December 5, 2021
Joe Fairless

JF2651: Three Things All Syndicators Should Do to Protect Themselves When Making Deals with Rick Martin


 

Rick Martin Real Estate Background

  • Been involved in real estate since 1998 and recently made the transition to a full-time career as a syndicator.
  • Founder of Fortress Federation Investments, which provides multifamily investment opportunities to its investors, helping them build wealth and multiple income streams.
  • Does both active and passive investing.
  • Portfolio: Throughout his career, he has bought and sold single-family and small multifamily. He still owns a fourplex, but otherwise, he is now invested both actively and passively in 1,992 multifamily units.
  • Based in Redondo Beach, CA.
  • You can find him at www.fortressfederation.com
  • Best Ever Book: Who Not How: The Formula to Achieve Bigger Goals Through Accelerating Teamwork by Dan Sullivan

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TRANSCRIPTION

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, Rick Martin. Rick is joining us from Redondo Beach, California. He has been involved in real estate since 1998 and has recently transitioned into a full-time syndicator. Rick is both an active and a passive investor and has almost 2000 units. Rick, thank you for joining us. How are you today?

Rick Martin: I’m great, Ash. Thanks for having me.

Ash Patel: It’s our pleasure. Rick, 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?

Rick Martin: Way back in the day, around 1998 or so, I bought my first house. I was with a girlfriend, we were going to buy it together, she backed out, I moved forward. A year later, my career, my life took a change, so rather than selling it, I hung on to that thing and rented it. That was up in Seattle, Washington, and I’d gone off to film school up in Vancouver, BC. I was basically a broke student, but I was getting these rent checks, so that’s how the light bulb went off and I discovered passive investing. Really, it wasn’t that passive, because I hired a best friend to manage it and that led to all kinds of problems. But lesson learned.

Ash Patel: How did you progress in real estate from that one house? Did you just buy another house?

Rick Martin: My plan at that time was “I’m going to try to do this once a year.” But coming out of school, having debt from school, and whatnot, that didn’t quite work out. But I did continue to invest as I made my way down the coast. As I said, I was in Vancouver, and I ended up buying a place in Las Vegas, which at the time seemed like a home run, but that was 2004. Four years later, it didn’t look so good, but I held on to that baby.

Then I actually doubled down during the valleys of that recession. I bought some more in Vegas, and I bought some more in the Desert Hot Springs, because at that time I was living in Los Angeles and that was the place where we could go out. I partnered with a friend. It was really hard to get a loan, basically. We were working, we had good jobs, but it was really hard. The capital markets had sort of dried up so we were coming out of pocket, but paying very little for places. Then we put a little bit of money back into them and basically do the BRRRR before I learned about BRRRRing.

Ash Patel: This was all a side gig, right? You had a full-time job?

Rick Martin: Absolutely. It wasn’t like we were doing 20 homes a year. It was looked at that time like “Okay, this is going to be a part of my nest egg.” But then as I began to sell these things, they were really far exceeding my returns in the stock market, and I just really wanted to become more focused on real estate in general. Then toward 2016 or 2017, I continued doing the out-of-state thing. I picked a market, I was sort of trying to decide between Kansas City, Indianapolis and Birmingham, and I settled on Indianapolis and did some BRRRRs and some flips there. Again, I was still working full-time. I wasn’t really considering a career, just as one day this is going to help me retire earlier. Then I got involved in an online program about multifamily. I can’t remember, maybe it was the Best Ever podcast, but I learned about multifamily and thought this is the way to go.

I joined an online course that had a network, a Slack community, got to know several people within that community, then learned about syndication, and actually went passive for my first five. I’m happy to say those have done well, they’re doing well. I knew that I wanted to get involved more actively, so I became a general partner.

The areas I was most interested in at that time was the West, because I knew it the best. But I really wanted to get more involved in the Sout-Eeast, because I could see what was happening down there, as well as Texas. So South-East Texas is sort of where I set my sights. I was also looking in Tucson, Arizona, but logistically it was very difficult to hop on a plane, even Tucson which isn’t that far from Los Angeles. I was also involved in Columbus, so I was flying back to the Midwest trying to meet brokers that way. I thought something needed to change, at least for me, my lifestyle. I’m married, I got a couple of young kids, I couldn’t be hopping on a plane all the time. So I focused on partnerships and made some great relationships in the South-East and in Texas, and I co-sponsored alongside of those guys.

Ash Patel: Rick, early in your investing career, when you were doing these single-family houses, did your friends know what you were doing with investing in real estate?

Rick Martin: They were always just sort of impressed. I went to the University of Washington School of Business, but I had this scratch that I needed to itch. I tried pursuing music, because I was a musician from an early age. All the while I kind of kept my right brain going in investing; this is before I made that career change I spoke of earlier. They were always impressed, like “Wow, how are you doing this Mr. starving artist? You’re buying these houses; you’ve got a nice nest egg going.” I kind of tell them how I did it. But sometimes people have a hard time wrapping their heads around real estate.

Ash Patel: The reason I asked that question is had you taken on some of these friends as investors, you would have scaled sooner…

Rick Martin: Yeah, absolutely. I didn’t think in those terms. The whole using other people’s money thing had come to me much later in life. There are many things I would do differently or I would tell my younger self to do. But yeah, I was basically saving, and then when I partnered, we did bring in a third silent partner. But for the most part, it was our own money.

Ash Patel: And Rick, you mentioned Birmingham, Indianapolis, and what was the other market?

Rick Martin: Kansas City.

Ash Patel: Why did you pick those three, and then how did you settle on Indi?

Rick Martin: I wish I could say that I was studying underlying market fundamentals… But back at that time, I just sort of went with where the buzz was. I shot first and asked questions later. For me, personally, I thought Birmingham was a little flat in growth. There are some markets that were extremely hot, but I thought the barriers to entry were too difficult… And it came down to Kansas City and Indianapolis. And I did like the mix of appreciation and cash flow in Indianapolis. That’s where I started and that’s how I chose it. And then you can go back and you can check the fundamentals. It wasn’t until later that I really started researching underlying market fundamentals.

Break: [00:06:54][00:08:27]

Ash Patel: What year are we talking about that you did Indianapolis and Columbus? This is recently?

Rick Martin: 2016.

Ash Patel: Okay. And right now you’re focused on the South-East?

Rick Martin: South-East and Texas. So we have properties in Augusta, Georgia, we have three now in Sarasota Bradenton, Florida, one in Lubbock, Texas, and another in Webster, Texas which is like a Greater Houston suburb.

Ash Patel: Do you still shoot from the hip, or is there some analytics behind these now?

Rick Martin: No, there’s a lot of analytics. I’ll usually start by assessing what the downside risk is, definitely compare absorption rate based against vacancy and occupancy, see what’s going on there in terms of what’s driving the population. Take our Florida market, for instance – the average occupancy right there is 98% right now, which is pretty crazy. The last two years have had dramatic rent growth. We’re talking 27% year over year rent growth. So we don’t depend upon that. We’ll underwrite it with more of a 2%, 3%, 4%, and kind of consider that extra spike that we’re getting right now as gravy, the cherry on top.

Ash Patel: Rick, I see a lot of syndicators chasing deals with very low cap rates. What happens if interest rates rise,  what are your thoughts on that?

Rick Martin: Yeah, it can happen, and that’s sort of the downside risk I mentioned. I think everybody’s in fear of that. We keep waiting for the Fed to raise interest rates and see if cap rates are finally going to rise along with them. I don’t think you could stand on the sideline, but I do think you have to be very careful. Make sure — whether it’s a deal that you’re actively involved in or passively involved in, make sure that it’s very well-capitalized, make sure it has flexible financing, and make sure it has active cash flow. I think if you have those three things, you can weather any storm, and you can hold out for a better day to sell. I’ve hung on to certain deals for a long time…

Ash Patel: Just like your house in Vegas.

Rick Martin: Yeah, exactly. It’s a perfect example. I held out, I actually sold that thing for a profit, when it looked pretty sorry there for a while. So yeah, the flexible financing I think is a big one. You don’t want to be pushed out of a loan any sooner than you want to be.

Ash Patel: What does that mean, flexible financing?

Rick Martin: It’s tricky, because if you get into fixed long-term debt, that might not match your business plan. Let’s say your business plan, if it’s a value-add and you want to go in, you want to renovate units, maybe turn tenants over in a matter of 18 to 24 months, then you’re going to increase the value, you’re going to go back to the bank and possibly refinance, and pull investor capital out… You’re gonna be stuck in that loan because there are some pretty steep penalties that you’re going to have to pay on it. So you might want to get a floating rate. To some, that sounds risky. But there are things that you can build in to protect yourself. You can purchase a cap, so that the interest rate doesn’t rise any farther than, say, 5%. There are also forward-looking curves. There’s data that predicts what future interest rates are going to do. So you build that into your underwriting, and it accounts for rises in interest rates; therefore, you’re not left holding the bag when you — say you’re coming in at 2.8%, which is like some of the rates we’re getting today. And it’s floating — it might float on up to as high as 5% in a couple of years, you want to make sure that you have all that built into your underwriting.

Ash Patel: Got it? Rick, you’ve got almost 2,000 units. What does your team look like today?

Rick Martin: Actually over 2,200 now as of this call. We’re just closing on another deal. I have two sets of boots on the ground, because like I said, I do like the southeast and I do like Texas. In each one of those, we have an acquisitions person, and we have an asset management specialist in each one of those markets. In terms of marketing and due diligence, we all sort of team up on that, and then I oversee investor relations. I do quite a bit of content development, just to educate the investors, which I enjoy. Then we have some pretty sizable property management teams in place. We have a property management company in Florida, they have over 10,000 units. They know what they’re doing, they’ve been doing it for a while.

Ash Patel: Financials and legal?

Rick Martin: Financials and legal – we have pretty much the same attorney on each deal. So the PPM looks pretty similar, one over the other. We have accountants, we have bookkeeping; it’s quite a staff, from A through Z.

Ash Patel: What were some of the growing pains that you encountered as you’re coming up to 2,200 units?

Rick Martin: I think the toughest thing for me was breaking in to syndication. I didn’t realize it was going to be such a challenge. I was just kind of trying to find my way and see how I could fit in, where I could deliver the most value to people. Quite honestly, that’s what kind of led me into passively investing, which I do out of my solo 401k. I’d come close on a couple of LOIs, but I just wasn’t sealing the deal. And not only did I want to learn, but I wanted to start growing my wealth. So I started meeting with a few operators that I met through various conferences, and got to know them, got to like the way they worked. I also got a peek behind the curtain, kind of see how they communicate with their investors. Everybody does it differently. There’s a lot of content coming in every week, others are pretty quiet, and then a deal comes around. So everybody does it differently, and I can sort of learn from that, and I did, and I still do.

Ash Patel: What’s an example of a challenge that you had with an investor?

Rick Martin: That’s an excellent question. One person specifically comes to mind. He just didn’t want to be a part of an audience. And when your investor base grows, you have to look toward some way of managing that. So you look at a CRM. What’s that? Customer…

Ash Patel: Relations management.

Rick Martin: Relation management, thank you. Well, when I would send out maybe a blog article or some market information, maybe a video that I did, he didn’t like that. He unsubscribed; and he had just subscribed, and he seemed very interested. We’d had a conversation. So I said, “Hey, what’s wrong? What did I do?” He just told me, flat out, that he didn’t want to be a part of an audience. It’s challenging, because I always have to remember that guy. When I’m sending out important information, like a deal, for instance, I have to go “Oh yeah, I’ve got to contact that guy separately.” That’s okay, I’ll do it if that’s what he likes. But it’s just a matter of always remembering. Okay, I have to remember him. Then if other people do that, then it’s kind of hard to track.

Ash Patel: He’s got to have the cleanest inbox ever.

Rick Martin: He must. He’s very particular.

Ash Patel: Yeah. Interesting. What about a challenge that you’ve had with co-GPs or partners?

Rick Martin: I think the biggest thing is, initially, people have reached out to me and asked, would I like to participate in their deal, and I’m always flattered, but if the deal is happening within the next several months, I just can’t do it. I think the biggest thing is you just have to allow enough time to really get to know these people, and meet with them in person, and just make sure that your interests align, that you really do complement each other’s skillsets, and there are no quirks that might rub each other the wrong way. I’ve seen a lot of partnerships go South pretty quickly. I have a little bit of fear of getting into a permanent partnership, because I know that can happen… But I’ve been very fortunate with the level of communication, and I try to reciprocate, and I try to pass that on to my investors as well. So I’ve been lucky, they’ve been very transparent, and I try to do the same for them.

Break: [00:16:14][00:19:07]

Ash Patel: Rick, does that mean you don’t have any permanent partners in your company?

Rick Martin: I’ve come close a couple of times. And for whatever reason, it wasn’t going to work out. Right now, in a sense, I’m sort of a one-man-band. But I’m always on the hunt, I have a lot of great conversations, and I’m always open to that. But right now, Fortress Federation is working pretty well alongside the other partners. They’re pretty semi-permanent; we partner on every deal.

Ash Patel: But the doors open for anyone to do their own venture.

Rick Martin: How do you mean?

Ash Patel: I’m confused about what a permanent partner is, versus the partners that you have now.

Rick Martin: There are lead sponsors and there are co-sponsors. I consider my boots on the ground the lead sponsors, because they’re the ones that are actually operating the deal. So they would look at me as a co-sponsor. Now, I’m talking with someone and we’re talking about doing a deal together where we would be the leads, in Georgia. That person would become a part of Fortress Federation permanently. Like I say, I’ve had those conversations, but I’m very careful, and I think I’m leaning toward that, but at this time, I’m maintaining my co-sponsorship role.

Ash Patel: Historically, you’ve had partners on deals but not so much a partner in your entity, your Fortress company?

Rick Martin: Exactly.

Ash Patel: Got it. Okay. Interesting. Proceed with caution.

Rick Martin: Well, when I do partnerships with people, then everything is legally written out. There’s always an LLC that we enter together. So when I do vet a partner, it’s not as if it happens overnight. These are people that I consider, basically, friends. We hop on the phone and have conversations about things other than real estate as well.

Ash Patel: Rick, if you can go back and give your 20-year-old-self advice, what would it be?

Rick Martin: I think to scale faster. I think, for me, I didn’t really learn about the power of real estate until I listened to my first Bigger Pockets podcast. Bigger Pockets have been out for a long time. I wish I had opened myself up to greater resources. I wish I read more real estate books. I think podcasts were something pretty new. I think it would have been nice having the technology that we have today, but I think there were resources back then. Syndication has been around a long time. I would have started digging into other resources sooner.

Ash Patel: Rick, what is your best real estate investing advice ever?

Rick Martin: Don’t ever be afraid to walk away from a deal, no matter how much time and effort you put into it. It could be heartbreaking; you spent months and months underwriting, you’re flying to the market, you’re speaking with property managers, someone’s accepted your LOI… But you find something; if it’s a red flag, pay attention, and you’ll get another deal. It may take a lot of time, effort, blood, sweat, and tears again, but better to not lose your shirt than to do a bad deal.

Ash Patel: Have you been burned by following through on a deal that you shouldn’t have?

Rick Martin: I have really not. I’ve never lost investor money. But I did make sort of a dream investment where I bought a piece of land in Costa Rica. It was going to be my dream home. Again, I had a partner on that deal, and he sort of switched philosophies midway. We paid a lot of cash for that, and there really was no income coming in. We did this back in 2006. And when it became apparent that we weren’t going to get water, like we thought we were going to get water and electricity, it was just kind of burning a hole in our pocket. We had to sell it at a bit of a loss and walk away.

Ash Patel: I think that is important advice. Even if you’ve paid thousands for an appraisal, you have lender fees, title fees, if it’s not the right deal, you’ve got to walk away.

Rick Martin: You do, and it hurts. Sometimes people have money that’s gone hard and you can’t get that back either. But you really have to pay attention to the red flags.

Ash Patel: Don’t let your ego force you to continue.

Rick Martin: No. Or maybe you want it so bad… You’ve been wanting to get into this business for the longest time, or you really want to do a deal… Don’t let that overtake the facts.

Ash Patel: Yeah. Thank you for that. Rick, are you ready for the Best Ever lightning round?

Rick Martin: Heck, yeah.

Ash Patel: Let’s do it. Rick, what’s the Best Ever book you recently read?

Rick Martin: Recently, I would have to say Who, Not How, but I will plug the Best Ever book on syndication. I do think it’s a comprehensive resource.

Ash Patel: Awesome. Who, Not How – what impact did that have on you?

Rick Martin: Just not to try to do everything yourself. How refers to how I’m going to do this? What are the tactics I’m going to use, when you really should be leveraging other people who can maybe do it better, and free up your time to focus on big picture items that you should be focused on.

Ash Patel: Rick, what’s the Best Ever way you like to give back?

Rick Martin: I have a soft spot in my heart for kids without parents. I have a few places that I’d like to donate. I give out a lot of free content. One of my mantras is just add value no matter what, deliver good content, and don’t expect anything in return.

Ash Patel: I love it. Rick, how can the Best Ever listeners reach out to you?

Rick Martin: The best way is to go to www. fortressfederation.com. There’s a free resource that’s a quick start guide to investing in syndications.

Ash Patel: Awesome. Rick, thank you for sharing your story with us today. From being on the West Coast, buying a house you were supposed to buy with your girlfriend, that didn’t work out, but that kind of got you the real estate bug, and you’ve achieved a tremendous amount of success. Thank you for sharing your story with us.

Rick Martin: Thanks so much, Ash. It was a pleasure.

Ash Patel: Yeah, pleasure is ours. Best Ever listeners, thank you for joining us have a Best Ever day.

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