April 11, 2017

JF952: $50MM In 3 States Using PHYSICIAN'S Money with Thomas Black

He has built a portfolio of multi family complexes funded by physicians on apartment syndications. He even wrote a book on it. I would take extensive notes listening to this interview if you were interested in multi family fundraising and selecting specific properties to purchase.

Best Ever Tweet:


Thomas Black Real Estate Background:

– Co-founder and Managing Partner of Napali Capital; a real estate investment company
– Currently regional director of 8 hospital Emergency Departments and practice clinically few days per month
– Napali Capital, LLC, owns nearly $50 million in multifamily real estate in Texas, Oklahoma and Wisconsin.
– Former Navy veteran, turned physician, turned real estate investor
– Based in Dallas, Texas
– Say hi to him at www.freedomintheblack.com
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Check out his new podcast at https://soundcloud.com/financialfreedomer


Made Possible Because of Our Best Ever Sponsors:

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to adwordsnerds.com/joe to schedule the appointment.




Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki (Rich Dad, Poor Dad), and a whole bunch of others.

With us today, Tom Black. How are you doing, Tom?

Tom Black: Great, Joe. How are you doing today?

Joe Fairless: I’m doing well, nice to have you on the show. Tom, first and foremost – he’s a former navy vet turned physician, turned real estate investor, so thank you for your service in the navy, my friend!

Tom Black: Thank you so much! It was great!

Joe Fairless: In addition to the navy, as I mentioned, he is a former physician and a real estate investor. He currently is a regional director of eight hospital emergency departments, and I guess you’re currently a physician too, practicist.

Tom Black: I currently am. I’m practicing maybe one day a week or so, just to keep my finger on the pulse with things, should I say…

Joe Fairless: Sweet! In addition to that, more relevant to our conversation, he is the co-founder and managing partner of Napali Capital, a real estate investment company. His company owns nearly 50 million dollars in multifamily real estate across three states – Texas, Oklahoma and Wisconsin. Based in my hometown, Dallas, Texas. With that being said, Tom, do you wanna give the Best Ever listeners a little bit more about your background?

Tom Black: Sure thing. I got involved in real estate about seven years ago now; I was finishing up my medical training at the wonderful Indiana University, and was really hitting a time where the market, as you know, wasn’t doing so hot around the 2008-2009 period. I decided to rent my house up there instead and we moved down to the Texas area, and just rented out a residence. That really gave me insight to a depreciation, which is something that a lot of physicians don’t know about and/or don’t have, just because of the nature of our business and not having any assets to use.

I got into practice at [unintelligible [00:03:58].16] Texas. I designed and developed and built from the ground up a small apartment complex and did very well on it. I 1031 that into some commercial properties, and just completely got enamored by it and what it could do for physicians and other high net worth individuals, translating from a high income to a high net worth, which has been career-saving for me. The emergency department and other physicians in general tend to have pretty high stress careers, and there’s a longevity to that – you can only do it so long.

So I moved to the Dallas area and started doing some syndications, mainly with physicians and my brother, who is the former chief operating officer of Great Wolf Lodge, which is an indoor waterpark community and hotelier. Since then, it’s just been going off to the races, and I just finished a book, in fact, entitled The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth. It’s basically about my background from the navy, up into medicine, and then translating that and having a heck of a fun time doing it.

Joe Fairless: You designed and built a small apartment complex – can you elaborate and tell us the details about that?

Tom Black: Sure. In Longview, not a lot of economic pressure as far as big box places; a lot of local economic impact, and I found a three-acre plot that was on foreclosure through a bank, and I decided to jump in. I had read enough about real estate and I had owned numerous single-family homes that we bought as foreclosures and were using them as rentals, so I partnered up with a local custom homebuilder that had been building custom homes for about 20 years.

I started designing and doing the utilities – of course, that goes hand-in-hand with rezoning, which is not something that I would ever wish on my worst enemy, but learned a lot about the process. We took this thing from a pile of dirt up into just under 20 units; it took us about a year and a half, and then I was fortunate to sell it at a time where oil was starting to decline a number of years ago.

Joe Fairless: Okay. How much did you buy the land for and what were your all-in costs, in addition to the land?

Tom Black: The all-in land cost was only $35,000, and I bet somebody will probably out there dropping their jaws, but it is East Texas, for a couple acres, and it actually had a pipeline run through it. East Texas is of course known for a lot of oil, so there’s a lot of issues with engineering that need to go around that, and variances and things. We had to specifically design the apartment complex so that we could get around these pipelines.

All-in cost was just about a million dollars or so, right around there. With fees I think we ended up at about 1.2, and ended up selling for just under 1.9 million 18 months later.

Joe Fairless: That’s great. What type of financing did you get in order to build it?

Tom Black: On this, oddly enough, I didn’t know enough about multi-family, and built the units probably a little larger, looking back, than I should have, and used some really nice interiors of cedar, granite and stainless shell appliances. This was all done as a recourse note, on my back. Of course, now getting to educate physicians, it’s one of the paramount things that I discuss – recourse vs. non-recourse financing. At that time I didn’t really understand what that meant. For those that do know, the non-recourse with larger assets, you’re not limited having any financial liability unless there’s certain clauses that are met. That was all done as a banknote on my cheat.

Joe Fairless: With that exit, you 1031-ed it into what?

Tom Black: Light industrial properties near that area, that are all triple net leased to oilfield service companies. So we’ve managed to do very well on those; they’re anywhere from 5,000 to 20,000 square feet. We ended up building those as well, and have gone very well for the last three years; despite the decline in oil, oilfield service companies still have to operate, and there’s still a certain amount of measuring and calculations and other things that need to be done on existing oilheads.

So we did that, and we used that money then as I broke off and moved to the Dallas-Fort Worth area and fit the existing position I’m at, managing a physician group, and then in turn really focusing a lot on physician wellness and more passive income and professionals and people that may not know the absolute joy it could be to depreciate a large asset, at the same time creating passive income for yourself.

Joe Fairless: So with that 1031 you went into light industrial properties that were triple net lease and you built those from the ground up…?

Tom Black: One was a purchased existing, and what we did was a leasehold improvement on it for several hundred thousand dollars, because the tenant existing wanted some more office space. So we bought that building and that satisfied the 1031 requirement.

The other one we got was essentially a shell. So the land, the building had been developed, we just did not have a tenant in there, so it was kind of a building we built on spec, and luckily, a month after we signed the contract, we had a national oilfield service company out of Utah came in and started leasing that.

Joe Fairless: How did you attract the company that ended up leasing it?

Tom Black: Relationships. That’s the cornerstone of this multifamily and real estate… The gentleman that owned and developed the industrial park actually had relationships with a lot of places all over. He had had some people that already finished their business plan on a couple of these commercial buildings, so he offered them to me. It was just a gentleman in the community, and it’s a very small community, so I was fortunate to have made those relationships early on.

Joe Fairless: And you have a toehold in Longview, Texas, East Texas, and I have some friends who are from there, and I love hearing them talk; they have a different accent from a typical Texas accent… Why not focus on that market, albeit smaller, but you could dominate that market, versus going in larger markets?

Tom Black: At the time I built this area… That’s very possible, it’s just that there’s a decent amount of people that are doing a lot of different land plays and things like that, and of course oil and gas is very big there. The issue – it’s really only a town of 80,000, with traffic counts maybe to 110,000 during the day. So what happened is I had this great idea that I was gonna build something very nice, because there was no existing multi-family there that was available for rentals when I actually moved there. The last property had been built maybe in the early ’90s; still a class A, but really wasn’t up to par. There were consistently 99% waiting list.

What happens, when we started designing this complex, two major companies came in and put in about 800 units, and they grow in part of the community. The first one did very well, and leased out very quickly, as well as the majority of the second, but that pretty much absorbed all of those folks that would have been looking for nice places, which is where we built.

So at this point, there’s just no jobs for that class of folks and people are leaving that area, and it’s really tough to make that work.

Joe Fairless: On the 20-unit that you built from the ground up, why build from the ground up versus buy an existing property?

Tom Black: Well, really at first it was to satisfy my goals of creating housing that was something that I would wanna live in, which was probably my first mistake. The units were anywhere from a 1,000-1,300 square feet, almost like homes inside, so that was really the first thing… And I didn’t see anything out there in the community. It was kind of a private ownership at that time, whereas now I’m focused on my investors, my returns, while at the same time still doing a quality product in private ownership. But at that time I was very fixated on those classes only, and kind of had some blinders at point.

Joe Fairless: Okay, makes sense. And what year are we in when you moved to Dallas and you’re done with the Longview stuff?

Tom Black: I finished the Longview property about 2012, right around there… Actually 2013 we sold, and I moved to the DFW area in July 2014.

Joe Fairless: 2014, and now you have 50 million in multifamily real estate in Texas, Oklahoma and Wisconsin… What’s the largest property in terms of units and where is it?

Tom Black: We have 305 units on the North part of Arlington. We bought that in December 2014, and it has been — as you know, the DFW area is very hot right now, and there’s a lot of infrastructure and a lot of influx of jobs etc., so we’ve done very well on the property. That’s our largest asset right now – 305.

Joe Fairless: And how many total units? Roughly, if you don’t know off the top of your head, just so I get an idea…

Tom Black: Just including multifamily, we’re probably sitting at just over 900.

Joe Fairless: So you’ve got a third of them in that one property in Arlington, but you’re also in Oklahoma and Wisconsin… Why choose to branch out to those two states?

Tom Black: We had, as you know, underwritten a lot of different areas and looking for where we could find value, and we were fortunate to go into the Tulsa market and find two properties that were owned and had fallen in disrepair, and really it came down to a management issue. Since then, we’ve taken over the properties and rehabbed both of them and we’ve done very well.

The Tulsa market, of course, is not as robust as the DFW market, but we’re still seeing great and strong returns. Looking at those other markets – such a strong underwriting, number one, and I think a very long underwriting period, so that we can essentially do a yield play. The loans – of course, they’re Freddie Mac loans, but they are 10-12 years, so we can underwrite for a long period just in case the situation changes.

Joe Fairless: With your Tulsa two properties that were in disrepair and there was a management issue – I think I know the answer… I think you’re gonna say “relationships”, but how did you hear about those two properties?

Tom Black: Exactly that – it was relationships! [laughter] One of them was being managed out of a company in Utah, and they had gone in and they’d done some great things with the property, but they just didn’t finish their business plan.

The other was another syndication of a gentleman in Texas; he didn’t put a dollar into that property, and just did some very one-off things… They hadn’t done a distribution to any of their investors in a number of I think two years, and they had just maybe over-analyzed the property where they couldn’t put back in the cash flow that they needed to to make the property really shine… And that’s where the key is – being able to have enough capital to go in and to do what you can and execute the returns that you need to.

Joe Fairless: As far as how you got in touch with those separate groups – was there a broker, or did you know those two groups personally and you did it off-market?

Tom Black: Yeah, it was one single broker, off-market. Tulsa is a funny market like that, there’s not as much competition brokerages. DFW probably has a lot of different brokers, but only five did the majority – kind of the 80/20 rule – whereas in Tulsa it’s very few times that the property is even listed, so they don’t go to best and finals or have [unintelligible [00:14:11].09]

Joe Fairless: Was it First Commercial?

Tom Black: No, actually it wasn’t. Right now I would love to be giving them a plug, and I cannot see their company name in front of me right now. [laughter]

Joe Fairless: That’s fine… I only know one group in Tulsa, it’s First Commercial. So it was basically a pocket listing where the broker had a relationship with you, and they had these two owners who were looking to sell, and the broker went to you because they knew you would close, and you made it happen. Okay, cool.

And Wisconsin… You’re in Dallas, you went to school in Indiana – Tulsa makes sense, but Wisconsin?

Tom Black: My brother, Tim – Tim and Tom, of course – who was the chief operations officer at Great Wolf… Great Wolf was actually headquartered in Wisconsin. Around that area of the university, he lives probably 20 minutes from there, so we have a couple of multifamily areas around there, too. He heads those up, and I try not to fly anywhere near Wisconsin unless it is July, August…

Joe Fairless: [laughs] How many units do you have in Wisconsin, and what city are they in?

Tom Black: They’re all in Madison, and probably only just less than 30, I believe.

Joe Fairless: Okay, and are they student rentals?

Tom Black: No, actually they’re not. There’s a 16-plex, and I believe a bunch of quadplexes that are nice, and they’re actually not student rentals.

Joe Fairless: How do you manage those 30 units, since they’re so far away?

Tom Black: That would be Tim. We’ve got a professional management company up there also.

Joe Fairless: Okay, just a third-party.

Tom Black: Yeah, right. I let him set his boots on the ground right there, and he’s able to manage all that; I try to not get involved with that as much as possible. They’re good friendvestors.

Joe Fairless: Okay. But it’s a third-party management company that he oversees. So you’ve got the 305 in North Arlington, you bought them in 2014 – what’s your business plan with those? You’ve had it for over three years, what’s the progress on that business plan?

Tom Black: I misspoke, I made a mistake – it was actually 2015. We’re 18 months into the process. Our business plan originally – 3-5 years execution plan on that. We started with the concept that 1) all the rentals were about $50 under for comps in the area, as well as they weren’t doing any kind of utility billback or RUBS. We’ve been able to recapture the grossly month from 170,000 collections, and this month we actually just hit our record of $217,000.

Joe Fairless: Great job!

Tom Black: Thank you. So we’ve taken that property up just in value by [unintelligible [00:16:40].16] approximately 5 million dollars in 18 months. We’ve been very happy with that.

Joe Fairless: Great, so from 170k to 217k in collections. How much did you buy it for?

Tom Black: Right under 13, I think we were at 12.8.

Joe Fairless: Thirteen million…

Tom Black: If you look at [unintelligible [00:16:56].13] using the same cap as we bought, we’re right at 17.1 million.

Joe Fairless: And I’m sure that cap is actually lower than when you bought, at this point…

Tom Black: [unintelligible [00:17:04].00] and I like to try and look at it realistically, and I think we look at about seven and a half. Although in net R, [unintelligible [00:17:11].02] it’s probably not unrealistic you get a seven cap or so.

Joe Fairless: Yeah, I agree. The way that you said you do a 3-5 year business plan – did that mean that you’re planning on exiting in 3-5 years?

Tom Black: Right. As soon as we hit those returns we had estimated – I know the first year we paid out our investors roughly 13.1% cash-on-cash; I think our business plan calls for a little bit more than that this year. When we typically hit around 100% return – which right now we’re in year three of that proforma – then we will try and execute, whether we look at it, go to the investors and say “Hey, we wanna do a supplemental here, that way we can get tax-free money out and then we’ll continue to cash-flow the property… Or do we sell the property outright or do we just continue to use the cash flow?”

At that point, I imagine at the 36 months, if the market is favorable – and certainly in Dallas I think it will be – then we look at it, because I think one of the keys is being able to sell it to somebody else and allow them to create some value there and continue on to improve the property and drive revenue.

Joe Fairless: I should have asked this, because this is a relevant question if you’ve increased value five million – how much did you put into it to increase it that five million?

Tom Black: We put about 600k in CapEx. Not too horrible. We’re still executing some of the smaller little details, but the major items have already been done – a caged soccer field, which for that community has been fantastic. We did a lot of repair, and really where it came down to was management customer service.

Joe Fairless: That is incredible. It’s less than $2,000/unit, and you have increased the value – five million dollars, according to your projections. I suspect you haven’t done interior renovations on unit turns.

Tom Black: Very few. We’ve done a little bit… We normally budget about $2,500/unit, and that’s where we went with this, for the 305. There wasn’t much to get caught up on as far as structural, or any kind of deferred maintenance.  We have some roof issues, but the unique thing about this property was that, like all areas around that Arlington location, all the units had tile already, and they were actually Sarana tile, so that saved a good amount of money. We do go in and when we’re turning the unit put in brushed nickel fixtures; the upstairs tends to get some faux wood vinyl floors, and we get two-inch blinds, and add a more palatable color scheme.

Really there wasn’t a whole lot that needed to be done to the units. We’ve been really fortunate.

Joe Fairless: Based on your experience as an investor who has bought triple net lease buildings and done ground-up development, now focused on multifamily syndication, what is your best real estate investing advice ever?

Tom Black: To no be afraid not to jump in. Fear will hold you back. All those years ago when I bought that land in Longview, I got seriously crazy looks not only from my family, from my wife, from other physicians… Something in me told me it was the right thing to do. Don’t let fear be a detractor from being able to jump in, even if at a small point. It will pay off dividends.

Joe Fairless: When you talk to, let’s say, your wife… And you’re talking about going into real estate more heavily than, say, renting out your residence when you were in Indiana – what are the talking points? And I ask this not because I’m interested in your relationship with your wife and the conversation, but for Best Ever listeners who need to have those crucial conversations with their significant others, how would you recommend it based on your personal experience?

Tom Black: It’s been a total team approach. We have four young children, so a lot of her job is obviously taking care of them… But she’s been super passive during the whole thing, she’s been fantastic. One of the things I did – because I’m a physician, of course, and for those listeners out there that don’t know, there’s certain requirements by the IRS to be considered a real estate professional; you have to spend at least 750 hours involved in that to be able to take those depreciations.

For me, of course, as a physician, I was not gonna qualify for that, so my wife actually went and got her Texas real estate license, which automatically qualifies her as a real estate professional, thus giving us the ability to depreciate a good amount of our taxable income, which has been very favorable. When she gets the ability to do that and she sees the dollar signs, then it’s a win/win, really.

Joe Fairless: Are you ready for the Best Ever Lightning round?

Tom Black: Okay, let’s do this!

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

Break: [00:21:27].03] to [00:22:09].27]

Joe Fairless: Best ever book you’ve read?

Tom Black: Best ever book… Robert Kiyosaki, Rich Dad, Poor Dad, I would say. It changed my life.

Joe Fairless: Best ever personal growth experience and what did you learn from it?

Tom Black: It was in the navy. I had an appointment to the naval academy, and did something really stupid as a young, 18-year-old guy, and got that removed. I learned to never give up just because you’re down. There’s a lot of other roads that you can take that are just as profitable – if not better – for you in the long run.

Joe Fairless: Best ever deal you’ve done?

Tom Black: I would say the Arlington deal right now is just smokin’.

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

Tom Black: Volunteering as a physician is a big one. And as Napali Capital grows, we have some plans to contribute around to the community, and that’s something that I cannot wait to do – financially contribute.

Joe Fairless: What’s the biggest mistake you’ve made on a particular deal?

Tom Black: Don’t ever buy a piece of land and assume you can rezone it. That is a big mistake. Understanding zoning is very good. I bought a piece of land inn Kilgore, Texas one time, and I wanted to rezone a single-family over to a multi-family and build some very nice, small, little condos. The homeowners association that was adjacent to it absolutely went crazy, and I found myself in the newspaper and at town hall meetings being yelled at. I will never rezone any other — needless to say, I lost that battle, after numerous tries.

Joe Fairless: What were they saying in the newspaper?

Tom Black: Oh my god… It was “Evil doctor from next door [unintelligible [00:23:34].21] wants to put in rentals with druggies…” Everything that I was not planning on doing, they accused me of doing. In fact, there was condos or town homes right across the street that were rentals, and as you may know, they have to put out messages to the surrounding area of 200 feet. So they had people that were renters coming to these town hall meetings and accusing me of doing something that they were already doing. [laughter]

It made no sense, and town hall meetings are not something I’ll ever do. That’s why we have attorneys.

Joe Fairless: I don’t think you’re gonna be getting into ground-up development either…

Tom Black: It’s not gonna happen. I will willfully partner and be an equity component to that, but otherwise no. If you’re gonna develop, start on the ABCs of rezoning and knowing what you’re doing.

Joe Fairless: I don’t want any part of development at all, because of that. It’s funny, because you said earlier the type of finishes that you put into the 20-unit – it sounds like you went a little over and above what you should have, with granite… So they were actually way off base, because you were probably gonna put in stainless steel appliances into this…

Tom Black: Oh, it was over the top… These were nicer than a lot of my apartments; I could have said when I was in the navy… Heck no! I lived in some places that are B class. [laughs] Now, yeah… I did that; I probably could have gotten in about 400-500 units and really driven in [unintelligible [00:25:02].12] if I really would have understood that. But I was building that based on what I projected the rents to be, and from a meager percentage of increase as far as what we knew we could sell it for.

I was not sophisticated enough to even know what a cap rate was. Lucky, but that’s the schools of hard knocks. It was a great, great learning experience.

Joe Fairless: Yeah, you wouldn’t be here if you didn’t go through that. We have a lot of multifamily investors who listen to this show… What’s one learning experience or one thing you would do differently when given an opportunity, when it’s presented to you next time on maybe your 305 units, or the Tulsa deals? Just one little operational nugget.

Tom Black: Operational – less so. I would say relationships again. I know we keep harping on that, but make sure that if you’re getting involved with somebody, or you’re doing the investing, just know who you’re getting in bed with, because it’s very, very important. Vet them out thoroughly; sometimes personalities conflict.

Operationally – I would just say have a very strong operations team in place and know your third-party management and really understand what a P&L is and how it operates, so that you can take full advantage of your asset and being able to turn the highest priority in the interest you wanna bare.

Joe Fairless: Do you have a particular program or software that you use to vet people out?

Tom Black: You mean as far as investors?

Joe Fairless: Well, you said “Pick your partners wisely”, so I’m wondering if you have a certain process you use.

Tom Black: No, we’ve honed it after trial and error; we learned some really big lessons and we’ve ended up with a core that’s really important. Because once you develop your team – it’s all about the team. Investing is not just for you to go out there — as a single person it’s very difficult. Make sure you have a team around you to do it properly, because not doing so, having the correct attorney that understands what they’re doing… If you’re doing some syndications or investing with a syndicator, [unintelligible [00:26:54].00] track record, as well as CPAs, things like that.

Joe Fairless: Thinking back to a team member who now today you’re like, “Oh, man… No way, not on my team again”, but they were originally on your team in some capacity, what would you look for now, that you didn’t look for then?

Tom Black: I’d look for somebody who operationally complemented, who had a very good insight maybe into a part that I was weak in if it’s in operations, or maybe if it’s an analytics part – somebody that is able to go in and garner those sides that maybe I didn’t have a strong hold on… And understanding that. Because at the end of the day, when we’re sitting around the table, having a consenting voice is always a very good thing, albeit in the right manner. Now, somebody that’s abrasive, that destroys relationships – that’s not gonna work.

When you’re dealing with brokers, or even investors, you have a very serious obligation to do what’s best for them first. Not the brokers, the investors. [laughter]

Tom Black: Brokers will be fine! They’re looking after their own interest, so… [laughter]

Joe Fairless: They always land on their feet.

Tom Black: Right, they will. They’ll be doing fine.

Joe Fairless: Well, Tom, I really enjoyed our conversation. Where can the Best Ever listeners get in touch with you?

Tom Black: The easiest – I have a blog called FreedomInTheBlack.com, as well as www.napalicap.com. The book actually just came out on 1st March on Amazon. It’s called The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth. If you just google my name, Thomas Black MD, it will indeed pop up.

Joe Fairless: Outstanding. Congratulations on the recent book launch, and congrats on your transition and multitasking abilities, as well as surviving the ground-up development and doing well on the first one, and learning your lesson on the rezoning stuff in (I think you said) Kilgore… And getting in the newspaper and all that stuff, as well as, most important, the macro level – the properties that your company has: 50 million dollars in assets under management, the 305-unit in Arlington, as well as the other couple large properties in Tulsa.

Interesting stuff, especially the lessons learned along the way – team members, and underwriting, and how you approach relationships. I’m grateful we had a conversation.

I hope you have a best ever day, and we’ll talk to you soon.

Tom Black: Thank you so much, Joe! I appreciate all your time.

Subscribe in iTunes and Stitcher so you don’t miss an episode!


    Get More CRE Investing Tips Right to Your Inbox

    Get exclusive commercial real estate investing tips from industry experts, tailored for you CRE news, the latest videos, and more - right to your inbox weekly.