Bruce Wuollet got his start in real estate by chasing tax lien foreclosures on single-family homes in 2002. That led to wholesaling, and by the time he was introduced to multifamily, he had flipped over 2,000 houses across Phoenix. Today, Bruce buys fix-and-hold multifamily properties in Arizona, New Mexico, and Texas as founder and CEO of Bakerson. In this episode, Bruce discusses how he selects the right investors for buy & hold deals.
1. Don’t Be Afraid to Turn Down Money
This is the first and most important rule Bruce lives by, which sets the precedent for the remaining tips. Sometimes protecting your investors’ best interests means having to say, “Maybe you’re not the right fit for this deal.”
2. Use the 20/20 Rule
Bruce’s 20/20 rule is that no investor can fund more than 20% of a deal’s equity, and they cannot invest more than 20% of their liquidity. An investor with $1M in liquidity, then, would be limited to investing $200K. That way, they’re not pouring all of their money into the deal.
3. Enforce Penalties for Withdrawing Early
Bruce instated the 20/20 rule after an investment went longer than anticipated, and an investor wanted to take his money out. It turned out that this person had invested all of their money in this deal. “I didn’t sleep for a few days,” Bruce says. “... So I had to work on getting [his money] back to him, and I said never again. Never again will I have somebody give me all their money.” Because of this experience, Bruce warns every potential investor that they shouldn’t expect to be able to take their money out in the case of an emergency life event.
4. Communicate Clearly
While Bruce and his team were transitioning from the “buy, fix, and sell” model to buying and holding, he made a communication error. He brought investors on for a short-term deal, changed to long-term, and then ended up selling short-term. Some investors wanted to get out while other investors wanted to get in on the deal. “We were trying to figure out the best way to get those investors out and get them out short-term,” Bruce says, “but one individual that had a pretty good tax bill coming was not happy, and he did not reinvest in the next deal.” Bruce learned from this experience how important it is to communicate clearly with investors in order to consistently meet their expectations.
Bruce Wuollet | Real Estate Background
- Founder and CEO of Bakerson, which buys fix-and-hold multifamily properties in Arizona, New Mexico, and Texas.
- Portfolio: GP of 1,000 units
- Based in: Carefree, AZ
- Say hi to him at:
- Best Ever Book: Blind Ambition: How to Go from Victim to Visionary by Chad E. Foster
- Greatest lesson: Inflation is not an increase in prices. Rather, it is the increase of money supply. And with that, appreciation is increased value MINUS inflation.
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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 I'm with today's guest, Bruce Woullet. Bruce is joining us from Carefree, Arizona. He was a previous guest on the Best Ever podcast. If you Google "Joe Fairless and Bruce Woullet", his episodes will pop up. Bruce, thank you for joining us, and how are you today?
Bruce Woullet: Hey, Ash, thanks a lot for having me on. I'm doing fantastic and improving.
Ash Patel: It's our pleasure to have you. Bruce is the founder and CEO of Bakerson, which buys and holds multifamily properties in Arizona, New Mexico, and Texas. Bruce's portfolio consists of being a GP on over 100 units. Bruce, 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?
Bruce Woullet: It should be over 1,000 units, not over 100, but that's okay.
Ash Patel: That's a great accomplishment.
Bruce Woullet: Actually, I started in single-family back in 2002, chasing tax lien foreclosures, then got into buy, fix, and sell in 2003, and then got introduced to wholesaling. I wholesaled a ton of properties across Phoenix, over 2,000 houses that we flipped, and we would take them down -- the average hold time was 52 days, the average fee was $5,800, average flips; so just small flips in just high volume. Then got into flipping, doing the same thing with multifamily. We watched what people were doing, like, "Man, there's a lot of money to be made if we take these down." So we formed some partnerships and took down some properties in Phoenix and Glendale. After I did half a dozen in Phoenix, I saw the market's peaked here, so let's go to Tucson, and the market had more than doubled since I thought it peaked. I haven't been so clear on where the prices are going, but... Who knew Phoenix would do what Phoenix is doing; it's insane. Then we started buying in Tucson, did 11 projects down there, and now we have one in Sierra Vista, Albuquerque, and Fort Worth, Texas.
Ash Patel: So everywhere you go, you just leave a path of destruction. When I mean destruction, I mean fully priced properties.
Bruce Woullet: Yeah, we've been able to find really, really good deals. The property is Sierra Vista is $38 a square foot, we purchased it at. The one in Albuquerque we bought for under $42,000 a door, we just closed in January. Then the one in Fort Worth is $90,000 a unit. So the price points we're seeing are not typical, and it's a lot of work to find those deals... But we're particular. We buy cash flow, we don't buy appreciation. We accept appreciation, but that's not what we're buying. We're buying in appreciating markets, but we're focusing on cash flow purchases now.
Ash Patel: And Bruce, you mentioned you're buy-and-hold. Do you not sell properties?
Bruce Woullet: We have in the past. That's one of the things that -- I find out that we're operators first and we became syndicators as a way to fund our business. And the challenge that I find is... In fact, I've told this to some of the investors I speak with, is "Why do you consistently put the sponsor out of work?" To me, even by tax definition, over 12 months is a passive investment. But I think 18 to 24 months is still a flip as far as real estate goes. Real estate is a long game.
The reason I'm very passionate about that now is my mentor has 53 years of experience in multifamily investing, and that's how old I am, so I figured he's been through many, many cycles, and he says that the way he buys and sells is much different than syndicators. Syndicators are maximizing the investors' investment during a certain time period, but at some point, the ride's going to stop. And are we prepared to go when the ride stops and the huge increase we've seen in values stops? Are we prepared?
Ash Patel: What a great question. So what does that look like, when the ride stops? And what factors would contribute to that ride stopping?
Bruce Woullet: There are some hints of it right now. We've got a couple of years left in this run, I believe... So to get in and out in 18 to 24 months probably is safe. It seems we still have a lot of good fundamentals in place that have that. But what we're seeing now is we're seeing uncertainty in the interest rates. So the interest rates are going up; there's so much money in the streets... We're actually seeing -- for operators, the equity cost is coming down a little bit. It was 20%, 25% expectations, and it dropped down to 18% or 15%-18%. Now, there's a number of people that are getting 12%-15%; some even get around 10% equity. And if you get preferred equity, you can get even less than that. [unintelligible 00:06:00.02] and then bring in common equity on top in your capital stack.
But we're seeing the cost of equity coming down. So with the rising rates and the cost equity going down... Plus, the rents are going up. So with rents going up, we're going to continue to see a push for increased prices. But at some point, the rates are going to continue to go up, we're going to see where rents won't meet projections, people are going to over-promise... And one thing, Ash, that I'm seeing on the people that are putting out their proformas - I do not see an increase in expenses that's meeting inflation. I think that will bite operators; they're going to take some arrows in the assets, let's just put it that way.
Ash Patel: [laughs] I'm going to use that. I love that line. I see a lot of that as well, where proformas are basically expecting flawless execution. If there are any hiccups, the numbers don't work. I've also seen where exit cap rates are lower than entrance cap rates, which doesn't make sense in a rising rate environment. And there are also a ton of new syndicators out there that had a W2 job, and within six months have taken on $20 million of investor capital. It kind of blows my mind in how somebody with less than a year's worth of experience is comfortable taking $20 million of other people's money.
You mentioned rates are going up, cost of acquisition is going up... Now rents are going up as well, material costs are going up. Where's that collision? What do you think is going to cause an imbalance? One of the things is, interest rates are rising, cost of borrowing from private investors is going down. At some point, will it just be advantageous to borrow from the banks at 8%?
Bruce Woullet: What happens is when investors shut their cap off, is when we're going to have a problem. Investors are like "Okay. Enough is enough. It's too volatile. I don't see the returns, or I don't call your numbers", or the operator is not able to meet their proformas... When things like that start to happen, the investors are going to shut that cap off. And when that cap shuts off, we're going to see where we could have certain segments implode. Now, some of the hotter markets, like Phoenix, have been boom and bust; is it going to crash this time? I don't know. But it's certainly not going to keep rising at the current rate that it's going.
When the average C property is selling for $280,000 a door, the rents just don't cover that. You have to get nearly $3,000 a month in rent if you look at the old formulas in a normal market. So we see that.
But the other thing that people don't know that they got to be careful of is lenders require an exit cap different than what you would think. People are dropping their exit cap to make their numbers look good, but getting a C under four cap is not sustainable. When I first got into multifamily investing six, seven years ago, C properties were around 8%-8.5% cap. Now, it's at 4% or 5%.
We see something that we underwrite at a 6%, and we're like, "Well, it's an existing 6%, and we can push it up to an 8%." And now we're excited, where back seven years ago, it needed to be at 8%, 8.5% current, or even a 10%. It was crazy what's happened. That's why I don't think it's sustainable, because the market is rising I think too fast, and that concerns me. But could I be wrong? Sure. I was wrong before. I mentioned when I thought Phoenix was peaking and it's doubled since then. So will it continue to go...? But there are so many other fundamentals and metrics that you look at; the rent is one thing. Now, how far can you push that and you outprice the market?
Ash Patel: Yeah, a lot of us were wrong. We thought the market had peaked several times over the last seven years. How are you preparing for what you're expecting to come?
Bruce Woullet: What we do when we underwrite is we push our rents to the market average. We're on the C market, I like the C market and I want to deviate a little bit just why I like class C... The lower middle class and the upper-lower class residents, or that demographic, is the fastest-growing demographic and the most underserved demographic in United States today. When you have things like Roosevelt Row in Phoenix that came in and built beautiful buildings - it's a great business model, and I like what they did there. But the people that had to move out of those buildings that were demoed and were completely removed - they had no place to go. So that demographic, they're going to need a place to live. So C class properties is where we exist.
When we go into a market. We don't raise our rents higher than the competition. We use the competition as a benchmark, like the one we have in Fort Worth. The rents are around $700-$750,a nd for those smaller units, we shouldn't be at $950. We know that, because we drove the comps which are in worse condition than our property, but yet, they're getting higher rents. We push to that. And the proforma on top of that is once we do these value-adds, we can push these higher numbers. But we don't underwrite on that, we underwrite on existing rents, where can they be today, not on adding a 10% increase each year for the next three years. So that's one way that we protect - we make sure that when we underwrite, we can stress test that at current market rents for similar properties.
Ash Patel: Bruce, back to timing... You mentioned buy-and-hold, you don't understand really why 18 to 24 months is the normal syndication cycle. What do you tell your investors in terms of how long you're going to hold the property?
Bruce Woullet: Let me give you a secret. If you want to completely shrink your investor base...
Ash Patel: Tell them it's a 10-year hold.
Bruce Woullet: Yeah. You completely shrink it. But we've attracted other investors. One guy that I talked to, they came in our most recent deal, he said, "Bruce, I made 22% of my last investment. I was super-excited. I did really well. I got the money in the bank. And now, I'm deflated." I said, "Why?" He said, "Because I don't know where else to put it. There are too many options." He said, "I just got into this 14 months ago, or 13 months ago, just over a year." And he said, "Now, I've got to find a place." He said that was two months ago. He says, "I'm making no money on that. I'm busy at work. I don't have time to go out and chase another opportunity. I just want to put something and get a double-digit return for 10 years. Where can I put it?"
He put a part of his into ours, just a small investment, but yet, he wants to give that a test runs to see how that works. It's not an easy conversation, Ash. I'm in the minority when it comes to that... But I thought, "You know what? If we can attract those people--" There are some people that are accredited investors that are in the military. They've been through 22 years in the military, or 25 years. They've been able to do small investments in rental homes." Now, they said, "You know what? I want to get passively involved." They like the longer-term hold, that's what they do with the rental houses. So they've become accredited, a very savvy structures that they have in creating their wealth. Then they said, "Hey, I don't want to sit here and move money all the time." They're busy in the military, they're busy doing their job.
Another one's a surgeon, he says, "I don't have time to sit here and manage every year, find a new opportunity. I want to put it somewhere and then as that grows, keep adding to that." So it is a difficult conversation, like I said. We shrunk our investor base very fast when we shifted from an 18 to 36 months hold to a seven to 10-year hold. It was crickets for a little while.
Break: [00:12:51] - [00:14:40]
Ash Patel: Bruce, is there a way for investors to get out early? Do you get asked, "Hey, what happens if I have a life event in five, six, seven years? Can I get my money out?"
Bruce Woullet: That's a great question. That's one that we tell people, don't put the money into our investment that you expect to get out in case of an emergency life event. The reason is we're focusing on a little higher net worth individuals. They might have a net worth of $5 million to $10 million, and they've given us $200,000. So it's not like it's their nest egg.
And I have a rule, we call it the 20/20 rule in our investments. No investor can be more than 20% of a deal of the equity. And they can invest no more than 20% of the liquidity. So if they have a million dollars in liquidity, they can put in no more than $200,000. Now, that's on an honor system.
The reason I have that is we had an investment that went longer than anticipated, and the investor wanted his money out. And then one day he sat down with me and said, "Bruce, we have all of our money with you." I didn't sleep for a few days. It was like, why would he put all of his money with me? That was ridiculous. It was $300,000, $400,000 so I had to work on getting it back to him. And I said, "Never again will I have somebody give me all their money." Now two of us aren't sleeping. How's that healthy?
Ash Patel: I love that contrarian approach, and I love how you talk yourself out of people's investment dollars, but you're doing it for the right reasons.
Bruce Woullet: It's not an easy discussion internally, because when they say, "Hey, I've got $300,000 I want to put in your deal." Well, that's easy, $300,000. Then I find out that their net worth is $300,000 and they're not accredited, I'm like, "Probably not a great idea on this deal to do that. Let's do $50,000 and see how it goes." It's not an easy discussion, Ash, because it's really tempting to take it.
Ash Patel: Yeah. But it's a discussion more people should have. It's almost like people are looking for floodgates to open. "Yes, I'll take all of your money. Keep it coming. As a matter of fact, if you have friends and family, I'll take their money as well." But really getting to know your investors, their threshold for returns and risk I think is very important. I applaud you for doing that.
Bruce Woullet: Thank you. It was due to headaches and heartache in a person's situation that we've found out. When people say they have to get out because of a personal emergency, it's probably not a great investor. I even told people that "Maybe you're not for this deal." In some of our documents, we've had what's called a Dutch Auction, I don't know if you're familiar with that. You can sell yours for face value, or for a percentage. You keep working it down until an investor says, "Yeah, I'll take that one for X." So there are ways to get out, but we make it very difficult. We want them to bet on the horse, and that's the operator and the sponsor, and to really trust that we're going to run this, and it's a good investment for them.
It's a similar thing if they had their money in a 401K or an IRA and the penalties are so steep. Why are they steep? Because they don't want you to take your money out until you're 59 and a half. There's a reason why those are steep penalties. We have a similar mindset, that this is money that is out of sight, out of mind. That's what we're hoping to attract in the future as well.
Ash Patel: Bruce, one thing that rarely gets talked about is tax consequences, because everybody says, "I'm not a tax attorney, no tax advice is given." But with your model, you're saving people from paying taxes when they exit that syndication, and that operator does not have another 1031 deal for them to put the money into. Does that conversation come up a lot with your investors?
Bruce Woullet: It hasn't come up too much. They've enjoyed the great returns, and they have not -- although, actually, I take that back. It did come up one. We had a property that we were going to hold for 10 years, and we had proforma'd it long-term, to be around five years. We said, "Oh, it will be worth about 7.3." Somebody said, "Hey, we want to make an offer on your property." I said, "7.5, and we'll let it go." They offered it, so [unintelligible 00:18:10.27] the market in Tucson.
Also, we had a couple of investors that wanted to get out... We were in the transition from going from buy, fix, and sell to buy-and-hold, and we had both investors in this deal. It became problematic as a conversation, because we realized we had created a little bit of a problem by having investors that were in and out in three years, and then we said, "Hey, we want to hold this one long-term." We had people that said, "Well, we want to get out. Well, we want to get in." So we were trying to figure out the best way to get those investors out, and get them out short-term.
That one individual that had a pretty good tax bill coming was not happy, and he did not reinvest in the next deal. But that was a communication issue on my part, to have investors come in for a short-term and then change to long-term, and then sell it short-term. It was difficult.
Ash Patel: Yeah. You screwed up by giving somebody really high returns, and then they had to pay taxes on it.
Bruce Woullet: Yeah. What a bummer, huh? [laughs]
Ash Patel: But again, I applaud you for really deep-diving into the expectations of your investors. A question I've got to ask... You had wholesaled over 2,000 single-family houses; have you used any of those wholesaling skills to acquire multifamily?
Bruce Woullet: Absolutely. In fact, it's pretty fun. We bought a property in Tucson where my son went and talked to the owner and visited him at his property. "No, I liked the property's cash flow. It's a good property, I'm not going to sell it." So he asked him, "What don't you like about it?" He said, "Well, the only problem is this little bit of a drive from Southern Arizona up to Tucson. It's 90 minutes each way, so if I have an issue, it takes some time." He kept in touch over months. And I asked "Hey, how's that drive going?" One day I caught him at a time when he had to go back and deal with an emergency. He said "You know what? I think I should just sell. This is taking up too much of my time." So we bought direct with that owner.
It reminded me back to the little yellow notes, when you've seen a property that was distressed, you talk to the owner and you ask them what are your pain points, and they say, "I don't have any." The same thing happened on a house, where the guy said, "Oh, this house is great. The only problem is my knees are getting sore and it's a two-story house; going up and down the stairs has been difficult." Well, I talked to him over the course of months, and eventually, the person sold. So we learned that in wholesaling, [unintelligible 00:20:18.20] to owners, find out what are their pain points, what don't they like about a property, and just continue to visit with them. When you're in their sales cycle, they're going to call you first. That was taught in wholesaling.
In fact, I used to send people postcards and they said, "You need to stop sending me these postcards." I said, "I'm going to mail them until I buy or you die." [laughter] I mean, we [unintelligible 00:20:37.09] they didn't want us to bug them anymore, of course, we'd be respectful and not bug them. But you've got to be careful if you're talking to an elder. Somebody who's really old and feeble, you don't want to do that. But that was our mindset. We still use that today and we'll continue to knock on the door of owners. Now though, the challenge is, you probably know, they're getting knocked on by every broker and any savvy buyer in the market. So it is difficult. But yeah, that's probably the biggest thing we've taken away.
The other thing is how to estimate cost per unit. In a house, we'd walk in and it was either $5,000, $10,000, $15,000, or $20,000 to rehab the house to retail. We use the same thing; just real quick, what is it? It's a light turn, it's $2,000 per door; or $5,000, or $8,000. We get real quick numbers, multiply it times the number of units, get a pretty good idea of what the costs are going to be for the sniff test. So those skills are also very deep.
Ash Patel: And are you competing on every offer that you put out? Are you still able to find off-market deals that you're taking down?
Bruce Woullet: We're finding some off-market deals... They've been on market as well, and it has to do with timing. But if it's going to [unintelligible 00:21:40.02] market call for offers, we have lost those 100% of the time; we have never won a call for offers on a property. In fact, the most recent one, when we bought, we just said, "What will it take to avoid the call for offers?" They said, "Hey, if you get us to X amount, we'll sign the deal." I said, "Okay, done." Because if it markets, it would have went somewhat higher. But that was our threshold. Our threshold is 13.5, they came in at 13.7. We said, "Okay, we can make that work. It's only $200,000."
Ash Patel: Good for you. Bruce, what is your best real estate investing advice ever?
Bruce Woullet: Persistence. The compound effect. Do a little bit every day and stay on the details. It's very important to be structured. It's difficult for me to be structured, because I've got the mindset of always wandering all over the place. But having a structure to your day is really, really important. And little bit every day on your tasks.
Ash Patel: Bruce, are you ready for the Best Ever lightning round?
Bruce Woullet: Oh! Bring it!
Ash Patel: Bruce, what is the Best Ever book you've recently read?
Bruce Woullet: It has to be Blind Ambition by Chad E. Foster. I met him skiing in Aspen. He's a blind skier and he skis double black diamonds. I met him and he said he wrote a book. That's the lighting round, and it's a long answer, so I'm sorry. But Blind Ambition - phenomenal.
Ash Patel: What was your big takeaway from that book?
Bruce Woullet: Here's a guy that felt sorry for himself for a brief moment and then said, "You know what? This is my new life. This is the new me? What can I do with the new me?" And we have that advantage every single day, to say, "This is a new me. This is my new me. What happened yesterday can't be undone. I can go forward from today." That was by far the biggest eye-opener thing - and pun not intended, eye-opener... To read about a guy that's blind that does amazing things. Blind Ambition by Chad E. Foster, phenomenal.
Ash Patel: Bruce, what's the Best Ever way you like to give back?
Bruce Woullet: I like individuals that are in need, and I get this from my wife. If somebody needs help, she's the first one to make a meal, the first one to bring them goodies, the first one to make sure... So I just ride on her coattails; where are we going to serve next? We bake cupcakes, thousands a year. If people need something, we'll do something small like that. Or something even larger, we're donating to an event or situation. But giving back on the personal level is most important to us, and people in need.
Ash Patel: Bruce, how can the Best Ever listeners reach out to you?
Bruce Woullet: The best way to reach me is to go to bakerson.com, B-A-K-E-R-S-O-N. bakerson.com, because I'm an SOB, a son of a baker.
Ash Patel: Bruce, thank you so much for your time today, giving us your journey - 2,000 wholesale houses, your outlook on what's going to happen with multifamily, some of the pitfalls, and your contrarian approach... But most importantly, how you value what your investors are looking for. Thank you for your time today.
Bruce Woullet: Hey Ash, thank you so much for having me on. It's truly been a joy.
Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review. Share the podcast with someone you think can benefit from it. Also, follow subscribe and have a Best Ever day.
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