After losing everything in 2000, Brian Noel realized he could make more money with real estate than his full-time job, and he decided to start investing in cash flow properties. Today, he talks about the biggest challenges he faced as a GP, lessons learned from working with co-sponsors and investors, and how to keep investors from pulling out funds unexpectedly.
Brain Noel Real Estate Background:
- 40+ years of real estate investing experience
- LP/KP/GP in 12 buildings for over 3,000 doors
- Flipped more than 30 properties
- Based in Denver, CO
- Say hi to him at: www.ascotequitypartners.com
- Best Ever Book: The One Thing
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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 with today’s guest, Brian Noel. Brian is joining us from Denver, Colorado. He has 40 years of real estate investing experience and is either a GP or LP in 12 buildings that contain over 3,000 doors. Brian has also flipped over 30 properties. Brian, thank you for joining us, and how are you today?
Brian Noel: I’m doing great, especially now that England is in the semi-finals of the Euros.
Ash Patel: Alright. Great to hear. Thank you for joining us. Before we get started, Brian, can you tell us a little bit more about your background and what you’re focused on now?
Brian Noel: Sure. Well, I’m from London, England. I originally bought my first house when I was 19, 20 minutes outside of London; I quickly realized after two years when it doubled in value that I’d made more in real estate than I did from my actual career. Came to the US in 1985 and I started acquiring properties. At the time I lived in Los Angeles, began acquiring properties out of state in Texas, Houston and Phoenix. And I didn’t realize it at the time, but what it did is it kind of set me up to where I got a lot of confidence in being able to invest and manage a property out of state.
And then fast-forward years later, those properties hadn’t really gone up much in value, so I liquidated them all, put the money in the stock market, and then in 2000 lost everything… But I hadn’t lost my faith in real estate. The difference was I needed to change my focus a little bit, and instead of trying to go after appreciation, I went after cash flow. And once I did that, that changed the game for me. So I began acquiring properties, threw out the most amount of cash flow possible, used that as extra cash flow to pay down the mortgage as fast as possible, to where I had eight properties I owned free and clear.
And then one day when I was looking at my spreadsheet and I realized how much money I was spending in HOA fees, I made the decision that I was going to sell all of those properties and buy a small building. But I didn’t know anything about buying multifamily buildings. What I did know was I couldn’t make the numbers work in Denver or Colorado Springs or Fort Collins, because the cap rates have gotten too low. So I jumped on LoopNet and started looking in Dallas and Houston and Kansas, and very quickly discovered that I could make the numbers work.
So then I ran across another gentleman who was a large syndicator and joined his program and quickly got educated on how to evaluate and underwrite deals, began investing as a limited partner initially. I’ve invested in several deals with Joe, and he’s awesome. I love Joe Fairless. But I also decided I wanted to be a GP as well. And we closed our first property, which is a Class B 280-unit building in Houston in February this year. And I’m pleased to say it’s doing extremely well. In fact, we told our investors that we anticipated doing distributions in October of this year. And we’re actually going to start distributing this month in July. So we’re one quarter ahead of schedule. So it’s going really well. And now I’m currently underwriting more buildings and hoping to get another one under contract by August or September at the latest.
Ash Patel: Brian, there’s a lot to talk about. And congratulations on that win with your latest deal. The difference between being a passive investor and a GP, in your definition, is what?
Brian Noel: Work.
Ash Patel: Work.
Brian Noel: If you’re a GP, you’ve got to be willing to do a lot more work. If you’re an LP, there’s work on the frontend to evaluate the property, the investment itself and the team that you’re investing with. But once that investment has been made, you pretty much walk away and don’t do anything, and you just get your distributions coming through every month or every quarter.
As a GP, you’re constantly in communication with the other sponsors, and with your investors that have invested with you. There’s a transition period when you’ve acquired the property to get the property stabilized, and maybe even transition over to a different property management company…
So the difference, to answer your question, Ash, is an LP – you can retire; a GP – you really have a second job
Ash Patel: Brian, on this latest deal, how many other GPs are there?
Brian Noel: On that particular deal, there are seven GPs. There was four initially, and then we had to bring in three more to get the deal closed.
Ash Patel: Why did you have to bring in more? Is it just additional downpayments or signatories on the loan?
Brian Noel: The capital raise was $10.5 million and we’d gotten to seven and we were kind of struggling a little bit to hit that capital raise. We had one big investor for a couple of million that sort of backed out at the last minute, and we’d already extended the close date twice with the seller, so he wasn’t willing to give us another extension. So that really let us with no other option other than to bring in a couple more GPs.
Ash Patel: How many investors total are there for that $10.5 million raise?
Brian Noel: Whoo, that’s a good question. I just know how many investors I brought in. In total, I honestly couldn’t tell you. If I had to guess, I’d say it’s probably in the 70-80 range.
Ash Patel: Okay, and who found this deal?
Brian Noel: One of my [unintelligible [00:07:59].17] sponsors.
Ash Patel: Okay. And this is your first time that you’ve been on the GP side of things?
Brian Noel: Correct.
Ash Patel: And I’m assuming you would do it again. Or was it too hair-raising of an experience?
Brian Noel: No, I would do it again, and I am. There’s a lot of people I know that have aspirations to do many of them. Five, eight, 10, 15. I’m not at that point, because I’m at different stage of my life. I’m trying to retire. And I learned a lot through this first experience, so I want to apply that experience and knowledge to the second deal. So I’d say I’ve probably got two more deals that I would like to get done, and then at that point, I’ll probably be finished until those deals go full cycle, and then I may do another one again. But my goal is to just do two more in the next 6-12 months.
Ash Patel: Now that you’ve been on the GP side of things, would you go back to being a passive investor as well?
Brian Noel: I absolutely would. In fact, Ash, I constantly struggle. Every day I wake up and I ask myself, “Do I really want to do this?” Because it is, again, a lot of work, and like having another job, and I constantly go back and forth. I could just give the money to Joe and let those distribution checks come in every month and spend more time on the golf course, or I could go in as another GP and roll my sleeves up and do more work. And to be perfectly honest, it can be a little bit stressful, too. There are times when it gets stressful, because you’ve got deadlines to meet, you’ve got due diligence to complete, you’ve got attorney PPM documents you’ve got to get done… So not only is it a lot of work, but it can be a lot of stress. And in my stage of life, I’m looking for less stress, not more.
Ash Patel: Yeah, so it’s not as easy as everyone makes it seem to be, is it?
Brian Noel: No, it certainly is not.
Ash Patel: What are the biggest challenges? You have a lot of GPs on this deal. Are you intimate friends with these other GPs, or are they acquaintances, business partners?
Brian Noel: I’d say one of them in particular I was an intimate friend with, and I knew both the other folks at the beginning. But you know when you go through this, you quickly become very intimate, right? So I’d say I’m intimate with all of them now; some a little bit more than others. It’s like anything when you start hanging out with a bunch of people, you kind of gravitate towards those folks that you just click with. So in the beginning, we would have daily calls, and then the daily calls would go to three times a week, and then twice a week, and then once a week to now to where it’s once a month.
Ash Patel: Is there an organizational hierarchy with decision-making amongst the GPs?
Brian Noel: There is. The lead sponsors, who initially found the deal, brokered the deal and lined up the lender have the primary say so in the deal, if you will, and attend most of the meetings with the property management company and then with the lender. And in this particular deal, we did end up having to bring in a preferred equity investor. So they communicate with those folks as well.
Ash Patel: And what is that structure on a high level?
Brian Noel: Well, similar to Joe’s, its preferred Class A and Class B. So the capital stack looks a little bit different. The preferred investors get a slightly higher rate of return, but they don’t get any equity on the backend when we sell the property.
Ash Patel: Got it. So knowing what you know now, would you recommend a large set of GPs for future deals, or would you rather keep it small?
Brian Noel: I’d rather keep it small. But again, it depends on the size of the deal, right? So the one we did was 280 units, and therefore, the capital raised was higher. The next deal I do, I want to keep it 140 units or below. So the capital raise is more in the $5 million to $6 million range, because I think it’s much easier to pull that off, and we can do it with a smaller group of sponsors. My hope is that we could do it with no more than four sponsors.
Ash Patel: Got it. Brian, can we dive into this deal a little bit, the high-level numbers?
Brian Noel: Yep.
Ash Patel: You raised $10.5 million… What was the total purchase price?
Brian Noel: $26.1 million.
Ash Patel: What’s your hold period on this?
Brian Noel: Three to five years. It appraised for a million more than we paid for it; we got it at $97,000 a door. One of our GPs also acquired another building a quarter of a mile down the street for $105,000 a door. So that made us feel really, really good about the investment that we made. And it’s our hope that within 2-3 years, we’ll be able to do a cash-out refi, buy out that preferred equity partner and give our other investors the option if they want to get bought out, they can. But if they want to stay in the deal, then obviously their percentage ownership is going to increase substantially, because the preferred equity investor would be bought out at that point.
Ash Patel: And when you do a cash-out refi, do your investors have the option of receiving the cash, or can they re-invest it?
Brian Noel: Right now, they can either stay in the deal or they can be bought out.
Ash Patel: Okay. Is there a value-add proposition for this property? Does it need to be renovated?
Brian Noel: There is. Yep, there is. Like a lot of syndicators, we are upgrading some of the units; that was $4 million in capital improvements made prior to us acquiring it. So I would say it’s not a heavy lift. But putting washer and dryers in a large number of units, we’ve put in covered parking, we’ve upgraded some of the facilities like the swimming pool, and we’ve put LED lighting all around the building to provide more security. So yeah, we definitely implemented some value-add.
Ash Patel: What’s the targeted return for investors, the IRR?
Brian Noel: It is between 70% and 100%.
Ash Patel: Over the five year period?
Brian Noel: Correct.
Ash Patel: Okay. You’re jaded on buying for appreciation.
Brian Noel: Well, in the single-family market… Just because when I first came to this country, I was at a seminar and heard a real estate guru say that the mean average across the country for appreciation was the property’s would value every 7.8 years. And I had held some single-family homes in Houston Dallas for 10 years and they hadn’t gone up one penny in value. So in real estate, like a lot of investments fluctuate; it can go up and it can go down. But I just learned that it’s better to focus on cash flow than try to get appreciation, because appreciation may or may not happen. You just don’t know.
Ash Patel: Would you look at any other asset class besides multifamily right now or in the future?
Brian Noel: Not if I’m going to be a sponsor; I would consider it as a passive investor. I mean, I’ve looked at some investments in storage units, I know some people doing mobile home parks and those produce great rates of return. I know some folks that go off to distressed assets that require a heavy lift. Those make me a little bit nervous, because just like flipping houses, there’s a lot of things that could go wrong. And I’m in a stage in my life where I can’t really afford to lose my capital. So capital preservation is very important to me. If I was 20 years younger, I might be inclined to take a little bit more risk, but right now, that’s not really an option for me.
Ash Patel: So Brian, a two-part question – what was your biggest lesson learned with interacting with co-sponsors on this deal, as well as interacting with investors?
Brian Noel: Well, a couple of things. One, I think it really behooves sponsors to get a sponsorship agreement in place from the very beginning, and we didn’t do that. So we kind of had more of a gentlemen’s agreement in roles and responsibilities and sponsorship splits, and it all kind of worked out in the end. But if I were to do it again, I think it’s a better business practice if you have that all defined and written down upfront, so there’s no disagreements three months later when you close on the building.
In terms of the investors, one thing that is really important to me is regular communication. And there have been times when maybe some of the sponsors feel like there’s no need to communicate because we haven’t really got that much news. But I think if too much time passes, the investors naturally get a little bit nervous. So I always believe in communicating, even if you don’t have much to say other than how are things going, the property is still performing well, we’re attaining our goals. We’ll have more information next month. So to me, communication is vital.
Ash Patel: That is critical. If you don’t set the narrative, it’s your investors imagination that sets the narrative.
Brian Noel: Exactly. Well said, Ash. I like that.
Ash Patel: And Brian, what happened with that large investor who was committed for multi-millions and backed out?
Brian Noel: Well, he had a small group of friends. It was $1.9 million, and one of his friends was coming in with $400,000. And I guess another opportunity came up where he decided to use his money for a different investment project. And because he wouldn’t go in, the rest of the guys wouldn’t go in. I think there were three or four guys in that small group, and they just all decided to kind of back away.
Ash Patel: You know, I hear that a lot. So how do you remediate that? It seems like syndicators don’t want to take money too early; they kind of want to wait closer to the funding date. So what’s a good solution for that because, you know, it’s easy to get verbal commitments, but then when it comes to wire the funds, it’s a different story.
Brian Noel: Yep. I think there’s a couple of things I’ve learned through that. One of the things that Joe is doing, which is very smart is he’s creating a fund. And I’m predicting you’re going to see a lot more people do that because that was something that happened to me.
I had a friend actually who saw that I had posted on Facebook some of the investments I’d made, he called me to go have lunch and shared with me that he had a million dollars sitting in the bank that he wanted to put to work. He didn’t want to put in the stock market, because he was already overleveraged. So six months later, when I called him to invest with me, he had decided to buy some land to build a custom house and needed the money for that.
So timing, when you’re raising money, what I’ve found is timing is very critical. Just because somebody has the money three months ago, it doesn’t mean they’re going to have it now. And I had numerous people, when I reached out to them say, “Gosh, if you just called me two months earlier, I would have invested. But I’ve put my money into another investment.” So I think by having a fund, you can circumvent a lot of the timing issues around that.
I think the other thing I would say is, again, just keep communicating with your investors. Let them know that you’re actively underwriting properties, you’re actively submitting LOIs, you’re on the lookout for another investment, and you anticipate within the next 60-90 days having a property under contract. And when you do, they’ll be the first ones to know about it.
Ash Patel: I love that. You mentioned communicating with investors, but really, it’s communicating with investors before you strike the deal.
Brian Noel: Oh, yes. Yeah.
Ash Patel: Interesting. Okay, very good. Brian, what is your best real estate investing advice ever?
Brian Noel: Whoo, hoo-hoo-hoo. I would say it’s managing risk. So I’ve traded options and futures for many, many years and been very heavily involved in even day trading in the stock market. And one very experienced Wall Street trader told me one time, “When you put money into a stock or into an option, don’t think about how much money you could potentially make. Think about how you’re going to manage and mitigate the risk.”
And I’d say the same thing holds true in multifamily investing as well. I don’t think any limited partner or any passive investor wants to get a phone call and be told there’s going to be a capital call, right? So I think when you’re underwriting, you’ve got to do your stress testing and you’ve got to take a hard look and say, “What’s the worst thing that can happen?” And if that scenario does play out, are we still going to be able to not lose money, protect our investors money?
Ash Patel: Yeah, that’s a great perspective.
Brian Noel: [Crosstalk].
Ash Patel: So knowing what you know about real estate now, do you still trade options?
Brian Noel: I do. I can tell you, I’ve done much better in real estate than I have in options and the stock market.
Ash Patel: Awesome.
Ash Patel: Brian, are you ready for the lightning round?
Brian Noel: Am I ready for the lightning round?
Ash Patel: Yes.
Brian Noel: I’m not sure what the lightning round is. But sure.
Ash Patel: You’re about to find out.
Brian Noel: Okay.
Ash Patel: So Brian, what’s the best ever book you recently read?
Brian Noel: Best Ever book I recently read. I think the title of the book is One, and it’s by Gary Keller, who started Keller Williams. And then right before that, it was The Multi-Millionaire Real Estate Investor. And the funny thing was when I read that book, he basically advises [unintelligible [00:23:28].03] But I’d done it the hard way. I did it through trial and error. If I’d had his book 20 years ago, I think my journey would have been a lot easier and could have gotten there a lot faster.
Ash Patel: Yeah, I think the book is called The One Thing. Brian, what’s the best ever way you like to give back?
Brian Noel: Hoping to mentor other people. There’s people that are obviously a lot more knowledgeable and experienced than me that I reach out to. And there’s one guy – in fact, he’s a co-sponsor on the deal with me, and he started doing this in 2013. And I’ve reached out to him many, many times and he was always very gracious and always very generous with his time, very patient and he taught me a lot, and I want to pay that forward. So if I can help other people, I absolutely will.
Ash Patel: Fantastic. And Brian, how can the Best Ever listeners reach out to you?
Brian Noel: A couple of ways; they can either email me at email@example.com. They can call me at 720-217-7656 and they can also check out the website, https://www.ascotequitypartners.com/.
Ash Patel: Brian, thank you so much for being on the show today and sharing your advice with us, coming from your first property in London at the age of 19, to losing everything in 2000, and learning some hard lessons about cash flow versus appreciation, and dealing with other investors and sponsors. You’ve given us a lot of good advice, so thank you for sharing all of that.
Brian Noel: You are more than welcome.
Ash Patel: Best Ever listeners, thank you for joining us and have a best ever day.
Brian Noel: Thank you, Ash.
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