Learn from a real estate black belt
I chatted with Marc Gilbert of Orchard Principals. Marc left his corporate job about five years ago to reno and rehab buildings full time. He's built a successful business and has talked about working towards generating a million dollars a year in cash flow.
A few takeaways from our conversation (the audio is below as is the full transcript):
- Have an asset niche (Marc's is $1-10M in non-operational buildings, i.e., no hotels, nursing homes etc.) and stick with it once you've got it figured
- Know one geography cold and build a reputation in that area with brokers
- Solving complex/tricky legal deals is an (arbitrage) advantage
- You have to start somewhere with your first deal and running it "half decently" means it is a forgiving asset class
- Modified IRR is a good investment metric
- Local competition is (paradoxically) healthy because it improves the neighborhood and raises rents for landlords
- Find the two-way fit between the GP and LP
You can follow Marc on Twitter @MarcSGIlbert.
Laziest Landlord: Hi, this is Manu, the Laziest Landlord, and I'm here today with Marc Gilbert. Marc, thanks for spending the time today.
Marc Gilbert: Thank you.
LL: Great. Marc, I’d love to dive into, you know, how you ended up here. So you started your background in finance. Tell me a little bit more about why you are now doing multi-families and have built Twin Oaks into what it is today.
Marc Gilbert: So back when I was working in finance, I covered both RMBS residential mortgage backed securities and commercial mortgage backed securities. So I worked on the lending side and it was on the on the heels of the recession coming out of the recession. A lot of the recession loans had already been worked out and the people who had purchased those properties at a foreclosure or in a distressed form were actually refinancing and cashing out in a major way. We were looking at those loans come through, the values for justified, the cash out refinances that we were working through, made a lot of sense. They were supported by the cash flow of the property. They were good solid loans and sponsors who propose those deals for us, they did incredibly well. And being that I was restricted from trading in public markets altogether, I bought a couple of properties on my own; distressed properties, legacy product from the recession and started operating them. And, you know, as time went on, the operation of the properties took over. It was hard to hold both careers and I basically jumped ship and went full force head-on into real estate investing.
LL: How many properties did you have before you did the full jump ship?
Marc Gilbert: So the number was four but they were four intensive properties. So four distressed properties, plenty of upside, but a lot of work to capture that upside.
LL: And when you look back at those first two, four properties, what would you have done differently knowing what you know now?
Marc Gilbert: So that's a good question. The first deal that we did, and this is self-critique looking back quite a while, it was not a great deal. It worked out very, very well, but that's because the market helped us out. Not because it was one of those phenomenal deals. And what we would have done differently with hindsight is get a better handle on underwriting in specific markets. We were just generally canvassing. We weren't tied to any location. We hadn't settled on the location. When we bought our first property, that was basically the location which I did settle on, but I didn't have a handle to any particular market at all. And looking in the end it worked out, it worked out really well and we gained a handle pretty fast, but for somebody starting out and if I were starting out, I learn one market call before diving into it, just so you have the perspective of what is a really good deal and what isn't.
LL: And so you think geographical knowledge and expertise is one of the keys to this?
Marc Gilbert: Absolutely and also within the asset class that you're buying, understanding that specific asset class really well, what drives it, how it works, down to the neighborhoods in specific area where you're working in. Because once again, in some of these markets, you cross the street and there's a one point hits to the cap rate.
LL: Right. And so today you have multi-families, I've seen that you've talked about storage buildings. We talked about asset classes. Is that what you're limited to? What do you look out for your asset classes and why?
Marc Gilbert: So we're actually pretty asset class agnostic. The only thing we stay away from is real estate as a business, as I would call it. So that includes hospitality like hotels, assisted living, self storage, and WeWork type product. Because once again, a lot of that is business operation with marketing, with employment and labor, with high tenant turnover, so student housing is another thing we probably shy away from. But otherwise we concentrated in geography. We have a reputation in the geography. We have a, you know, a well-established relationship with many of the brokers. And to that end, we'll buy industrial, we'll buy retail, we'll buy office and obviously we'll buy the bread and butter multifamily, which makes up the majority of our portfolio.
LL: When you talk about the relationship with the brokers, how did you start building that relationship? And now today that you have those relationships, what advantage does it give you?
Marc Gilbert: So the most important thing with brokers and from the start, by far the most important thing is to do what you say and not to over promise if you can't deliver. Because it all comes down to credibility. The marginal difference to a broker, if they sell a property for 2 million or 2.1 million is nominal, and if you make it easier for them to do their job it, you know, it goes a very, very long way in terms of getting a first look at deals. And, you know, in terms of getting the deal sent to you in the first place. So you want the reputation as A, somebody who closes. B, somebody who doesn't re-trade deals and C, somebody who just delivers. So if you're going to finance a deal and you're not willing to commit yourself to closing in cash, don't make a cash offer and re-trade it during the contract period. And if you made that cash offer and you're running up on the closing deadline, close with a bridge loan, and then refinance. Don't drag the timelines out in order to close with your initial financing because once again, you'll get that deal done, you'll save a couple thousand dollars and you'll skewer your reputation over the long run.
LL: And now that you have that reputation in the market that you operate, are you number one on the brokers’, you know, speed dial, or is it how do you kind of rate yourself with that community?
Marc Gilbert: So within the, I guess the network of brokers, there are quite a few brokers who I'm number one with. There's a single broker who we've bought pretty much every deal he's brought to market for the past two or three years. He's not a high volume guy, but he knows exactly what we're looking for and we'd call those deals, procure deals. He's looking for deals to sell to me, not to broadly market and sell to the highest bidder. So that's been a lot of it. Are we number one with the larger brokerages in the area? Look, there are a lot of brokerages that'll market every property to the moon and back. Well, we get a specific call if it's in our warehouse or, sorry, our wheelhouse, will they call us specifically and say, “Hey, we're bringing this to market.” Yes. But at the end of the day, you know, a lot of landlords who are selling come with a marketing plan in mind. They want the property broadly marketed. They won't accept offers within the first couple of weeks because they want to tour the building and they want to show it. So even if we are first on the brokers’ list, you know, it only goes so far.
LL: Right, right. When you say we in this, how do you structure your financing and your deals today?
Marc Gilbert: So my deals are what you would consider a very tight sent to get. We have very limited number of limited partners. I always co-invest a substantial portion of the equity. So whether that's 25 or 50%, it's, you know, it's a significant portion of the deal. I'm committed to every single deal. I don't raise for deals until after due diligence is over and I have a financing commitment. So at the end of the day, if I have to close the deal on my own, I'm unsuccessful in raising the money, hasn't happened yet, but I always make sure I have that capability. And our tight circle LPs tend to reinvest, tend to stick with us and tend to, you know, hang out for the long run. We've done well for them. And they've done very well by us.
LL: Nice. How do you find and choose your deals? Or I should say more, how do you choose your deals within this? So you get a bunch of things coming through to you. What are kind of the top three, four or five things that you look for when you do your due diligence and say, yeah, I'm in on this?
Marc Gilbert: So the most bare bone metrics that we use are basically price per unit in a multi-Family because at the end of the day, we know where the rent's going to be, and we know where it's starting off. So it's irrelevant where it is at this point in time to a certain extent, assuming we can get financing. On warehouse and industrial it's price per square foot. In a very pure sense, we can always work with leases as long as nobody's bound to a 15, 20 year lease. You know, we were very comfortable turning over tendencies and bringing rents to market. And those are the major, major drivers for us.
LL: And what metrics do you look at, whether it's IRR or is it cap rate ‘cause you seem very focused on cash flow from everything that you tweet about, Marc.
Marc Gilbert: Yeah. So our most important metric, the metric that makes or breaks for me is the modified IRR. Now, a lot of our deals, a standard IRR internal rate of return assumes that cash flows are reinvested at the same rate as the initial investment. In general, for our projects, that's not a fair assumption. I don't think that if somebody invests a hundred thousand dollars and makes $10,000 in a year, a 10% return, they’ll be able to immediately deploy that 10, you know, that $10,000, you know, at a 12, 14, 16% return or a 10% return, depending on the deal. I presume they're going to reinvest it at the preference on our deal, the preferred return. So I assume a 7% rate on reinvested funds. But the modified IRR is the metric we use. And obviously for an IRR, you need an exit. So what we base it off of is a conservative appraised value at the point of refi and we look at the sale and we look at the MRR on a cash basis as well, assuming you just refinance and you hold onto the equity, describing no value to the equity.
LL: Got it. When you said that you've got a very tight circle between, you know, your LPs and everything, how do you balance between the GP and LP? That's not something that I know a lot about. I would love to kind of just, you know, get the 101 guide on this.
Marc Gilbert: So we have a very basic approach. Information, we hand over very, very freely. We have an online web portal for our LPs where they can see financials, they can see operations in real-time. In terms of operating the property, what we demand and what we have is very strong, operational latitude. We generally don't discuss operational decisions with the LPs. We feel we have a very strong handle and we're doing, and we're able to execute on our plan. So unless there's some overbearing decision, which would potentially result in a cash call or something drastic like that, we wouldn't have that conversation even.
LL: Right. Talk a little bit, if you don't mind Marc about what you think your differentiator is. So I read a great posting that you did about, you know, you going through various files and I think it was a very litigious kind of scenario. You've talked about the fact that you know your area code, that you've got kind of these broker relationships. Would that be kind of a fair summation of kind of what your differentiator is, or do you think there are other things that I've missed in what makes you so competitive and able to, you know, drive some of the value that you're driving?
Marc Gilbert: So that's a great question. There are two variables, which I think give a strong edge in the market. The first one is our willingness to engage in deals that are complex, hairier deals, which have a lot more moving parts and most people would pass up on. And I can give two or three examples of deals like that. So we did the deal in Downtown Newark with both, it was a foreclosure deal with what's called a quick claim deed with existing title issues and existing environmental issues. We felt that the property may never have been financial considering the title environmental issues, but we felt that on a cash flow basis, we'd be able to operate that deal and generate a sufficiently high return and very few other people were looking at it. In the end, we were able to resolve with the title issue and the environmental issue, and we were able to cash out and refinancing it in a very strong way. Once again, the returns met our threshold, assuming no refinance just on a cash flow basis, but considering that we were willing to go in and do a whole lot of leg work to resolve the issues. We created a huge amount of upside there.
The other deal is litigated deal. It started off as a complex deal in the first place. It was a 25 year ground lease. Initially it was a 75 year ground lease with 25 years remaining. Now land lease deals are traditionally very, very tough to finance as you get into the later years of the term. And it was pitched as a nonfinancial deal by a major brokerage. So what happened was, is on that deal, you know, true to our tone, we made a cash offer and we put it in writing that if we got a commitment letter, we have the right to close with financing. The broker been in the area many, many years, sophisticated individual said, you know, Marc, you're not going to be able to finance this. And I said, we'll see, and sure enough, we got to the closing table with financing in hand. At that point, the deal entered a second stage of complexity where the fee owner of the land, the ground lessor attempted to raise the ground rent contrary to the terms of the lease. We didn't close. We were notified at the actual closing table and on that particular deal, we litigated, we ended up purchasing the land at a really strong discount of 40% discount to appraise value and went on, put the two halves together. And, you know, once again, it's a deal that took, you know, probably two years from our offer to the closing date.
We stuck it out and I can tell you, the property itself has appraised at a 50% premium to our all-in cost. So not a bad deal either. I'll give you one more deal on that note. The deal was on Nate unit multifamily building with an adjoining lot and basically the purchase, it was a distress purchase. The seller was Nita cash. We made a hard offer on the deal contingent on us assumption of this existing loan. It was a $600,000 deal, $450,000 loan and we came in with $150,000 in cash. Considering that the lot, separate tax lot had its own tax bill and had no corresponding income to it, what we did is we pitched the deal for a refinance to bank. And basically what we did is we removed the tax liability from the lot. We removed the lot from the loan and considering the tax burden the lot, which was no longer there, we were able to cash out the entire down payment, the entire $150,000 within a very short span of time, within a few months from the initial close on the deal.
So we had no equity in the deal. We owned an eight unit building and we owned a vacant lot. On that lot, what we did is we went for approvals with the township. At this point, two years later, we're 90% down that road, we're going to get our approvals. And what we're going to do is we're going to get a construction loan using the lot as the collateral. Once again, $0 down to go and build out another 16 units there. So $150,000 down, $150,000 back in the refi, $3 million construction loan, you know, with land as the collateral. And we'll end up with 24 units with almost no cash expenditure. So we like to deal with those complex deals. They’re a lot of fun for us, and it's an area where you can create a lot of value where others don't see it.
LL: Those are great stories. I'm really interested though, because you do not have a legal background, not at least according to your profile, and yet a lot of the things that you're describing sound, you know, pretty, they sound like what a lawyer would do. Talk to me about what it is that, you know, is my summary fair and how is it that you got into kind of driving some of these more complex deals? What is it about you Marc that likes this?
Marc Gilbert: So that's a function of luck. I'm married to an attorney and who we got married while she was going through law school and I was working in real estate and they have a lot of law school outlines, which are basically summaries of the case law and the textbooks. And when she used to finish the property ones and the title ones and secure transaction books, I would go through them. And there was a lot of stuff there to unpack, what the difference between a representation and a warranty is, all sorts of title issues, insurance contiguity of lots and other endorsements that people wouldn't look at, don't care about and never see. And when she's gone to continuing legal education classes, it’s a requirement for every attorney in the state, I've attended those classes with her and I have attended some on tax foreclosure, on title issues, on zoning rights and land use. And well, I don't have a formal education in law. I've been through a whole lot of the pertinent material the same way a lawyer would be educated so I can utilize the lawyer to basically put into play what I want to do.
LL: It sounds like your wife is to be credited for a lot of your success as well by introducing you to a lot of this stuff.
Marc Gilbert: A hundred percent. And while she doesn't work on very many of my own transactions, it's good to have what I call most in-house of in-house counsel.
LL: Quite literally an in counsel, yeah, that's-
Marc Gilbert: Correct.
LL: That's great. What advice would you give to someone who is starting off in real estate today, other than kind of like focus on a geography? You found your niche clearly, and I'm sure a lot of people, I know when I listened to, I think that is not for me. I don't think I could do that. How should people think about beyond kind of focusing on a geography, how they should specialize and how they should create value if they want to build a real estate portfolio like you?
Marc Gilbert: So it all begins with the purchase in my opinion. If you buy well and you don't lose the property to foreclosure, you run it half decently, over the long run, you'll do very well. The asset class lends itself to forgiving mistakes and allows the beginner to learn, you know, on a smaller scale and scale up very, very quickly. It lends itself to a lot of leverage. And, you know, the most important thing I think that people should learn at the outset is what setbacks are, how to handle them and how to move on. On our second deal, I went in one with one partner. It was a refrigerated warehouse deal, single tenant, 20 years left on the lease. We bought it from the owner who was basically embezzling the tax portion of the CAM reimbursements and was about to lose the property to tax foreclosure and may have gone through criminal charges.
So we bought it from him in a distressed manner and about two hours after the closing, the tenant in the refrigerated warehouse called us up and basically said, I'm leaving, I'm terminating the lease. I know there's 15 years left, it's game over. So that's a setback that can basically bury somebody starting out in real estate. It all worked out. Basically it was play for lower rent. We were able to read through it with the help of a bunch of other, you know, parties who understood the game a little bit better, but setbacks like that and the horror stories you hear from everybody, there's always a solution. There's always a way out. And the people who stick around tend to look past that. There are other issues, which I've had down the road, which, you know, if they occurred on my first deal, I probably would have bowed out and said, this is not for me.
You know, I have a tenant, a single-tenant going on three years without paying rent. She's played the courts in a phenomenal way. I always tell my attorney she'd make a better lawyer than you because she's beat you every single time. If that was on one of my first properties, I’d bow out. I wouldn't be in this business, but knowing what I know and being able to just stick it out and persevere to have the tenacity to just muscle on and deals, that's probably the important skill and most important talent, because there are a lot of unknowns. There's stuff that you won't discover in due diligence, but at the end of the day, virtually every problem is addressable. It's a function of just waiting it out and you know, grinding at the issue until you solve it.
LL: It's so interesting to hear you talk about it like that market. It sounds very much like a founder mentality of like, no, a lot of this is just grinding out and it's much less glamorous than you might think it to be.
Marc Gilbert: Yeah, there's a whole lot of that. There’s a lot of elements of the business that are no fun. Evictions are miserable. They're the nature of the business. They exist. They're unavoidable. They're absolutely no fun. And one of the luxuries I have now is to be detached from the eviction process. At the beginning it's gut-wrenching but we do it. The same thing with the 2:00 AM calls when you haven't attained the scale to have a property manager and they do come. You know, the Thanksgiving, the pile lights out on my hot water heater where you can't find a plumber in the world, who's willing to come out on Thanksgiving, so you go out and do yourself. It's no fun, but it takes a year to scale past that. And you never have to deal with those issues again.
LL: Tell me, what is the next, you know, 18 months, two years, three years look like for Twin Oaks? You've talked about, you know, getting to a million in cash flow, which is really admirable. What do you think you'll be doing over the next 12, 18, 24, 36 months? I'd love to hear.
Marc Gilbert: So, our end goal is to do exactly what we've been doing. There's no grand plan to scale it up to a hundred thousand units and take over the country. It's just to keep grinding it out, doing what we're doing, executing in the middle market deal range between 1 million and 10 million, where we're not competing against the institutions with the low cost capital, but we're not competing with the mom and pops and we have the scale to grow the portfolio without getting, you know, bogged down in the weeds.
LL: Is there anything that you think you'll do differently in that period of time than you've maybe done in the last year or so?
Marc Gilbert: We made you a bit more ground up development. We're like everybody else in a very supply constraint market. One of the things that's finally happened is the cost to build, even with the increased cost of materials has finally been eclipsed by the actual sale prices of buildings. So there's finally an opportunity develop and actually make some money on it without relying on massive tax abatements or subsidies. So at this point, we're ready to develop a little more aggressively, even if we do, you know, by some odd chance actually have a basis in the land where we don't get the land for free. Until now, our development deals have basically been free land where either we bought the building with the land and refinanced or story similar to that tax liens, where we've got the land for next to nothing. At this point, it makes sense to actually go out and buy land and actually build. So that's one of the things that may actually change, but otherwise not much. We're just going to stick with the plan. It seems to be working and we want to make it work for the long run.
LL: I love that by the way. I see so many people on Twitter that I follow who say like, once you find kind of what's working for you stick with it, right? There's a lot of that rather than getting sidetracked and bored with what you're doing.
Marc Gilbert: No, no, a hundred percent. And once again, you're operating in a smaller market, the opportunity set is pretty well-defined and, you know, are we going to outgrow the market and eventually take over other regions? Maybe, maybe not. We don't have those goals. We just want to keep doing what we're doing. If the deal makes sense outside of our immediate zip code, we'll take a look at it, but we're not running to chase down more deals. Although we're not capital constrained. There are LPs chomping at the bit to invest with pretty much every GP at this point in time. You know, part of the discipline that you have to have as a GP is not doing deals for the sake of doing deals. You know, turn an acquisition fee into, you know, make some money where your LPs are not necessarily allocating to the best deal. So that takes a lot of discipline, but over the long run, that's what makes the most sense for both the GP and the LP in the long run.
LL: Marc, last question, what question should I have asked you that I haven't?
Marc Gilbert: That's very good question. That question in itself. What I always like to ask is how do you vet a GP or, you know, how do you vet an LP? Because those are the most important elements for any single real estate investor. If you're a GP, you want to know how the LPs are vetting you, how they should be vetting you. And if you're an LP looking to place money, you want to know, how are the GPs looking at you? What, you know, why are deals from certain GPs landing up on your desk and why are others not? Because once again, if you're an LP you want to gravitate to the best possible GP, if you're a GP you want to gravitate to the best possible LPs. And there may not be an objective best, there may be just a good match.
So we've referred LPs out to other dealmakers. Once again, we don't sell our properties, we exit in the refinance. But we have LPs who want to see a defined period in which your capital's returned. We refer them out to a bunch of other GPs who we know some of them are our competition, but they're phenomenal individuals. And one of the things I say is in our market, competition's a positive. If somebody takes an abandoned building three blocks away from me, gut rehabs it, makes it into a luxury building that brings on my values too. So we get along very, very, very well with our competition. And you know, the competition foster is a better market for everybody.
LL: That’s a great insight to leave it on as well. Marc, thank you for the time today. This was really insightful and certainly very helpful for me. I appreciate the time.
Marc Gilbert: For sure. Thank you.
LL: Thank you.