March 5, 2023

JF3104: Secrets to Scaling an Investment Firm ft. Keith Nelson



Keith Nelson is the fund manager at Dual City Investments. In this episode, Keith discusses why he’s niche-agnostic, investing in everything from multifamily, to car washes, to self-storage — anything that pencils out. He also discusses the nuances of running an evergreen fund and the secrets to scaling an investment firm.

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Keith Nelson | Real Estate Background

  • Fund Manager at Dual City Investments
  • Portfolio:
    • Most asset types in Investment Real Estate
  • Based in: Greenville, SC
  • Say hi to him at: 
  • Best Ever Book: The Road Less Stupid, by Keith J. Cunningham
  • Greatest Lesson: Riding the wave is not the same as knowing how to swim.


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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, Keith Nelson. Keith is joining us from Greenville, South Carolina. He is the fund manager of Dual City Investments. His company provides investment opportunities using strategies that differentiate them. Keith's portfolio consists of several different asset types in real estate. Keith, thank you for joining us, and how are you today?

Keith Nelson: Doing great. Thanks for having me, Ash.

Ash Patel: It's our pleasure. Keith, 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?

Keith Nelson: I'll give you the short version, because the long version is going to take longer than this podcast. Real quick. I was born in New York, Long Island, grew up there in a middle class family, working class, went to college there, graduated, became a special agent with the Drug Enforcement Administration. That's before I uprooted. Met my wife, we moved down to Greenville, and after a couple other career stints, I got involved in real estate, and I've been doing that since 2014.

Ash Patel: So you found real estate by accident. How did that happen?

Keith Nelson: It wasn't really by accident. Actually, I had a child and we were shopping for daycare, and at the time I was a middle school teacher; my wife was working in the dental field, and we couldn't afford the daycares that we wanted to put him in. So I said, "I have to find out how to do something that makes more money." So I did a Google search, and the two things that came up were to become an author, or to get involved in real estate. I actually became an author first, didn't make any money doing it... So then I tried real estate. So that's how I found investment real estate.

Ash Patel: And what was your first property? What was your education? How did this all come about?

Keith Nelson: Sure. So the first property, as I was a teacher, it took me two years to acquire. It was a 12-unit apartment complex that myself and a couple ex co-workers from New York, we ended up purchasing together. It took me two years to acquire that asset, and it wasn't from lack of effort. I was working full-time, I was doing this in my off-time, and just couldn't find much help on the commercial brokerage side.

So after we bought that first asset, I said, "Look, if I want to build my portfolio, I need to do this full-time." So that's when I left the teaching profession, got full-time into real estate, and got my broker's license to try to find the secret sauce of finding assets. And then quickly realized there was no really secret sauce, but at least I could find my own assets, instead of relying on other people. So that's the quick path of how I got into it.

Ash Patel: You kind of took the long way. However, you skipped the whole single family, duplex, four-unit route and went right to a 12-unit.

Keith Nelson: Yeah, there was actually a story behind that as well. I went to one of those local groups, home for free, start investing and learn to invest in rental properties... So I went to the first one, and they of course then charge you for the next one, which is a couple hundred bucks. So I went to that one, spent the weekend there... It was like a big rah-rah, whole big thing about rental properties, and they had several speakers that were awesome, but they all said the same thing. They said "We started in single family homes. I grew my portfolio. I ended up selling it, and then I went into multifamily." And I heard that story probably three or four times over that weekend. So when I left I said "Well, why don't I just skip all that and go directly to multifamily, if that's what everyone's end goal is?" And they were selling it indirectly. So I ended up not paying the large dollar amount to learn how to flip single family homes, I just learned on my own how to get into more scalable assets.

Ash Patel: Keith, today what types of assets do you own?

Keith Nelson: Well inside our fund - and I guess personal holdings, too - I'm product-agnostic, which means I don't have a specialty any longer. I started in multifamily. I cut my teeth on that, but then that quickly got crowded. So the competition for good deals got so great, it kind of forced me to look in other directions. So from multifamily, I started investing in self storage, from there we looked at retail, office... So right now we have everything from car washes, to boutique hotel, to industrial properties, to retail centers, to multifamily. So as long as the deal pencils and make sense, and we do research on the market and they check the boxes, we go for it.

Ash Patel: You mentioned you had a fund. Are these deals that you're taking down, or are these deals that you're helping capitalize?

Keith Nelson: So I do have a couple assets that are owned by myself and two other partners. That's kind of my personal portfolio. We've held them for years. And I'm not saying I wouldn't stop there; I would, as long as I'm buying something that doesn't have the fund criteria. That's my primary focus right now, is to get stable cash flowing assets inside of this fund. We think we do things a little different than everyone else, and a little unique... So my focus is to really blow this up in 2023.

Ash Patel: What does that mean, to blow it up?

Keith Nelson: Well, just to raise capital, to acquire assets. I'd love to, by end of the year, have 100 million under management in this fund. And this is our third fund, but this one has a lot of unique capabilities to it, such as there's no lockup period, right? So it's an evergreen fund. The investor wants to come in, take their money out the next month - they're free to do so. And we have liquidity triggers and all that to give us the capabilities to do that.

Ash Patel: How does that work? If I come in with a million dollars, and a month later, I want to take that back out. Is there a penalty?

Keith Nelson: No, there is no penalty. So we have lines of credit on some free and clear assets that we could pull; so if we have redemptions, we can access that capital if we don't have it in our accounts. And we don't like to sit there with a large amount of cash inactive, obviously... So we do have lines of credit that we can pull to liquidate. And we have 20% capability to liquidate that. We also have a trigger in there. So if more than 20% want redeem their capital out, we can't continue to operate the fund unless those people are bought out first. So there's no more raising, and -- you can ignore them, right? So we raise capital, and that capital has to go to buy out those investors that want to exit.

Ash Patel: I would imagine for having the luxury of not having your money locked up, the returns have to be marginally lower.

Keith Nelson: That depends. We use a benchmark, and we like to double the public REIT ETFs. We took the three largest re ETFs, they're returning about 3.5%, and we'd like to stay in that benchmark around two times that amount, because it is a private equity fund, it's not a REIT. We have it actually set up similar to a REIT, where we distribute 90% of the profits, and then we do take an AUM fee, but that benchmark is our target. And this past quarter, we just surpassed the 7% return mark. So marginally, less than some deals, but still greater than a lot of other options out there.

Ash Patel: And still trying to understand the business model... Are you doing a fund to funds model? Where do these assets come from? Are you and your team taking them down, closing on them?

Keith Nelson: We could do it two ways. One, we could raise capital, so like any other funding/syndication, and go buy it with capital. Two, we could purchase it with the lines of credit that we have, and then raise against that to pay that down. And then thirdly, we actually have a tax-deferred component of the fund, and we do have a sister commercial brokerage company that we see a lot of deal flow from, and that's been giving us a lot of meetings, especially in this market with high interest rates, and sellers and buyers really not connecting.

We do have a tax-deferred exchange program inside the fund, where we could take in an asset, and issue units to that owner, and then they become essentially an investor in the fund, and we acquire that property. So we're acquiring both traditionally and a little bit non-traditionally, with this tax-deferred exchange program.

Ash Patel: And you're not raising to get into other people's deals.

Keith Nelson: No. It's not a fund-of-funds. We can do that, according to our legal docs, but we have not. We're kind of paranoid about other operators. We're extremely conservative. This started as a friends and family only in 2014. This is our first fund where we take accredited investors only. So we are able to advertise and talk about it right here. So this is our first foray into trying to grow our network, trying to grow this fun and really take it to the next level.

Ash Patel: Got it, okay. So you want to control the deals.

Keith Nelson: I'd like to, but I'm not opposed to doing a joint venture with somebody, as long as they're good operator and we get to know them, and obviously agree with their methods.

Break: [00:09:33.18]

Ash Patel: It sounds like you've had tremendous growth since 2014. What was your secret to scaling?

Keith Nelson: This is contrary to a lot of gurus and advisors are out there, but we put the investor ahead of us. And one, like I said, it was friends and family, right? So I'm not going to feed my grandmother to death because her capital's in our fund, right? So that was one reason. But the other reason was, we didn't have to grow the company off of the fees. So we run it conservatively, we could put the investor first, we could pass off most of the returns to them and still run a really clean, conservative operation. And that's the way we look at assets, too. We are extremely cautious, sometimes we're overcautious, and I think now it is playing out well... Because last year we grew our dividend from 5.5% to 7%, when interest rates were skyrocketing from Q2 to Q4. So I think that practice helped us grow the right way. And I'm [unintelligible 00:11:30.22] took advantage of the market between 2014 and 2022, just like every other group, but we learned a lot of lessons, and fortunately for us, the market was going in the right direction. And I think we're applying those lessons now, and it's proving to be invaluable.

Ash Patel: What is your team made up of? What type of people? Or their backgrounds, so to speak.

Keith Nelson: Well, my co-founder of the Dual City, he actually was a retired FBI agent. So I guess we have a little bit of a federal law enforcement pedigree... But we're from Greenville, South Carolina, I have a Clemson grad who - he's our financial analyst, essentially, or acquisitions specialist, and he's a whiz with numbers. I partnered with a CEO of a capital markets firm here in Greenville, and he handles our loans, and our loan prep, and making sure that all that is squared away... And then we have investor relations people, marketing people, and asset management, and everybody in between.

Ash Patel: In terms of all the different assets that you manage, what do you look for going forward, and what is the metric that you use to take down a deal?

Keith Nelson: So I wish I could answer that in one concise answer, but I can't. When the deals cross our desk, it goes through several levels. So first, a broker will give us some pitch on why this is a good deal, then myself and the management team will sit down and get through and say, "Okay, does this have legs? Does this fit our fund criteria? Is it cash-flowing? Isn't in a growing market? How are we going to manage it? Is there any value-add? What's our exit strategies, Plan A and Plan B?" And then we'll take a vote on whether we acquire that asset.

But like I said earlier, we are extremely diversified, and our previous fund that survived through COVID did an awesome job with the diversification. We thought some assets would do poorly when other assets would do great, and the pandemic hit and we exited that flawlessly, and we did a great job. So we're using that strategy here again. We don't know what the future holds. Nobody does. We can't predict what's going to happen in the next couple of years, but I feel our best defense against any market is extreme diversification, and conservative underwriting, conservative management and operations.

Ash Patel: Do you have a favorite asset class going forward? Or currently, in the present.

Keith Nelson: In the past it was multifamily, but like I said, that got extremely competitive and overpriced, in my opinion... And I think we're gonna see some adjustments in that in the first half of this year... But I love self storage, and we've been concentrating heavily on industrial right now.

Ash Patel: Do you self-manage, or do you have property managers for all your properties?

Keith Nelson: We use third party when we have to, but we do have an asset management team. If it's within a three-hour radius, we tried to do it ourselves. But if we have something out of state, or don't want to deal with it, we'll hire a third party and use them.

Ash Patel: Keith, what's the hardest lesson you've learned in these eight years? Whether it's about friends, partners, deals money... Just a tough, tough lesson that our audience can learn from.

Keith Nelson: Sure. The best lesson I've learned is riding a wave is not the same thing as knowing how to swim. And what I mean by that is we saw a competition just come out of every place imaginable when we first started, and they grew bigger and faster than we did, and we're sitting here, scratching our heads, like "What's going on? Why are these companies buying these deals, and they're raising millions and millions of dollars, and we're sitting here passing on a lot of that stuff?" And now I think some of that's coming to fruition a little bit, because riding the market and making a profit for investors does not equal good operators. Myself included, we learned some lessons on some poor assets, but fortunately for us, it was 2015, '16, '17, when the market was still skyrocketing, and we were able to exit those assets while taking valuable lessons away, and not taking a loss, and returning the profit back to our investors.

So I think the biggest lesson for us, and it made us probably even more cautious, is what I just said - riding a wave is not the same thing as swimming.

Ash Patel: Thank you for that cautionary tale. Now, if you had to give our audience your Best Ever real estate investing advice, what would that be?

Keith Nelson: Best Ever real estate investing advice... I would say if you're dipping your toe in real estate, and you really have a passion for it, and you want this to be a career, you have to make the leap; you've got to put the full-time effort in. And it would be scary leaving behind a salary and a pension, but it is doable; I'm living proof of that, that putting all effort in, burning the boats behind you is something you have to do if you want to really succeed in this industry.

Ash Patel: Keith, what was the last asset that you guys took down?

Keith Nelson: It was a portfolio of single-family homes and mobile home parks.

Ash Patel: So still to this day you're not opposed to taking down single families if the numbers work?

Keith Nelson: If the numbers work. And if this was kind of a rare opportunity. We actually had a really large owner financing component to it that helped us do this... And the door price was still pretty reasonable in a growing market, so we feel comfortable. But those deals are far and few between now. But yeah, no, absolutely, we'd still love to get into multifamily.

Ash Patel: And the boutique hotel - where's that?

Keith Nelson: Is in Lake Placid, New York.

Ash Patel: Let's dive in, if you don't mind.

Keith Nelson: No, that's fine. One of my partners who has had hotel experience was trying out the commercial brokerage world, and he was kist looking on LoopNet one day, and he saw this asset... [unintelligible 00:17:14.14] information, but it was from a residential broker. There was no OM, it came on like an MLS printout... And that kind of piqued my attention of "Maybe should dive into this, maybe there's something there." And when we did our due diligence, we find out that we got it at a really good basis, and the thing has been one of our prime assets since like 2016 or so.

Ash Patel: How many keys for that hotel?

Keith Nelson: It's real small. It's got three retail spaces and 10 [unintelligible 00:17:43.04] units. But funny story with that is when COVID hit, we thought that hotel was going to be shut down. We even contemplated about shutting it down, but we didn't. And my previous fund, our multifamily was the one that suffered the most, because they put the rent moratoriums, and no one was paying their rent. So there were no returns. The hotel was actually able to cashflow. We ended up raising rates, we were overbooked, because all the people that didn't travel would come up and stay in our hotel, and we had kitchens and everything inside the units, so they didn't have to go out to eat, and everything. So it was a pleasant surprise. It wasn't a planned surprise, but pleasant surprise in how well it did. And we like to have it as a place to go, and have managed meetings, and so on.

Ash Patel: A corporate retreat, so to speak.

Keith Nelson: Yeah, there you go.

Ash Patel: Yeah. I'm assuming there is a local property manager that runs that...

Keith Nelson: Well, actually, we have a staff up there, and actually my partner runs it who's in New York, but more locally than I am.

Ash Patel: And it's just one partner, the two of you?

Keith Nelson: No, we're three partners. One's in New York, the other two are local here in Greenville.

Ash Patel: I was gonna say, this is a lot to manage...

Keith Nelson: Oh, yeah. I couldn't do it out my partners. [unintelligible 00:18:56.10] the rest of the other help, too. So it's definitely a team effort.

Ash Patel: Awesome. Keith, are you ready for the Best Ever lightning round?

Keith Nelson: Sure, shoot.

Ash Patel: Alright, Keith, what's the Best Ever book you recently read?

Keith Nelson: Road Less Stupid, by Keith Cunningham.

Ash Patel: What was your big takeaway?

Keith Nelson: Biggest takeaway was having a goal or a dream without an action plan is just a wish. I probably mangled that quote, but... This was very practical advice to a lot of the "believing into existence" type of motivational talk and books that you've probably read, and I know I have... But I loved his approach to everything, about avoiding mistakes is better than getting into something and trying to figure your way out.

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

Keith Nelson: Best way... We've actually started some educational content on our website. It's out there for anybody to watch. We'd love to educate people on some simplistic terms, all the way up to utilizing tax-deferred strategies and some more advanced stuff. So we're putting that out there, and I'd love that information to be out there, as it was a little tough to find back in 2014.

Ash Patel: And Keith, what is your website, and how can the Best Ever listeners get a hold of you?

Keith Nelson: Yeah, I guess through the website is the best way. It's

Ash Patel: Awesome. Keith, thank you for your time today, sharing your journey, after having a long career with the DEA, going into education, and then, out of all things, not being able to afford a daycare that you wanted, it prompted you to go into real estate, and you've had a great run. So thank you for sharing all of that with us today.

Keith Nelson: Yeah, I appreciate it, Ash.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this podcast, please leave us a five star review. Share this episode with someone you think can benefit from it. Also, follow, subscribe and have a Best Ever day.

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