May 6, 2023

JF3166: How to Prove Yourself as a New Syndicator ft. Caleb Johnson



Caleb Johnson is the founder of Red Sea Capital Group, where he focuses on broker relationships and asset management for commercial real estate syndications. In this episode, Caleb discusses the advantages of investing in smaller to midsize multifamily properties, shares how to prove yourself to GPs and capital raisers as a new syndicator, and breaks down his first value-add deal.


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Caleb Johnson | Real Estate Background

  • Founder of Red Sea Capital Group
  • Portfolio:
    • Five properties across three states
    • One retail property
    • Four multifamily properties
  • Based in: Phoenix, AZ
  • Say hi to him at: 
  • Best Ever Book: Zig Ziglar's Secrets of Closing the Sale by Zig Ziglar
  • Greatest Lesson: Have someone you trust that truly knows underwriting to give you a second opinion on your early deals.


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Deal Maker Live


Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Caleb Johnson. Caleb is joining us from Phoenix, Arizona. He's with the Red Sea Capital Group, which syndicates commercial real estate. Caleb keeps up with their broker relationships to source new deals and does Asset Management. Their current portfolio consists of five properties in three states, one of them being retail and the rest being 16 to 30 unit multifamily. Caleb, can you tell us a little bit about your background and what you're currently focused on?

Caleb Johnson: Yeah. Slocomb, thanks for having me. A little bit about my background is that my parents were W-2 workers; I did not have that entrepreneur bug planted in me through them. I really saw what they had, and I did not want that for myself. So especially when it came to my mom, she had both of her knees replaced, and she was around 60 years old as an occupational therapist. So after that surgery, she had to take three months off of work, and she actually should have stayed longer, but she was forced to go back to work a little bit earlier, because she could not afford to save for savings or for her retirement. And around that age, that was really important for her then, so she had to go back to work. And I would just see her come home in tears, crying, from so much pain and just the stress of having to go back to something that she was forced to do when she wasn't ready. So that broke my heart; that really inspired me and was the why that really got me started into investing in real estate.

I have a manager background, managing a barbecue restaurant for five years, and what I'm doing today is really focused on value-add apartment buildings, primarily in Oklahoma and Texas, but we are emerging into other real estate markets, and we're also dipping our toes into different asset classes, like short-term rentals, student housing, and mixed use.

Slocomb Reed: When you say "we", I imagine you're part of a partnership with the Red Sea Capital. how many partners are there?

Caleb Johnson: Well, it's actually just myself, and then we have strategic partners per the offering. Sometimes we need a capital raiser, a KP, maybe it's a joint venture, so it's just a couple people... So "we" is pretty loosey goosey, but it's really just myself at Red Sea.

Slocomb Reed: I get the feeling I say "we" a lot with my own companies as well... So you're primarily in Texas and Oklahoma. The five properties that you have now - have you sold any, Have you gone full cycle yet?

Caleb Johnson: Not on commercial. I've sold two residential homes that were actually house hacks.

Slocomb Reed: Nice. I'm living in my second house hack right now. Been doing it for the last 10 years.

Caleb Johnson: Nice.

Slocomb Reed: The five properties that you have right now - how long have you owned them?

Caleb Johnson: We actually acquired the first one in December of 2021. The other four acquisitions were in 2022.

Slocomb Reed: Cool. It's sounds like you all are focused on smaller multifamily than most syndicators syndicate; between 16 and 30 units - that's an arena that I play in here in Cincinnati, Ohio, Caleb's, so I'm fairly familiar with the asset, not with the markets that you're in. Tell me why that was the route you decided to go.

Caleb Johnson: Well, for me that was really just a stepping stone to start... And I have a really solid KP who's a broker on the lending side, and he actually gave the advice of the first few deals if you just do some smaller properties, 30 units or something like that, you're really going to get your hands dirty, really sharpen your pickaxe, and learn about the business on the smaller deals... And then you can scale. Not saying that you can't start with larger offerings; you absolutely can. But just for me, his advice was such where just you can really get some smaller properties and learn from those. And that was what we did, and it was really, again, the stepping stone. I wanted to pursue larger. I do believe that there's more meat on the bone the larger the property is; there's better economies of scale if you have 100 units under one roof, compared to 16 units under one roof. Vacancy is going to be not as big of a challenge on a bigger property... So I firmly believe in larger properties, but with the smaller space, that really helped us, again, get my feet wet and learn that business.

Slocomb Reed: Are you focused on the value-add business model, the roughly five year hold period, increase NOI and sell?

Caleb Johnson: We are focused on the value-add business plan primarily, 1970s vintage or newer, and we find there's just more meat on the bone with value-add compared to A class, where you're going to have lower return, less headaches, and also compared to D or C- offerings where you actually will have more meat on the bone than even value-add B/C class, but you're gonna have a lot more headaches. And the operators I've spoken to, that had done that D class property, it's just not worth the headache. So we are focused on that value-add play.

Slocomb Reed: Value-add 16 to 30-unit multifamily, with an eye to scale from there and get into larger properties, of course. In the markets where you are - this is a fair question, because I know you're not focused on all of these property sizes at the same time. Do you know how the cap rates compare for these 16 to 30-unit properties with regards to other larger 50-plus, 100-plus apartments in those areas?

Caleb Johnson: Yeah, you maybe get a higher cap rate a little bit on the smaller properties. So there might be some more returns, but again, there's going to be more risks with that, and just more management on a smaller size property, compared to if you were able to acquire a 50 or 100-plus size property.

Slocomb Reed: What do you think the difference is there on cap rate? Are we talking half a point, two points?

Caleb Johnson: Probably I'd say 10 to 20 basis points. So not very much.

Slocomb Reed: 10 to 20 basis point difference. Gotcha. My experience has been that the delta is far greater here in Cincinnati, at least the deals I'm looking at. In your bio, I've said that you focus on broker relationships. Are the deals that you're acquiring all brokered?

Caleb Johnson: Let me think... One was direct to seller. A partner of mine - he had a relationship with the seller, and we were able to acquire that through seller financing... And that was a retail facility, so that was a really unique play... But otherwise, I'm trying to think... They are all broker relationships, and I want to say three of the four value-add apartment buildings have been completely off market.

Slocomb Reed: When you say completely off market, what do you mean?

Caleb Johnson: Here brokers a lot will say "This is off market." And it's not on Crexi or LoopNet, but they've blasted out --

Slocomb Reed: "They've signed an agreement with me, the broker, and I'm sending it to all of my buyers, but it's off market", right?

Caleb Johnson: Exactly. So 10,000 people have seen it, but it's off market. So when I say off market, I call up a broker and I say, "I saw your information on Crexi or LoopNet, and this is my buy box. Do you know anyone that's selling with that selling criteria?" And they say, "Yeah, I actually do know so and so", or "I actually have this deal where I just got the financial information two days ago, and I'll send it to you; we're kind of in a pinch, they already have one offer on the table, but if you're able to come in... There's only been two or three people that have seen this. So if you can give me an LOI by Friday, and today's Wednesday, then we can get a deal done, and we can stay in front of them." So that's what I really mean by off market.

Slocomb Reed: The first of the multifamily properties that you acquired, how big is it? How much did you pay for it, and what market is it in?

Caleb Johnson: So my first value-add apartment building was a 16-unit property in Oklahoma City. It's actually about 200-300 feet from the main university there, OU University in Oklahoma City. 1969 vintage, and we bought that property for $755,000. So price per door was around $49,000 per door.

Slocomb Reed: How long ago did you buy it?

Caleb Johnson: We closed on that in February of 2022.

Slocomb Reed: February of '22, so over a year... What was the business plan there, and how far along into it are you?

Caleb Johnson: The business plan there and the value that we saw on that property was the seller - he wanted to sell two years ago and it just didn't happen... And he was pretty out of touch from his property, really just letting the management company do their thing... And I think all of 2021 he maybe made two grand on that property. And the reason for that was because he was so out of touch with the property management company that there were so many little repairs and things being done that can really be dialed in and focused on if you spend some CapEx money into improving the property and are actually managing the property manager... And additionally, the management company was really nickel and diming this guy; they were giving him little fees here, little fees there... So we saw a play there. And the average rents of this property - they were all one bedroom, one bath, about 530 square feet per unit... And rents were about $535. And market rent was $725. If you inject maybe $5,000, $6,000 per interior renovation, painting cabinets, maybe new floor, interior paint, maybe a backsplash and an appliance package if it's needed.

So we saw that we could maybe inject about $200,000 into interiors, potential exterior work as well, roof, parking lot, things that we might need to address... And today that property is performing great. We've renovated seven of the 16 units, and we are getting to the point where -- we had 18 months of IO on this debt that we got through a commercial bank, so we're coming up on that 18-month time period where it's going to be about June... So we're having that negotiation with the bank now, to really say, "Can we extend this another six months?" We haven't finished renovating the other nine units, because if that IO goes away, we don't have the leverage with the bank, the additional $115,000 in renovation CapEx that we initially projected. So we would be renovating those interiors through cash flow, which isn't going to give us the best return.

I'm hearing a lot of that going on with other operators, they're starting to have those conversations with banks to either refinance or sell... So our bank is very open to that renegotiation, but I think there's gonna be a lot of opportunities on the table for people that are going to have to sell in those type situations.

Slocomb Reed: Caleb, I want to take this conversation in a direction I wasn't necessarily expecting, and isn't all that common, or maybe even all that popular right now... I find myself often as a daily podcast host asking people about the market of the moment... And I think instead of talking about the market of the moment, if we could, let's set interest rates, the changes in the debt market - if we could set those aside, and just talk about the asset class and the business plan as it was when you acquired in February 2022... Of course, you shouldn't have, and none of us should have assumed that interest rates would stay in the threes forever. But looking back at February 2022, what was your projected all-in purchase plus renovation, and what were you projecting it to be worth when you finished? You said you had an almost $200 a month rent bump across each of those properties. The owner was getting nickel and dimed to death by their property manager; they made two grand in two years... So clearly you didn't buy it based on the actual NOI, but I imagine you bought it at a considerable discount. I want to take the conversation from there... What was your projected purchase and rehab, and where do you think that number is actually going to shake out? And then what do you think - based on when you acquired it, what do you think it's going to be worth after the business plan has been executed?

Caleb Johnson: So we did try to sell the property actually early this year, so after about a year of owning the property. We wanted to sell it for -- 1.2 would have been great. I think 1.1 was our bare bottom. So we bought it for 49k a door. We wanted to sell it for around 70k, or maybe a little bit higher than 70,000 per door. And right now, we've --

Slocomb Reed: What was your rehab projection?

Caleb Johnson: The rehab projection was $218,000, and we bought it for $755,000.

Slocomb Reed: So your rehab projection was 13k, 14k a door, you bought for 49k, so call it an all-in of 62 a door and you were looking to sell for 70k?

Caleb Johnson: That's right. It was about a 2x equity multiple projected to investors.

Slocomb Reed: Gotcha. And you decided not to sell?

Caleb Johnson: Well, we would have liked to sell, but we didn't get the offer we wanted. We were offered -- I want to say highest was $950,000. We did receive one offer from an inexperienced buyer, but they ended up falling through, and we did not go under contract with them... So the highest offer we got was 950k, which wasn't going to meet our criteria.

Slocomb Reed: Weird question for most of our listeners - did your broker put it on the MLS?

Caleb Johnson: He actually did not. It was one of those off market opportunities where they blasted it out to their 10,000 investor database.

Break: [00:14:53.01]

Slocomb Reed: You know, it's interesting, there are a lot of brokers, at least here in Cincinnati, and I imagine in Oklahoma City as well, who just won't take listings that small, because they'll do better on the MLS... Especially a 16-unit where most of the work is done, and the person who's buying it is buying it for cashflow, and not necessarily for a five-year appreciation play. In my experience - and again, this is specific to Cincinnati - a lot of those buyers are on the MLS. Those are your white collar professionals who are looking to have a little more control over their investment savings, that are local, they want to be able to drive it and touch it and then hire somebody else to deal with all the icky stuff, mostly people...

Here's where I wanted to take this conversation, Caleb. I operate in that space currently; a few assets in that - well, if you call it 11, or 12, to 30 unit space, I have a handful. A few that I own, and another few that I manage for friends and business partners. And there are a couple of things about this property size that are making me hesitant to scale. I've been in this property size a little bit longer than you have, Caleb, and I am an operator... I'm the property manager and the construction manager myself. I'm here local. But a few of the things that I've experienced in that asset class is that you're gonna have a lot more amateur operators; operators who do things like make two grand in two years, don't do a good job... And it's not just leaving the meat on the bone for the next owner. They allow the property to fall into distress, or their -- I believe the lingo would be 'loss to lease.' They're so far behind the market when it comes to rents, because they're renting these places themselves. They get involved in caring emotionally for the tenants, they think they're doing right by the tenants by accepting low rent and then not having the money to maintain the building. I personally disagree. A higher rent and a better maintained property I think is better for the tenant.

There are many more distressed opportunities that per door, per deal give you more opportunity to force appreciation in this space, than in the 100 unit plus space, for your time and your effort as a syndicator, Caleb. There's certainly an argument to be made that with a 100-unit property you increase the rent $50 a door and you're increasing your gross revenue at a 100 unit more than if you do it 200 a door at 16 units, but the ability to turn around, force appreciation, cash-out refi or sell for a significant profit quickly - I think it's faster, easier and there are more opportunities to force greater appreciation proportional to the amount of money involved in the deal in this size property.

Again, I'm local, I'm an operator, I self manage, so I'm not relying on third party contractors, including property managers, to execute on my business plans. But thinking about the experience that you're having thus far, is any of this resonating with you?

Caleb Johnson: Yeah, I think it is. And I definitely see an opportunity for someone to focus on that being their niche, that 10 through 30 unit space, and especially if they're are dialed in on the market, they have the relationships with lenders, property managers, or even in your case, you're local, so even better. You can really niche down, and you know your business plan, and you can replicate that... And I definitely see the value there. And at the same time, usually with a larger property, sometimes you can have more people in on the deal, some more GPs, but there's enough meat on the bone. So let's say you do find that offering where there's $150 rent premium per unit, and maybe you can get seller financing, or maybe you can structure a deal specifically so the numbers work... And even if someone can come in, raise some capital, and help also operate the building a little bit, there's enough meat on the bone for everybody, because it's a larger offering. So I do think that is a nuanced question, but I definitely see your point that there's a lot of opportunity in that space.

Slocomb Reed: You've mentioned a couple of times, Caleb, about branching out into other asset classes, and you have a retail space in your portfolio. Tell us about that one.

Caleb Johnson: So that was brought to me as primarily a silent partner, kind of; I still make big-picture decisions on that property... But I had sold my first house hack, that was a fourplex, and did very well on it, buying it in 2019, and selling that within a year and a half. It was really good timing, praise God for that. So I had a 1031 that I was looking to place some capital in, and this opportunity became available, where it was a seller finance play... We were actually going to be the first operators to gentrify this location, which - I don't like being the first person to the party. I like being the third or fourth person. But the opportunity presented itself, and I had to deploy this capital. If I went back, I don't know if I would do that again, because we actually haven't started seeing distributions from that... Because it's a kind of a redevelopment play, so it's taking longer than we projected. But I see there's progress being done, so I do think that will be a great cash-flowing asset.

Slocomb Reed: I want to squeeze in one more set of questions before we transition the episode, Caleb. As a newer syndicator, five deals currently under management, you talked about partnering with capital raisers and KPs. Can you give a quick description of KP?

Caleb Johnson: Yeah, KP being a key principal. So they might have the net worth, liquidity... The banks, they want to see -- if I remember the requirement right, it's about 10% of the loan balance liquid. So if someone's new, and they don't have the cash in the bank, you need to partner with someone that does have that cash. And the bank will also want to see that there's someone on your team that has a net worth equal to or greater than the loan amount. So if someone, again, is just starting, they might not have a $5 million, or even a million dollar net worth. So partnering with a KP that has that will actually get you in the door of those deals. And then for a capital raiser, no one can be on the team, and your syndication attorney will tell you this - and I'm not an attorney, so get your own advice... But no one can be on a team and just purely raise capital. They need to be doing some other things - investor relations, marketing, asset management... So that's what I mean by those terms.

Slocomb Reed: Let's talk to the newer investors who want to syndicate and who are going to need to partner with people with the capacity to raise capital, and people who could be their key principal, who are the ones who are possibly signing on the note, or at least demonstrating to the lender that there is sufficient liquidity and sufficient net worth to justify the load. I have two questions for you here. The first one is - as a newer syndicator, what is your advice for how you prove yourself to these people and why they should be in on your deals? And advice for other people who want to syndicate, but also how is it that you demonstrated that these people should be working with you?

Caleb Johnson: I love that question a lot. It really resonates with me. The answer is you have someone on your team that does have the experience, and they sign off on the deal. So you have someone that has 10-20 years of experience, they own other properties in the market, they have some net worth liquidity... So if this person signs off on the deal, then you can sell that to investors. So it's not just Caleb or this newer investor who's been in the industry for two years, it's someone that does sign off on this property, so that's what you're selling to limited partners.

Slocomb Reed: How did you demonstrate to your KP and your capital raising partners that they should be in your deals with you?

Caleb Johnson: Well, my first deal, actually it was joint venture. So it was myself and then three people that they do make high-level decisions, and they also brought some capital. Now, on the syndication side, when we did need the KP or some people to bring some more equity, my other business partners actually brought that. So the play that I made was I brought the offering to someone that had already owned a property in that market; he had just bought it within a year, year and a half... And I said, "Hey, man, I've got this deal for you. Let's get it done." I underwrote it, and he taught me that. So we already had that pre-existing relationship. So he and his partner, and then another contact of his, who was the KP. So we had different people that were brought into the deal, and I think that really just shows how important your partners are. You can't play every hat and be good at it. Maybe you need to do that when you first start off, but you really need to be able to focus on what you're good at, and be willing to share a little bit; share the GP a little bit and bring in some other people that do have those relationships with capital partners, KPs and asset managers, so you can get the deal done.

Slocomb Reed: Last question before we transition the show... When you're bringing on a KP, and when you're bringing on partners for capital raising, and of course other responsibilities within the general partnership, how much of the general partnership are you offering to these people for playing these roles? How much have you actually given in your five deals?

Caleb Johnson: I'm trying to remember back, but off the cuff, I'd say the person that brings the deal, they get about 10% to 15%, depending on the deal size; it might be five, but usually 10% is my experience. The KP is 10% to 20%. Capital raising is maybe 40%, something around there... And then the asset managers, the rest. Those numbers vary dependent upon what roles and hat someone's actually bringing, and the size of the deal, of course... But that in general, just off the cuff, has been my experience.

Slocomb Reed: And your five deals fall within those numbers?

Caleb Johnson: They do.

Slocomb Reed: Awesome. Well, Caleb, are you ready for the Best Ever lightning round?

Caleb Johnson: I'm ready.

Slocomb Reed: What is the Best Ever book you recently read?

Caleb Johnson: Best Ever book is "Secrets to closing." I think that is what it's called, but it's written by Zig Ziglar. Yeah, "The secrets of closing a sale." I'm in the middle of that right now, and it is amazing.

Slocomb Reed: What is your Best Ever way to give back?

Caleb Johnson: Best Ever way is, I'd say, mission trips. I really enjoy that, partnering with my church and other organizations. And additionally, the podcast that I have called "From trial to triumph" - I really enjoy sharing those conversations and experiences with people that were not always going to be on Earth for so long... So if I can interview a guest, and share that conversation with someone else that will provide them value, that really gives me fulfillment.

Slocomb Reed: Caleb, thus far in your commercial real estate investing, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?

Caleb Johnson: Well, the first one that comes to mind is we had an accepted LOI on a 160-unit property, and after about a month of negotiating that, I found there was an error in my spreadsheet. And that meant we had to go back to the seller and ask for a million dollar discount, and we ended up losing that property. So that was a mistake. And what I learned from that was to have someone you know, like and trust, that can understand underwriting; really understand it, not someone that just likes looking at numbers... But they're underwriting themselves, and they just love and can understand spreadsheets, and they can give you a second opinion on that. So that's my learning lesson on that front.

Slocomb Reed: Caleb, on that note, what is your Best Ever advice?

Caleb Johnson: Best Ever advice would be to start. So many people, they want to do these masterminds, and I think that's great. I'm in a mastermind myself, but I hear people - they can be in this mastermind for five years, and they don't do a deal. So it's so important, yes, to understand the basics. But at some point, you need to start taking action. Get around people that have what you want, that are doing what you want to do, and just start taking action, because you can't predict everything, and once you start taking action, you'll really start to learn and grasp what needs to change, the nuances... So that would be that.

Slocomb Reed: Last question, where can people get in touch with you?

Caleb Johnson: The best place to get in touch with me would be at our podcast, "From trial to triumph", or you can go to and find me there.

Slocomb Reed: Nice. Those links are in the show notes. Caleb, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend who you know we can add value to through our conversation today. Thank you, and have a Best Ever day.

Caleb Johnson: Thanks, Slocomb.

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