October 19, 2022

JF2967: How to Salvage a Deal & Make It a Win ft. Johnny Nelson

Johnny Nelson started out as a contractor and a mechanical engineer before becoming an investor and fund manager. He was motivated to get into real estate after the death of his father. The experience made him realize that he wanted to be able to pay medical expenses for his family and friends, and he knew achieving financial freedom was the key to making that possible. 

Today, Johnny is the principal at Arctos Capital, which focuses on multifamily assets. He is an apartment owner/operator and real estate fund manager. In this episode, Johnny discusses a recent deal where he struggled to raise funds, how that experience motivated him to focus on capital raising and become a fund manager, and what he would have done differently with that deal with the knowledge he has now.

Johnny Nelson | Real Estate Background

  • Principal at Arctos Capital, which focuses on multifamily assets. He is an apartment owner/operator and real estate fund manager.
  • Portfolio:
    • GP of 49 units
    • LP of 70 units
  • Based in: Minneapolis, MN
  • Say hi to him at:
  • Greatest Lesson: Only do things that positively impact a lot of people.



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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, Johnny Nelson. Johnny is joining us from Minneapolis, Minnesota. He is the principal at Arctos Capital, which focuses on multifamily assets. Johnny's an apartment owner, operator and real estate fund manager. His portfolio consists of being a GP on 49 units and an LP of 70 units. Johnny, thank you for joining us, and how are you today?

Johnny Nelson: Hey, man, so excited to be here. Thanks for having me on. I read -- I'm following, obviously, Joe Fairless's group and you guys for quite a while. You guys are quite the name brand, and it's really exciting to me to finally have a slot here on the show.

Ash Patel: Great to hear, and great to have you here. Johnny, 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?

Johnny Nelson: For sure, man. So my family moved up to Alaska when I was a teen, and we basically launched right into starting a general contracting business. And during that time, as a bit of a personal story, probably some background too on why I kind of got into the space... There's a tie in here, so bear with me. So customhomes.com, that's kind of what we did, and I got tired of that. I'd been a mechanical engineer for the last number of years or so, but kind of all woven into that, my dad got sick. And he eventually passed away from a brain tumor. But seeing that, it kind of embedded this desire to really have financial freedom, and also be able to pay, I guess, for my family or my friends' medical expenses. So that's kind of been like this underlying motivation for why would I step for a contractor, and an engineer, to now full-time as an investor, as a fund manager, why I'm so passionate about the space, and the opportunities within that.

Ash Patel: Yeah, sorry to hear about your dad. So engineers, in my experience, make some of the best real estate investors ever, because they put a lot of systems in place. What systems do you have in place?

Johnny Nelson: I love systems, man. I actually spent time literally as a process development engineer a couple of years ago. So basically, we would set up these lines from medical devices, stuff that goes in the human body, so I have to be pretty careful... Documentation, machines, fixtures, jigs, instructions to people, and all these kinds of things... So I really have about the processes.

So as far as, I guess, when it comes to my own system, a lot of just automation; lots, lots of automations out there. There's Calendly, there's integrations between Zoom, and Active Campaign, and when you have people coming into your portal, or you're doing a network and you want to have those things automatically filtered correctly, and then you want to have those flagged correctly... So really, I think a lot of people are aware that they're out there, and a lot of the savvy investors are using these things; it gets into this kind of this virtual digital infrastructure that I call it space, that have those set up correctly. But there's always someone smarter that could even optimize it even further. So never stop learning. But always really, really take advantage of all these sometimes free, but oftentimes you pay, reasonable charges, I would say, for some of these digital integrations across all the calendars and other kinds of things you use on the daily, in this space, particularly.

Ash Patel: Johnny, let's go back to when you had that epiphany, and you knew you wanted time freedom, you wanted your financial freedom for you and your family. What were your next steps?

Johnny Nelson: It kind of opened up to me. A friend just suggested - it was actually an engineering colleague, he said, "Hey, I'm house-hacking." And I didn't mean to allude that I knew what I wanted to do right from the get go. When I became a contractor or an engineer, I was just like, "Oh, this is just stuff I'm doing, and these things appeal to me." And then it opened my eyes. And I know 95% of everybody says this, but I did read Rich Dad, Poor Dad, the purple book... And he also said that -- I think it was kind of like either concurrent or shortly thereafter, and then I realized there was other ways of getting there, and it wasn't just me with my insurance, there was actually this alternate way of scaling way beyond anything that I had even conceived. Like, I literally didn't even think this, that there was other ways -- like, you could retire early, or have passive income and do some amazing things.

Ash Patel: You were just going to do the corporate route, where you're working till 65, get a pension, do your thing...

Johnny Nelson: For sure, yeah.

Ash Patel: So what was your journey into real estate? Through reading the book, after educating yourself.

Johnny Nelson: Right. 2019, kicked off there, bought my first house ever in 2017. I didn't have the plan to actually real estate invest, like "Well, I'm gonna buy a house", and then I got there shortly thereafter. And we did leverage that into -- we remodeled it, and added that room in the bedroom, and then rented it out... But really, kind of our first investment property, kind of the start, the zero line, with the duplex here in Minneapolis. That's really kind of the first property that I would say that was the starting line.

Ash Patel: And then what was the next step?

Johnny Nelson: I'll just take one paragraph back... So after the colleague engaged with me, he's like, "Hey, I'm doing this house-hacking thing." So I was like, "What is that?" and he kind of explained it to me. And then I dove deep into podcasts, which one of them was the Best Ever podcast, one of them was The Gino Podcast, one of them was Bigger Pockets... That was really a profound influence... And depending on where you go within the podcast domain, you learn obviously different things. So that was kind of the foundation, I was getting my education. A lot of us like to learn, a lot of us are educated folk anyway so we're not strange to it. So that was my undergrad, in real estate education, was "Hey, how does it work? Who do you talk to you?" And I started also, like everyone else does, going to meet ups, and tracking out all the best Facebook groups, and the meetup, and all those kinds of things just online, too. So I'm constantly having all this content come at me and trying to insert myself in this space.

Ash Patel: What was your next purchase?

Johnny Nelson: It was another duplex. And after that - I can step through it quickly now... It was like there was another duplex, and then a single family home, and then we did an ou of state flip, which was kind of like a family help, but also we tried to make an investment out of it... And then a fourplex, and then a 40-unit.

Ash Patel: And what's your next step?

Johnny Nelson: The next step in my current journey right now?

Ash Patel: Correct.

Johnny Nelson: Sure. I can elaborate on this just real briefly, but after seeing how difficult it was to raise on a good deal here in Minneapolis - and there's folks out there that would push back, that were from Texas, or Arizona, and like "Oh, I don't know about Minneapolis. I've seen things in the news, this, that and the other.." I'm like, "Okay, fair enough, but the deal is pretty good. It's brand new... I got it under contract for a good price." And I know many people have said this, but it's like, "Oh, well, you find a good deal, and the money is going to show up." I had to learn the hard way, but I kind of suspected that might happen anyway... The money didn't show up. So it was very difficult to raise for it. But we did do it, we did close on it.

But that kind of opened my eyes, I'm like "I think there's a real need in the community to focus on the capital raising space." And I know there's lots of people too in the capital space too, kind of focusing within that... So that's kind of where I'm pivoting now; I'm starting a fund, what they call an emerging fund manager, and that fund will be focused on multifamily assets, 100-unit-plus, in growth markets across the US, and other assets too that are more opportunistic.

Ash Patel: Alright, Johnny, help me understand this. So you had a difficult time raising funds, and now that's all you wanna do.

Johnny Nelson: Yeah, for sure. It's kind of my nature, man. These career pivots - like, where's the hardest thing? I have this -- it's probably an in-bred thing, where when it's hard and I know it's uncomfortable, I turn towards that, and I grow, and I go into it even harder and deeper.

I was coming out of high school, and I started building in Alaska, I really didn't know how to build, and I'm just kind of like "Hey --" I'd tell people I could do it, even though I didn't know how to do it. I challenged myself to go back to school as an engineer, not because I was so good at math or because school was easy, but because it was hard for me. I don't mean to sound full of myself, but that's truly what I do. And I think the same kind of philosophy appeared now. Like, why this was so hard, I see the asymmetrical return on time, and also the ability to really create my dream and another dream, too... And then [unintelligible 00:07:59.18] would say that it was the driving force of being able to support my family for these realistically astronomically high medical bills - could I be part of that? And this, not being afraid to just plunge into that, even though it was hard, seeing that as a path to that - I think that encouraged me, and I just went for it.

Ash Patel: I've got a buddy who if you say "I bet you can't", he'll find a way to get it done... Is that a similar trait to what's in you?

Johnny Nelson: I think it is. I never have confronted that idea [unintelligible 00:08:28.10] directly, but I think there is something that's subconscious where I chase after that which is the hardest to me.

Ash Patel: Awesome. I wanna dive into that deal that you said was difficult to raise on. It was a great deal, but you couldn't raise the funds. Can we dive into the numbers, and what the asset was?

Johnny Nelson: Absolutely. It was a 40-unit deal, and it was a new build... I was not expecting within the multifamily group that I was a part of, as a lot of the groups - they teach what they know, so I was like B, C-class, value-add type of thing; that's what I was looking for. I was underwriting a lot of deals here in Minneapolis, and then I found this one deal, and I called up the guy... Actually, we did a direct-to-seller campaign, that's how we got connected initially...

We kind of hit it off just over the phone, like "Hey, do you wanna come out and visit it?" And we got it under contract - I'm shortening up the story here - and then we did the webinar, we had all the docs, and all that stuff signed up, and we were pitching it, this, that and the other... And again, just the investor base that was out there was just kind of a little reluctant to go into Minneapolis. Again, that was back in 2021. We had the George Floyd riots and other things probably still fresh in people's minds...

So all that just kind of colored the deal, and there was enough people that had a negative connotation and a kind of reluctance to not go full-in on the deal.

Ash Patel: Knowing what you know now, what could you have done differently?

Johnny Nelson: This thing, it's always frustrating, but also, you wanna like yell at yourself, but then you're like, "Well, I can't start any sooner than I started." So that's something I wish I would have started sooner. I wish I would have started real estate investing ten years ago. I wish I would have started growing my investor base at the same time. And it's one of those things, like, if you don't start sometime, then the clock doesn't start. It's kind of like, again, that thing, that thought of the zero line, and moving forward into it... So I knew there was a chance our investor base wasn't large enough, and it was true. However, we did get the deal done, because we found some partners within our group, and they brought some 1031 money, and we all put capital in, and there was some additional 1031...

So even though it was difficult, it was not impossible. I guess that's really the lesson. If you don't take action, you don't start down the road, then failure because you're not doing it is for sure. But even though it's challenging, we still got through it, we still got the deal done... So yes, I wish it was more streamlined and more like this thing we talked about, as an engineer - I wish it was more a precise process, and it all rolled out per expectation... But that didn't happen, but it did get done in the end.

Ash Patel: Good, I'm glad you got the deal done. What were the returns on that deal? It was a new build, so there's no reno, it's just pure cashflow... What were the returns to investors?

Johnny Nelson: Basically, we took it all in-house. So we started the syndication, but then we just went to a JV. So it's really kind of [unintelligible 00:11:01.00] there are no returns yet. We're still kind of working on leasing it up, and that kind of thing, because we've closed at the end of last year. So no realized returns, but I know --

Ash Patel: Sorry, what was your pitch to investors in terms of returns?

Johnny Nelson: It was traditional. It was an 8% preferred, but we were in the high teens for IRR. Still, not that much different than a lot of folks. We anticipated actually probably higher than that, because of the lack of CapEx; it was a brand new deal, so I was like "We know this is gonna be a home run." But yeah, that's what the target was, and it was achievable.

Ash Patel: And after investors funded the deal and you closed on it, how much time lapses before they started getting their preferred return?

Johnny Nelson: We were anticipating around a 9-month deal. 9 months to a year is what we anticipated, and then followed by maybe even 18 months to refi. That was the business plan.

Ash Patel: It seems attractive enough... How many people did you have on your investor list at the time?

Johnny Nelson: We had like 35 or 40, which shouts really loud as I say that right now... And I think about 25(ish) showed up for the webinar, and there was some interest... We'd hoped that our kind of curated investor base was sufficiently educated and kind of knew what was going on there... I guess we anticipated a high percentage of those people that were in that group wouldn't be investing. And just by chance, other things going on, and reluctance, this, that and the other... We had maybe 300k or 400k of soft commits at most.


Break: [00:12:23.27] to [00:14:21.14]


Ash Patel: What was the purchase price and what was the raise amount?

Johnny Nelson: A little over 5.5 million, and the raise - I think we were targeting about 1.2 to 1.5 million.

Ash Patel: And again, you had 30 or so investors... Why didn't that deal get done? Or better yet, what could you have done - hindsight is 20/20 - to get that deal done?

Johnny Nelson: If we were gonna follow a path that was predictable from the beginning, like "Okay, we have this investor base, we have this deal", present the deal, and then the group is gonna self-select on whether they wanna invest. It's Minneapolis, it's a new deal, they know it's gotta be leased up, it's not cash-flowing from day one... There's certainly some criteria that wouldn't fit everybody.

I know for a fact though if I had maybe a couple hundred investors, there would be enough people in that investor base to fund the deal. So again, just time. Again, if you want predictability, if you want a repeatable process, grow that passive investor base. It's just numbers. Some percentage of those people will be interested in a deal that matches the criteria, that wants to be in a new build, to wait for cashflow etc. and can stick with you.

Ash Patel: Yeah, thanks for sharing that. I think it's a great lesson you shared, because I know a lot of the Best Ever listeners probably have gone through that, where they try to raise for a deal and it just doesn't work out... But instead of walking away, find a way to salvage that deal, partner with somebody. Even if you have to give the deal away for a small percentage of equity, or even a finder's fee, find a way to make it a win for you.

Johnny Nelson: That's such a great comment, Ash. We had that attitude, actually. Four or five times we were kind of like "Yeah, there's no way we can recover from this." And we had the attitude [unintelligible 00:15:51.27] this will be our credibility deal. This deal will be the one that gets us the first notch to the belt, to the hat, or whatever you were gonna call it; the knife... And this is gonna be number one here.

So I was so deternined to not lose the deal... And it ended up very favourably, but to your point, kind of the high-level point of finding a way... There was just like a mental [unintelligible 00:16:10.03] here in the team that was not gonna let it go.

Ash Patel: Yeah. Okay, so let's move forward, and instead of saying "This sucks" and "I'm just gonna outsource the capital raising", you took it upon yourself to focus on that. What steps have you taken to focus on capital raising?

Johnny Nelson: Absolutely, man. So as I said, that's the goal of my next venture really, is starting a fund. And really, a fund is all about partnering sponsors with passive investors, and you are essentially in the business of providing these passive investors with the knowledge, the expertise and the relationships of finding the best deals across the U.S, really. So I'm a part of a fund group, like the Multifamily Group, and I've paid quite a bit of money to get into these groups... I've invested in some systems, and we're right now going through a rebranding, and I have my own podcast... So really, it's the advertising, the focus on getting these passive investors, and getting the word out, and of course, finding your avatar.

My avatar is an engineer, similar to me, older, more successful, but also, he doesn't even know about these things. So finding that avatar, putting the systems in place, and getting your message out there, and really focusing on that business is kind of the -- things that we all know, that need to be done, but maybe some of us don't have the time, or you rush the process too much, and maybe we don't have an option, like "I'm gonna start this, come hell or high water, I'm gonna make it happen..." So yeah, just time going by gets investors in your court. And they know about you and your own deals.

Ash Patel: And Johnny, when you raise money for other people's deals, how do you get paid?

Johnny Nelson: So right at the beginning of that process right now. Basically, very simply, it's kind of the fund of funds model. Some people know better, some not. But more or less, when you bring enough capital to a sponsor, to an operator, oftentimes somebody's running a syndication, you're bringing enough capital where it's worth your while. So maybe their buy-in, your minimum commitment is $100,000, maybe the fund will bring a million or two million. And [unintelligible 00:18:01.11] of having of having to deal with 20 more individuals, 20 more people.

So when it's worth your while, when it's saving them money, saving them time not to have to connect to all these additional people, then they can turn around and offer you a preferred, or a special share class. So maybe most deals, most syndications are 8% preferred return - they're gonna offer it to my fund at 10%, or maybe even more. And oftentimes - not always - sometimes the returns can actually be better, at the very least equal to, or even better sometimes, whether they went directly to the syndication or go through the fund route.

So it's a very powerful deal, where I can focus on what I enjoy - raising capital - and really focusing on those business relationshisp, and also I can alleviate the stress and the struggle of sponsors trying to raise all that money, and the returns to the investors are still equal to, or again, better in some cases, as going directly to the syndication.

Ash Patel: So do you have free rein to disburse to your investors what you see fit?

Johnny Nelson: Yes. Again, I don't wanna talk ahead of myself, or suggest that I'm further ahead than I am... But absolutely, as the founder, I'm bringing on some other high-level talent as well here... But [unintelligible 00:19:04.03] best for the fund, but also we have the ability to exit or participate in deals as deals exit or come on board, and I have full control over there as well.

Ash Patel: So for example, if you suggested to your investors that they would get an 8% preferred return, and the pref goes up to 10%, either due to the syndicator hitting a home run, or you just negotiating a better deal, can you do what you want with the excess capital? Do you have to distribute it, or can you use it as you see fit?

Johnny Nelson: We'd set it up as we would see fit... And I would hope that we'd be able to basically give bonuses. I just like that, because my focus, Ash, is not jump right -- because there's a lot of people in the funds space, and they just want to jump right over to what some call the missing middle, and that's your successful professions - it could be engineers, managers, entrepreneurs, all these people, and they just wanna go right to the family offices, to the 401k's, and just take those really, really big checks. I'm really super-passionate about providing access to these kinds of deals through the fund model... So that's why I think it's really cool -- so if you do get windfall, I absolutely wanna have that in my legal docs, essentially (hat's where that would be spelled out), to be able to share that windfall with my investors.

So I know that's a lot of handwaving and [unintelligible 00:20:21.10] but because it's kind of the ethos, kind of the core fabric of what I'm trying to achieve here, I'm really passionate about that. I wanna somehow -- it would be up to the lawyers to give the right language to enable that.

Ash Patel: Well, I could see enabling that, but on the flipside, you're allowed to take as much as you want to pay yourself and your team.

Johnny Nelson: You could. But you're also starting out with the foundation, and then, again, if you incorporate -- yes, if you have a huge windfall, the GP would be rewarded handsomely. But also, if you incorporate [unintelligible 00:20:55.04] I guess it depends on who you're bringing on the team... Like, am I deeply money-motivated? I'm not. I'm super-excited about this stuff, I'm very passionate about building, and family, and like I said at the beginning, kind of the core underlying values. So if there's opportunity in there to spread an extra hunk of cheese - yeah, let's do it.

Ash Patel: Johnny, right now are you a one-man operation?

Johnny Nelson: Yes. My wife actually has been a tremendous resource, and back-up, and support, but she's still working for Wells Fargo essentially... And as the operation grows, I know for sure we'll team up full-time; but in a fledgling enterprise, one of us has to keep the lights on.

Ash Patel: Yeah. And you mentioned bringing on talent... What do you envision your team looking like?

Johnny Nelson: I would love to have a person that's been raising capital for 20 years. Again, no one's gonna just say "This is my job", at least initially. I'm not gonna do anything else. We're all gonna be investor relationship managers, we're all gonna be raising capital, we're all gonna be tapping our resources for the best deals... But people will have that core focus. They'll have their zone of genius, which is a [unintelligible 00:22:01.05] So I envision someone raising capital over ten years, and they have a nice rolodex, and they can raise 20, 30 or 40 million bucks. I see someone that has been deep in the investment banking space, that is an awesome person at structuring deals, and has deep connections to - it could be Wall Street, or banks, and deal structures... Those are the kinds of people that I'm working on bringing on my team.

Ash Patel: Awesome. Johnny, what is your best real estate investing advice ever?

Johnny Nelson: Take action in the direction where you wanna go, because you never will have the clarity, at least the engineering mind or the analytical mind - I'm just gonna speak from my own experience - and to be fully satisfied. I feel like there is no shadow of doubt that I need to take this step.

Find out where you wanna go, find out your core principle, and take an action, take a step in that direction of where you wanna go.

Ash Patel: Johnny, are you ready for the best ever lighting round?

Johnny Nelson: I am ready for the best ever lighting round, Ash.

Ash Patel: Alright, what's the best ever book you've recently read?

Johnny Nelson: Oh my gosh, I've been reading so many good ones lately. I saw that question coming up here... So probably people have been throwing this out there, but I still like it... It's Who, Not How. I really do love that book, and I think it speaks directly to some things we've been talking about right here on this show, of - yes, eventually, whatever you're doing, you could eventually probably learn all these things, and run around like a crazy person... But there's people that are so much better at most of these things than you... Let them do that. Participate, give them the equity, give them whatever they need to participate, and you're gonna grow so much faster and scale so much quicker.

Ash Patel: Yeah, it's a hard concept to understand for a lot of people, but it's an absolute game-changer. Johnny, what's the best ever way you like to give back?

Johnny Nelson: Basically, just direct donations to our church. My wife [unintelligible 00:23:38.27] to packing food for kids that are around the world, and that are less fortunate. So that's an awesome way to give back. So those are the top two.

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

Johnny Nelson: That would be fantastic... So LinkedIn is kind of my name of the game for me. I'm also on Facebook. It's ArctosCapital.com, and also you can just go out to Johnny Nelson on LinkedIn and I'm there as well. And I have a podcast too, which I should throw out there. It's The Investing Stuff You Should Know Podcast. I'd love for you to take a listen, write a written review and give it a five-star. Meet me out there.

Ash Patel: Awesome. And it was Arctos Capital.

Johnny Nelson: Yes.

Ash Patel: Johnny, thank you again, man, for sharing your story today. I love how you took something that initially didn't work well, and you didn't seem to like it, but you made it your forte, your focus, and what you're doing moving forward. So great inspiration. Thanks for sharing the lesson on how that first raise didn't work out, but you salvaged that deal, and made it into a win. Thank you for your time today.

Johnny Nelson: Absolutely, man. A delight sharing that, and hopefully I inspire someone, and I look forward to hearing back from some of the people out there.

Ash Patel: Awesome. Johnny, thank you again. Best Ever listeners, thank you 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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