October 22, 2019

JF1876: Creating A Diversified Portfolio Across Asset Classes & Markets with Matt Shamus

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Matt was a Facebook employee before getting into real estate investing. Now Matt is doing deals across multiple markets and asset classes. One deal we will hear about is an office to multifamily conversion, which is not something we hear a lot about. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Trust has to be there first with your partnerships” – Matt Shamus

Matt Shamus Real Estate Background:

  • Founder of Driven Capital Partners
  • They are a private equity group with a diversified portfolio, including nearly 700 units of multifamily, 105,000 square feet of office and industrial space and a mixed use opportunity zone development project.
  • Based in San Francisco, CA
  • Say hi to him at https://www.drivencap.com/
  • Best Ever Book: Principles by Ray Dalio


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Joe Fairless: Best Ever listeners, how are you doing? 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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Matt Shamus. How are you doing, Matt?

Matt Shamus: I’m doing great, thank you so much for having me, Joe.

Joe Fairless: Well, I am glad to hear that, and it’s my pleasure. A little bit about Matt – he’s the founder of Driven Capital Partners. They are a private equity group with a diversified portfolio, including nearly 700 units of multifamily, 105,000 square feet of office and industrial space and mixed-used opportunity zone development project. Based in San Francisco, California. With that being said, Matt, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Matt Shamus: Absolutely. I am in the Bay Area in California. I have a background in the technology space, as a lot of people do based here in the Bay Area. I was most recently at Facebook, where I worked for six years, and I kind of throughout my time there, and even before working there, I was investing in real estate on the side. And I’m pretty entrepreneurial… Facebook was really only my second ever real job. Everything else that I’ve done has been kind of self-directed, entrepreneurial… And I’ve always been interested in real estate, or I always was, even from a young age. I got my real estate license when I was 19 or 20, and ended up selling my mom’s home, the house that I grew up in. She made a really good profit, and I just kind of had this light bulb moment where I realized “Wait a minute… There’s something here.”

I went off to college, I studied Economics and took whatever real estate courses I could. That was when I read Rich Dad, Poor Dad, which kind of set the foundation for the right mindset. Once I started making a little money in my career, I started investing in single-family homes… And I was basically doing the BRRRR strategy before the term was coined, or at least before I knew about it.

I had a chance to do several projects where we were buying kind of the worst house, or the worst duplex in a decent neighborhood, and significantly renovating it, and then holding it as a long-term rental. I’ve started taking money from other friends and co-workers and people that knew what I was doing and wanted to be involved in real estate, but they just didn’t really have any means to get started on their own, with their own two hands.

So I did that several times over… And I just realized “You know what – I’m doing everything right, but I need to add a zero or two to everything I’m doing in order to achieve the scale that I want to. So that’s when I started looking into apartments as an investment option, and then from there I started looking into other commercial real estate.

So now what we do is we pool money from individual investors and we sponsor real estate deals. In Driven Capital Partners, our theme is we want to create a diversified portfolio across asset classes, and across markets. So that’s what we do today.

Joe Fairless: Let’s  talk about the approach of a diversified portfolio across asset classes and markets. First, are you doing this full-time, Driven Capital Partners?

Matt Shamus: Yes.

Joe Fairless: Okay. So when you were at Facebook, what was your role?

Matt Shamus: As an employee of Facebook?

Joe Fairless: Yes.

Matt Shamus: Well, I did a bunch of different things, as you do at a company like that. I moved around a bit. I went originally in 2012 to work on Facebook’s very first iPhone app, and then I moved. Most of my time there was in business development, working on an initiative called Internet.org, which is basically Facebook’s initiative to bring free internet and introduce the internet to the poorest countries in the world.

Joe Fairless: Okay. Your skillset that they hired you for was — what was your primary thing that you were really good at?

Matt Shamus: That’s a good question. I guess I’m not sure what they hired me for in particular, but I think general adaptability, strategic thinking and planning, definitely a marketing emphasis… Those are some of the things that I focused on at Facebook.

Joe Fairless: Okay, cool. I just wanted to put you in a category in my mind – software developer, or… But you’ve answered that question.

Matt Shamus: The teams that I worked on at Facebook were generally made up of management consultants. I didn’t have that background, but that’s the kind of work that we were doing.

Joe Fairless: Okay, cool. Alright. That helps give some context for what you’re doing now… Because now that you’re a private equity group, you’re pooling capital – what aspects of your previous career are you applying now towards what you’re doing?

Matt Shamus: That’s an interesting question. I haven’t particularly put those two dots together. I think taking a strategic and analytical approach to investing definitely, and having a long-term mindset, I think, as opposed to having a quick, short-term “I need to accomplish something in a short period of time” mindset. I think those are two things definitely that I’ve translated from my former work to what we’re doing at Driven Capital Partners.

Joe Fairless: Okay. And how are you defining long-term, when you’re talking about that mindset?

Matt Shamus: Well, I’m gonna turn 35 this year, so I am planning on being here for quite a long time. What I mean is just that I wanna build a portfolio for myself, that’s gonna withstand the test of time and get me into and through my retirement years. So I’m always gonna make the decision that I think is the better decision long-term, even if it’s a little bit more painful in the next few months, or even a year. So that’s all I mean. I think it’s more of a mindset. I’m not looking to make a quick buck on a deal. I’m looking to make sure that I feel like we have a good approach in place, and that even if there are some external factors that give us some bumps in the road in the near-term, we still feel really good about what we’re doing long-term.

Joe Fairless: Your focus is having a diversified portfolio across markets and asset classes… How do you mitigate risk when you’re looking at multiple markets and multiple asset classes?

Matt Shamus: This is a good question. The more common model is to find a niche and exploit it, and rinse and repeat – which I think is tremendously valuable. What we’ve decided to do is since Dan, my partner, who’s based in L.A. – Dan and I are first investors, for our own account… So what we are doing is find investments that we wanna put our own money into. And then we are letting our passive investors ride along and benefit from the research and due diligence and operational expertise that we bring to any deal. But first and foremost, we’re investing our money. So we are very conservative in what we do, and what it translates to is we tend to say no to almost every deal. And when we find a deal that we’re excited about, we’re really excited about it.

So in terms of mitigating risk, what we wanna do is if we are investing as the lead sponsor and we don’t have anyone else on  the team in a new market, we wanna make sure that we have a very strong team in place in terms of property management, in terms of any consultants that are required, and all the professional services that you would want in a market, so that you can lean on their expertise.

If we are partnering with another operator, which we do, then we lean on their track record and their expertise. So we may, for instance, partner with an operator in North Carolina, and although North Carolina is not our market of expertise, it is this particular operator’s market of expertise. So we’re gonna use their knowledge and background and track record to accelerate our opportunity in that market. So that’s what we lean on and that’s where we see the value in actually — not exploiting a particular niche on our own, but finding really good investment opportunities and being open to the fact that I myself am not gonna find all the best opportunities. There’s a good chance that there’s someone else in a different market that may have an opportunity that I may never see otherwise, and I still want the chance to invest in it.

Joe Fairless: I would love to talk more about that and risk mitigation, and we will, but just a quick clarifying question… So you’re the lead general partner on some deals, and then other deals – you find a deal you wanna passively invest in, and then you bring in your investors after you have qualified the deal. Is that correct?

Matt Shamus: Generally, yes. There’s a little bit more nuance to it, but yeah, generally that’s right.

Joe Fairless: Okay. So you’ve got 700 units of multifamily and 105,000 sqft. of office and industrial and mixed use… How much of that is you being the lead general partner?

Matt Shamus: It’s about 50/50 to date… And I think that’s probably the mix that we’ll look to continue to do, keep it 50/50. What we like to do is Dan and I are out, looking for opportunities, but we wanna be able to weigh and compare them against opportunities from partners… And if our deal wins, we wanna invest in our deal. But if our deal doesn’t win, then we don’t wanna be putting our own money into a deal of ours just because it’s ours. So this method or this strategy gives us a lot more deal flow, and gives us a chance to have better returns over the long term.

Joe Fairless: What’s the largest deal that you’re a lead general partner on?

Matt Shamus: Well, we have — probably our 4 million dollar project. Our markets of emphasis or the places that we like the most are generally in the South-East. We happen to have one deal in Santa Barbara, California, and that’s the deal that I’m referring to here. It just happened to be an opportunity that fell in our lap, so we had to take advantage of it… But it’s about a four-million-dollar deal that is an office to multifamily conversion project in a really great location.

Joe Fairless: Office to multifamily… And of the 105,000 sqft. approximately how much of this project is the 105,000?

Matt Shamus: I don’t know the square footage… It’s under 20,000 feet.

Joe Fairless: That’s quite the undertaking… Office to multifamily conversion. How have you taught yourself how to do that?

Matt Shamus: [laughs] Well, okay, so we just got off an hour-long phone call this morning, which we do weekly, on this particular project…

Joe Fairless: Who’s on the call? What team members are on the call?

Matt Shamus: Just me and Dan and any other potential partners that are relevant for the week. We have permitting consultants, architects that are all working on the project. This property was actually built in the ’60s and it was originally built as multifamily. So the footprint is kind of there. It was converted to office space in the ’80s. If you’re familiar with Santa Barbara, this is right off of State Street, which is the main drive downtown.

In the ’80s, apparently, office space was more desirable for this location, and the property was held in a trust and it was recently inherited, and it was poorly managed. Santa Barbara has about a 2% multifamily vacancy rate; there’s a pretty big housing crisis… So the city really wants to see more relatively affordable housing options, especially in a downtown location like this… So all those characteristics or components kind of aligned here. If it was strictly truly an office that we were trying to convert into multifamily, that would probably not meet our risk tolerance.

Joe Fairless: Got it, okay. So not a heavy conversion. What do you have to do to convert it?

Matt Shamus: Honestly, mostly this is a political process.

Joe Fairless: Zoning?

Matt Shamus: It’s not zoning… It’s already zoned for the use. It’s changing the permitted use and coming up to code on certain items, and making sure that the city is on board with the project. So it’s mostly political, and kind of permitting and planning. The actual construction and the conversion is gonna be I think pretty straightforward.

Joe Fairless: Okay. And have you already purchased the project?

Matt Shamus: Yes.

Joe Fairless: And how much equity did you raise for that deal?

Matt Shamus: I don’t have it in front of me, but on the order of a million and a half dollars, somewhere around there.

Joe Fairless: And approximately how many people did it come from?

Matt Shamus: Well, our average investment over the course of all of our deals has been somewhere close to $75,000 per passive investor. Probably a little less than that. So if I had to guess, this is probably close to 20 passive investors that put money into this deal. It might have been a little bit more. On some of our deals we allow investors to come in — typically, we have a 50k minimum, but sometimes we allow investors to come in at less than 50k, and I think we had a few of those on this deal… So I would say maybe 20-25 people potentially.

Joe Fairless: And I imagine there were a lot of questions about “Have you done this before? You’re trying to change permitting use… It’s California… It sounds like a really uphill, tough sleddin’…” How did you give the 20 or so investors the comfort level that “Hey, we’ve got this. We’re gonna mitigate risk, and it’s a conservative investment”?

Matt Shamus: Well, first of all, we made sure that — in any deal that we offer our investors, we wanna be really clear about what we consider the risks to be. We’re not ever gonna sugarcoat and say that there aren’t risks. There always are, in any deal. And in this particular deal, from our research and discussing with the city, and with our planning consultants and other developers that have done similar projects, the risk seemed to be in the permitting process and the amount of time that it would take to get the permitting from the city.

So all of the signs pointed to “It’s a matter of when this is approved, it’s not a matter of if.” The city needs more housing… This was originally built as multifamily; this is really just changing the use back to its original use. We don’t know all of the little detail that the city is gonna ask us for, so there is risk in terms of “Did you budget enough?” So what we tried to do to mitigate risk is we tried to pad our budget very significantly. We raised more money than we needed to. We’re working with a lender who understands the project and is flexible in terms of LTV, and is flexible in terms of what we get back from the city can dictate how we go about the actual renovation… So we really just tried to be honest and upfront, and know – this is the first project that we’ve done in this city, this is the first project that we’ve done of this capacity, but we’re dedicated, we’re semi-intelligent, and we’re gonna do the best that we can… And our own money is in the deal, so we think we have a very good opportunity here.

Santa Barbara multifamily trades at 4 or 4,5 cap, so there’s a big, big value-add opportunity here if we can get it right… And we felt like we understood the risks and downsides, and we presented them to our investors, and they understood what they were as well.

Joe Fairless: So every now and then I ask the Best Ever listeners “Hey, what additional questions aren’t I asking, that I should be asking?” and a lot of them are like “Well, ask investors how much money are they actually making, or could they make?” So here’s the question – how much money is the general partnership projected to make approximately on a deal like this, should it come to fruition like you envision?

Matt Shamus: The general partnership… Well, I don’t have the deal in front of me to know exactly, but first of all, we put our money into every deal. I think we’ve probably put close to 10% of the total equity that we raised was from principals… So we’re making money alongside the investors in the same way that they are. In this particular deal we have 70/30 profit share, anything above an 8% pref, and then profit at the sale will go 70% to the investor and 30% to the general partner.

On this particular deal we’re gonna be all-in for a little over 5 million. Let’s just say it’s 5.5 million, and let’s say we can sell it for 7.5 million. So we have a 2 million dollar potential profit in this deal, 70% of which is gonna go to our investors, and 30% of which ($600,000) could potentially go to the general partnership. These are really round, ballpark numbers, but that at least gives you a feel for what you could expect.

Joe Fairless: That’s actually more valuable than answering just with a number, because you went through the thought process, and how it’s structured… Thank you for that, I appreciate it, and so do they. What is the best real estate investing advice ever?

Matt Shamus: Make your money on the buy, and look for ways to add value before you close the deal.

Joe Fairless: Going back to what I said we would go back to, the mitigating risk when you’re investing in multiple asset classes, and multiple markets… I get  you really hung your hat on having a strong team, that has a track record and expertise whenever you’re investing in those deals as an LP, and then you’re bringing your investors as well… My challenge – I’ll just speak plainly, with my challenge; my challenge is if I’m presented  an industrial deal, a self-storage deal, a  mobile home park, a retail deal, an office deal, I don’t have an expertise in that, so I don’t really know without having a team of advisors, who — I certainly could reach out to some people who are experts in those areas who I’m friends with… But I personally don’t have an expertise in that area, so how do you determine the validity of the projections that the general partnership has if you’re not focused on one particular asset class?

Matt Shamus: Yeah, this is the crux of it… So one thing we decided early on is we wanted to be knowledgeable enough across asset classes that we could at least be asking the right questions, and understand when we get an answer whether we believe it or trust it, or not.

I think though, Joe, a lot of this, honestly, like in any other partnership, comes down to some level of trust. That has to be there first. And I actually think that your choice of partner is actually more important than the market or the asset itself. I think that’s something at least that we believe, and a track that we follow.

So we ask a lot of questions, we try and vet answers independently, we try and do as much research as we can on our own, and we try and get collaboration from other people in the market that are third parties that don’t have any horse in the race. That’s really what we try to do.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Matt Shamus: Yeah, absolutely.

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

Break: [00:20:49].24] to [00:21:25].07]

Joe Fairless: Best ever book you’ve recently read?

Matt Shamus: Principles, by Ray Dalio.

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

Matt Shamus: It all comes back to not understanding exactly what you’re buying. Not checking off all the boxes, or not realizing that you missed this in the budget, or not realizing that something was gonna take two months longer than you expected… So I think it’s really just not doing the full, complete level of due diligence that you should have before you purchased.

Joe Fairless: Any one of those things in particular that you can share with the listeners, that tripped you up one time, and then it’s something that might trip up others, that you just wanna mention?

Matt Shamus: Yeah, I would go back to my single-family and duplex/triplex investing days… One of my first projects, I bought a really nice little house, and it was built in the ’60s. And in California, in the ’60s, they were putting down cast iron pipe. So going through my first few transactions, I didn’t fully appreciate the need or the benefit to really digging into all of the critical components of the foundation and the infrastructure, including the plumbing… And those particular projects literally – two weeks after we bought the house – I was in Mexico, on vacation, getting a phone call from the tenant, saying that the toilet was backed up, the tub was backed up, and the house was in danger of starting to flood… And I just kind of thought “Man, what have I gotten myself into here?”

It was a simple fix. All these problems can be fixed with a check. But if you don’t have that check budgeted, then it’s painful. So I think from some of these painful mistakes you learn, and I haven’t made that mistake since, and I don’t intend to make it again.

Joe Fairless: Best ever deal you’ve done?

Matt Shamus: I’m really excited about an opportunity zone development deal that we’re working on, just because we’ve found a great property, that was fundamentally undervalued, and we got it at a really good price. We’re close to determining what is actually gonna be built there, and I just see tremendous value long-term in it.

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

Matt Shamus: Right now it’s really about educating people about investing in real estate, about the benefits… And over time I hope for that answer to be able to change, but right now I think it’s really about that.

Joe Fairless: How can the best ever listeners learn more about what you’re doing and connect with you?

Matt Shamus: Well, our website is drivencap.com, Driven Capital Partners. They can email me, Matt@DrivenCap.com. Those are probably the two best ways to reach out.

Joe Fairless: Matt, I really enjoyed our conversation. You got into the specifics of the four million dollar project in Santa Barbara, how you structured it, the potential earnings on the project for general partners, as well as limited partners, talking about why you got into the commercial space, and then how you look to mitigate risk, since you are focused on a diversified portfolio across markets and asset classes. Theoretically, that’s great, but then how do you bring that to life while doing it in a conservative way when you’re investing, and you talked about that.

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

Matt Shamus: Hey, thank you so much for having me, Joe.

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