Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Jonathan Nichols. He and his wife first began their real estate investing journey in 2018 and have since purchased 8 multifamily properties and 1 self-storage project, totaling 1,000 units as a general partner and another 1,000 units as a limited partner. Additionally, he owns a 20-unit portfolio of residential real estate investments used as short-term rentals in the Arlington Entertainment District. Prior to launching his real estate investing career, he spent nearly ten years in the aerospace industry as an engineer specializing in helicopters. Thank you so much for being on the show!
Jonathan:
Thanks for having me, Charles. Excited to be here. Yeah.
Charles:
So break down kind of what you guys got going on, and I’d like to learn a little bit more about what got you into real estate, and so a little bit professionally and personally before you started to invest in real estate in 2018. Yeah,
Jonathan:
There’s kind of a lot of things I’ll try to make a, a long story short. So my wife and I got married about eight years ago, and shortly after we got married, she informed me that we needed to have a hobby that we did together. And so, you know, we kind of went back and forth on what that hobby could be, and after a while we learned a little bit about real estate investing and thought, well, why don’t we do something that makes us money instead of paying for money? And so, you know, our idea was we’ll go out and buy a single family house and start renting it and basically just invest excess money that we have for investing into real estate as opposed to putting additional funds in stocks or our 4 0 1 ks. And so that’s kind of how it was born.
Jonathan:
And, you know, it went pretty well. We really, really enjoyed the industry, really enjoyed that investment avenue and had a good bit of success with it in the single family world the first two or three years. Anyone who’s owned single family in Dallas from 2018 through COVID knows that it’s done quite well. And so that took off and we said, Hey, how can we make this a full-time business? And that’s where the commercial multifamily really came into play for us. And so, you know, we began syndicating deals back during COVID times. Like you mentioned, we’ve done about seven or eight projects now. We did three last year. And that’s what we both do full time. And so we buy properties across Texas and Oklahoma pretty bread and butter type of things. You know, c properties, B minus type things that, you know, need a little bit of love go fix ’em up, put in professional management, and then have a plan to exit a few years later.
Charles:
So being a, you know, going from a W2 as an engineer for nearly a decade and then going into what you’re doing now can you tell like a little bit about exactly kinda what that process was and how, you know, how long it took you to actually go and be full-time in real estate? And then a little bit about how that was that mindset as being an engineer, becoming a real estate investor? Yeah,
Jonathan:
I think there was a couple things. You know, I always kind of had the, the desire to be an entrepreneur. Like it’s something that was always in the back of my mind. So even though I went to school for engineering, you know, for some reason it always just piqued my interest of owning my own business. The challenge in the the aerospace world is it’s a very, very difficult industry to start your own business in unless you’re Elon Musk, perhaps <laugh>. And so, you know, I always kind of wondered like, what’s the feasibility of actually starting a business in this industry? And one of the things I really was attracted to with the real estate is that there’s a pretty clearly defined blueprint in my mind of how to be successful as a real estate investor. Many, many people have done it before and your likelihood of success is significantly higher having a business in real estate as opposed to a lot of other industries like aerospace. And so that’s one of the things that as I began learning more about real estate, that really drew me into it. I like a lot of the components of being an entrepreneur, controlling my time, you know, working hard, not having a limit on what I can accomplish compared to the corporate role. And so those were a lot of things that, that I found particularly attractive, you know, both about being an investor and an entrepreneur.
Charles:
Interesting, interesting. So you touched on a little bit before, but can you give us a little bit more in depth of kind of what your, your current real estate investment strategy is? You’re talking about some c and b minus class properties. What type, what markets are you really looking at within Texas and then what kind of size properties, vintage stuff like that do you guys usually target?
Jonathan:
Yeah, so it’s changed a little bit over time. You know, early on, we’ll, we’ll say the first three-ish, so years or four years we were investing in multi-family. You know, we really spent a lot of time focusing on tertiary markets around Texas and also Oklahoma. So think markets like College Station Oklahoma City, Tulsa. Last year we bought a property in Lubbock. We bought a property in Abilene. And the reason for that is that in our mind, or in my mind as kind of the, the acquisitions guy of our group a lot of the properties in in Dallas proper and DFW proper and the other big cities within Texas have really been pretty overpriced the last few years. You know, there’s been a lot of just money chasing deals where they don’t really make sense. And so we were able to go out to some of these tertiary markets and find, in my mind, a lot better deals in markets that are still very strong, put fixed rate debt on these deals that are still, you know, providing distributions.
Jonathan:
And so that was kind of our investment strategy. It’s pivoted a little bit, I would say over this last couple years. ’cause Now that we’re in more of a down market for commercial real estate, I happen to think it’s a great time to attack some of these more aggressive markets like Dallas. And so we’re spending more time looking at deals here now than, than what we were before. But just kind of our overall investment thesis is, you probably makes sense to your listeners, but in the same way that if you’re gonna go do a house flip, you know, you don’t go find the most beautiful house that’s already been redone, right? You find something with a problem. And so as investors, you know, the way you create value is solving problems. And so, you know, we look for properties that, you know, maybe they haven’t been renovated, they’ve been owned by mom and pop owners for a number of years. Maybe they don’t have professional management running them. Any number or combination of a number of these problems really helps us find a project where we can go in, put in professional management, upgrade the property, and create a lot of value both for the residents living at the property as well as our investors.
Charles:
Yeah, no, that’s, that’s a lot of great information. When you mentioned tertiary markets, this is something that obviously with every investing strategy there’s pros and cons. Can you kind of outline a little bit what you would consider, I mean, pros, I imagine you’re getting a discount on the property versus being in a primary market, right? Secondary market. But the thing is that what are some of the cons of working and how you guys have kind of mitigated that risk? ’cause If this is part of your investment criteria and your strategy, I imagine you figure out a way of kind of limiting that downside when going into these markets. Yeah,
Jonathan:
So I would say you know, you already mentioned a couple of the other pros. Usually things are trading for a higher cap rate, which translates to better cash flow. And although we didn’t necessarily fully realize it at the time the ability to have fixed rate debt on properties a few years ago that we still now have where, you know, a lot of operators in the larger cities are being forced to sell. They have, you know, bridge loans coming due or very high floating rate debt to deal with. We don’t really have those problems. And so that’s been the big pros. The cons to smaller markets is, is a couple fold. Probably the biggest one I would highlight is management. You really need to have a good management partner in place to run these properties. And so, you know, in Dallas, if you pick a bad property management company and you have to fire them, there’s 75 others you can go interview and choose from.
Jonathan:
And some of these smaller markets, you may not have as many options. And so really making sure you have the management piece dialed in. We have a couple markets where we’ve had really great managers and we’ve had one or two where, you know, we struggled right off the bat because, you know, we had poor management and we had to make changes to that. And, and our options were, were somewhat limited. And so that would be one of the cons is, is management. I would say the second one that’s more holistic of the business is investors, right? If you send out a, a pitch deck for a deal that’s in Dallas, everyone’s excited about that. You know, I mean, you can, you can always make the numbers and stuff look good on a deal. People did it for a long time. And so, you know, they’re excited about deals in, in a hot market like Dallas, whereas like if I tell you, Hey, we’ve got a great deal in Lubbock or Oklahoma City may not be as excited about that. The the big thing that helped us overcome that objection is being successful on our first couple projects, right? So we close them, we start doing high distributions, they’re doing well, word gets out that they’re doing well, and then that’s kinda what builds trust with other investors to come into projects in those locations.
Charles:
So one thing I see there is that I would’ve thought one of the cons, obviously property management wasn’t what I was exactly thinking, but the other one would be that maybe you don’t have much of the ma do you have as much demand as if you were in a bigger market? I mean, how have you found it with your, like your vacancies throughout being in these different tertiary markets? Yeah,
Jonathan:
It’s interesting. So it’s, it’s market dependent, right? Because we’re in several markets, but we have a couple of them. Oklahoma City and College Station come to my mind immediately. So and, and I don’t know where obviously all your, your listeners are located, where they’ve invested, but you know, Dallas has been flat rent rates for about two years now. Austin has been negative. In College Station, we’ve pushed rents 4% last year, and we’re pushing 4% this year in Oklahoma City. We’re at 4% year over year rent growth. And so yeah, the demand in those two particular markets has been very strong. In Lubbock it was a little bit of a different story. I would say it’s a bit of a softer market. One of the things I don’t like about that market is that everyone offers big concessions. Historically I’ve not been a big concessions guy, you know, and, and in Lubbock to play the game, you gotta offer concessions and you need to include that in your underwriting. And so it’s, it’s been a little bit softer. Obviously the, the pro is that we were able to find a deal there at just an incredible basics. And so that kind of offsets doesn’t kind of, it does offset, you know, a lot of the, the negative headwinds you have with the, the rental market. So it’s market dependent, but, you know, we’ve had some that were just fantastic and others where we’ve had to, to pivot.
Charles:
I think you know, in Dallas and Austin, especially Austin, I mean the amount of new inventory product on the market, I mean, has just kind of has, I wouldn’t say decimated, but has pushed rents down dramatically, you know, over the last few years. Dallas, I don’t know if pushed it down that much, but it’s, like you said, it was, it’s been flat for years. So it’s I guess one of the things too in a tertiary market is you’re not having to compete with so much inventory coming on the market that you have in one of these larger markets. That’s kind of one thing I would see, which would keep it a little bit less volatile when you’re, you know, doing your underwriting and when you’re owning the property. Yeah,
Jonathan:
Yeah. Agreed.
Charles:
So you guys use third party managers. You’re in different markets. I mean, how, I mean, what do you suggest? Because this is always a question, and when I’ve found property managers myself, third party managers sometimes I ask an investor and I get a better, sometimes I ask a brokers and you kinda like trying to, then you have to do your due diligence on ’em. When you’ve been successful in finding good property managers, how have you really found them?
Jonathan:
Yeah, the best, the best ones that we’ve found where we hit the nail on the head first go around is referrals, right? From other investors. And I would also say on the other side of the coin, some of the best bullets that we’ve dodged has also been from negative referrals, right? From, from other investors. Any one of these property management companies that’s in business, they, they know how to answer the questions, right? They know how to get on the phone, talk to sponsors explain the, the nuances of their business. And so referrals has been, has been number one. Obviously if you find a good manager, you know, for example, we have a really great management company we work with in Oklahoma City. And so I really keep my eyes peeled for deals in that market because I know I have that in place and I really like working with them a lot.
Jonathan:
And so referrals is, is definitely big. The other thing that I would say is that I see, I think a lot of times investors think of PMs as either good or bad. It’s kind of a, a binary thing. I see it as a, a bit more of a spectrum. And so in my mind, a perfect scenario is if you, if you own your own management company, you can control everything and do everything just how you want, right? And a lot of larger sponsors do that through vertical integration. The next step down is having a really good management partner that you work with on multiple deals. You really like them a lot, and obviously you can go to the other end of the spectrum of they’re really horrible and there’s no way to work with them. And we’ve definitely seen management companies like that before, but then there’s kind of a, a almost another step down there.
Jonathan:
And in my mind it’s someone that they do the basics well but they don’t, they don’t necessarily operate the property at a high level of excellence. And I think that if you’re working with a property manager like that as a deal sponsor, it’s your responsibility to identify where those gaps are and basically fill them in. And so that could be things like really grabbing the bull by the horns when it comes to marketing for your property. It could be spending extra time having conversations with the onsite team about collections and what needs to be done to resolve collections problems. But essentially it’s like there’s no perfect management solutions, but you as an asset manager, as a deal sponsor, are responsible for identifying those gaps and figuring out how you’re gonna fill in those.
Charles:
No, I, you know, the marketing is always something I’ve found that with a lot of the property managers, I wouldn’t say all maybe, but the majority of the property managers we’ve worked with, they’re good, but they usually are subpar when it comes to marketing. And, you know, you’ve gotta really, you gotta really keep that, especially if you have larger property, you gotta really keep that marketing cranking, you know what I mean? To get people and get those people in there. And it’s like a, you know, like on Mondays and stuff, when we’re getting like reports in from property managers on what happened with people that are in this, you know what I mean, that are in the pipeline, getting renting and where they came from. I mean, it’s like, I had this before with a portfolio of my own properties and it was like a, it was just so difficult to, I would say, tell me when something is like ready to go. And then I would have like, you know, somebody, our VA or someone else or you know, put it out and really get it, get it moving, you know what I mean? And it just, I just find marketers like, oh yeah, we put up an ad and you know, we’re kind of waiting for, there’s not as much rush to get people in the door to see the property, you know what I mean?
Jonathan:
I agree. And one thing that, that I think is missing, this might be useful for some of your listeners that are our sponsors, you know, that have these kinds of challenges is one of the things that, that we’ve seen, you know, consistently with our third party PMs is, you know, kind of a deficiency in the marketing, like you were mentioning. And you know, in engineering school we take a grand total of zero classes in marketing. So I kind of had to figure all this out, you know, on the job, so to speak. And so one thing that we’ve seen is a lot of third party PMs, their marketing people don’t have a good feedback loop. And what I mean by that is that they don’t assess what’s actually working on the property. So, you know, they’ll be good about going out and just spending money across all the platforms, you know, Google apartments.com, Zillow, whatever you wanna name.
Jonathan:
But they’re not good about measuring how effective each of those channels are. And so one of the things that we do in our weekly asset management meetings is we have our PM track where each lead comes from, you know, they’re on the phone, how did you hear about us? Okay, jot that down, how did you find us? And then, you know, we’ll track those leads all the way through to leasing. So we don’t just know where does each lead come from. We know where our ultimate leases come from. ’cause You could get a lot of unqualified leads from one channel and less leads from another, but that other channel’s the one that actually gives you the leases. And so tracking that information and then honing in your marketing plan specific to that property in that market is really important. And if one, you wanna get top of market rents and stay occupied but also you don’t wanna burn a million dollars in, in marketing dollars.
Charles:
Yeah, no, that’s a lot of great information. We do the same thing. And then, you know, sometimes you’re turning off marketing, you know what I mean? That’s not, it hasn’t resulted in leases or resulted in qualified tenants and stuff like that. So it just depends. And I’ve really found out too, I don’t know if your, your markets are pretty close to each other, other, I don’t know if it’s changed where you’re using, we at some of our properties will use one platform and not use another. And we’ve had that before. We’re turning one off. And that’s what you’re really getting down to it because you’re really figuring out where people in this area, in this submarket or whatever are utilizing to find apartments, you know, where they’re gonna live and where they look.
Jonathan:
Yeah, no, that’s, that’s pretty normal. You know, I mentioned, we started a project in, in Lubbock last year, and one of the features we had is we had basically a double marketing budget for year one of our, of our ownership. And part of that was because we were doing a big lease up. We were taking over that project at, at 65% occupied. So we wanted a lot of marketing dollars. But another reason for that was because it was our first time in that market, we needed a little flexibility to kind of dial in which channels worked and didn’t work. And so, you know, after about six months, we were able to kind of have a pretty good idea and then, you know, close some channels down, maybe even spend more dollars on some other channels, but dial it in, which gave us a better marketing budget with, with a lot of effective leads.
Charles:
That’s a lot of great information. So as being, I mean, you’re spending a lot of time in asset management. It’s a really important role, obviously working with that property manager that works well for that property. I mean, what are some of the other important responsibilities of being a successful asset manager outside of the marketing piece?
Jonathan:
I mean, the most important thing is, is having hiring great people, right? So that comes obviously with picking the right company, the right third party management company, but also the onsite staff that are working there. You know, we’ve probably, most of your listeners have been in a corporate type job before. I can tell you in the world of engineering, you can have two engineers sitting side by side, same, you know, level, same pay grade, and one’s literally doing three times what the other is. And so <laugh>, you know, in the world of property management, you wanna get the one that’s doing three times the work that cares about their job, shows up, does a good job, goes the extra mile, that kind of thing. And so you know, that’s the most important thing is your people and, and taking care of your people. I would say probably a close second is really tracking clearly what’s going on on your properties, which is why, you know, I referenced the, the weekly meetings, the KPI reports that we go through because it’s really hard to solve problems if you can’t identify where it’s coming from and you don’t know where your property is.
Jonathan:
And so those would be probably the, the two most important on my list, I would say.
Charles:
Typically when you have a property, how much time are you spending there? Just you know, after you purchase it, let’s say in the first few months, then in the first after it’s six months a year. I mean, how many times is your team actually going boots on the ground to that property?
Jonathan:
Yeah, I get that question a lot and it’s, it’s actually kind of hard to answer because it depends, right? So what I, what I tell my investors is that generally speaking, I don’t wanna say that we’ve, we’ve a hundred percent done this, but generally speaking, I want to be onsite myself or my wife Paula who actually leads our asset management for our, for our, our group. I wanna be on site once a month at properties. And so, you know, for us, we kind of have a rule that we invest in locations where we have the ability to drive there and back within the same day. That’s our radius of investment. And so that’s about a five hour stretch for me. No more than that. You know, I, and, and even then, you know, we’re obviously usually spending night at those places, but we could go there and back in the same day if we needed to.
Jonathan:
And so that’s kind of the boots on the ground on site piece. What I would say though is that it really depends on the project. So, you know, kind of just go back to the same one I was talking about. The, the Lubbock project we took over, it was our first super heavy value add project. You know, we purchased the property at an incredible discount, but 65% economically occupied mom and pop owners of 35 years, multiple down units no management on site. Like we started staffing from basically zero and a large property, 170 units. And so we actually rented an Airbnb in Lubbock, and we moved out to Lubbock for about three months during the turnaround of that property until we had our PM in place, our onsite going well, and our occupancy, you know, at 90%. We basically spent all our time there. And so, you know, it’s kind of two totally different ends of the spectrum, right? If something’s running well, I think a once a month visit to, to check on things as appropriate. And if it’s not, whether by design or not, you know, you need to put the time and effort into to get it where it needs to be.
Charles:
Yeah, no, that, that makes, that makes perfect sense. Wow, 170 units, no onsite management. I mean, that’s a these, your work cut off for you on the property? Well, they, they
Jonathan:
Did, but all of them were gone by the time we closed. And so that was the
Charles:
Awesome, that was the kicker, right? <Laugh>.
Jonathan:
So we were kind of, here’s the keys, walk in, no one’s there basically day one, you know geez,
Charles:
Starting from scratch, right? Yeah.
Jonathan:
Yep. And now we have a really great team there that, that they’re, they’re fantastic. So
Charles:
So seven years real estate investor. I mean, what are some of the lessons you’ve learned or expensive mistakes, let’s say, that you’ve made as a real estate investor over those seven years?
Jonathan:
You know, one of them you know, we’ve been pretty blessed. Our, our GP deals, our, our general partnership deals that we’ve sponsored have done pretty well through the downturn the last couple years, which I’m, I’m really thankful for. We have a couple deals that we invested in as LPs where that was not the case. And then obviously I have a lot of friends in this business, both on the active and the passive side who have lost money, have not done as well. And I think that, that going back, say during 20 20, 21 timeframe as a newer sponsor on deals, at that point, I had a lot of doubts, a lot of questions in my head of like, am I doing things the right way? You know, I’m going to these other markets, I’m using different debt products. And I think it’s really taught me, like for, for me personally, you know, rely on the skills and rely on what I’ve learned, you know, both as an engineer and now obviously with several years of, of experience as a, as an investor.
Jonathan:
And don’t necessarily just take someone’s opinion or thought just because they seem like they’re good or they’re big or they know what they’re doing. You know, really think through these problems and come to the conclusion yourself. And I think that probably would’ve saved people a lot of heartburn on their investing journey the last few years, you know, going forward. I’ve never really had the desire to have a, like a a billion dollar real estate portfolio. I know some people go into this and they’re building out huge companies and, and that’s fantastic. For us, we like to have a good team with people that we like to work with, and we like to do projects when we’re ready for them when and when they make sense, right? So we’re not forced to go do another project or, you know, where we have to make a payroll to go do another project. We do projects on a one by one basis as we find them and, and we like what we’re seeing. So in my mind, that’s, that’s what investing’s about.
Charles:
Yeah, that’s one of the things is that if you become one of those you know, like a deal machine syndicator, then at that point really you’re just, you’re just doing deals to acquisition fees to keep lights on and pay people, you know what I mean? And it’s, you don’t want to be a passive investor if you see that happening, you know what I mean? You want the person, the deals I’ve done the best in passively investing have really been almost with small groups that like do deals, one off here, one off there. It’s usually their own money, you know what I mean? The majority of it’s their own money, kind of almost like a family office with like a couple guys type of thing. And I, I, I found out that that better, I mean in the sense of like, they’re like, oh yeah, no, we’re real estate, you know, this is what we do. But the thing is that it’s just kind of like, it really has to fit in this box, and if it doesn’t fit in this box, then like, we’re not doing it. Like, we don’t need this to pay to pay the bills. You know what I mean? And that’s a different situation. Yeah,
Jonathan:
No, I agree. I think that’s, that’s part of the conundrum that people went through, particularly with large companies, is like, you know, we have to hit payroll, we have to hit something. Also, you know, when you, when you have larger companies, it’s great to have teams and people and all that. I’m a huge, you know, advocate of that. But you can have a disconnect. So, you know, your, your acquisitions guy your analysts are not communicating the risks and stuff with the project to leadership or vice versa, right? So like, hey, you know, we’re getting this, this loan at 85% LTC and this means that we’re buying this property at a four cap. What happens if our buyer five years from now does not have access to the same level of debt? What does that do to the valuation on the property?
Jonathan:
And those are the kinds of questions that I think, I think some people were not asking a few years ago that really came back to bite them. But at the same time, like, you know, being sophisticating, having people on your team, so you’re not a, a one man band. And for us part of that is, is partners on a deal by deal basis, like our third party management, our other, you know, gps that have joined us on deals. I do think that’s important so that you have a good cohesive team that, that can execute on projects. And it’s not all on just one person’s shoulders.
Charles:
So Jonathan, as we’re kinda wrapping up here, you talked about scaling we talked about building a business, but kind of if someone wants to grow and scale their real estate portfolio, maybe not to a billion dollar business, but maybe to couple dozen properties, whatever it might be, you know, what have you found to be the building blocks that investors need to have in place to efficiently scale a real estate portfolio? We talked a lot about property management and obviously having a solid asset manager being them, you know, themselves. What other things do you think are extremely important and required if someone really wants to not just buy a couple deals, but really build out this to maybe a thousand plus doors?
Jonathan:
Yeah, I would say there’s, I, I’m gonna list three things that’s in my mind right off the bat. So number one is, is you need to have a vision, right? You need to have a visionary that can say like, these are the kind of projects we wanna go after. And that person’s usually the, the sales kind of person on the team. And it’s, it’s funny ’cause I’m, I’m the person that does most of that for our team, right? Like I look at the markets we’re gonna go into I talk to our partners that join us on deals, like I said, we do partners with, with other, or we partner with other gps on a deal by deal basis. So every single deal is a sell to those people, right? It’s not like they’re an employee where I’m like, you will do this.
Jonathan:
I have to convince them to join along with our investors and, and team members. And so having visionary that can kind of see things ahead of time. I think the second thing is, is be really strong in, in acquisitions, specifically in risk assessment. You know, a lot of times you think of engineering and you think of being able to run numbers. A lot of people can run numbers on a spreadsheet for multifamily, it’s, it’s not that complicated to be completely honest, but the ability to make good assumptions and assess risk is where the money’s really made in this business, right? So where are cap rates gonna be? What’s gonna happen to rent growth? Can I really operate on this lien of a budget? Those kinds of questions are the ones where the money’s made or lost. And then third, and probably the one that I appreciate the most, because I am definitely not, is really strong asset manager, which is what my wife Paula does.
Jonathan:
So her background is working as a, a management consultant. So, you know, she would go in to companies that are maybe launching a new product or struggling through a particular season in their business and fix those problems or launch those services. And you really have to be critically minded and think about, how do I organize all this? But then you have to be really good at driving for results, right? And so showing up to a property management meeting where someone has not completed a task two weeks in a row and put your foot in the ground like, this has to get done this week. Like this, this is your job. This is why we’re paying you, you know? And you need someone like that on your team that can really drive for results. And in my mind, that’s, that’s a very difficult position. So if you have those three roles and it could be one person doing all three, I think that’s probably not typical. It could be three different people, it could be six different people. But if you can fill in all those roles, I think you’ll be successful in, in that endeavor.
Charles:
Well, thanks, Jonathan, a lot of great information. So how can our listeners learn more about you and your business?
Jonathan:
Yeah, best way is just, just take a, a journey to our website. It’s apogee mfc like multifamily capital.com. We’ve got tons of information out there free resources you know, info about our past projects, our team, and would love to have you give it a visit.
Charles:
Jonathan, thanks so much for coming on today. We’ll put all of your links into the show notes and looking forward to connecting with you here in the near future. Awesome.
Jonathan:
Thanks for having me, Charles. Appreciate it.
