November 11, 2022

JF2990: From 75 Units to Nearly $400M in AUM ft. Jason Harris

Jason Harris is the founder and CEO of Harris Investment Group, which invests in multifamily properties, focusing on adding real value to the property for its tenant base. In this episode, he shares how he’s scaled to almost $400 in AUM in the last four years, the hardships he experienced along the way, and some of the toughest lessons he’s learned in his career so far. 

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Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Jason Harris. Jason is joining us from Orem, Utah. He is the founder of Harris Investment Group, which focuses on multifamily, and specifically adding value to its tenant base. Jason is a GP on 2,000 units, totaling $300 million of assets under management. He was also a previous guest on episode 1579. If you google Jason Harris and Joe Fairless, those episodes will pop up. Jason, thank you for joining us, and how are you today?

Jason Harris: So glad to be here. Very good. Thank you.

Ash Patel: We're glad to have you back. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Jason Harris: Yeah, thanks so much. I started in financial services for seven years, growing a portfolio with Edward Jones; during that time I was growing my own real estate portfolio. Back in 2010 I bought my first fourplex, and from there just wanted to build my own financial freedom, and I felt like real estate was the best way to do that. However, I didn't have very much money. So my whole thought was "I'll be a financial advisor by day, real estate investor by night", and happened to, in 2013, meet a very fluent family in financial services that had thousands of doors personally. As a real estate investor I learned some things that he was doing from a tax shelter strategy through real estate to pay zero in taxes through bonus depreciation. That changed my life and understanding what I could do within my own real estate, and helped me eventually quit my financial services career and do real estate full-time, where we've been doing JV, syndication, and our fund model structure, and helped us exponentially grow our own personal wealth, but help investors and the majority of our accredited investors do the same.

Ash Patel: So that was four years ago that you interviewed with Joe Fairless, and you had a handful of duplexes and quads to your name... And now you've got $300 million of assets under management. How did you scale in four years?

Jason Harris: Well, the market certainly helped with that, I'd say; the appreciation has been really strong. But a lot of it too is once you establish yourself as someone that's a mover and shaker, that's doing well and having success, that track record starts to be what other capital will look at. So with that reputation and respect maybe that I have for outside of just real estate alone, I was able to start growing my portfolio with other capital. So we actually should be at 400 million before the end of the year; I'm hoping that I can follow suit with what Joe's done, of hitting a billion dollars before 40. I think that's possible for us.

But a large number of it was just looking at the best way to drive IRR and return. And once you start seeing a strong enough equity, over value of what you own, we saw opportunities to sell those assets captured the equity and roll up into something bigger using 1031 exchanges to keep the tax efficiency. So it was through that, and then partnering with other capital we were able to really scale and grow to the number of units that we're at now.

Ash Patel: Alright, on a macro level that sounds great. Now let's dive into the weeds and find out how you did it.

Jason Harris: Awesome.

Ash Patel: So what was the first large complex that you bought?

Jason Harris: What would you say is large?

Ash Patel: Take us through the evolution. How about the first deal you raised money on?

Jason Harris: Okay. That would have been a 56-unit in Salt Lake City. I took a million dollars in from outside capital and put in 500,000 myself, and we purchased it for 7.5 million roughly, negotiated a seller credit on that deal, and sold it last year for 11.6 million. I think we had a 2.6x equity multiple in the two-year timeframe that we held that. I had done much smaller properties, a bunch of eight and 12-unit type properties at that point with JV structures... But that one was a bigger one that really got me excited about -- everything that I'm learning in this small, 20 units or smaller, you can do at a much bigger scale; it's just the returns are a lot better. So that really excited me to start doing 100 to 300-unit type properties that we are at today.

Ash Patel: Why did you sell that property in two years?

Jason Harris: Again, it comes back to new opportunities that had stronger growth potential. I'm still focused on growth as the primary objective, and we had about almost $5 million worth of equity before closing cost in the property. If you take that 5 million and roll it up now into a $15, or $20 million type portfolio that has more upside opportunity through the value-add process, we saw that we'd be able to increase our return potential, than continuing to own that property, even though it still had some meat on the bone, by selling it early, before full stabilization. So it was more just about the numbers speaking to us doing better by rolling up into three new assets, which is what we did.

Ash Patel: So you added about 80% of the value, let's say, and left the remaining 20% on the table, moved on to the next deal... What do you say to those buying hold investors that are struggling with teetering on "I'm just going to buy and hold forever", versus "Why not take the money and extrapolate it into the next deal?"

Jason Harris: Great question. Being a previous financial planner, I love breaking down the numbers. I actually used to do consulting on the real estate side as well, where we actually did a portfolio analysis spreadsheet to look at what your true returns are from a principal reduction, cash flow and appreciation. There's also a tax savings component that we would look at. But what you'll find is more times than not, your return on equity percentage is drastically lower by keeping a property that has significant equity, typically 40% equity to value or higher - there's justification more times than not to take that equity and redeploy it in assets that have more opportunity, with new leverage.

And it really just comes back to the numbers. I can cashflow more by owning more property and controlling it, even if my cash on cash return number is smaller as far as a percentage than holding on to the asset. And with the value-add process you have the ability to push rents or gross revenue quite a bit more typically than a stable property. So I can increase my cash flow while also achieving greater returns because of the appreciation, and the ability to own and control more assets than a smaller number. So the numbers don't lie, if you can explain it from a breakdown of what they're making.

Ash Patel: Thank you for that. What I really want to say is how do I convince some of my stubborn friends that the buy and hold strategy is not the right way to go? You should publish a white paper with some examples on that. I think that would go viral. Because again, it's a mindset thing, right? People think that through principle paydown and just staying the course, they will make a ton of money, but they don't put the numbers to paper and look at the alternatives. So if you do that, we would publish it on our website, on our blog. I think that would be incredible.

Jason Harris: I'll circle back with you on that. I think that that'd be possible.

Ash Patel: And I could throw it in their faces the next time we have that argument.

Jason Harris: I'll add one more thing to that.

Ash Patel: Yeah.

Jason Harris: For any of these people who it seems like has a significant interest in real estate, they're active in real estate, if they're claiming or willing to look into claiming the real estate professional status, or depreciation loss, and can go from a passive loss to an active loss, and you couple that component of the tax savings benefit along with the return potential of the buy and hold strategy versus rolling up into something bigger - it's a night and day difference of why you should sell it and roll into something more, to capitalize on the tax savings component in addition to the returns. So I'd love to actually break something down with you and share that. That's been a big part of our success.

Ash Patel: Awesome. I love it. What locations do you focus on?

Jason Harris: We're in five core markets. Utah, obviously, is home base. So that's where I got my start. Salt Lake City area, although we're in some other tertiary markets here in Utah... Beyond that, we're in Kansas City, both Missouri and Kansas side. Dallas, which I was telling you I just got back from, and then Louisville, Kentucky are our primary targets that we have a pretty strong home there.

Ash Patel: How did you pick Kansas City, Louisville and Dallas?

Jason Harris: A big part of it is strong economy, job growth, low unemployment, low crime, net migration trends... And then just the price per door. Some of it was -- I'm from Texas originally, so Dallas made sense. I know the market there, Kansas City I have family ,and so we travel there frequently... And in the beginning, when I was getting my start and I wanted to go out of state for the first time, having local people on the ground that knew the neighborhoods... There's different trends that you'll see, where school districts actually play a big part in where people decide to move and live... And I just wanted to know some of those things before jumping all-in into a new market.

So that helped... But then as you get more savvy and you use Costar and some of the other data from broker relationships, it allows you to navigate to where you think are the best places within a community to be able to continue to build.

Ash Patel: Jason, right now interest rates are going up, cap rates are still pretty compressed with multifamily... How do you find good deals today?

Jason Harris: Most of what we're doing, because we're IRR-driven, is still on bridge loan debt. Ironically, we've looked at a lot of permanent debt structures, the agency, Fannie and Freddie is something that we like, but our return through analysis is still much stronger utilizing higher leverage. So we've been more conservative on our underwriting of what the expectation of what cap rates will be in the next two to three years when we look to exit, through either a sale or a cash-out refinance. But as you know, in the value-add space, right now due to inflation we're seeing much higher rent rate growth than what was expected. So most of the deals that we're working on, we underwrote to a more conservative post-renovation rent rate number, that we're already exceeding that number, which puts us in a more comfortable position to achieve a higher net operating income than what we were expecting, so that we have some give as far as what we're going to need to do when it comes to selling the property. But yeah, bridge debt still is what we're doing the majority of our new property and acquisitions with.

Ash Patel: Are your exit caps 100 basis points, 200 basis points higher than your entry?

Jason Harris: 100 bps is what we're doing, and every year that we hold it, it's a 10 bps higher. Obviously, there's a lot of variables into that to know what really is going to happen, but that among other things that we've built into our underwriting is what we're using to kind of guide conservatively to make sure that we're not in a tough spot. And I think the best thing that you can do to prepare is either one, have fixed rate debt that you have extensions built in on the debt, or two, know that you're buying right and well enough now to have enough upside and net operating income that can be achieved to absorb some of the higher debt or interest expense that you may have to take on later.

1:So I'm a non-residential commercial investor, and all of my debt is through portfolio loans with lenders. Can you explain to me how bridge debt works and how extensions work, and what today's rates are?

Jason Harris: A lot of the current debt that we've been taking on recently, we've had anywhere between 6.5% to 7.65% interest, interest-only. Most of it we've been able to get fixed to avoid interest rate caps, which had been very common this year, as lenders have become more and more conservative with the Fed's guidance on higher rates, especially on the daily rate or the 10-year Treasury, depending on what type of debt you're getting.

So to avoid those upfront fees and expenses, and to try to have more of a determined interest rate, we've tried to do more of ours fixed, that aren't subject to the prime market, which we've had anywhere from 350 to 500 bps above prime. So those are the type of debts and those are the interest rates. Most of the time, you can have a one-year extension up to three more years after your two or three-year locked period, to give yourself some more room if you need to hold it for a longer period of time than expected. There's usually an extension fee of 1% to do something like that, on the balance of what you carry at that point.

But we like that, Ash, and the reason why we prefer it is because they actually will provide the majority of the renovation budget, and most of the properties that we're doing have some pretty significant lift that we're needing; $10,000 per unit, or higher even sometimes. So because of that aspect of not having to come in with our own capital, we'd prefer to take debt at 6.5% to 7.65%, knowing what that money could do for us in additional value income. Most of our guidance is a 25% IRR or higher, over a three-year period or longer. And if we can't meet that number in this underwriting, we're passing. And we're at a size where we can look and analyze enough deals and pass on it, because we're not placing billions of dollars of capital, so we can hold out for those better opportunities. It's getting harder to find, but due to the market and the current conditions, you're finding more motivated sellers in distressed situations or predicaments, that's allowed us to be able to hit that higher benchmark.

Break: [00:15:35.00] to [00:16:33.29]

Ash Patel: Jason, on those extensions, do they keep the rates where they are for your initial bridge debt?

Jason Harris: Fortunately, yes. The ones that we work with have, yeah.

Ash Patel: Got it. Okay. And then buying rate caps - how does that work?

Jason Harris: Well, geez, I don't know all the science behind it. My CIO helps with those aspects of things. But from what I understand is to protect the lender from the risk of default, or from interest rates going up that they could capture a higher return, you have to pay something upfront to lock in the interest rate now, so that you're not subject to a variable rate over the term of the duration of the loan.

So those have become pretty significant... I've seen some as high as 3% or 5% of the debt amount that you're borrowing. And I've heard of higher, but we ourselves have seen some at three to five. And that's just a significant amount upfront that's not a return driver, that hurts IRR when you have to bring that up to the front... So we've wanted to avoid those if we can. A lot of times the properties we're buying don't support leverage on an agency type structure of 60% or more. So when you can borrow money at 75% plus the renovation budget, or self-fund those renovations and borrow at 55% leverage, maybe 60% at best, you run the numbers side by side and the bridge debt still looks quite a bit more attractive. So we're willing to take on that little bit of additional risk knowing that we've got fixed rate debt, plus additional extensions for the significantly higher leverage that we can bring to the table to achieve a better return.

Ash Patel: Thank you for clearing all of that up; that helps a lot. So you have a CIO... Who else is on your team?

Jason Harris: We're a 10-man team now. I think when I met with Joe four years ago it's just a one-man band here. And so we've been able to hire some C-level position employees that have been fantastic. We've got an admin help, and people who oversee the loans and the asset management, post-acquisition. So we do a lot of due diligence now, on-site to the properties...

Everything that we do in the way of property management, leasing, or project management through the construction phase is third-party. It used to be something we did in-house, which I think has helped us see what's worked and what hasn't worked ourselves when we're trying to hire third parties... But again, when you get to a certain size, which we've finally achieved, we're able to work with professional companies that have 10,000 plus units under management, so they're really an asset manager that's on your side, that we can present our property plan or reposition plan to have what we need to do over the two or three-year period in order to achieve the returns that we expect from our own capital, and from the capital of our investors, and keep them on track. So yeah, it's a team game now.

Ash Patel: And did you preemptively scale, or did you have the pain points and then hire?

Jason Harris: Both. I think sometimes it's like we really are hurting in a certain area and need to address that, and then we find who we think could be a key person to fix some of those issues and improve our processes... But sometimes it's like we just know. When you're in the beginning years, you're running the show on all fronts, and that's a really difficult space to be. You like it because you understand it well, and you know what's going on, but you get to a point where you just can't give it the time that it needs... And so I think it's been a mixture of both.

The CIO role has been a very meaningful person who was hired and has taken on the acquisitions and the broker relationships, as well as post close making sure that our property management teams know how to execute thereafter... But yeah, we have a Head of Investor Relations that's helping on the relationship side, some admin help and lender processing... So it's been great; I'm happy about the way that the teams taking their roles and responsibilities on.

Ash Patel: What's your current bottleneck?

Jason Harris: It's always a mixture of too much capital, or too much deals. And right now, I think we're seeing -- as we're approaching year-end and trying to find opportunities, it's more capital I think at the moment, more because people get skittish and nervous when you enter bear market territory. Most asset classes, as you know, are 20% from all time highs... So it becomes a little bit more scary to put that money to work. And yet, we're looking at it and saying "These could be some really great times, when we finally have more of a balance." It's been a seller's market for so long that buyers have really had to appease what the sellers want, and there's not been a whole lot of negotiation that's been able to be had. But we're now seeing a lot more balanced, and finding some off market opportunities, but the capital has been harder to come up. So I'd say right now it's the capital... But it whipsaws.

Ash Patel: Yeah. What's the toughest lesson you've learned in your investing career?

Jason Harris: Oh, geez... The toughest lesson...

Ash Patel: The most painful, how about that?

Jason Harris: The most painful... I actually think it's probably being able to delegate and trust other people sooner. I held on too long trying to oversee and operate, and not being able to trust and delegate it out soon enough. If you can do a good job of hiring out your personnel right - that's not just your full-time staff and W2, but also your 1099 companies and contractors that you're working out - you can scale and focus your time on the key activities of highest and best use where your value is. I was taking on too much where I should have been delegating sooner on some areas that don't have as high of value of my time... And I wish that I would have been able to catch that vision sooner and been able to trust other people who actually do their job better than I was doing it with the time I could give it. But I think it was really hard for me to know that I was hiring the right people and being able to delegate that, and I wish I would have done it sooner.

Ash Patel: Yeah, I think it's a struggle that a lot of people endure... So you're not alone in that. In terms of returns to investors, what are you offering today?

Jason Harris: Right now, we have two different fund structures with a syndication component, because our fund is limited to a certain allocation per property. The deal in Louisville I was mentioning - it's a $24 million property acquisition. It's about an eight and a half million dollar equity amount needed. But we don't want the fund to have any more than $3 million as a part of any one property, because we're trying to stay diversified with smaller allocations to get the benefits of diversification.

So we'll take on outside capital beyond what the fund will do... So the majority of that fund - Fund 2 we call it - is multifamily exposure value-add, with a two to three-year expectation of timeframe, but up to five years. We underwrite to a 25% IRR, with an 8% preferred return. Track record speaks to everything we closed in 2021. We achieved a 42% IRR or higher, but we're typically - like we were discussing earlier, having a shorter hold period; because once you achieve stabilization or something close to it, you'll notice that IRR typically drops quite quickly thereafter... Because once you've mostly stabilized the property, what can you do thereafter to continue adding value? There's just not a whole lot more, so we start really seeing those returns drop, even though your overall cash flow on initial investment's higher, which is what some of your investors and relationships are looking at, your overall return or ROE has drastically dropped... So we're looking to then pivot if we can by either selling the property to lock in those returns and distribute back to investors, or take those profits and carry them forward into new opportunities, usually trying to do something that's tax-efficient.

Ash Patel: Spend 20% of your time making 80% of your returns, versus the opposite.

Jason Harris: I agree. Love it.

Ash Patel: Yeah. Jason, if you were to lose everything today, all of your net worth, how would you start over, and what would you do?

Jason Harris: There was a time I think during the pandemic that there was some concern early on about what was going to happen; that came to my mind several times. It's a comforting feeling knowing what I know now, and having the relationships that I have now, that I could probably scale something quite a lot faster now than what I did the first go-around. But I think that you'd have to assess what the economy and the markets look alike. But knowing what I know, I would do what I'm already doing, which is raising capital for value-add multifamily.

I started out with nothing. I grew up in Amarillo, Texas; my dad made $35,000 a year and was laid off twice during my childhood, so I saw my family struggle. I invested in financial books and intelligence and trying to create my knowledge of understanding what other people who've been successful have done... And through my experience, I've lived on a lot less than what I've made, and put that money to work, and what my best investments have been is in value-add multifamily. So I would go right back at what I know and understand. I'm assuming if I wiped out and lost everything, there's something I messed up on, or external factors that hurt a lot of people, that maybe we couldn't have controlled. But hopefully, I've learned some good lessons from it, that can allow me to be a smarter and better investor this next go... But you can make such great money for others and for yourself if you do this business right. I'm coming right back at what I know well, and doing it again.

Ash Patel: Got it. What is your best real estate investing advice ever?

Jason Harris: Invest in yourself, and invest in the knowledge of what you can within real estate, because applied knowledge has changed so many people's lives to make many people financially free, and to be able to live the lives that they hope to live, and give the way they'd like to give, because it gives you time back. I think the tax efficiency of real estate is one of the most misunderstood aspects of real estate that people aren't taking advantage. That, coupled with the return potential, it's just a phenomenal asset class, especially from a risk/reward analysis. Invest in that knowledge, invest in people who know what they're doing, and learn from them, let them be your mentor, because it's a phenomenal asset type, and it's a problem that we're solving in America where affordable housing is a major crisis. Feel good about what you do and what you give your time, but be able to make some good money while you do it.

Ash Patel: Jason, are you ready for the Best Ever lightning round?

Jason Harris: Let's do it. I'm ready.

Ash Patel: Alright, what is the Best Ever book you've recently read?

Jason Harris: "Tax-free wealth" by Tom Wheelwright. He came out with a new edition, and with the phase-out about to happen, I'm wanting to really understand it. I love that book.

Ash Patel: Explain that. Because the phase-out is happening, and that's a nice thing that they're taking away. So what are you going to do to prepare for that?

Jason Harris: Well, we're trying to lock in as many of those losses as we can, those phantom losses, because we know you don't lose them if you don't use them. So lock them in while you're getting 100% benefit now, so you can carry them forward to your future. It's a big part of what we try to do within our investments. That's one aspect, is trying to lock those in... But two, looking at how that tax-planning strategy can play itself out over the upcoming years as that phase-out starts to go away... And then know that there's other assets and opportunities, but make sure that you understand the underlying investment. Because real estate - you remove the tax benefits, it's still a phenomenal asset to own, without the tax benefits.

Ash Patel: What is the Best Ever way you like to give back?

Jason Harris: My wife and I three years ago started a nonprofit called the Kinwell Foundation, and it's been awesome, where we've every year given away scholarships to aspiring kids in high schools who are unfortunately not in a position to go to college without some help. So that's one thing we've done. We also give to A Child's Hope, to 11 orphanages in Mexico, and growing that expansion to help - and we're actually doing a team trip; all of our families are going down in October to give to an orphanage, to serve, to build... It's exciting, because we help wealthy people get wealthier, is how we look at it... But we're hoping those wealthy people will take a little bit of what they're doing and be willing to give back to some good causes to help those who really need it. So my wife leads that passion, and she's awesome, and it's been fun working with her on it.

Ash Patel: And Jason, how can the Best Ever listeners reach out to you?

Jason Harris: You can reach out to us through an email, contact [at] Or head of investor relations, Jesse Yates for sales: 801-404-2653. He can also set up a call.

Ash Patel: Jason, thank you for coming back on the show and sharing how you've scaled to almost $400 million in assets under management, some of the hardships that you went through, some of the lessons learned... So thank you for your time.

Jason Harris: I really appreciate the time, too. Thanks so much for having me.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share the podcast with someone you think can benefit from it... Also, follow, subscribe and have a Best Ever day.

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