San Diego native Bryan Underwood grew up learning the ins and outs of self-storage from his family. After honing his acquisitions, entitlements, and property due diligence skills, he went on the start Responsible Real Estate, which develops residential projects in both the single-family and multifamily asset classes. In this episode, Bryan discusses his biggest learning curve in residential development, what he looks for in a project manager, and what it takes to thrive in the San Diego market.
1. His Biggest Learning Curve
For a recent townhome project, Bryan set out to hire a contractor who would invest alongside him in the deal. However, he ended up hiring a contractor who didn’t invest. The contract had a guaranteed maximum price, and it had an outside date. The project that should have taken no more than 12 months is now on month 16. It is costing him $5K per day to continue to carry out, but Bryan says, on the bright side, he’s learned what to do in the future: “I would go out and pay a really big salary to the best project manager, the best superintendent that has this hybrid skillset,” he says. “I could pay them $250K a year, and I would have saved hundreds of thousands of dollars on my project.”
2. What He Looks for in a Project Manager
So, what does Bryan look for in a project manager? “There’s this sort of attitude on the construction site that everybody points fingers, and I want to change that,” he says. “ I want to bring the person on my team that can change that attitude.” He says his priority is to find someone who can admit when they have made a mistake, take ownership of it, and correct it immediately.
3. What It Takes to Thrive in California
Although many investors say it’s more difficult to invest in California due to lack of cash flow and heavy regulation, Bryan embraces the challenges. “The regulation is an extreme challenge, which … if you can understand it and navigate it, that’s where I can get in and create some massive value for our investors,” he says. While the barrier to entry in the market is high, there are profitable opportunities available to those with the expertise to surpass it.
Bryan Underwood | Real Estate Background
- President of Responsible Real Estate, Inc., which sources investment opportunities, entitles land, raises capital, performs property due diligence, and develops residential projects.
- GP of:
- 109 units between two development properties and one value-add property
- 10 townhomes
- LP of:
- 15 self-storage facilities
- Based in: San Diego, CA
- Say hi to him at:
- Best Ever Book: The Bible
- Greatest lesson: Surround yourself with great people.
Click here to know more about our sponsors:
Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed and I'm here with Bryan Underwood. Bryan is joining us from San Diego, California. He's the president of Responsible Real Estate, which buys value-add multifamily and develops new multifamily in San Diego. Currently, the GP of 109 units between two development properties, and they have a value-add property under management as well, as well as 10 townhomes, and he's an LP of several self-storage facilities. Bryan, can you start us off with a little more about your background and what you're currently focused on?
Bryan Underwood: Absolutely. Thank you, appreciate it. Thanks for having me, thanks for taking the time. Yeah, like you said, born and raised in San Diego. So been here 40 years. The family has a background in commercial real estate, the family does self-storage. So the bulk of my career I spent in our family business, learning the self-storage game, deploying capital, really honing my skills on acquisitions, entitlements, everything related to property due diligence. And left that company to start responsible real estate, and now we're in the home-building game. So there's a whole host of stories about where I came from, and happy to dive into those.
Slocomb Reed: Gotcha. Coming from self-storage, you've decided -- now, are you developing multifamily or single-family or condos?
Bryan Underwood: There's two brands. Responsible Residential is focused on townhomes and some build-to-rent communities, single-family homes, and then Responsible Urban and that's focused on really market-rate apartments in urban core here in San Diego.
Slocomb Reed: You're developing affordable housing apartments in urban San Diego?
Bryan Underwood: Not the technical term, affordable housing. It's...
Slocomb Reed: Sure, of course.
Bryan Underwood: The market rate - we're not dealing with the five different government arms that need to be in the top...
Slocomb Reed: Top rental subsidies, or anything like that.
Bryan Underwood: Correct. But yeah, we're absolutely trying to hit that middle-income housing the best that we possibly can. San Diego and a lot of other places are in a housing crisis, and so we're doing our best to add that much-needed product to the market.
Slocomb Reed: Gotcha. Bryan, let me put a lot of fodder in the cannon here. Anyone who listens to real estate podcasts - ours, definitely BiggerPockets, what everyone is hearing is that it's too hard to invest in California, there's no cash flow, it is the most, if not one of the most, heavily regulated states for development, or any real estate in general. You just can't make money there; you should be investing in the Midwest or the Southeast. Like me, I'm an owner-operator in Cincinnati, Ohio. This is where I live. That's the narrative, that's what everyone is hearing all the time. So here's your soapbox or your pedestal. Why is everyone wrong?
Bryan Underwood: That's a great question. I actually get that a lot. I look at a lot of different markets, but I'm focused in California, particularly in San Diego. And one of the reasons why I like doing business here is that regulation. The regulation is an extreme challenge, which actually makes it if you can understand it and navigate it, that's where I can get in and create some massive value for our investors.
So our team has over 100 years experience right here in San Diego, that they could get in the weeds, go through that process and actually get product out of the ground. And there's other cities that might benchmark against Southern California, but you show me asset appreciation that compares with Southern California and I'll go do business there.
So cash flow - yes. Here's the thing - I'm not trying to get rich tomorrow, I'm trying to create generational wealth. So as I look around at generational families here in San Diego that have been in the game 30, 40, 50 years - you know what? They own a lot of real estate, and they have almost no debt on those properties, and that cash flow is unbelievable. So if you're looking at trying to make a quick buck tomorrow, stay out of California, leave it to me. If you want generational wealth and cash flow and you want to create some massive value, then California is your place.
Slocomb Reed: To the credit of a lot of investors recently, there are a lot of people who are talking now about "transcending cash flow" and looking at the bigger picture and what the assets you are buying are developing now will be doing 20, 30, 40 years from now, and thinking about how appreciation and the trajectory of rent growth is more important for some investors than what they can get now. So that resonates.
Coming back to what you said earlier, tell me if this is a good summary, Bryan... California and San Diego and the development of new buildings in those areas has a very high barrier to entry, specifically because of the high levels of regulation, but also the many moving parts of development deals in general, and you're doing it in San Diego, California. That high barrier of entry means that yes, the vast majority of investors should be going elsewhere, because elsewhere is going to be easier. However, if you have the specialty, the knowledge, the expertise required to surpass that barrier of entry, that creates profitable opportunities for you.
Bryan Underwood: Great. Great summation. There's a recent article in GlobeSt about San Diego housing stock; and when we can literally build 108 new thousand homes tomorrow, and that's just going to meet the demand. We need another 10,000 more this year, and we're probably only going to bring online 6,000. So on average, San Diego, we've got to build 10,000 units just to keep up with natural growth. We haven't built 10,000 in decades. So that opportunity where - yes, it's very, very, very difficult, and that's what we're experts at. Getting them out of the ground is just massive value, all around.
Slocomb Reed: Gotcha. Bryan, I want to talk about what that value looks like. Let's frame the conversation as we get into the numbers. The vast majority of Best Ever listeners are familiar with or even involved in apartment syndication of value-add multifamily deals as a general partnership that structures it. They raise money from limited partners and deliver on some form of cash on cash return, whatever metrics they choose to use. So let me ask first, have you guys brought on limited partners and delivered on a return, take a deal full cycle, buy it, build it, sell it?
Bryan Underwood: The townhomes that we're actually just finishing up will be the first full cycle for us. So that is a friends and family raise. All of our raises to date have been friends and family. This is the first time that we're going out as a group, and we're exposing us as a group and our opportunities to outside investors. So on the Santee townhomes, as an example, that is roughly a $5.5 million project. We raised $1.5 million and...
Slocomb Reed: Borrowed $4 million?
Bryan Underwood: Exactly. Borrowed four, construction loan. And I've tested Zillow, the rental market, I know where we're going to be at. Those townhomes, we're actually going to be renting up and selling it as a 10-unit investment property. Even though they are townhomes, I can sell them individually. And at what is a 4.25% cap rate at that rental rate that we think we can achieve, that I've already tested in the market, we're at about a 7.3 to a 7.5 exit on that. So when you look at - I've got $1.5 million, I got $5.5 million, you're looking at in about a little over two-year period, we're going to be handing out checks of double their cash, 2X equity multiple.
Slocomb Reed: 2X equity multiple in two years.
Bryan Underwood: Correct.
Slocomb Reed: That's pretty solid. Development is tricky, though. Where...
Bryan Underwood: Don't recommend development for a lot of people. It's extremely difficult. There's a lot of places that you can make mistakes. So don't go out and just try to develop a property. You need to surround yourself with people who have done this before, who understand the process that can mitigate your risk, because it's extremely challenging every step of the way. I want your listeners to know that. It's not an easy process.
Slocomb Reed: Yeah. Speaking of that, Bryan, where has your biggest learning curve been in residential development in San Diego? The less poised way to say that is where have you screwed up the biggest and had to learn the most to be as good at it as you are now?
Bryan Underwood: That's great. So one of the things that we strive to do as a company is to surround ourselves around the best people that we can find. They're like-minded, we're rowing in the same direction, and at heart, they're just good people. Because no contract is perfect, and the last thing we want to do is have to pull out a contract and sit around a table and say, "What did we agree to?" Because tensions get high, and people argue, and that's a bad situation. So what I want to do...
Slocomb Reed: I've been there. Yeah. Go ahead.
Bryan Underwood: So it's not bulletproof, but what we've tried to do in every single deal is get around really good people, that are going in the same direction, that all have skin in the game. So we have skin in the game, so when tensions get high or we have some problems to solve, I want people around the table problem solving, not saying, "What did our agreement say?" I think once you say "What did our agreement say?", it's just a lose-lose situation.
So let me give you a small example on that Santee townhome project that my gut had told me, "I want to hire a contractor that wants to invest alongside me this deal."
Slocomb Reed: Bryan, I want to hear this example, but give us some of the pain, man. Tell us about one of the times that you did this wrong, so that we understand why this is so critical...
Bryan Underwood: This is extreme pain. I'm getting into pain, brother, I'm getting into pain, brother. I am getting into pain. So I had told myself -- look, I went soup to nuts on self-storage. I spent about $60 million buying land, 1.5 million sq. ft. of storage. But I was part of a team and I wasn't signing the back of that check. Once I started signing the back of that check and I'm cutting the biggest checks I've ever cut in my entire life, I'm reading this contractor's agreement between owner and contractor and I'm scratching my head saying, "This makes zero sense to me."
Now, people do this every single day, so don't get me wrong, this is how Bryan Underwood is perceiving this. I'm looking at this, saying, "Hold on a second. If this project costs more, you win. If this project costs more, I lose." I just don't understand how people hire contractors. And again, I see there's different ways to incentivize them. Trust me, I understand there's things...
Slocomb Reed: Is this a contract you had already signed, or you're reviewing before you...
Bryan Underwood: No.
Slocomb Reed: Gotcha.
Bryan Underwood: So I was interviewing contractors. And I don't like to talk bad about people, but I sat down with [unintelligible 00:12:17.26] and I asked this contractor to invest. I said, "It's not 1%, it's not 100%. You've got to put some skin in the game. I've got to make sure that I've got your full attention on this project." And he kindly talked me out of it and told me all the reasons why he's not going to invest, but he's going to have my best interest in mind and he's going to take names and kick butt and it's going to be awesome.
If you ask anybody in the marketplace... Now I know we went through COVID, I can go back and connect a bunch of different dots. But here's the thing, is I have a contract with him that's a guaranteed maximum price, and it has an outside date. This project should not take more than 12 months to build, and I'm on month 16, and I'm not done. It cost me $5,000 a day to carry this project. So this is like extreme pain.
Now, thank God, I'm learning a ton through this particular project and I'm learning a ton about these contracts, and I'm also learning a ton about what I'm going to do different next. So if I were to start this project all over again, what would Underwood do? I would go out and pay a really big salary to the best project manager, the best superintendent that has this hybrid skill set. I could pay them $250,000 a year and I would have saved hundreds of thousands of dollars on my project. $250,000 a year is a lot of money for this job, even in Southern California.
Slocomb Reed: Bryan, there are a lot of things that you just said that I want to dive into. Two in particular. First, you said there is a maximum amount written into the contract that you will pay the contractor, regardless of how long it takes?
Bryan Underwood: That's it. It's what's called a guaranteed maximum price. So the contract reads as though, "Here's the price that I could build your project for. And I'm going to do it within this timeframe." His profit is already built into a percentage of that guaranteed maximum price.
Also in addition to that, what we're doing is incentivizing them by, "Hey, if there's any savings on the GMP, then we're going to split it." So that's where he starts making his money. Now, 16 months later, I don't think there's going to be any savings on this project, but there might be a couple of bucks here or there. But that's really what a GMP, a guaranteed maximum price contract looks like.
Break: [00:14:36] - [00:16:24]
Slocomb Reed: So no matter how long it takes him now, the amount that you pay is the same.
Bryan Underwood: That's correct. Now, you get into nitty-gritty stuff, so here's the other thing. Just because you had your construction drawings permitted by the city does not necessarily mean that any contractor off the shelf can take those plans and build your project. So there's a lot of coordination efforts that didn't happen early on in this project. When I bought it, it wasn't titled, so big lesson learned. When you buy an untitled project, you didn't design it, someone else did. You weren't in the weeds at the beginning, someone else was.
So buying an untitled project saved me three years of my life. But at the same time, you look at what I'm dealing with now, because it's some plans that really aren't that great, so every time they say, "This wasn't in our GMP," we go back to the plans and say, "Well, yes, it's right here. This is the project that you bid." So it's just this constant tug and pull all the way through the project, which quite frankly, just isn't fun. If that guy was invested in the project, he wouldn't be nickel and diming me every second. He'd be saying, "How am I going to fix this? How am I going to build this for cheap so I can make the most money I possibly can?"
Slocomb Reed: Creating that alignment of interest on the front end - absolutely invaluable. Making sure, in whatever arena it is, in whatever agreement it is, when there are two parties signing an agreement together, it's mission-critical to create alignment of interest, so that both parties who are signing know that they're winning and losing together, 100%. And if the profitability for the general contractor came from your profitability, then yes, you'd have that alignment of interest. And that's the point, Bryan, that I'm hearing you make overarching here.
I have one other thing about the guaranteed maximum price. I, as a residential real estate agent, represented a very small developer here doing his first deal, and he had negotiated something similar on a project that went way over time. Tell me if this resonates with you. One of the potential issues with a guaranteed maximum price, especially for a project that goes on too long - if that contractor has lots of projects going on and they realize that based on your contract, their profitability is drying up and they have more lucrative clients to work for, all of a sudden you find your GC prioritizing other people and not coming back to you, because they know they're done making money on your project because of the way that it was structured.
So you become less of a priority, and it furthers the delays, instead of hastening them the way that you may have hoped. Bryan, is that part of what's happening here, or is the circumstance of my client just different from yours?
Bryan Underwood: A little bit different, but it doesn't take away from - the theme that we're talking about is alignment of interest. That's the theme that we're talking about. In my mind, that's how you solve all of these problems. So two things that I did, that I don't know about your friend, but one of them is I do have what's liquidated damages. They're being assessed every single day that the project goes on. And two, I've got a holdback, I've got a retainer.
Slocomb Reed: Good.
Bryan Underwood: So even though their guaranteed maximum price, as round numbers, might be let's just call it $3 million, I'm going to have over $300,000 of their money, in which is really like their profit. So...
Slocomb Reed: This is the episode of this podcast that my client should have listened to five years ago, basically. They hear all of the things that you could do if you were Bryan, to make sure that when you're potentially over budget and definitely over time, here are the things that you can have structured into your contracts to still incentivize your GC to get the work done. Bryan, can you give us a list here of the ways that you built that into the contract? You were getting into it just now.
Bryan Underwood: Those were the things. It's a lengthy contract, but in short, I've got a fixed price that he's going to build it for. The profit is already established, it's a percentage of that GMP. We have some opportunities for them to make more money under the GMP, and if we didn't use contingency, we're going to split that contingency.
The ways that I protect myself is I have an outside date, I've got liquidated damages if we go past that date, and then I've got a retainer. So every time they bill me, if it's $100,000 bill, I'm giving them $85,000. And there's a column on our payment schedule that says, "Here's what I still owe them in theory." But at the end of the day, no one wants to go to court, so it's just a negotiation over a table, and you're saying, "I'm not going to hire an attorney. You're not going to hire an attorney. We have an agreement. Here's what I think you owe me." He's going to say, "Here's what I think you owe me." You're going to shake hands and negotiate something at the end of the contract.
Slocomb Reed: Hopefully.
Bryan Underwood: Yeah, hopefully. That's okay. Again, I go back to the very beginning and I didn't stick with my gut on this particular project. My gut told me, "Find a contractor that wants to invest in the deal." It's really hard when you're building 10 townhomes. It's a small project, you're dealing with small consultants, you're dealing with small subcontractors. It is extremely challenging.
So one of the things that we're doing different is going bigger. So we're early stages on an 89-unit apartment development in North Park, which is a submarket here in San Diego. We have a contractor that their sweet spot is building 100 units. We have a contractor that is invested in the deal, they are an owner in the deal. We have some of the best architect and design consultants that you could hope or wish to work for here in San Diego, all excited and pumped to work on this project.
Slocomb Reed: That's awesome. Speaking of contractors and general contractors, and thinking about how hiring so many different third-party moving parts can lead to delays, I want to ask one question two different ways, Bryan. Have you considered bringing some of those contractors in-house to work with for you exclusively in some form? Asked a different way - how big would your company have to be in order to bring in-house the majority of the labor involved in developing these townhomes?
Bryan Underwood: I'll answer the question saying it would probably be about 100 or 125 employees, but you would never do that. As a developer, you need to know a little bit about a lot. You can't know a lot about a little. So what we try to do is... What I've experienced with these townhomes with smaller subcontractors - which, when we do (again) a smaller project like this, I think I had already talked a little bit about, I know all the ways that I would do it differently. And one of the biggest things would be the project manager and the superintendent.
The project manager and the superintendent - I would like them to have the same skill set. So that's the one person that I would bring on my team. Every one of these subcontractors out there - I see the people, I see them. A lot of them are my age, and they're working and getting dirty for a living, and I love the fact that they're on my job and I love the fact that they're working, particularly here in California, because a lot of people don't like to work in California. So I want to support them. I want to champion them. But there's this sort of attitude on the construction site that everybody points fingers, and I want to change that. I want to bring the person on my team that can change that attitude in the construction industry. Because we all get up the exact same way, we all have families, we all want to put food on the table, and everyone wants to work for somebody that has kindness, grace, and wants to support them, and we all make money.
So I want someone who can understand people and understand the job, can lay out their roadmap and really get people to do their job and they're excited about showing up. And when they mess up, they say, "You know what, I messed up on that. I'm going to fix that for you." Going through a project where no one takes ownership of their work is brutal, and I don't understand how the construction industry is like that, but I want to fix it. I want to do it differently.
Slocomb Reed: Absolutely. Bryan, are you ready for the Best Ever lightning round?
Bryan Underwood: So - lightning round, is that literally lightning, or can I elaborate?
Slocomb Reed: Yes. Both. What is the Best Ever book you've recently read?
Bryan Underwood: It's the Bible, man. Come on. The Bible.
Slocomb Reed: The Bible?
Bryan Underwood: The Bible.
Slocomb Reed: Do you have a preference on translation?
Bryan Underwood: I like the New Living Translation, the NLT.
Slocomb Reed: NLT. Gotcha. What is your Best Ever way to give back?
Bryan Underwood: So we connect every one of our projects with a local nonprofit here, and we have a percentage that we carve out of every project. So when we finish that project and we sell that project, when we do a deal, whatever the case may be, they get incentivized. There's a lot of different ways - time, treasure, talent - but we do it with financial resources.
Slocomb Reed: This current deal that's in month 16, who's the nonprofit for that one?
Bryan Underwood: Fellowship of Christian Athletes.
Slocomb Reed: Okay, nice. We touched on this already... Tell me if it's the same answer we've already discussed. What is the biggest mistake you've made in residential development, and what is the Best Ever lesson you've learned resulting from it?
Bryan Underwood: I'm going to pick something else out, because we talked about that. So recently, I almost lost my bottom on a deal. I had four homes in escrow, ended up being three. We had 38 units designed. I'm going through preliminary review, hiring consultants, I'm at $70,000 at this point; it's not coming back. And I get a letter from one of the homeowners that says, "We're not in escrow anymore." And I'm thinking, "Well, you can't just do that. You understand it's the contract, right?"
So I'm reviewing my contract like, "Your attorney is crazy here, because yes, we are very much in contract." So instead of going to mediation or fighting this guy, I thought, "What's a way that I can get out of this deal and still make some money?" And there was a homeowner, one of the three, that still wanted to make some money. And I thought, "You know, what? We could take this on as maybe a fix and flip or a value-add." But even better, I found someone who does that for a living, which I don't. I don't do fix and flip on single-family homes. And we basically just wholesaled it to him and made $250,000. Happy I didn't lose money, but that was the one I was going to lose some money on.
Slocomb Reed: Real quick. What's the mistake, and what's the lesson there?
Bryan Underwood: Well, I think the mistake is part of the game. I think there could have been better communication with the homeowners on exactly where we were and what we were doing. And I think that's huge in any extended escrow that you're in, is communicate. Sometimes you think, "I don't want to tip my cards, I've got to keep them close to the chest." Look, we're all people. Communicate with your seller. Let them know what you're doing. Let them know when you're spending. You're sweating, and you spent a lot of time and effort and you're spending your money. And I think that would have helped us out.
Slocomb Reed: Awesome. Bryan, what is your Best Ever advice?
Bryan Underwood: Best Ever advice? Take the next step. What I think - and this is like I'm talking to myself, but I also see it with friends and family and all the other people, is we project out and we say, "Here's where I want to go." And somewhere along the way, whether it's fear or something else, gets us to just stop and say, "It's too much" or "I can't do it" or "Somebody told me I can't do it." And it's like, if I've got 20 people in the room and ask them, "Hey, what are you after?" They're going to tell me. So "What's the next immediate step?" They could tell me what that next immediate step is, and so do it, and then think about what the next one is. So a month from now, five years from now, 10 years from now, you keep taking that next step, you're going to be doing some pretty cool things.
Slocomb Reed: Awesome. Where can people get in touch with you, Bryan?
Bryan Underwood: investwithbryan.com, and that is Bryan with a "y".
Slocomb Reed: And the link is in the show notes. Bryan, thank you. I feel like there are so many different ways this conversation could have gone. If we had two hours, we definitely would have filled it with great conversation. Best Ever listeners, thank you as well. If you've gained value from this conversation about the real estate development game in a market like San Diego, please subscribe to our show. Leave us a five-star review and share this with a friend that we can add value to through this conversation as well. Thank you and have a Best Ever day.
Bryan Underwood: Thank you for having me. Appreciate your time.
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.