolio with that company.

John Okocha: I would say maybe about two years after that. Initially, what I was planning on doing was trying to see if I could start a fund with the company. That's actually what I was planning on doing. And I guess differences in goals and things like that. I mean, they're great people, amazing people, but I saw what happened during COVID and I was like, "It is a recessionary period, so I'm just going to go for it."

Joe Fairless: Good for you. And what's been the biggest challenge since you've taken that leap?

John Okocha: I would say just navigating a different space, because it really is a different world. So just navigating a different world, and just understanding the dynamics, understanding how people move a little bit different, which is different, small things like that.

Joe Fairless: We're going to do a lightning round, but first, what's your best real estate investing advice ever?

John Okocha: Hang out with people that have what you want.

Joe Fairless: Are you part of a mentorship group or a mastermind group?

John Okocha: I am right now. It's not really real estate-focused, It's mainly just personal development focused.

Joe Fairless: Nice.

John Okocha: But I do plan on joining... There's a group called REEC. It's Afro-Latina and, I believe, women minority group, and their main goal is to get people in that segment of society to be fund managers.

Joe Fairless: What's the group again? You said reap?

John Okocha: REEC. So it's R-E-E-C.

Joe Fairless: Okay, cool. We're going to do a lightning round. Are you ready for the Best Ever Lightning Round?

John Okocha: Let's do it.

Joe Fairless: Alright. First, quick word from our Best Ever partners.

Break: [00:21:58] to [00:23:40]

Joe Fairless: What's the best ever book you've recently read?

John Okocha: Miracle Morning.

Joe Fairless: Best ever way you like to give back to the community?

John Okocha: It would be speaking with young adults about finances, going after their dreams, that sort of thing.

Joe Fairless: And how can the Best Ever listeners learn more about what you do?

John Okocha: They can reach out to me on Instagram. That's one of the best ways. They can reach out to me at johnnyequity.com, or you could just send me an email. My email is john@akochaequitypartners.com.

Joe Fairless: John, it's been a pleasure talking to you and learning about your journey. I'm grateful for our conversation. I hope you have the best every day, and we'll talk again soon.

John Okocha: I really appreciate that, Joe. Thanks for having me.

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