January 12, 2022
Joe Fairless

JF2689: Scale from LP to GP with These 3 Tips with Joel Fine


Starting out as a Limited Partner, Joel Fine did everything he could to learn about multifamily syndication: he read books, listened to podcasts, and even asked to be part of a weekly GP meeting on one of his passive deals. In this episode, Joel discusses how he scaled from being a Limited Partner to a General Partner.

Joel Fine | Real Estate Background

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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, Joel Fine. Joel is joining us from Austin, Texas. He is a multifamily investor and syndicator that buys undervalued assets, improves them, and then sells them. Joel’s portfolio includes over 1000 doors as a GP and over 5000 doors as an LP. Joel, thank you so much for joining us today and how are you?

Joel Fine: I’m great, Ash. Thank you very much for having me.

Ash Patel: It’s our pleasure.

Joel Fine: Really appreciate getting to talk to you.

Ash Patel: Yeah. Joel, 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?

Joel Fine: Absolutely, yeah. I originally went to college to learn to be an engineer. I worked as an engineer for many years, then as a project manager, and a program manager. Back then I was living in California. I started doing real estate on the side, but only did real estate outside of California. I didn’t like the characteristics of the California market; no cash flow at all, we were just counting on the appreciation. As it turns out, in hindsight, the appreciation was great, but I didn’t want to take that risk on buying properties that didn’t cash flow.

But eventually, I came around to learning about other markets that do cash flow. I bought a single-family house in Texas, and then some duplexes and triplexes and other small stuff in Ohio. I learned about syndication and started getting involved with syndications, first as a limited partner in a passive capacity, and then later, as an active general partner or sponsor. About the time I was starting to invest more heavily in real estate and ready to make the transition from passive to active, my wife and I moved from California to Texas; we moved about a year and a half ago, right in the middle of COVID. That was a kind of an exciting story in itself. At the same time, I left my W2 job and decided to go full-time into real estate. And at that time, that’s when I decided I want to pursue the active side of syndications, the active side of large-scale commercial multifamily… And I haven’t looked back since.

Ash Patel: So you moved to Austin right when it was popping?

Joel Fine: Yeah. In fact, I think I beat the flood by about a month. We moved in May of 2020, and within a few months, things just went crazy here.

Ash Patel: So Joel, for all those years that you invested as an LP, what were some of the things that you learned that GPS do well and that they don’t do so well?

Joel Fine: Let’s see. Things that GPS do well – first off, when they’re putting together a transaction, the assumptions they make about the transaction are absolutely essential. They can make assumptions that really can affect the apparent quality and value of a deal. For example, one of the assumptions you make is how quickly rents might rise over a period of time. If you move that a little bit, let’s say from 2% per year to 4% or 5% per year, it doesn’t sound like a big difference, but that can make a huge difference in the apparent outcome of the deal. So you have to look carefully at what kind of assumptions the GPs are making.

Beyond that, I love to see GPs that are transparent, that share a lot of information about what’s going on, both before the deal is closed, then after the deal is closed, and while they’re operating the property. Sharing the good and the bad. When things go well, and when the plan is being executed properly, but also when things aren’t going so well.

Sometimes you might have higher delinquencies than you anticipated, it might be a little more challenging to get renovations done, and so forth. So when things aren’t going well, it’s important to share that with the passive investors. They’re really not in control of the investment; most of my passive investors are remote, they don’t live in the Austin area. Likewise, when I was a passive investor, I didn’t live near the properties I was investing in. So there was really no way for me to make any first-hand observations about the property, so I was dependent on the general partners sharing information about the property. For me, that was really critical, this transparency. And then just diligence, making sure that they’re paying attention to the other properties operating, focusing on the key metrics, managing the property manager effectively; just good, high-quality execution.

Ash Patel: What made you transition from being an LP to wanting to become a GP.

Joel Fine: So when I first became an LP, it was sort of with the intent of, “Okay, I’m going to learn about this enough that I can decide if I want to be a GP or not.” I was content buying the small stuff, the duplexes, triplexes, and quads. But I felt like scaling up might be a good way to go. And as I learned about syndications and about how to go about investing in commercial multifamily, I realized that being on the active side is a much more effective way of scaling up. It gives me an element of control that I don’t have as a passive investor, and I’m willing to put in the time to do it.

As I said, when I moved from California to Texas, I left my W2 job to do this full-time. So I figured, “Okay. If I’m going to do it full time, I want to do it in the most effective, most scalable way possible.” For me, that was being on the sponsorship side over the general partnerships.

Ash Patel: Joel, what was your first deal as a GP?

Joel Fine: Let’s see… The first one was 42 doors in Austin; it’s a 1983 property, mostly untouched. The exterior looked pretty good, the interiors were pretty much what we call classic, which means they really hadn’t been renovated, they hadn’t been updated since the property was built in the ’80s. So there was a lot of opportunities there to improve the property, mostly cosmetically, which is really the ideal situation. A lot of properties, they’ll have issues like maybe foundation issues, or they’ll need a new roof. Things like that, you’ve got to do the repairs, but they aren’t going to really improve the top line, the rent you can get. A potential tenant isn’t going to come to a property and say, “That’s a beautiful new roof. I’m willing to pay an extra 50 bucks a month in rent to live here.”

On the other hand, if you swap out the interior components, if you repaint, put in new cabinets, countertops, new flooring, new plumbing fixtures, and lighting, that can really improve the property, not only from the perspective of the potential tenants, but also from the top line. Tenants are willing to pay more to live in a place that looks better. So anyway, that’s one of the characteristics of this property. Again, it’s 42 doors. As it happens, a few months later we bought the property next door that had 44 doors. Combining them, that’s 86 doors, and they’re literally next door to each other; they share a fence. We’re now running it as a single property.

That’s really important, because a 42-unit deal has challenges in terms of its scale. Below about 70 to 75 units, it’s really hard to manage effectively, because you can’t really afford an onsite property manager full-time. But once you go above 70 to 75, you can afford a full-time property manager and maybe even a full-time maintenance tech. That’s what happened with these properties – we combined them, a 42 and a 44 to 86. Now we’re running them as a more efficient property.

Break: [00:07:24][00:09:02]

Ash Patel: Joel, on the 42 units, how much did you raise for that deal?

Joel Fine: Let’s see. I think that was 1.9 million, purchase price was 4.4 million.

Ash Patel: The whole time that you were an LP knowing your end goal was to become a GP, were you prepping investors, gathering emails? Or did you wait until you found the deal?

Joel Fine: No. In fact, I started letting people know that I was involved in real estate, focused on real estate, and planning to syndicate. One of the things I did was I updated my LinkedIn profile to make it clear that I was no longer in the high-tech engineering IT field, I was now full-time in real estate, and I talked about the deals that I was a passive in. Because even as a passive, that’s a great learning opportunity to find out what syndication is all about, how the industry operates, how people manage their assets. In fact, in my first LP deal, I got the general partners to allow me to dial in to their weekly property management calls. I would dial in every week and just go on mute and listen. That was a terrific learning experience for me because I got to hear what kinds of problems they were having, how they addressed those problems, the problems that lingered and were difficult to solve so I used that as a learning experience. Then I communicated that kind of information to friends, family, acquaintances, people I knew, I attended lots and lots of meetups. I had been attending meetups in California. When I moved to Austin, I attended as many meetups so that I could hear, meet locals, just get to know the real estate community, and hopefully have them know me as a potential investment partner.

Ash Patel: Can you walk us through raising that 1.9 million?

Joel Fine: Yeah. I have to backup before the raise actually. My partners in this deal, there were three of us. My apprentice actually found the deal, got it under contract, and then brought me in to help out. We agreed that we would share the responsibilities of the capital raise. So we did the underwriting, reviewed the property, we wrote up a pitch deck, developed information that we could share with potential investors, and then we put together a webinar where we presented information about the deal. In that webinar, we shared all kinds of information. Again, transparency is important to me. We talked about not only the property itself and the business plan about the property, like what we wanted to do to the property to improve it, but we also talked about the markets, what was the neighborhood like, what’s the Austin market doing. We talked about what sort of comparable properties were in the area and why the behavior of those comparable properties justified the numbers we were putting together. We laid out our expectations of, “Hey, if we do the following upgrades to the units, we think we can get this much in additional rent, we think we can improve the net operating income, and so forth.”

We put that information together in a pitch deck, in a PowerPoint slide deck, presented that in a webinar. I think we had, I don’t know, at least 40 people attend. From there, it was actually fairly straightforward. It took us about two weeks to get all the commitments we needed to fund the deal. At that point, it was just a matter of going through the rest of the purchase process, including due diligence and getting the lender approval, getting the appraisal done, and so forth. It actually was very smooth. I think Austin is a very, what I would call a sexy market. When you tell people you have a deal in Austin, there’s a lot of interest in it. They know that Austin’s a fast appreciation market, it’s a place where jobs are growing, people are moving to Austin, so the demand is high. There’s a shortage of housing here so people are inclined, are attuned to invest in Austin. I think that was part of what made it relatively easy for us to raise the money. But within two weeks, we had the money and ready to go.

Ash Patel: What do you say to those people in New York, Austin, and Southern Florida, that say there’s no good deals here?

Joel Fine: Well, it’s very challenging to find deals, there’s no question about that. I have to give credit to my partners, they’re the ones that found that deal, and they found a couple of other deals since then that I participated in. It’s really all about relationships, getting to know brokers, getting to know sellers, getting to know lenders who might have access to deals. When you find deals, you underwrite them, and you have to be ready to move quickly. It can be challenging to get a deal to underwrite, to get a deal to look like it’s going to do well. But if you’ve got your ducks in a row, if you understand the market well, you know where the rents maybe are under market, and you have a good sense of what you can do to a property to improve it, there are opportunities. We’ve done two deals already in Austin, we’re in contract on numbers three and four. I’ve also done a couple of land deals here that are very promising.

Ash Patel: That’s incredible. Joel, in my experience, engineers make some of the best real estate investors because of all the systems and processes they employ. What’s one of the biggest mistakes you’ve made so far in your real estate investing career?

Joel Fine: Ooh, a mistake that I’ve made. I guess I would say one big mistake that I made was early on. One of the first properties I bought was a quad in Cleveland, Ohio. That was before I was really doing any syndications. In fact, I think it was even before I started being a limited partner. But this particular property was four units, it was in a suburb of Cleveland called East Cleveland. For folks who aren’t familiar with Cleveland, East Cleveland has a very poor reputation. It’s kind of the hood. This particular property was in a pocket of East Cleveland that was isolated from the rest of the city by a big park. It was right next to a much nicer suburb called Cleveland Heights. I was really optimistic about that. I convinced myself that my property, because of its location, was going to attract Cleveland Heights type tenants and not East Cleveland tenants. In hindsight, I was wrong. Bought it for 145,000, I did about $80,000 worth of renovations to it, it really needed a lot of work, rented it out for a couple of years. While I was renting it out, I had a property manager running it, but it consumed a lot of my time. Between vandalism, there were delinquent tenants, there were fistfights on the property, broken windows, broken lights. I finally gave up. I sold it for a little bit more than I paid for it, but much less than I put in, including the renovations. I probably lost about 60k on it. In hindsight, I suppose it was a good learning experience. I’ve heard folks call that expensive seminar.

Ash Patel: Just time and money.

Joel Fine: Exactly. It did help me on my journey. If I hadn’t bought that quad then I wouldn’t have bought other things I did buy in Cleveland that worked out much better. I wouldn’t say I regret it but it was certainly, in hindsight, a mistake.

Ash Patel: Yeah, thanks for sharing that. With your investors on the 42 unit and a 44 unit. What’s their projected return in such a competitive market?

Joel Fine: On that one, when we underwrote it, we were projecting 16% to 17% internal rate of return, IRR, with I think it was 10% cash on cash return. We had an 8% pref, we’ve been operating the property for a little less than a year, I think nine months now. When we bought the property, the units were almost all one-bedroom. The units were getting 950 to 975 a month, we underwrote for 1100 a month. We said, “Okay, we think after the renovations we do, we can get 1100 a month.” We did the renovations on a handful of units and tenants were willing to pay 1250 a month. We went from 1100 a month in our expectation to 1250 a month. We expect to beat our forecasts substantially. We haven’t quantified that, I don’t know what the number will work out to be. But we’re feeling really good about it. It’s like I said, the rent is higher than we anticipated that we put in our spreadsheets and so that’s just really good news for us and our investors.

Break: [00:16:43][00:19:40]

Ash Patel: Did you have appreciation as part of your proforma?

Joel Fine: Well, with commercial multifamily, the appreciation is embedded in the improvement to net operating income. It’s different from single families where appreciation is all about the comparable sales. If you’ve got a three-bedroom two-bath and your neighbor has a three-bedroom two-bath, you’re not going to get much more than your neighbor no matter what you do to the property, no matter how much rent you can get. But on a commercial multifamily property, if you can increase the rents and increase the net operating income, you can increase the value of the property, it’s almost linear. If you double the NOI, the net operating income, you can almost double the value of the property. For us, that’s what it’s all about. We can force appreciation by improving the property, by renovating, upgrading the tenant base, increasing rents, and thereby increasing the net operating income. That creates the appreciation so we don’t have to count on market appreciation. What we’re counting on is our ability to force that appreciation and then derive the benefits from it.

Ash Patel: Was your exit cap rate lower than your entrance cap rate?

Joel Fine: No. We always underwrite for a higher exit cap rate. It’s a more conservative thing to do. That particular property, I think we bought it 4.25% cap rate, which isn’t bad for Austin. In Austin, three and a half is not uncommon. But we bought it at 4.25 and I think we underwrote for 4.75% cap rate. It works out to about point 1% per year, which is roughly where we like to be.

Ash Patel: It’s very conservative underwriting. Good for you on that. Do you have a waterfall structure? If let’s say the cap rate is even lower when you exit and the appreciation is just through the roof.

Joel Fine: We haven’t put a waterfall structure on any of our multifamily value-adds. But the one land deal that I syndicated, I did put a waterfall again. That one, we have a 10% pref and then I think it’s something like 70/30 up to 20%, and then 50/50 after 20%. We figured, if we can deliver a 20% IRR to our investors, that’s pretty awesome. We all can be dancing in the streets. At that point, we’ll take a little bit more of the top-line as an incentive, as a reward for all of us for doing better than that.

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

Joel Fine: Best advice. I would say if you’re trying to get into the business, be ready to partner up. One of my limiting beliefs that took me a while to get over was I thought I had to do things on my own. When I was buying the little stuff, the duplexes and triplexes, I thought, “Okay, whatever I’m going to buy, I have to be able to afford to buy on my own.” Now I was dealing with debt, I was getting bank loans, but for everything I bought, I would have to come up with 25% of the purchase price. Once I broke through that limiting belief and decided I could partner up, suddenly I could buy much bigger assets, because I didn’t have to come in with 25% of the purchase price. I could come in with a much smaller number, maybe one or 2%. My other co-sponsors would come up with a little bit of it and then my passive investors would come up with the rest of the down payment, that would get us to 25 or 30%, the bank would do the rest. But the key thing is, by partnering up, both with other sponsors and limited partners, that enabled me to scale up substantially and buy a very different class of properties.

Ash Patel: Joel, are you ready for the Best Ever lightning round?

Joel Fine: Absolutely. Bring it on.

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

Joel Fine: Well, let’s see. There are two of them, I want to give a shout-out to. These are actually for passive investors. I love it when people read these books and then have a conversation with me as potential passive investors because it makes them much more knowledgeable. One of them is called The Hands-Off Investor by Brian Burke and the other one is Passive Investing in Commercial Real Estate by James Kandasamy. They’re similar in terms of the content they present, but slightly different angles on the content. But the key is, they’re really great for people who are thinking about investing passively and just want to understand how to get into that, and how to do their due diligence since they can’t necessarily visit properties, they can’t necessarily look through the books the way general partners do. They’ve got to rely on a lot of information that the general partners are feeding them. Those books are really excellent resources for passive investors to learn about the business.

Ash Patel: What’s the best type of way you like to give back?

Joel Fine: A couple of things. One is, giving back for me is a kind of an interesting phrase because I think what I do on a daily basis improves lives. For me, that’s what’s giving back. When I buy a property and I renovate it and improve it, I’m improving the lives of my tenants, I’m giving them a better home to live in. That’s important to me. I’m also improving the lives of my investors by giving them a great return on their investment, by giving them good risk reward trade-off that allows them to diversify their portfolio and buy into asset classes that they might not otherwise be able to. I also run a meetup locally in Austin. I love to have people who want to learn about syndication and multifamily investing. Join me in my meetup. The education of other investors is important to me. When I was in California, I actually ran an educational nonprofit that focused on social and political education. I did that as a way to give back. I haven’t run across a charity organization in Texas just yet, but I’m hoping to find one that I can participate in.

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

Joel Fine: Well, they can go to my website, lakelineproperties.com, or they can email me joel@lakelineproperties.com.

Ash Patel: Joel, thank you so much for joining us today, sharing your story, going to college, becoming an engineer, and getting into LP investments knowing your end goal was to be a GP. Congratulations on your success.

Joel Fine: Thank you very much. I appreciate the time.

Ash Patel: Best Ever listeners, thank you so much for joining us and have a Best Ever day.

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