October 14, 2017

JF1138: Making Elite Level Opportunities Available To The Average (G.I.) Joe with Timothy Herman

Timothy is an active duty military member and active investor. His goal is to make the opportunities that typically are only available to the top income earners, available to everyone, especially military and ex military members. He works towards that everyday while also working full time in the military. Timothy has great tips on building a good team, networking, and starting a syndication company. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Timothy Herman Background:
-CEO at UpEquity, a real estate tech company
-His company brings exclusive investment opportunities to the military community.
-Spent most of the past decade flying and instructing in fighter jets for the Navy – both F-18s and now F-35s.
-Naval Academy graduate and London School of Economics alumnus
-Based in Hanford, California
-Say hi to him at www.upequity.com/
-Best Ever Book: Never Eat Alone

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Tim Herman. How are you doing, my friend?

Tim Herman: I’m doing great, excited to be here, and thanks for having me. I’m a loyal Best Ever listener, and I’m really excited.

Joe Fairless: Yeah, you mentioned that before this show, and I love it. I’m so glad to hear that you’re a loyal Best Ever listener, and you are also active military, so thank you sir for your service.

Tim Herman: Thank you! Like I said, I really appreciate you paying your taxes, putting gas in the jet so we can go fly.

Joe Fairless: Well, you’re giving me too much credit for paying my taxes; you’re not sure I’m doing that, actually… No, I’m kidding. Yes, I do pay my taxes, and I’m grateful that you are on the show.

A little bit about Tim – he is the CEO at UpEquity, which is a real estate tech company. His company brings exclusive investment opportunities to the military community. He has spent most of the past decade flying and instructing in fighter jets for the navy, and he is based in Hanford, California. With that being said, Tim, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Tim Herman: Yeah, thanks a lot, Joe. I think that life really is about finding things that you’re passionate about and then pouring yourself into that. So with my background, chronologically, my first passion was playing baseball. I wasn’t good enough to make a career out of that, and I think that’s something a lot of people can relate to…

My next passion was actually naval aviation and being a fighter pilot. Through that I have gotten a great affinity for the military community. We really have the opportunity to serve with our best and brightest, and people that are just selfless [unintelligible [00:02:45].26] has to offer, so I’ve been lucky for the people that I have served with. But the military to me was always the great adventure of my youth, and I’ve been ready to find my next passion and move on.

Luckily, the very next passion that I found was my wife and my new son – my son is turning one next Friday, so I’m excited about that. And by the way, Joe, I know that you just got married, so congratulations on that.

Joe Fairless: Yeah, thank you! I appreciate it.

Tim Herman: No problem. That brings us full circle to what is the next passion, what do I want to do as I get out of the military – I wanna continue to serve the community that I’ve been a part of, but I wanna find something that I have the time and the energy to devote to both my family and that. So what that is for me is entrepreneurship, and specifically real estate. I grew up in a family that invested across the spectrum, but real estate has really been something that speaks to me. I’m really attracted to the fact that you can get leverage on an appreciating asset, and I’m really attracted to the fact that it’s a tangible asset.

I think that people don’t give real estate enough credit as an altruistic and exciting way to make money and make a living. You forget about the fact that when you’re building or buying or creating a house or an apartment building, you’re literally putting a roof over somebody’s head, you’re really driving value to the economy and to your customers, and that’s something that I’m passionate about and that I’m excited to be a part of.

Joe Fairless: With UpEquity, where are you at in the lifecycle of the business?

Tim Herman: We are at the very beginning of the lifecycle, and what our goal with UpEquity is is to provide the wealth creation and wealth management tools that have to this point been exclusively available to high net worth individuals. On your podcast your guests talk a lot about being an accredited versus a non-accredited investor, and I personally think that the American dream belongs to all of us, and that non-accredited investors should have access to the same types of opportunities as accredited investors. So I don’t know how familiar you are with the jobs act or some of the recent legislative changes, but our end goal is to be able to provide the type of wealth management service that your high net worth individual could get exclusively – we want to provide that to your everyday investor, but specifically to that community that I talked about earlier, which is the military community, which we have an affinity for.

Joe Fairless: Got it. You’re basically putting together a crowdfunding platform.

Tim Herman: We basically are. We did have a recent pivot away from that with the end goal being the same, but for the first couple years we’re going to do traditional syndication in order to establish a track record and to establish ourselves in this space, while our end goal is still gonna be to come back and bring it to that military community.

Joe Fairless: Oh, okay. So basically you’re doing syndicated deals. What is your real estate background so far, just so we have some context?

Tim Herman: Sure. Personally, I have done a little bit of investing in single-family homes with my wife, but that was one of the weak points that I had; what I think I can drive the most value to your listeners on is talking about team building and networking. You recently had a blog where you talked about your 15 lessons from seven multifamily syndication deals – is that correct?

Joe Fairless: Yeah.

Tim Herman: In lesson three you talk about going further by playing to your strength, and I think that that is what we have done really well at UpEquity. But the first part about playing to your strength is knowing your weaknesses and knowing your strengths. In the communities that I was brought up in, which is fighter aviation, we debrief every single second of every single flight to a painful extent. We call each other out if you’re one degree off of heading, or altitude, or whatever the case may be… We call each other out, and what it does is it gives you a thick skin; it helps you have the self-realization of what you’re good at and what you’re bad at and what you need to improve

So what I did was I built a team of like-minded individuals that have strengths where I have weaknesses. So we brought on a partner that has closed 50 million dollar deals; we brought on advisors that have managed billions of dollars of assets from many different perspectives, and then we brought on advisors that have built companies, and when I say companies, I mean one of the largest airlines today. And we brought on people that have developed millions of square feet of real estate. I look to find people that could bring value where I have weaknesses.

Joe Fairless: It sounds like a lot of people before a deal has been done, so how are you approaching this?

Tim Herman: Another thing that you talk about a lot that I am a huge proponent of is aligning incentives; what we have done is we’ve got this team of people with all this talent, and in order for them to be incentivized, they have to have a piece of the company, and they have to have an idea of what is possible with that company. So we’ve sold the dream, while being very honest about the challenges along the way.

I think the basis of anything that you do in life is integrity and honesty, and admitting what’s gonna be challenging and where your shortcomings are, so we’ve been forthright with that, and as you get more and more people on board, it’s a flywheel that starts to get its own momentum.

Joe Fairless: So you’ve brought on team members; everyone has equity in the company, correct?

Tim Herman: That’s correct.

Joe Fairless: Okay, so now how many team members are on the team?

Tim Herman: We have six team members, and I think that what has helped me attract the advisors – which I’m not counting as the team members – is really how talented that team is. I’ve been very blessed – I’m lucky that I went to the naval academy where I met really the greatest, most honest, hardworking, smart people.

Some of these guys, Ivy League MBAs, our tech guy is actually working for one of the largest car companies, heading up their autonomous car development. And as you get each additional talented person, it builds on itself and you can attract more and more talented people.

Joe Fairless: Have I read what?

Tim Herman: Good to Great, by Jim Collins. And don’t worry, that’s not my best ever book.

Joe Fairless: [laughs] I don’t think so.

Tim Herman: It’s a fantastic book that I would highly recommend to all of the Best Ever listeners. But the point that I wanna take from that is Jim Collins talks about getting the right people on the bus before you know what direction the bus is going to go. The bus is your company. Because as it develops and as new challenges come, you may pivot, you may change the direction, but what you always need is talented, hardworking people that set the culture of your company.

Joe Fairless: How much money and time have you put into the company so far?

Tim Herman: I’ve put about $20,000 into the company, which is not a whole lot, but the time has been bigger. The six of us have been working on this pretty regularly for about a year, and most of that has been networking and finding investors, both on the entity side and on the deal side.

Joe Fairless: Okay, so you all have spent a significant amount of time – and dollars, too; $20,000 is a decent chunk of money for a year – how come you haven’t gotten the deal?

Tim Herman: That’s a great question. The reason was we wanted to go with the crowdfunding first, and crowdfunding takes about $300,000 regulatory fees just to be allowed to market the deal, let alone do anything else. The first thing you have to have is $300,000, and that’s where until recently our focus has been, until we had some really good meetings and took the pivot that I talked about earlier, which is now we’re gonna focus on deals from a traditional syndicated standpoint.

Joe Fairless: Okay, that’s what I was wondering. When you talked about the crowdfunding platform, I knew it was more than 20k; I thought it was around 100k to get it up and running.

Tim Herman: 300k is the regulatory. You still need about 100k for a website, and then who knows how much, probably 100k to another 300k in advertising. So to really do it right, it costs closer to three-quarters of a million dollars to set up the crowdfunding side.

Joe Fairless: Okay. So it is cost-prohibitive for your team, unless you bring on outside investors in the actual company to do crowdfunding, therefore you now have the team that you would have had with the crowdfunding space, but you’ve decided to pivot and go on a deal by deal basis… So what is the next step for your company?

Tim Herman: What’s really nice is in the process of raising the money on the entity side, we networked so well that we have relationships in place to fund deal-by-deal deals. So now we have very sophisticated investors, so we can be opportunistic. We don’t need to keep it to something easily understandable, which we were doing with the crowdfunding, so we’ve identified three different areas where we’re looking to be opportunistic.

One is the single-family homes to turn into vacation rentals via Airbnb. I don’t know how much you’ve looked into that, but the cap rates that you can get on that are simply fantastic.

Joe Fairless: Oh, yeah.

Tim Herman: So we are in the process of buying 5-10 homes in Las Vegas, which we are going to operate as Airbnbs. The second place where we’re looking for deal flow is near and dear to your heart, which is large multifamily. We’ve just spent this past weekend in Sacramento, looking for deals there, but we’re looking in a couple different locations for multifamily to get into. And then the third is non-performing debt.

Joe Fairless: Is it basically whichever one hits first, you’re gonna focus on? Or when you buy those 5-10 single-families in Vegas, are you still gonna look to do non-performing and multifamily?

Tim Herman: Yeah, we’re gonna look to do all three; that’s part of the beauty and part of the reason that we’ve built such a large team – the ability to take advantage of opportunities where they present themselves.

Joe Fairless: Okay. I love the single-family to vacation rentals via Airbnb, as long as the policies don’t change for how Airbnb is treated. Those are just cash cows, just ridiculous the amount of cash you can make by turning a rental to an Airbnb.

Tim Herman: Yes. We have seen a couple of our friends doing it in Chicago. They’ve been buying multifamily at a 6-8 cap rate, and turning it to a 12-15. But absolutely, you’re right – the regulatory risk is high, which is why the choice of market… I think the regulatory risk is the number one thing that we’re worried about. However, we have identified a couple markets that we really like for both regulatory risk and the cashflow potential.

Joe Fairless: And where do you see those markets? One of them is Vegas.

Tim Herman: Yeah, Vegas has 20-30 cap rates, that’s what we’ve seen historically. The second is Palm Springs, and the third is Nashville, Tennessee – the regulatory environment there is a little bit tougher – and then Savannah, Georgia is really, really good.

Joe Fairless: Savannah, Georgia, and Charleston, South Carolina are the two cities on mine and Colleen’s list to go visit; we haven’t seen those places yet, and we really want to. When you said 20%-30% cap rate, what are you referencing? With vacation rentals it’s 20%-30%?

Tim Herman: Yeah. There’s a pretty good technology company out there – they have an algorithm that they can look at the average occupancy and the average nightly rental, and what they can do on a zip code by zip code basis is tell you what a reasonably managed Airbnb has the potential to make in that zip code, and then if you take the reasonable expectation of net operating income, you can also use Zillow to find the median price.

So when I’m saying cap rate, it’s a little bit of a flag from the averages; it’s not the existing on a particular property. But part of the reason you need to do that is because this is such a [unintelligible [00:16:21].10] that existing data in place, stabilized assets is not available.

Joe Fairless: Yeah, I imagine in order to really make some headway with your company UpEquity, you’re gonna have to place significant dollars, because 5-10 rentals is great for you or I, but not for a company with six people. So that’s probably where the large multifamily comes into play, and buying a bunch of non-performing notes, right?

Tim Herman: Absolutely. We’re looking to scale. I think the way that I see forward is not hitting home runs, it’s hitting singles and doubles, but hitting a lot of them, and doing it to scale. And what’s nice, like I said, with the networking, we have gotten access to a very scalable pool of cash, and the ability to place that; what we need to do is — the 5-10 rentals is not enough, but if we can prove that that is a viable model, which I think is fairly easy, then we can turn that from 5-10 in one city, to 20, 30, 40 in a city, and then go to those different markets at the same time.

And there are also tech companies out there that make it easier to find a place, a single-family product. Another company that we have talked to – have you heard of RoofStock?

Joe Fairless: I’ve just interviewed the CEO an hour ago.

Tim Herman: Is that…

Joe Fairless: Gary.

Tim Herman: So I’ve been talking with the chairman, who’s been a very good friend, a very good resource, very helpful. RoofStock is an incredible company; I can’t speak highly enough about those people running it, and the opportunities that it provides.

Joe Fairless: What is your best real estate investing advice ever?

Tim Herman: My best real estate investing advice ever is dream big and dream out loud. People are too afraid to wait till it’s perfect to tell other people what they’re doing. Another thing that we talk about a lot from the naval academy is Teddy Roosevelt and “The Man In The Arena” – it goes along with that… Be the man in the arena, dream out loud, and you’ll get people to help you and you’ll get people to believe in what you’re doing, and then you can all get on the bus in the same direction.

Joe Fairless: What’s the Man In The Arena story?

Tim Herman: The Man In The Arena – that’s a long quote by Teddy Roosevelt. It’s more about it’s the person who is trying and struggling that counts, it’s not the critic who counts; it is about living life and being out there, going for it, and even if you fail, you know that you did your best and that you actually tried, which is much better than being the critic on the sideline, just talking about people who either succeed or fail.

Joe Fairless: True that! I completely agree. Are you ready for the Best Ever Lightning Round?

Tim Herman: Can’t wait!

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:19:15].28] to [00:20:19].02]

Joe Fairless: Okay, here we go – best ever book you’ve read?

Tim Herman: Best ever book I’ve read… Never Eat Alone.

Joe Fairless: Best ever deal you’ve done?

Tim Herman: Best ever deal I’ve done, in the real estate context – the first house that we bought, we bought with a VA loan, so we put no money down, and appreciation with no money down is infinite returns.

Joe Fairless: [laughs] What city is that in?

Tim Herman: That’s in Hanford.

Joe Fairless: I’m not familiar with Hanford. Where would I fly into if I was visiting Hanford?

Tim Herman: You’d fly into Fresno. We’re about halfway between San Francisco and Los Angeles.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Tim Herman: A mistake that I’ve made on a real estate transaction is not doing it. At the last place I was stationed, I was told that we would only be there for nine months, so we decided to rent. As the case often is with the navy, plans change; we were there for two years. San Diego was above $2,000 a month, so we washed $50,000 down the drain, and by the way, it was 2011 in San Diego. We would have made hundreds of thousands of dollars in equity.

Joe Fairless: What’s the best ever way you like to give back?

Tim Herman: Mentorship. I like to mentor people, but I think that one thing that is important to remember is unsolicited advice is never good advice, even if you’re telling people the right information, so I like to wait until people ask for it. But I’m happy to share expertise and experience. In addition to everything we’re doing with UpEquity, I think the end goal is to be giving back to our community.

Joe Fairless: And how can the fellow Best Ever listeners get in touch with you?

Tim Herman: The best way to get in touch with me is to e-mail me. That’s Tim@UpEquity.com.

Joe Fairless: Well, Tim, thanks for being on the show. Thanks for talking about your progression with UpEquity, or the company’s progression. It costs $750,000 or so to really have everything you need in order to launch a crowdfunding platform – $300,000 just in regulatory fees alone, not to mention the other costs… So 700k-750k or so. So then you all identified that, you have the team built, and now you’re pivoting to focus on syndications, and you have the investors based on the foundation you’ve built so far; you’ve got six team members on the team, and now you’re focused on single-family homes, converting them to vacation rentals via Airbnb, then large multifamily and non-performing notes… Then sharing the markets, where you’re seeing the Airbnbs really have some leeway with the regulatory process.

Thanks for being on the show. I hope you have a best ever day, Tim. Thanks for listening, as well, and we’ll talk to you soon.

Tim Herman: Yeah, thanks for your time.

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