Carolina Commercial Real Estate Connection

Joel Florek's Real Estate Blueprints: Mastering Deal Structuring and Financing for Maximum Returns

• Tony Johnson

Share episode

Discover the secrets of structuring successful real estate deals and securing profitable investments with our guest, Joel Florek of JFH Capital. In this episode, Joel shares his incredible journey from Marquette, Michigan, where he first developed his passion for real estate by working on home renovations alongside his parents. Joel's academic path took a turn from mechanical engineering to finance, leading him to entrepreneurial success. You’ll learn about his first investment in a four-unit building and how these early experiences laid the foundation for his impressive career.

Joel dives into the intricacies of structuring real estate deals for maximum returns, recounting his early success with a syndication that netted a 20% annual return for investors. He explains how performance-based hurdles can keep investors engaged longer, ensuring a win-win situation for all parties involved. Joel also provides a detailed look into the strategic decisions behind the sale of a 48-unit complex and the acquisition of an 80-unit property, highlighting the multifamily market’s challenges and opportunities.

Finally, Joel opens up about navigating the real estate financing landscape, from securing loans to negotiating favorable terms. He emphasizes the importance of reaching out to multiple lenders and understanding every detail of loan agreements to avoid pitfalls. His recent experience with an 80-unit project showcases the benefits of working with a specialized mortgage broker and implementing strategies like incremental refinancing. Don’t miss out on Joel's invaluable insights and the opportunity to connect with him for future investment possibilities.

Reach out to Joel
Joel@jfhcapital.com
www.jfhcapital.com

To learn more about Tony Johnson and Timeless visit us at:
https://timelessci.com/
https://timelesspropertiescc.com/

If you would like to discuss investing in Commercial Properties create a profile and schedule a call:
https://timelessci.investnext.com/

Reach out to us directly at:
info@timelessci.com

Tony:

Welcome to another episode of Carolina Commercial Real Estate Connection. Today we have Joel Florek with us. Joel, thank you so much for joining us. How are you doing today?

Joel:

Hey, tony, thanks so much for having me.

Tony:

Yes, sir, joel is the owner and operator of JFH Capital. He's up in the Midwest. And, joel, could you tell us a bit about your story? I know right now you're in Indiana. Where did you grow up?

Joel:

Yeah, I grew up originally in the Upper Peninsula of Michigan, up in Marquette on the shores of Lake Superior, grew up with parents that about every year or every other year we would move into a new home, we renovate it while we lived in it and then after a year or two they'd either sell it or we'd move on, and they'd occasionally hang on to property as a rental. And that's where I first started learning the basic skills of what it meant to, at that point, take care of real estate, laying hardwood floors. At eight years old and um get home from school and would have a bag of parts from the hardware store and a note from my dad saying you know, here's the joist hangers. You know, put them up on all the joists in the deck and I, you know, have a nice bruised up thumb as I figured out how to use a hammer bruised up thumb as I figured out how to use a hammer.

Joel:

But yeah, I was certainly blessed with parents that were very hands-on. They never scaled up their real estate investing, but I certainly got a front row seat to what it meant to take responsibility for real estate assets, to have rentals. They never really had more than two or three units at a time, but yeah, that's ultimately the roots of my investing. And then ended up going up to Michigan Tech University, got a degree in finance up there and when I started my first job in Iron Mountain, michigan, I bought a little four-unit building, lived in one unit, rented out the rest your very typical house hack bigger pockets book type real estate business plan and the rest is history, as they say.

Tony:

That's awesome. Let me dive in a bit on your growing up in your childhood. How many siblings did you have growing up?

Joel:

Just my brother and I.

Tony:

And was your brother? Did he have this same? You know, initiative and drive to doing this? Not at all. The one sibling is doing everything. The other one's over there sitting on their butt doing nothing all day.

Joel:

You're working and doing all this ones over there sitting on their butt doing nothing all day. You're working and doing all this. Yeah, my, my brother, he was uh very good hockey player, very good hockey player. He's had a wonderful career, uh, bouncing around in different leagues, ahl, uh short debut in the nhl, playing in europe for about 10, 12 years. Um.

Joel:

So, you know, even from a young age he was, he was very, you know, even from a young age he was, he was very much, you know, focused on his hockey. You know it's, you know, four or five, six days a week kind of thing, almost all year long. Me, on the other hand, I was pretty squirrely kid. You could never get me to, you know, sit down and focus. Going to quote unquote you know, sports practices was not my thing. I like the games, like the practice part of it.

Joel:

So I really enjoyed working with my dad. For me that was something that I had a lot of fun with and, yeah, I am certainly blessed to have, you know, gotten that experience. I mean, you know, there was one house we lived in. We we tore the second story off while we lived in it, so my brother and I were in the living room. The first floor was it was a living room, kitchen and one bedroom. There wasn't even a bathroom on the first floor, so there was just a toilet sitting on the second story and you know, tarps, blowing windows, windows. We were framing it back together but I got to put together there pretty quick but it was, uh, it was.

Tony:

It was a few weeks where it was like, yeah, this is, this is pretty interesting yeah, now I as well have family in the upper peninsula and we would go to the camp and you know there was no, there's no plumbing out there, so we would go out. It was just, you know, the old style shack where you go into the old porta potty sitting out there and you're just taking peas and poops in the dirt, basically oh yeah, oh yeah.

Joel:

Yep, I, I've got got plenty of friends with cap camps out in the woods and, uh, have enjoyed a lot of nights out in the wilderness and that is certainly part of the experience. I would not say a highlight, but it's part of the experience.

Tony:

Yeah. Now when you went to Michigan Tech, did you go with any interest or intent of doing real estate? Was that in your thought process, or what did you go to school for?

Joel:

I actually started going to school for mechanical engineering. I really liked. You know I've always enjoyed understanding how things work. I wouldn't say I was like a gearhead kind of kid. I really enjoyed the construction and building side of things. But very quickly in the first semester of school I realized that I would not be able to survive four years of some of the mentality that the professors in the engineering department had with respect to how they felt about businesses and people in the front office who work very hard to try and make the best decisions. But but it's not always easy and clear cut. So that kind of entrepreneurial mindset aspirations that I had gravitated me towards the business school. So I ended up switching.

Joel:

I felt it very important to get a technical degree and in the world of business, in my opinion, finance and accounting are going to be your two primary technical degrees that you can get. So I ended up choosing the finance route. Learning a big set of rules and memorizing in the world of accounting that's not my thing. Bless the people who enjoy that. My bookkeeper is a tremendously important part of my team nowadays, but I wanted to go into the finance side. I really enjoyed the idea of trying to distill down the basic fundamentals of a business through the financial statements and then translating that into real world decision making, whether you're trying to value business, value assets, understand where it looks like the trajectory of the market may go, and that quantitative analysis translating to the qualitative side of business and, you know, figuring out how to merge those two things together to be able to make smart decisions.

Tony:

That's pretty in-depth. I also went and started in mechanical engineering. I didn't really choose, I think I pretty much failed out of it and then switched to business and graduated with fun didn't really choose, I think.

Tony:

I pretty much failed out of it and then switched to business and graduated with fun, so you know. But so it sounds like we did a similar path on that front. So once you got out and got going, so you're saying your first initial with real estate was, you know, doing a house hack and renting out a couple of the units. And so once you saw that, you said you grew up and your parents never really scaled. So once you kind of got involved, is your long-term aspirations, it sounds like, were then more on figuring out a way to scale this. Am I right?

Joel:

Yeah, yeah, you know middle class parents. Mom was a nurse. You know dad was. You know facilities maintenance supervisor for our local. You know town in charge of water, sewer departments. And you know other facilities, parks, throughout the community.

Joel:

You know financial stress certainly a part of, I think, every middle class American's life at some point American's life at some point. And for me, I knew that financial independence was something that was tremendously important for me to try and achieve as early as possible, given the background that I had, working with my parents in what they did with real estate. I certainly understood the physical components. With my college education I understood a lot of the financial components and I said, well, heck, let's start with that four unit and let's try to scale it from there. I'll try to build a base through multifamily as kind of my core financial independence rock, if you will. And what happens after that I don't know.

Joel:

So in my head it was like I need 12 units and that was the big thing that I was really shooting for at that time. And just to put it into context, after a little bit of trading of some assets, selling and buying of 185 units here in the portfolio of multifamily assets, I also have a campground in the portfolio with 220 pads as well. So that's where the portfolio is today. But, like I said, at the time, I had the mindset of 12 units and that's what I was going to work hard to get to. I bought that. For 10 months later I ended up buying a 16 unit. So within my first year of leaving college at 23 years old I had 22 years old I had 20 units in my portfolio that I had owned, didn't have any partners. I was like heck, this thing's easy. You know I'm going to have a thousand units here in the next next few years. Got a nice dose of reality there.

Tony:

That's awesome. You set your initial goal right, so it's what you can envision. And you set those initial goals, so you can envision the one. You surpass the one, and then it was sky's the limit. So kind of walk us through what happened. What was the next thing? So you got, got up to your 22 units. Did you feel a cash crunch? Was you you were still ready to move forward, or what? What was the analysis once you're at the 22 units and now you surpassed your goal, did? Did you regroup, reset your goals and start again?

Joel:

Yeah, so this would have been kind of late. 2015 was when I bought my first building and, like I say, I had picked up the four unit, 16 unit about a year and a half later, picked up a three unit and then picked up an eight unit as well. I'd moved from the UP down to Indiana where my wife is from, as we started our family and I had 31 units at the time and I had done it all through creative financing. I mean, I was borrowing from credit cards, I was getting seller finance, second position notes, getting the bank to finance as much as I could. I was the guy wearing every hat I didn't have. I had worked for House Flipper on the side for a little bit, but I didn't have a W-2 job. I had left that pretty quick when I had moved down to Indiana and didn't pick up another.

Tony:

So yeah, I mean to say I felt well, you, you're creatively making things happen, which is awesome you know, but I, you know, I was, I, I was stuck right yeah, well, I mean so when, once you got so initially, when we're starting so up to 32 units, you were self-managing these properties, so you were the, you were the maintenance guy doing everything right.

Joel:

Yep, I was leasing agent. I was the maintenance guy. You know, painter, I throw my lawnmower on a trailer and drive it around and, and you know, mow the properties. But I barely had any equity, you know, in the deals because I had borrowed every dollar zero down and unless I wanted to go pick up another job, I had to do some of these things to at least make enough to make ends meet for for my young family, as, as we were getting started.

Joel:

So at that point I had decided that I really want to scale up and do some larger deals. It was getting really hard to find anybody who was interested in doing seller finance. I was interested in getting into better quality assets. The market was getting really hot in the late teens so I decided to start bringing on investors into my projects with the goal of being able to scale and tackle projects without being limited to whatever capital I did or did not have at the moment. So I bought a 15 unit townhouse portfolio as my first syndicated property, brought on 12 investors who all came in with $10,000 to $30,000 each to be able to purchase that property.

Tony:

I love that. I love that idea. A lot of people start with the massive project big investors. I love to hear about that. You've told me that before, where you brought in these investors, small money, and coupled a lot of people together but raised this capital for the first time. It sounds like you know, you are a no holds barred and just have that analysis that once you set your mind to something, you're going to accomplish it. And bringing along 15 investors the first time you're syndicating something and this lower range of investment amount you must have just been dialing, dialing, dialing, dialing. And people, obviously, you know, even if they didn't have a lot of money, they're giving you everything that they have because they have faith in you and belief in you, which is awesome. So that's a lot harder than getting money from somebody who's got multi-millions of dollars and you get a hundred thousand from them right, just to get somebody who it's almost everything that they've probably saved up for and they're willing to give it to you.

Joel:

Yeah, or at least that was that was my perception at the time. You know seemed like a lot and you know that's what they said they had. But the reality is most of the people who invested with me on that first project, as I've done subsequent projects over the year, those $10,000, $20,000, $30,000 checks have turned into $50,000, $100,000, $200,000 checks and we're starting to work with those individuals' IRAs on them doing self-directeds. It's really expanded but we built that initial investing relationship off of a much smaller check size.

Joel:

I was still very young, in my mid-20s, when we did that first syndicated deal. So for a lot of these people I think for all of them it was the first time any had gotten involved in a syndication. Of them it was the first time any had gotten involved in a syndication. So passively investing through another person into real estate was a new experience for them. It was a new experience for me. So I think it worked really well in all things.

Joel:

Considered the size deal that we took down with the quality of asset that we bought, in my opinion it was pretty darn low risk for everybody and proved out to be a great situation. Structured, that deal a little uniquely had a buyout clause with the investors built into it. We all pre-agreed going into it. So after three years I was able to buy out all my investors. They all achieved about a 20% average annual return over that three-year hold period. So, all things considered, a very, very good, respectable return for those folks as a passive investment, and then for myself and my brother who did get involved in that project as well. We now control that asset ourselves and the original group of passive investors are no longer involved in that project.

Tony:

So can you tell me a little bit so just giving somebody a little insider information, if somebody's looking at structuring, I love the idea of that and you've spoken a couple different times to me on other occasions about how you structure your deals. Could you give us a little more in-depth understanding of what you're talking about, how you structured the buyout clause and what are some specific things you're putting in these agreements? That is, making sure that you have control of the asset and can make the asset perform and are using what you're bringing to the table to your advantage.

Joel:

Yeah, so I'll start out with the structure in the legal documents. So the way that I put that together was our buyout was based off of an IRR internal rate of return. So the general idea is, during the entire hold period we're paying out cash flows. I pay out cash flows on a monthly basis to investors and then at some point we're going to have a capital event. So the challenge that you get into and how you structure it is what type of measure do you use to structure your buyout is what type of measure do you use to structure your buyout If you want to go through and have some sort of appraisal percentage of the property?

Joel:

That gets really messy, because I'm sure you've experienced it Appraisers suck. And I'm not saying that actual appraisers are bad at their job. It's just the process of trying to appraise a property is so variable and opinionated that you get three appraisers who try to value the exact same asset at the exact same time with the exact same information. They're going to put three different values on it and it could vary 25%, 30% in value. It's very challenging job for an appraiser to figure out what the market is at any given time. So if you have a structure that requires an appraisal. In my opinion, that's a recipe for failure. Irr allows us to be very specific, so I structured an 18% IRR buyout after three years, so we have a defined time horizon that says I can't buy you out before X date. That way, people feel like their money was working for them for a long enough period, and then we have an IRR measure, which allows us to factor in the time value money associated with those monthly payments that are varying amounts, and then that final capital event. It's a very clean approach to determining how shares are going to be valued at some point in the future.

Joel:

Ultimately, though, everybody has to agree on that, going into it Super disclosed is. This is the business plan. This is how we're doing it. What I did find, though, is, ultimately, while it was certainly a great project for investors, they all would have loved to have stayed in the deal. A great project for investors. They all would have loved to have stayed in the deal, and it was pretty disheartening from their standpoint to have exited the deal before it went full cycle. So, moving forward, my goal is to structure deals that maybe have hurdles associated with better performance, that allow me to get additional benefits as I execute a deal you know extremely well, but allowing my investors to stay in and participate more fully over time. So that type of yeah, go ahead.

Tony:

Give me an example of some structured hurdle that you've put forward that they, that you could basically be rewarded, but keep them in the deal so people understand what you're talking about.

Joel:

Yeah. So there's a deal that we actually restructured when we decided to do an eight unit townhouse development onto the existing apartment complex an eight unit townhouse development onto the existing apartment complex. So when we restructured that deal, the way it was set up was the initial. The first hurdle was a 70, 30 split 70% to investors, 30% to the general partners and after we have a full return of capital, then all cash flows get split 50-50 and all future capital events are split 50-50 as well.

Joel:

The idea with that structure was we were looking to do a cash out refi after we finished the construction and then hang on to that asset over the long term. The goal there was that I, as the primary general partner who's putting in the sweat equity, doing all the work associated with that, structuring that new construction and getting that project to fruition, that I would be able to see stronger cashflow over the hold period. All of my investors would have gotten their principal back to achieve that hurdle. So from an investor's perspective, they put money in a project, get cashflows for a while, they get all of their original capital back and then they continue to cashflow and then they get you know whatever split in this case 50, 50 of you know any future capital events kind of thing. So, um, that's something that we ended up putting in into that deal and everyone was was pretty excited, uh, to you know, to be able to participate and get involved with that new structure.

Tony:

Yeah, that's awesome. That's, that's structure. It's a great structure and you're exactly right. So it's rewarding you. So you know, in that initial investment period where the investors have all their money in, they're getting 70% of the return. You're getting 30% for all of your work. Then, once you're able to fully give them back their initial capital and basically neither one of you are fully invested in the deal then you're now splitting 50-50 and they're able to still reap the benefits of the project and you're able to reap more of the rewards of the project for all that work you put in. So that's a great structure. It's a win-win for everybody. Pretty common, but very attractive for a passive investor because once they've got all their money back, they're still able to be in this deal and really you know understandably. So all these people are doing are putting in their money. You're the one that's working blood, sweat and tears in this every day, and so then you're going to get that benefit of the rewards only once they fully recoup their initial investment, which makes it, like I was saying, a win-win.

Tony:

So awesome structure and thanks so much for walking us through that. So tell us a little bit about what you're after these days. So I know the market has shifted from that timeframe to now and so kind of walk us through where you're at right now. What are you working on doing right now? Exiting deals, having new deals? Are you looking at other pursuits? Where are you at?

Joel:

Yeah, so right now I am selling a 48 unit apartment complex that we've had for the last three and a half years. As I briefly mentioned, that was a project that originally purchased it was 40 units. We added eight units to it and now we're selling it off as a 48 unit apartment complex. We were looking at holding that one, but I felt like there were some opportunities that may be coming to the market this year and felt like getting all of our capital out was going to be advantageous.

Joel:

And it just so happens that about a week after we got that 48 unit under contract to sell ended up having an 80 unit that we got an accepted LOI on and are currently under contract on to purchase and are currently under contract on to purchase. So that 80 unit is going to have a very similar business plan, where there was plans for a future phase and the property was designed for that future phase. So we've got roads stubbed out in the back. We believe we can add 20 to 30 townhouses in the back of that property as well. So we're going to purchase the existing 80 units. There's a huge value add component associated with that part of the project and then there's this additional opportunity to add more units to that community as well, to bump it up to that 100, 110 unit community. So if we can execute that, definitely some really exciting opportunity with that particular project.

Tony:

That sounds awesome, and so that one you're also bringing in passive investors, right.

Joel:

Correct Exactly, I'll be the largest Chuck writer, but inevitably we'll bring in a nice pool of investors and pretty much you know it's going to be. You know a good list of everyone who's worked with us on the past and a lot of folks rolling money over from the sale that we're going to have. So, yeah, fun times right in the middle of transactions right now. So it feels, feels good it's.

Joel:

It's been a, it's been a really tough market. I mean, we've seen a huge run up in the prices of multifamily assets and with interest rates rising as much as they did, as quick as they did, you have this really big spread in many cases between what owners of assets would be willing to trade out and what buyers need to see to be able to get in. And it's just hard when every 30 days you see another 50 basis point, 100 basis point fluctuation in rates up and down and up and down and a lot of up. But it makes it very difficult for us to predict what's going on in the market. So it's been a couple of years since I've actually closed a new deal. Thankfully, I had that new construction project to keep me sane last year. But 2024, after the races I is going to make things happen here.

Tony:

So now one of the things that my market is starting to see in multifamily is rent softening a bit, and we have had a lot come online which I think is contributing to that. Are you foreseeing any softening in the rental in your area, the rental rates in your area, any?

Joel:

softening in the rental in your area, the rental rates in your area? Well, typically all the communities that I invest in, uh, they don't have much for new supply coming to market. So, from that perspective, you know, rents appreciating, staying flat or depreciating is generally, it's basic economics. It's a factor of supply and demand, whether that's increased demand from people moving into a market or wanting to shift to apartments, or it's shifts in massive supply, multifamily as a whole. I just got back from a Marks and Millchap conference in Chicago, and they had a really good discussion around what's happening around the country with the multifamily market in particular, and the apartment market is bringing record deliveries each year here to the United States, which, when you talk about the idea of affordability crisis that is the buzzword most people like to use that sounds fantastic. What's actually happening, though, is the concentration of that construction is in such a small number of markets that, frankly, the vast majority of America isn't seeing that big ramp up in supply coming. But the markets that are getting that ramp up in supply are getting hit very, very hard, and some are getting hit harder than others. We're seeing, in certain communities around the country, rents declining by as much as 10%, vacancies of 10% to 15% in certain markets, so that's something that investor beware, buyer beware.

Joel:

You really have to pay attention to the supply factors associated with the market. How much supply is going to be coming to market, and those are stats you can generally look up. It's pretty widely understood in each market how many units are coming to market each year, how many have been approved, and then there's typically some really good data out there associated with absorption rates. What type of concessions are having to be offered one, two, three months free rent? Offered one, two, three months free rent in some cases for people to move into this brand new product? That hurts every single level A, b, c class apartments, because there ends up being this natural shift of people from poor quality assets up to better quality assets, but everyone, for the most part, gets hurt across the board.

Joel:

So a market as a whole might be great, from a job growth, a population growth, all sorts of things but too many developers got excited about that market and threw so many units, and that's the boob and bust of capitalism, right? I mean, that's just what happens and that's okay. It hurts the people who are investing for sure. It's great for consumers, though, because they're seeing a bunch of new product and they're going to see rents going down and they're going to have a lot more optionality and apartment owners are going to be fighting for those renters. Those are going to be really hard markets to be in over the next five plus years because that doesn't fix itself overnight. It takes time.

Joel:

Now the markets that I've historically invested in are what some might call riskier markets because they're small towns of 5,000, 10,000, 20,000, 30,000, typically do 50,000 person population communities or less, and they've been in Indiana or Michigan. And the big thing for me is, as long as there is stable population and I don't see really anything for new apartment supply coming into market, I feel very comfortable investing into those communities, especially if I'm investing into assets that are up at a higher level in the market, because I know people always are going to want to choose the better quality asset should prices remain equal. So that's generally been my strategy over time is to stay in the slow and steady markets where I don't see this big up and down and vacancies and concessions and all sorts of other games that other apartment owners are experiencing having to play right now.

Tony:

Yeah, I think that that's a sound strategy. You know, the more people I speak to over and over again, everybody's got, you know, different analysis for what they, where they want to go, what market they want to go in. And, yeah, you know, you, you, a lot of people, are of the mentality you know and I follow the crowd and I follow the crowd, follow the crowd. So when everyone's going into this market this is the great markets Then everyone floods those markets and then, yeah, you get overexposure, then you got absorption rates come into play and then exactly what happened is the dominoes start to fall and that's where people start to lose out.

Tony:

When you're doing a strategy like you have, like it doesn't really matter, you're not really going through a boom and a bust. You're understanding these smaller markets. You are looking in markets that you know. You have historical knowledge on the markets and so when there's not a ton of new building going on, it's a lot less to be aware of these moving parts. So when you're going in a very busy market you want to develop something, it's how restrictive is that market? Or when you're in developing a multifamily project, they approve one right next door and they're coming in at a lower cost basis maybe than you, and all of a sudden you're screwed.

Joel:

Yeah, and an interesting thing that came out of the conference is some of the largest developers in the country were up there speaking and pretty much unanimously, all of them said that their cost to build is 10% 15% less today than it was just a few years ago. So, to your point, they're building brand new communities today at a lower cost basis than what they were building just a few years ago. So that adds fuel to the fire for some of these markets. One of the challenges that you have if you go after a strategy like mine of going into these smaller communities that not everybody's chasing, is a few things From a lending perspective. There are going to be fewer banks that are going to be interested in working because, for the same reason of what I'll mention here with investors, if a banker makes a mistake by approving a project that goes bad in a small town, they're going to be in trouble if, if they make a mistake and a project goes bad in a major community, well, you know I can't be in control of that, that's not my fault kind of thing it's. It's it's. It's much more acceptable for for things to go wrong in a larger community and you to still keep your job. So there's going to be far fewer banks that are interested in working in those smaller communities. So lending is more difficult. But I have never had a problem getting multiple banks to compete for loans in any of these markets over the last nine years.

Joel:

The other side of the equation is capital, Institutional capital, the big players. They don't touch small markets, they only stay in primary markets or secondary markets. I mean you've got to be a community of you know two 300,000 people or more for these major capital groups to be able to invest money. As you continue to work down the ladder of capital type. Again, you got to keep working out of the chain before you get people who are willing to invest capital into some of these smaller markets. So if you are raising money, it's going to be that much harder to be able to raise money and then subsequently you're going to have that many fewer investor groups who are interested in buying your asset upon the exit.

Joel:

Again, I've never had a problem thus far on the disposition side on getting multiple competitive offers available, and in many cases it's kind of like I already know who the three people are that are probably going to buy this asset because they're just that strong of players in markets of that size within my region. So I just kind of know going into who's probably going to be buying my asset and all the more reason to focus on buying stuff that makes sense, kind of normal construction. I don't like buying weird stuff, weird properties, weirdly constructed properties just you know those are things you see sit on the market for a long time. So it's I want to try to buy like normal, constructed garden style apartment complexes, plain Jane, simple as possible. Focus on improving the quality of those assets, leave some meat on the bone for the next guy and I have no problem.

Joel:

On the disposition side, I've built up an investor pool, starting with those small checks, building up now to larger checks to where they feel very comfortable on working with me in any community that I put my stamp of approval on. And now I've got a list of banks that have seen my reputation for what I've been able to do with projects, and it makes it very easy for me to be able to get good competitive term sheets whenever I have a project that I'm bringing to the lender markets.

Tony:

So let me ask you a little bit more on the bank and you doing the competing with lenders. So typically I'm in a smaller market too Nine's not as small as what we're talking about, but even so in my small market. So there's probably five or six banks that I could go to. I typically will go to two on the offset. When you're talking about that, are you letting the banks know that you're speaking to multiple banks? What's your approach with the banks when you're going?

Joel:

Absolutely. This is a competition and they need to compete to lend on your deal. So, you know, what I have always done is typically and there's probably a little better way I should approach this but the way I've always done it is whenever I get a new deal that I get assigned LOI on, or usually, like just before I even get to that point, if I know that I'm going to have a pretty good shot at getting a deal, I'll start that conversation with those couple banks that I have existing relationships with. But then, once I have a signed LOI and we're in the PSA negotiation process, I just start picking up the phone and I call every single lender that I think has an opportunity to lend within that market, and there might be five banks that are primary players in your market, but I guarantee there's another dozen banks within your state that are more than willing to extend into your market. Typically, banks will lend up to two to three hours from their closest branch. So you can go to your state website, pull up stats and figure out who are the largest banks. You can see, ranked by asset, how many assets that bank holds and you can see okay, yeah, these are the top 20 banks in my state and I'm going to go call those folks and start having the conversation.

Joel:

And then, within those conversations, it's very simple, right? Hey, here's my name, here's what I'm doing. I've got this property that I'm looking to purchase. Here are the general terms for the loan that I'm X, y, z. You know, is this something that you know you would be interested in working with me on? And you kind of pack that into like a you know 30 second to 60 second snippet of of you know, here's who I am. Here's the project that I've got going on. Here's the terms that I'm looking for.

Joel:

Is this a project that you think your bank might be interested in working on us with? And you know, kind of see if they fit within your buy box. And then from there you either get a pretty quick nah, this doesn't really fit well for us, or might it, might not. I got to run it up the chain and you could put a little question mark around that bank. And then you find the folks that are like, yeah, that's right up our alley, that's something that for sure fits our bill. We got to underwrite it, we've got to throw it through committee, but then you can have a really good conversation around it. Again, in that initial conversation to you know, you just let them know hey, here's some of the banks I've worked with in the past. I'm certainly giving them an opportunity to be able to, you know, work on this deal with me. But you know I'm looking for the best terms and got Amelia poking her head in here in the frame.

Tony:

Okay.

Tony:

So when you're doing that one of the challenges that people have come to me with and you know, just love your perspective to put in on that A lot of guys that are new to raising capital or you know, they 'll go to a bank and they'll say, yeah, I want to get the loan on this, and you know the bank will be okay, you have the, you know money.

Tony:

It's this much down payment. Well, I'm going to raise capital from others and you know some banks are okay and people get a lot of very confused there where you know maybe they're not bringing all of the capital to the deal themselves. So you know, and then the bank as well, you know you need to bring the money and who's signing on the debt then? So walking through that, and so one quick hurdle is, you know, for one specific investor, and if they're not going to be on the debt, you don't want to raise more than 20% of the equity from them. That's one thing I want to run in, but I was wanting to see if you could run through that kind of and have you had that hurdle come up to you at any point?

Joel:

Yeah, so that is that is absolutely a great point. Yeah, so that is absolutely a great point. Anytime anyone typically gets over that 20% threshold, they're going to be required to sign on the debt, and I just make that clear to my investors. So typically that's never a problem anyways, when bringing a pool of investors in my experience where somebody isn't going to be writing that big of a problem anyways, when bringing a pool of investors in my experience where somebody isn't going to be writing that big of a check, but you just got to make sure that if anybody is, you have that conversation upfront of like it's going to be a requirement from the bank for you to sign some sort of a additional guarantee on this note, so just be prepared yourself. Be prepared to have that conversation with any of your key investors and plan ahead.

Joel:

I've got a buddy of mine who he's got a portfolio of four or 500 units and that is something that is kind of a problem for him. His primary investors, who do provide big checks to him, they won't sign personal guarantees. So he's very limited to the debt that he can go get and inevitably it limits him on the type of deals that he can do because he knows like, oh well, I can't get agency debt on this project yet, it doesn't make sense, we really need to work with a community bank. But these guys aren't going to sign guarantees and he's just like, well, I can't do the deal, it doesn't work for our partnership and it's a challenge for him. It's not a challenge for me.

Joel:

I don't have a problem signing personal guarantees. Yes, there's a whole extra added layer of risk that I take on as a general partner, but that's also why I feel I'm very conservative going into any of my deals and I make sure that there's certainly more than enough levers for me to go pull, from an operation standpoint, that allow me to to move this asset in direction that you know keeps everything above water over, you know, over time put good fixed rate debt on things going into it. So when you do sign those you know guarantees, make sure that you're being smart about understanding where your risks are in the project and doing what you can to mitigate those risks for your project over the life cycle of it.

Tony:

Yeah, and one thing that's critical is you don't want to save money here on a deal. This is not where you save money. You don't save money on not understanding the terms of the loan that you're signing, right, so you know, don't? This is where you can really run into a mistake. You know that you could have kind of hedged. So go spend a grand, two grand, have an attorney, go through any questions, make sure you understand the terms. The banks might. You know people are very quick to just look at a rate, down payment amount and start comparing through there. But all of the nitty gritty is in the bank's terms. So you know, that's just all. That's like the shiny object there. But the terms are what really everything's going to come down to. Because once you sign and close on that deal, you're beholden to those terms unless you have negotiated those prior, and most people don't realize this.

Tony:

But banks are willing to negotiate those terms, but you have to oh, for sure you have to read the terms and understand what your terms you're signing up for in order to negotiate them. So that is critically important for any newer investor when you're looking at deals is understand those terms.

Joel:

So can you give me some examples?

Tony:

of anything that you've gone through with that.

Joel:

Yeah, I've spent the last two weeks actually basically playing two banks back and forth on pushing the terms with the loan turn sheet that we're doing for this 80-unit project. So this is what I've been living and breathing here the last handful of weeks. I do want to step back just one sec. I also might recommend that you find a very good versed mortgage broker and even if it means you have to pay them a fee, if you want to go find your own debt but you pay them a fee to review the terms, that's something you may be able to find somebody who could do. They might say thanks but no thanks, but those folks, in my opinion, are going to likely be more versed in understanding the opportunities and risks associated with the term sheet on the loan package that you're getting than an attorney. Attorneys are often very good at a lot of things. There are some attorneys that are very specific, but I do feel if you can find someone who's a specialist in working with term sheets all day, every day, that person's going to have some great insights. You might have to pay a reduced percentage fee of your loan or a flat fee to have them review, but that's something that I might recommend you add as a part of your deal team. I might recommend you add as a part of your deal team With respect to terms. So something that we are going to be doing here on this 80-unit deal, we're buying at a very low basis per door. We're buying this new 80-unit at 55 a door and after we execute our value out on just the 80 units, we should be looking at somewhere around like 85 to 95 a door for what it's going to be worth three to five years from now. So, with that said, we've got a lot of room to grow, and one of the things that I want to be able to do for my investors is be able to return capital to them as we improve the value of the asset.

Joel:

But I'm also very conscious of not getting into too short term of debt. I don't like one or two year debt. I generally want to see that I'm getting into an asset with five year debt, because who knows when the next pandemic is going to come around? Whatever's going to happen, I can't predict the future in the macroeconomic world and we can do it at the microeconomic level, so the best thing we can do is put predictable framework around our deal and move forward.

Joel:

So what I was able to negotiate on this deal is we've got a bank who's going to provide us the opportunity to do a swap. I can choose three, four, five, six, seven-year swap. So it'll be a fixed rate debt for whatever length of term I want want, and then, at 12, 24, and even 36 months, we got a 12 month period. Every 12 months the bank will re-up our loan and they will add an additional loan onto the package based on how much value we've created. So any appraisal will last about 18 months, and so the first 12 months we'll be able to use the original appraisal. But they'll look at where our trailing 12 month NOI is at and they'll be able to say, okay, we can move you now up to X for meeting your you know 1.2 DSCR.

Joel:

So you know we'll put two and a half million down and 12 months in we should be able to get another half million dollars back, and then, 24 months in, we should be able to get another half to three quarters million back and then, a year later, get another chunk of money back. So the cool thing from an investor's perspective is we get this incremental refinance, if you will, throughout our project Our interest rate will be a blended rate. We'll have the original fixed rate and then, wherever the new rates come in, those will all be fixed off of the original 25-year amortization. We're getting interest only period in there. That was something that was important for us to negotiate, but this is a really cool structure that allows us to get into longer term fixed rate debt and still be able to get cash out refis along the way. We've pre-negotiated the terms that those refinances are going to end up happening.

Tony:

Now that's a value bomb. That's a great nugget there for anybody listening. So what you've negotiated in simple terms is you've got a loan. You're not having to leave this bank, pay prep, create capital events every year, every 18 months, without completely going through a prepayment penalty, closing out a loan, finding another bank. So all of these things in terms that you've negotiated before you've closed on the property are building in where you can then create capital events for your investors and for yourself to recoup that capital invested. That's a fantastic value bond for people. Rewind that. Listen to that again, because that's about the most beneficial thing that we've talked about People can do.

Tony:

Actionable when negotiating terms like this is looking outside of the box, creating something that works for you will work for your investors and create a deal where there is a deal and be able to do something where you're not worried about what the market is doing Because, like you're saying, you're going to have a blended rate. So you've got that initial loan term. That's a fixed rate for whatever you set it up for three, five, nine, 10 years, whatever Right, so that one's fixed. Then you having an additional rate, which is whatever. You know the bank and you negotiate based on the rates of the day. Each time you create that capital event which is then going to blend your rates up, the rate starts dropping big times. Then that's going to lower your blended rate. Obviously, if it goes up significantly more now, even though you've got that initial loan which is the majority all locked in and you're able to create additional capital events where you're just going to deal with a blended rate and you don't have to start all over, yeah.

Joel:

So we're going into this project at like 50, it'll probably be like 52 LTV, like basically 50 LTV, right, we're bringing a lot of cash to the table in this thing and that allows us to achieve a 1.2 DSCR on a fully amortizing basis, even though we do have an IO period. But on a fully amortizing basis we achieve a 1.2 DSCR based on the trailing 12-month NOI. So out of the gate we've got a very safe loan amount. We've got to bring a lot of capital to the table and that's not super attractive from being able to get high returns. But again, having that being able to add those additional loans onto this thing over the coming years allows us to get to that higher leverage without having to be too risky out of the gate.

Joel:

So the flip side to that if you look at a lot of the deals that are going bad these days and we hear about keys getting handed back to the banks and investors losing their money it was folks that went out and got bridge loans, which are inherently expensive debt out of the gate. It's also floating rate debt. Expensive debt out of the gate, it's also floating rate debt. So that's a whole big issue. That happened, as we saw 400 plus point basis point increase. So they got very high leverage. You know some of it like 85 loan to cost on deals. So they were just crazy low money down on these big apartment complexes. And the reality is that as rates went up, even on their interest only payments, they were like 0.5 or 0.6 DSCR, not 1.5 or 1.6,. 0.5 or 0.6, which means they are burning cash every single month by 0.6, which means they are burning cash every single month as they just approach having to hand the keys back if they can't execute their plan. So if those folks would have put together a structure like I've got on this deal, yeah, it would have been a lot of cash to bring to the table.

Joel:

But the great thing when you are at a comfortable DSCR and you have fixed rate debt is you have time, and time is the most valuable asset any of us can buy. Who are structuring deals Right? Because political environments calm down interest rate markets figure out what the heck they're going to do. You're able to get through recessionary periods. You can deal with major employers shutting down and trying to ramp up new jobs and there's all sorts of stuff you can deal with right. You get a fire on your property you get, I don't know, some bed bug infestation and time. Time gives you just such huge benefits. So putting together a loan package and an equity package that balances giving you time as well as being able to give you those higher returns that you want, that come with added leverage, you know that's that's a really great thing and, and something in today's environment that I'm pretty excited about and, you know, pretty proud that we're able to pull this together as a structure for this new deal.

Tony:

Well, that's fantastic. So I mean, what you've basically gone through, what we've gone through, is the environment has completely changed here. And what you kind of hit on is you know, when things were flying all over the place, people were underwriting deals. They're in a lot of trouble. They weren't buying rate caps. Their interest rate was never going to go up. There was never going to be a bad day. You know, and that's where all the people get caught.

Tony:

You, like you've said, it's been a long time since you found a deal, because you're being prudent, you know, staying key to your principles and key to your principles, and that's how you're successful in this. This is a marathon, not a quick race. So you have to be prudent, slow, slowly build up. So real estate is not a quick make money and churn. Otherwise you're going to quickly make money and then you're going to crash. So, like with anything, you have to be slow, methodical, and you're going to build this over time. And real estate is appreciating assets, tangible. It will go up and you're going to build this over time in real estate as appreciating assets tangible. It will go up, but you can't expect it to go up like it did for that short run, or you're normally going to get burned. So as long as you're looking at stuff prudently and with a long-term vision, you're normally going to be more successful in the long run.

Tony:

But, Joel, thank you so much for taking the time to go through everything with us today. I want to kind of cut it and we'll get you at another point. I'd love to get you back on after you close and do some work on this new deal and find out if you close on it and start to do some development plans. I'd love to get you back and kind of walk that through with everybody so they can keep in touch with you. Now, if people are interested in getting to know you more or reach out to you about future investment opportunities, what's the best way to get in touch with you?

Joel:

Yeah, I'm on LinkedIn. I'm on Facebook. Head to my website, jfhcapitalcom, and my email is joel at jfhcapitalcom as well.

Tony:

And we'll put that in the show notes as well as a link to him on LinkedIn, and please reach out to him. Joel's a great guy and I think he's going to have a really bright future down the road, and so if anybody can get in touch with somebody and they want to invest, he's somebody I would definitely recommend to reach out to. So hey, joel, thanks so much for being on the show today and hope to talk to you again soon.

Joel:

Hey, thanks, tony, appreciate it.