January 31, 2023

JF3071: The Art of Multifamily Development ft. Dusten Hendrickson

Dusten Hendrickson is the president of Mailbox Money Real Estate, which finds land and creates a vision for it — usually a multifamily project. In this episode, Dusten shares what drew him to multifamily development, why being a developer requires more vision than strategy, and why he recommends starting with a small project before scaling. 

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Dusten Hendrickson | Real Estate Background

  • President of Mailbox Money Real Estate, which finds land and creates a vision for it — usually a multifamily project.
  • Portfolio:
    • GP of 888 units
    • LP of 2,034 units
  • Based in: Brookings, SD
  • Say hi to him at: 
  • Greatest Lesson: Growth without scaling leads to one step forward and two steps back.  You need to learn to scale before you grow so your growth doesn’t lead to overwhelm, burnout, failure, and eventually bankruptcy. Hard work doesn't equal results. There’s much more to it, and that’s why we have to be open-minded and continue to learn.



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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Dusten Hendrickson. Dusten is joining us from Brookings, South Dakota. He's the president of Mailbox Money Real Estate, which focuses on land deals that primarily result in multifamily projects. He's currently a gap of 888 units, and also an LP on 2,034 units. Dusten, can you give us a little bit more about your background and what you're currently focused on?

Dusten Hendrickson: I sure can. Thanks for having me on here, Slocomb, to the Best Ever podcast. My background was in construction mainly at first, and then I started slowly developing duplexes; the first one I did, I lived in half of it, rented the other half out. We started doing more and more duplexes, scaled it up, started doing 10, 20, 30-unit stuff, mixed-use buildings, historical buildings, and then I just ran into a wall, and figured "This has to be easier than this", and that's when I found the syndication model, and I learned how to scale to the syndication model, and now we apply that model to the developments that we do. And now we do 150 units, rather than 30 units.

Slocomb Reed: Gotcha. So reading between the lines here, you go looking for land to put apartments on now, you raise capital possibly to acquire the land, but also to build on it, you GC or have your hands deep in the construction of the apartments, which you then own with your partners. Is that all correct?

Dusten Hendrickson: Except for that I don't GC anymore. Now I bring in a partner to GC, because GC is a lot of day to day work, and I wanted to concentrate on the future -- the work where it's not an emergency to get it done, the proactive work. So I have a lot experience GC-ing, and I help with all the design process through the GC process. I understand the GC process, so it's easier for me to work with another GC, if you understand that. So I don't really GC, but I understand the GC process.

Slocomb Reed: I have a bunch of questions here, Dusten. The first one though is explain to us how you make it worthwhile or why it's worthwhile to go through the process of finding the land and developing it, instead of building or purchasing existing apartment inventory?

Dusten Hendrickson: Because the value you can add by coming up with a vision or a plan on the new land is so much more than the value you can add by buying real estate that's existing. Now, once in a while you'll get a really good off market deal on value-add, and that's really hard to compete with, but those are just so hard to find. Usually, you're paying market value. And when you pay market value for land and build on it, you create a ton of value. So the value is in more of the creating, and not finding the value.

And I'd say a lot of times when you find an under market deal, you're just actually taking equity from the person that's selling you the deal, that doesn't really understand how to get more money for the deal. So when we go and we can pay full market value for the land, pay everyone full market value for their work, and we still have a huge upside on the backend, so everybody wins in the development space. We're not coming in and taking anything over that's a dog, that we're adding management to, or anything like that. We're just taking raw land, putting a really good idea on it, and you can pick the best land and you can pick the best product, and that's the biggest difference when you go and buy something existing. Primarily, people are not going to sell you their best asset. They're going to sell you their worst asset first.

Slocomb Reed: I'd like to put some numbers behind this; knowing that you syndicate, let's do this in terms of overall value creation, and without speaking to any specific capital raises that may or may not be going on right now, the types of returns that you offer investors, as well as general global returns.

Dusten Hendrickson: Well, in my area if you buy a value-add, which is very unheard of here - it's hard to get any inventory here on the market, but... Let's just say you buy a value-add project here, you're probably going to get 10% to 15%. When you do a new development, you're probably going to get anywhere from 15% to 30%.

Slocomb Reed: Percent of what?

Dusten Hendrickson: IRR over a five-year period of your initial when you purchase the deal. After five years, there's lesser value to be had, and so the return drops down to more of a 10% appreciation type return.

Slocomb Reed: Gotcha. So you're developing targeting a five-year hold period? Is that five years of lucrative operation, or is that five years from acquisition of land?

Dusten Hendrickson: In a five-year value-add [unintelligible 00:06:10.22] income's coming in immediately; the five-year period is the same as when we buy the land and we don't have any income for a year and a half. Roughly, the five-year period's about the same, because there's a ton of forced appreciation right when you bring it on the market, and the first roughly two years when you're pumping the rents up from when you first bring it onto market.

Slocomb Reed: Gotcha. When did you start doing these land deals?

Dusten Hendrickson: In 2003?

Slocomb Reed: '03. Gotcha. So if we could avoid the volatility of the last couple of years, I'd like to ask you for examples on deals that you were doing before then; the property values, the numbers will be off, but I imagine it'll be easier to reflect returns available in 2023 if we avoid properties that you owned 2020, '21 and '22.

Dusten Hendrickson: So you're saying how much is the property value before the big boom that we had?

Slocomb Reed: Yeah, give us a couple of examples from before the boom, of what you found, what you bought it for, what you built on it, how much that cost, and then what it sold for five years later.

Dusten Hendrickson: Okay, so I actually don't sell any of my new developments, or haven't; I've just sold my smaller single family stuff, or my duplexes. Any commercial grade asset that I developed, I haven't actually sold yet. So I don't know. But I have refinanced some of them.

2015 we took an old, gross foot clinic, and a couple other buildings, they were supposedly haunted, and they were always run down. We raised those, put in a mixed-use building, commercial on the main floor, and then two storeys of apartments above that. Ended up being 24 residential units and six commercial bays. We built that for roughly 2.2 million, roughly. And five years later, it's worth 3.2 million roughly was, I think, our last valuation.

So everything built back in '15 was smaller. That's like only a 30-unit project. So I didn't build anything that's 150 units. But the numbers do seem to extrapolate very evenly. Almost everything that we've built has been in that 20% IRR or higher over a five-year period from the time we started developing, prior to the big numbers that we saw in the boom of 2021.

Slocomb Reed: Yeah, and with you calling it an IRR - is that you refinancing your capital partners out of the deal and keeping ownership of the asset yourself?

Dusten Hendrickson: No, I refinance back to the capital partners; they're still in the deal. I'm just saying overall equity. Everyone's equity, that's what it got. The total amount. And 20% is vague, because I wasn't sophisticated enough to keep track of actually where we were... But I know that it's probably greater than 20%, according to what we had done with that building. Because we pulled a lot of cash out besides just the valuation as well. We bought one other house to build another project on it, and then we built two other twelveplexes with that cash from that project.

Slocomb Reed: Dusten, what's the most difficult part of this investing strategy?

Dusten Hendrickson: There is actually no strategy. It's more of a vision, it's more of an art, it's more of a talent. You have to constantly be on the up and up. Like, what are the trends? What do people want? Because if you go in there and build a bad building, you design a gross building, or whatever, or you put it in the wrong spot, then you're going to be hurting. If you do a nice, new building in a great location, that everyone wants to live in, it's gonna be super-easy. But there's no handbook that you can go and you can actually understand "What's a good location?" You just have to understand intrinsically, and just in your mind, what is a good location. You have to have a lot of experience knowing what people want...
So I'd say the biggest difference is being a developer is more of an art. So not only do you have to have all the data behind, just like a syndication, but then you also have to have an artist on your crew that understands all these nuances.

Break: [00:10:18.00]

Slocomb Reed: Which component of your deals have you made the most mistakes on?

Dusten Hendrickson: Probably selections. Selections, putting in too nice of stuff. So I learned where that median is. If you put in too nice of stuff, your building doesn't make money, because you can't get the rents up quite enough to pay for it. If you go too low of stuff in a good location, the rents will never justify it, and you're leaving a lot of low-hanging fruit. You can add quartz countertops, get an extra 100 bucks a month for that unit, but it only cost you 10 bucks. But you've got to know where to add that stuff.

That was my biggest mistake, was over-building properties. So I really like high-quality stuff, so when I first got started, I put in too much nice stuff. Fireplaces, all that stuff, I've learned that you want the least amount of maintenance, but a high-end finish, but not too high end of a finish. So there's an art to that too, because it changes with your location.

Slocomb Reed: For our listeners who may be interested in looking into doing what you do, where would you say that they need to get started?

Dusten Hendrickson: I'd say start on a small project first. Because say if you have a duplex, you can make all the mistakes in the world on a duplex. It'll never bankrupt you; or it'll never actually sink you. You can bring in some money over here, you can rob Peter to pay Paul on your mistakes, I guess you could say. And then you learn how to slowly do it from there. But just double the project every time. So if you do a duplex, maybe the next time you do a fourplex, and the next time maybe you do an eightplex, next time maybe you do a 20plex, next time maybe do a 50plex. You can start scaling, but you shouldn't just go into a duplex and then do a 150-unit building, because the duplex is so much different than the 150 unit building. But once you get to, say, a 30 or 50plex, those are pretty much gonna be the same units as a 150 unit building; you're kind of dealing with the same economics.

Slocomb Reed: Gotcha. Start small, learn, build from there. Not necessarily an investment type where you want to dive into the big stuff first.

Dusten Hendrickson: No. If you don't want to do it any other way, just go get a development team. The problem with that though is you don't really learn when you're just watching the guy never make any mistakes, because he's been doing it for 40 years. So it's almost an experience-based thing. You need to go make those mistakes for those lessons to sink in, and that's why I recommend starting small, because in development there are so many moving parts.

Slocomb Reed: That makes a lot of sense. Dusten, are you ready for the Best Ever lightning round?

Dusten Hendrickson: Yes.

Slocomb Reed: What is the best ever book you've recently read?

Dusten Hendrickson: The best ever book I've recently read... 48 Laws of Power, by Robert Greene.

Slocomb Reed: Tell us about it. It just tells you how to interact with certain people, and it tells you that it's more about -- you've got to understand how that other person feels. In the book, it tells you to use that against them, as if every deal is a war. But I don't know if that's necessarily the case. It's more like, do you want to successfully be able to communicate with people? Do you want people to want to be around you? There's all kinds of stuff you do. You show up to the party late, and you leave the party early, that way nobody gets sick of your presence. There's all kinds of little things that you can do, and they're the same rule that successful people have used all throughout history... And it goes in and it breaks it down using Napoleon, Machiavelli, all these characters that we hear throughout history, and it shows you how they actually conquered, and the same traits that they used to conquer, or the traits that got them defeated still apply today. So it tells you you can't be too cocky, but then you also have to still be confident. It's a really good book on how to communicate with people and how to win in relationships, I would say.

Slocomb Reed: Well, it is downloading in my Audible account right now.

Dusten Hendrickson: So if you are autistic or ADHD like me - I have those traits - we don't really understand people's emotions and feelings quite as well. And when we read it in philosophy, then we can kind of be like, "Okay, so this is how I should act when I'm around this person." Because that person won't tell you how you're supposed to act. If they had maybe autism, they might tell you that, because they're so blunt. But I've just found that for me it's really good to understand that stuff, so that I know when I'm dealing with someone, I'm not emotional, and they're clearly emotional, how can I bring them down a little bit?

Slocomb Reed: That's awesome. What is your best ever way to get back?

Dusten Hendrickson: My best ever way to give back - I love helping anyone in the moment that needs help. That's my favorite way. So when I see someone that needs help, I love helping them and it makes my day. The other way - we're doing an autistic thing, like a special ed program at SDSU University here. We're trying to help with that, because we have an autistic son, so we're kind of close to that. So we try to improve awareness of autism. A lot of people think that you can't really help it, but what we've found is that you reduce the anxiety to a lot of these mental health problems. They don't seem like they're much of a problem anymore. It just seems more like an awkwardness, a social awkwardness, rather than an actual health problem.

Slocomb Reed: Shout-out to South Dakota State University, FCS Football national champions, right?

Dusten Hendrickson: Oh, yeah, we had the game Sunday. That was a great atmosphere. Yes.

Slocomb Reed: Back to Best Ever - what is the biggest mistake you've made thus far, and the best ever lesson that resulted from it?

Dusten Hendrickson: I would say the biggest mistake I ever made is doing a job with a partner that I didn't like, because I was greedy and wanted to do the job. And it was a great lesson, because I actually didn't get burned financially, but it was a lot of stress for no reason at all; absolutely no reason to be with this partner that brought so much stress to ideal. And after that, I realized that you have to get along with your partners, first and foremost, and you have to have similar philosophies, but also you have to have different personalities, similar life philosophies.

Slocomb Reed: On that note, what is your best ever advice?

Dusten Hendrickson: My best ever advice - I would say invest in real estate early and often. And if you can figure out how to do that, if you can figure out how to not get sidetracked by all the other investments... I don't know, I just love real estate; it's always paid me, and I've only lost money when I've done really stupid things. If you can afford to hold the real estate for long-term, it's going to be great. And that was my plan, and basically after 40, I don't necessarily have to work. I don't have to do day to day work. [unintelligible 00:17:53.28] the money eventually, but I'm not reliant on a paycheck anymore. And it only took me 20 years through real estate, and I think real estate is pretty bulletproof, as far as you don't have to be a genius, like in the tech world, to make money, you've got to be pretty smart. Real estate, you just have to be patient, and you've got to save up some money, invest it in it, and it just seems to always work out if you pick good locations.

Slocomb Reed: I'm in complete agreement there, Dusten. Last question, where can people get in touch with you?

Dusten Hendrickson: Mailboxmoneyre.com. That's my website, and it has all the information. It has our social stuff, and our investment portal, our email, you can set up a phone call through Calendly... All that stuff's on there.

Slocomb Reed: That link is in the show notes. Dusten, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through this conversation. Thank you, and have a best ever day.

Dusten Hendrickson: Thanks a lot for having me. Appreciate it. I've had the best day ever as well.

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