Real Estate

I would have lost my investors $5.5 million — what would you have done in that situation?

What were you doing on the morning of January 17, 2020? As the world learned about a strange new virus approaching our shores, my business partner, Ben, and I were visiting Louisville, Kentucky. We were meeting with our biggest operating partner, Mike (not his real name). Moving house Park was acquiring his firm. Our fund will be the largest investor.

This park looked like many we had invested in, but bigger. There were 315 lots, but about 50 were vacant. We saw a certain range of cars — from Junkers to Jaguars. People walked their dogs, children rode buses, and a caring man wandered around with his coffee.

But this park was different from most parks of its size. you see, The owner lived three states away—and hadn’t visited (or raised the rent) in at least five years.

This institutional-sized park was owned and operated by a classic mom-and-pop operator. They had no knowledge How to maximize revenue and value She was engaged in other pursuits.

And she was ready to get out.

Our operating partner pointed out. A variety of Drawbacks when we visited the park. He told us how the owner financed all the tenants’ utility bills. He described how he overpaid staff to avoid involvement. And he described the profitability of putting up new manufactured homes on vacant lots — something a seller wouldn’t even dream of.

We Flies home for Virginia. After lunch And started raising capital for this new fund. That will invest in this park and over 200 others. Commercial real estate Assets

Mike closed the acquisition on February 25 while headlines were screaming about the coronavirus threatening everyone. On the planet. He paid $7.1 million — about half debt and half equity (including ours).

We raised several million dollars in February and March while American investors watched trillions of dollars evaporate in Wall Street casinos.

A surprising call in the midst of pandemic chaos

in between Amid the growing national uproar, Mike received a surprising call: Within a week of the acquisition, a competitor called with an offer to buy the facility for $9 million.

Here’s where I might have messed up if I were at the helm — especially in light of COVID and the uncertainty on Wall Street. fast Drop

Mike told me about the offer. I But did a quick calculation Turning $3.5 million in equity into $5.5 million in about a month and securing a decisive win for investors in our third fund. with I had the knowledge.I accepted the offer and reinvested the capital in other assets.

Thankfully, I wasn’t in charge.

you see, Our funds do not acquire and operate commercial real estate assets. We work hard to find the most skilled operators. We invest in the assets of these operators within our diversified fund with over 800 accredited investors.**

We are not in the driver’s seat of asset management. And we don’t want to be. (I’m not that qualified!) Our firm selects operators with deep expertise and experience in their CRE asset classes and strategies:

  • Operators you’ve probably never heard of or had access to. On your own.
  • Operators who acquire such underperforming assets.
  • There was an increase in operators having a driving track record. Net operating income and improving investor returns.

Mike Clearly Refused the offer, even when they raised it to $9.5 million. He had a strategy to transform the park and pick on value effectively. He hoped to sell it for $13 million or more. Only three or more The year

Although his strategy was similar to others he had successfully implemented dozens of times, he reminded me that it An unusually large one Asset it is many operational and lack of income. He was excited to get his team to work.

And get to work. They hanged many. Their Important Goals in the first six months, even dogging the team with COVID-19. He created significantly. good place of residence, They Cost reduction, and They Income increased.

Another surprising call—from a different competitor

As he made final plans to begin the most difficult phase of his strategy (establishing new homes on 50 vacant lots), Mike received a call from another large housing operator. He questions Mike about the park and their improvements. He asked about their plans and their current income. And he offered to buy the park. $15 million.

Remember That it was later that year that Mike acquired the park for $7.1 million. Mike accepted the offer this time and closed a few months later.

Here are the final stats:

  • Acquired in February 2020 for $7.1 million.
  • Sold in December 2020 for $15 million.
  • Property Level IRR: 347%*
  • Property-level MOIC (multiple of invested capital): 3.4x*

Some equity was reinvested. Among other assets To further exploit the potential profits. Some were distributed. For investors, who did not expect bonus distribution in long term fund.

What would you have done?

Like I said, I’m glad I wasn’t in charge. I am Happiness Mike had more experience than I did. And I am Happiness Hundreds of our investors (this fund is no longer available) benefited from this deal and many others like it.

Hindsight is 20/20, but I still am. Not sure What would I have done in Mike’s shoes with the uncertainty of COVID-19 and without the benefit of a crystal ball? While no one stands in the way of making a profit, Mike’s wisdom and experience resulted in a much better result than selling the asset after acquiring it.

What would you have done?

Thankfully, our investors don’t have to answer that question. (I can say with confidence that none of them would have had access to deals like this before. Neither would I!)

Our investors Trust us to trust your operating partners. Acquiring, improving, and eventually divesting such underperforming and undervalued assets. Although this is a dramatic example, many others follow the same pattern.

Additionally, recession-resistant asset types, operators, geographies, strategies and Capital Stack Positions can provide a safe investment experience for accredited investors—those who want the benefits of real estate but are busy with careers, families and interests.

Final thoughts

I just read this. finished And felt a little funny—like I am. Just bragging On Our operators and funds. Although I’m proud of the team, that’s not my goal. I intend to. To remind busy professionals that it’s okay to outsource your active real estate investing. That’s fine, and I even believe it’s preferable to rely on others to do the heavy lifting.

Finding expert operators, diving deep is reasonable and often profitable on them, and entrust them with the earnings of your labor. I am mine. own Case study here.

I have been investing in real estate since 1999. I’ve written three books on real estate investing, spoken at every BiggerPockets conference, and been a guest on hundreds of podcasts. And I have raised and invested over $140 million in real estate investments. In a few decades. Even so, I feel completely unqualified to make such deals.

There is no such method as I have described. And I couldn’t take that opportunity anyway.

I’m sure I can Earn more profit and build more. Wealth by finding the best operators possible, with deals I could never find, and Passive investment with them.

But This is not necessarily the best way. for you Maybe you joined the BiggerPockets community to learn how to make deals. On your own. You can become happier and wealthier by buying and operating your own residential or commercial real estate assets. Or you can be like Mike, and hundreds of investors can eventually give you their money to invest on their behalf.

If that’s the case for you, I encourage you to go for it. With all your heart! But if you’re a busy professional hoping to make deals, I want to warn you: The story I just told may have a role for you.

Your career and family, lack of focus, lack of team, and lack of experience can put you in the role of the original seller. Magnificent Asset You can be a mom and pop operator. While the woman who sold the park made millions of dollars, she also left hundreds of millions of potential on the table.

I wrote this article to let some of you know that there can be a better, healthier, less time-consuming, and less frustrating way to build wealth in real estate. I invite your feedback, comments, and complaints!

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; Ask questions and get answers from our community of +2 million members. connect with investor-friendly agents; and much more.

*All investments are subject to risks, including loss of All principal investments. Past performance is no guarantee of future returns, and Currently open Wellings Real Estate Income Fund’s investment objectives may not be achieved.. Please read the offering memorandum before investing so that you fully understand the risks and consult your tax or advisor before investing. Wellings Capital and Bigger Pockets are not connected.

Note via BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.


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