Livin' La Vida Luna
Here's Luna doing her "is every year going to be like 2020?" look.
2020 Business Recap
I've come to realize there is no such skill as "business" or "entrepreneurship".
Business is a collection of micro-skills like sales, marketing, negotiation, sourcing, distribution, project management, etc.
An entrepreneur is a visionary who can identify experts in each micro-skill and recruit them along for a ride towards a specific location, namely a better future for all involved.
It’s worth making the distinction so I don’t fool myself into thinking I’m “good at business”, which would loosely mean I’m competent in all the micro-skills involved. I’m not. I’m well-versed in one or two things and leverage other people to fill in the gaps.
In 2020, I chose to put my entrepreneurial hat on and recruit some experts to help further my real estate investing business. This is a shift in strategy from years prior, where I was mostly allowing myself to be recruited by other entrepreneurs.
Lucrative & Meaningful Partnerships
The most lucrative and highest potential partnership I developed in 2020 is with RISE Properties. RISE is a 3-man team that excels in 3 key areas of real estate investing where I could use a lot of help.
- Bill is the Hunter: he's an expert at finding off-market properties and building rapport with motivated sellers.
- Pete is the Hammer: he's an expert at executing the business plan while keeping it on time and within budget.
- Marc is the Brain: he's a licensed CPA with expertise in accounting and finance.
I've leveraged my partnership with RISE into 7 units acquired in 2020 with another 4 units under contract to close in February 2021.
The most meaningful partnership I developed in 2020 is with Gabe DaSilva of DaSilva Homes. Roughly 25% of my 2020 business revenue came from the one deal Gabe and I partnered on, which is saying a lot considering I had ~30 active deals in 2020.
Gabe and I likely won't recreate that specific deal structure again because our eyes are set on bigger opportunities that will likely yield lower returns in the immediate future.
One of the biggest lessons I learned from Gabe in 2020 is: "what got you here won't get you there". We can choose to do the same old things and garner the same old results, or we can get out of our comfort zones to propel ourselves further.
Before I get to where I’m going in 2021, let’s look at some metrics from 2020.
2020 Business Recap:
Total Positions:
- 3: # of Investments Entered in 2020 (Not Yet Exited)
- 7: # of Investments Exited in 2020 (Entered during or before 2020)
- 19: # of Investments Entered before 2020 & exiting after 2020
Of the 19 long-term deals: 6 are debt positions and 13 are equity positions in large multi-family assets with 5-year lifecycles.
Of the 13 equity positions: Occupancy has remained high across the board (90%+) and Collections are about the same (90%). So if I'm fractionally invested in 100 units, 90 are occupied, and 81are paying their rent.
This sounds worse than it is. Break-even occupancy (satisfaction of debt service) on most properties is in the 50-70% occupancy range. While COVID has been somewhat of a drag on cash-flow, we’re not at risk of losing any properties.
Why did I only take 3 new positions in 2020? There are a few reasons:
- There was a month or two of uncertainty early in the year around COVID-19.
- Immediately following that uncertainty was the birth of my first child, which effectively took me out of my day-to-day.
- I've become more selective. I don't feel the need to say yes to every opportunity anymore.
What were the 3 new positions?
- 4-Family in Collingswood, NJ
- 3-Family in Delanco, NJ
- Side-by-Side New Construction in Philly, PA
The first two are an investment in myself. The third is an investment in a new partner with the potential for an outsized return.
Operating Statement:
- Total Revenue: ~130K - Roughly a 50/50 split between interest income (debt positions) and preferred returns (equity positions)
- Total Expense: ~65K - The largest expense is "interest paid to investors" at ~40K
- Net Operating Income: ~65K
Thoughts on Revenue:
Like I said above, 50% of the interest income came from the one deal I partnered with DaSilva Homes.
40% of the preferred return came from a single equity investment I made in a large apartment building back in September of 2018. That asset recently appraised well so a supplemental loan was put on the property to take advantage of historically low rates and juice investor returns.
40% of total income coming from just 2 investments supports my stance of being more selective in the future. I need to get better at finding these needles in the haystack.
Thoughts on Expense:
40K as interest paid to investors computes to roughly 500K of investor monies deployed this year. I'd say my blended cost of capital is 8% annually. (40 / 8% = 500). I have lines of credit at 4-5% and pay anywhere from 8-12% to private money lenders.
500K is a lot of money to take on personally. But it’s also not a lot of money if I ultimately want to go the fund route and provide passive investment options to a wider range of prospects.
$10M is considered to be a “small fund” in this space. Do I want that? Maybe it’ll become more clear to me in 2021. Right now my gut is telling me no. I’ve already lost investor money once in my life, and I was lucky enough to come out of that experience with the relationships still intact. It has been a major source of guilt and shame for me though. Need to think more about this.
My second largest expense is my "Office Rent". My entire family also eats, sleeps, & goes to the bathroom in my office. Catch my drift?
2021 & Beyond
Aside from being more selective, I want to focus nearly all of my time & effort on building my personal rental portfolio.
The Big Hairy Audacious Goal is 50 units by the end of 2021. I’m at 7 right now. I’ll be closing on 4 more in mid-February. That leaves 39 more to go.
How will I get there?
First, I’m planning on investing in RISE Properties’ direct marketing efforts. They already have a good process in terms of motivated seller outreach, but we’ve identified a few levers we can pull to make it even better.
Next, I’m looking forward to exiting a few active deals where I have investor money tied up in other people’s projects. Using my investor’s monies to support others was a good strategy when I had no idea what I was doing, but the juice isn’t worth the squeeze anymore.
Finally, I’m going to put myself out there more. I’m going to republish these posts to Medium, LinkedIn, and BiggerPockets to increase my visibility. I’m going to share my goal with anyone willing to listen.
