From Duplexes to Industrial Domains: Brock Mogensen’s $30M Journey Through Real Estate - REIA 439

Enlightened investors, I have some exciting news for those looking to dive into the world of passive real estate investing. Many have asked how I got my start in commercial real estate investing. Well, it all began with an event close to my heart. Multifamily Live is back, and this time it's online. This event holds a special place for me because it's where I got my start in commercial real estate investing. Imagine a virtual gathering where you can gain invaluable insights into how cash flow-ready apartment buildings are the key to your passive income journey. Take the mystery out of passive real estate investing and step into the active side of the equation to gain a comprehensive understanding so you can invest passively with confidence. Whether you're a newbie or a seasoned investor, Multifamily Live is designed to cover everything from acquisition to asset management. You can be confident that you'll leave this event with a comprehensive understanding of commercial investing. Mark your calendars for May 9th to May 11th. Trust me, this is an event you won't want to miss. Ready to enhance those passive streams of income? Get your ticket now, and together let's take the next step to enhance our financial well-being, to live abundantly and flourish in all areas of life. I'll see you in Multifamily Live. Hello, enlightened investors, and welcome to Real Estate Investing Abundance. I'm your host, Dr. Allen. Thank you so much for being with us. It's always a delight to be in your presence. Today we are going to take a look at one man's journey from scaling from zero to $30 million in assets in 5 years.

Brock Mogensen has been investing in real estate for about 6 years, and he now lives in and invests in the Milwaukee, Wisconsin market. as a principal at Smart Asset Capital. The firm currently has over $30 million in assets under management, and he is also the co-host of the Winning Wealth Podcast. Welcome, Brock, and take us into the show and share a memorable experience that helped you to be who you are today.

I would say when I was, I was Semi-starting out in real estate. So I started with doing a duplex deal, was the first deal I did. And after that, the next deal was a syndicated 89-unit apartment building. And my most memorable experience was really an accumulation of some of the mistakes I made on my first syndication deal and just really learning from those and taking those experiences to the third, you know, working on our 14th syndication deal right now and just kind of Taking learning lessons from those ultimately ended up being a profitable investment, but some things that could have been avoided and really taking those learning lessons. I'm happy to dive into what some of those were, but taking those learning lessons and making sure that they don't get repeated and that I learn from those on future deals.

Well, that's interesting. You went from a duplex to, you said, an 8-unit and you went—

89-unit.

An 89-unit. Oh, okay. I thought you said 8, and I was wondering why you syndicated an 8-unit complex. But 89, I can understand why you did that. Well, that's a big leap from, from a duplex to an 89-unit. And take us through that, that first syndication. I'm sure it was a huge and dramatic learning curve. So, how did you go from a duplex to an 89-unit in the first place?

Yeah. So I did that duplex deal and really just kind of like thought it was the right thing to do, right? I bought a duplex and it was crazy. Like the, I remember the first month I had a tenant upstairs. I was living in the lower unit and I had 2 roommates in the lower section. I remember I, my mortgage was paid and I had $500 left over in cash flow and I'm living for free and I'm like, this is the best business ever. Like, how do I, how do I make this into my full-time thing? At the time I was working a corporate job. So that's really where it started, right? And I decided I'm going to go down this path, right? I was kind of searching for a while. I knew I wanted to become an entrepreneur, but didn't really know what avenue I wanted to go down to make that happen. So it was that moment, real estate's the thing I'm going to do. And that's where I started exploring different avenues, right? I think a lot of people get stuck here, right? Where it's like there's a million ways you can go in real estate, which is awesome, but can also make you scattered on where you want to go. So I was like a lot of people, right? I was trying the wholesaling, the flipping. I'm putting signs in yards. I'm trying all this. And after doing that for like 6 months, I started really like diving into other avenues as well. And the syndication came up as, you know, the model of raising capital to buy bigger assets. And to me that clicked as this is the way to really build something big, right? If my goal is to build a big company and, you know, create a legit corporation, this is the way to do it. So that is where I decided, okay, now I'm pivoting from all of that. I'm going into syndication and started with just learning as much as I could about the syndication model. And I decided to really focus on one sector of that process specifically. And my goal was to go out and find partners that were strong in the other areas. So for me, it was underwriting. I spent a lot of time just learning how to underwrite deals and went deep on that avenue because I knew I didn't have a ton of cash, right? I didn't have a lot of connections to cash. How was I going to raise this money? I needed to find partners that could bring that to the table. So long story short, right, fast forward, started networking, found 2 partners, one of which had a ton of experience already. Owned a bunch of units, had the experience. So us 3 came together, we find this 89-unit apartment building, and really my role in that first partnership was being the one doing all of the, you could say, the paperwork, for lack of a better term, right? Like I was really in the details doing all of the administrative things while the other partner was raising the capital. So that's kind of how I worked my way into that partnership, right? And from there we partnered well on that first deal and kind of continued to do more and more. But yeah, I mean, from closing that duplex to that first syndication deal close was a 12-month period. So it was a very busy 12 months. And looking back, I mean, accomplished a ton, but just, you know, again, some of those learning lessons on that first deal.

So you had some experienced partners going into that syndication, but they were apparently relying upon you to actually get the syndication together, even though they had had more experience in that area. Did I— Am I getting that right?

So they, they, their experience was more on just buying property straight up, right, on their own, or maybe some joint ventures. So none of us had actually syndicated a deal before. So that was where I kind of came in and said, hey, I've been studying the syndication model. I understand how to do these structures and I know how to underwrite these deals. I have the model to do it. So that's, that's kind of where my value was brought in that partnership on the early stages.

So was there a mentor outside the partnership that was helping guide you through this, or were you just Doing it by the seat of your pants?

50/50, I would say. So I did, I was involved in some mastermind programs and took some courses and did all those things, but didn't necessarily have someone handholding me through the process of syndicating a deal, which has actually led to something I do now with that, help other people syndicate their deals. But it's, yeah, I didn't have, it would've been helpful to have someone holding my hand through that process because there was some 6-figure mistakes in there that could have been avoided with someone holding my hand.

That doesn't surprise me. And the other thing, I mean, there are stringent deadlines once you get that contract in place. It would be easy for an inexperienced person to miss those deadlines. Did you miss any deadlines?

Yeah, I know there was certainly things where it's like, yeah, like you said, it's very much a Can be really a step-by-step process, right? Like the first week, the focus should be, you know, for now, how I look at it, right? The first week is let's get the deal fully underwritten. Let's get our financing package put together. And the first things first should be let's go out and find debt on this thing first, right? And then, you know, getting the investor package put together, starting to raise the capital, the legal docs, all of that stuff is very much a systematic approach because like you said, I mean, usually you're operating on a 60, 75-day close period and you're under the gun, right? You got to do a lot of things in that time period. And if you don't, You delay one thing, that's going to delay the next thing, and all of a sudden you're going to have to call the broker and try to get an extension. That doesn't always work. So definitely some mistakes there on just strategically step by step what should have been done. And that's one of the learning lessons that now is applied where it's just very much a systematic approach.

Well, you had mentioned that there was a 6-figure loss in conjunction with that that could have been avoided. What was that 6-figure loss?

A step of due diligence. I would say just doing better due diligence. In summary, better due diligence on the tenant base. So long story short, we found out that after buying it that about half the tenants weren't really paying rent. So they're, you know, really this property that we were buying was under contract a few times before we came in and they were just putting bodies in there, right? Because the bank wants to see— they call it 90 for 90, right? 90% occupancy for 90 days. So they're just getting people in there to keep the banks happy, right? And get this deal closed. And we could have done better due diligence on the tenants to figure out, okay, are they actually paying rent, right? What sort of tenants in this property? Because then that led to us having to evict 50% of the tenants in the first year. So 89 units divided by 2, what is that, 48 units or so?

Yeah.

And that's a lot of unit turns and a lot of cost, right? So we blew through our reserves by doing that, right? And just, you know, then you stack on COVID-19 and we get, I think it was 25% of our tenants walked in when the eviction moratorium was put in place and said, I'm not paying rent. You can't do shit about it. So we got that going for us. And it's— so it was, you know, very— some also some just unfortunate timing. I think Class C really got hammered by COVID and tenants not paying rent. So we did, you know, we did do some things right. Right. We bought it at a good price per door and kind of were able to leverage that. Right. And ultimately sell it for a profit. But, you know, looking back on it, the biggest mistake was, like I said, I mean, just Especially if you're going to buy a Class C. I mean, that's— to me, that's an asset class where you have to really know your operations. If that's going to be your niche you want to buy, you have to know what's going on. You have to be able to manage that tenant base because there is a lot more work that goes into managing Class C versus Class B+ or A.

Yeah. Well, I'm surprised your lender or your insurer didn't look a little bit more further into that tenant base. How did that get by both the banker and the insurer or your lender? I don't know if it's a banker or insurance or whoever was funding it.

So that was the— we did agency debt on that one. So we had Fannie Mae debt on that, and that was the only time we've done agency debt. And I could talk about that too, just the kind of bad experience we had with that and why we now just work with local banks. But it's a good question, honestly. I mean, they probably should have looked into it a little bit more, right? I mean, I don't know if I think You know, some of the assumptions and stuff. I mean, they probably should have diagnosed that a little bit more. And the other thing too that was, you could say, a learning lesson too is the mortgage, the debt broker we worked with on that one. We no longer work with him, but he, you know, we had this promise of interest only in year 1. Actually, 2 years of IO was the initial thing that we were underwriting all the way up until like 3 days before close, and they pull away our IO. And we were kind of assuming that interest only was going to help build our reserves, right? And kind of fund some of this improvements we were making. So Yeah, I mean, it's certainly a good question. I guess I don't have an answer on why the bank didn't catch it, but I think you're seeing in the news, you know, as of now, right? I guess I won't mention the exact bank that financed it, but they're facing a lot of trouble right now and they actually have a lot of delinquent loans and they're one of the top banks right now with the most delinquent loans. So it's interesting because it's like, yeah, we directly experienced it with them.

Yeah, that is interesting. I'm a little surprised with all of that against you and this being your still and all of that, that you actually came out profitable on that. How did, how did you manage to pull that all together?

Sure. So like I said, we went through our reserves. One thing I'll say that we did was instead of, you know, most syndicators would— when we were $100,000 in the hole at one point, most syndicators would have gone to their investor base and asked them to write a check to keep this thing afloat. We covered it. The general partnership group, myself and my 2 partners, we covered that ourselves. To keep this thing going. So we were able to do that, right? Get it through. I mean, ultimately we were adding value to the property, right? We were flipping these units, we were increasing rents. I mean, we brought in an onsite team, we increased the security. I mean, we really turned the property around, we rebranded it. We did a lot of good things, right? I think aside from the mistake of the eviction, I mean, we did a lot of great things on top of that. The COVID eviction moratorium thing definitely took us back a little bit, but Ultimately, you know, I think we held it for like 3.5, 4 years. We added some value to it, right? And rode the market a little bit during that time and then found pretty much one of the biggest buyers in our market that buys those sort of assets to come in and purchase it from us. So, and luckily, we, you know, the interest rate environment changed, which actually helped us with the prepayment penalty because otherwise we've been facing a big prepayment penalty, which is another downside to agency debt. But it's, yeah, I mean, a little bit of luck, a lot of hard work. I mean, we did add some value and put a lot of hours into it, but it's Kind of the story of how it went.

Yeah. Well, I'm also impressed by the fact that 3 individuals who had never done a syndication before were able to raise the capital necessary for that. Tell us about that.

Yes, our capital raise was like just under $1 million. And really, my partner in our group that had a lot of experience, and he already owned a portfolio of a couple hundred units. So I mean, he was in the game for a while, had a good book of business. So he was really the main source of capital raise on that one. I mean, myself and my other partner did raise a little bit of the money, but he was the main capital raiser on that deal. So it certainly was leaning on him for a lot of that.

Yeah. Enlightened investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, we are talking with Brock Mogason today, and you can find Brock at smartassetcapital.com. And Brock, you have been through, I think you said, 14 syndications. You started out with multifamily, this 89-unit You've gone through several different sectors. We were talking about this before we got on air here, from multifamily, self-storage, office, retail, and now you have really decided to focus upon industrial. Give us just a brief overview of actually going through those various different sectors and Some of the— just, just an overview of this, of the pluses and minuses in each one of those and why you ultimately decided to focus on the industrial.

Sure. Yeah. So we, you know, after that multifamily deal, we were still searching for the next multifamily deal and started getting these other asset classes kind of dropped in our lap, right? Off-market deals that, you know, we get this office building, then we get this strip mall and then self-storage and then industrial. And we're looking at these deals saying, you know, these deals work, right? The fundamentals are similar, right? Across asset classes, the fundamentals of real estate, net operating income, right? They're similar. Certainly some nuances between asset classes and things to look out for. But essentially, we just, we saw, we found some good deals in other asset classes and we're like, hey, we can do this. So we just, you know, did one, did the other, did the other, and kind of during that time learned about these different asset classes and how to operate them, how to underwrite them, right? And That's kind of how it happened. I mean, I think as I look today, I mean, and having been involved in these asset classes, I would say not a big fan of office. We didn't have a great experience on the office sector, which I think is similar to a lot of people right now in the current market. But, you know, retail, I like retail, select retail, but really self-storage is great as well. We had a great self-storage asset, but I think the, you know, we really found industrial was the asset class we liked the most for multiple reasons. And then one being just overall seeing the best returns there in our market. So that's where we, a few years ago, decided to double down on that asset class. And now that's our stringent focus is Class B industrial, 20,000, 150,000 square feet in southeastern Wisconsin. That's what we know and that's what we buy and that's what we add value to. And I've really found that, you know, in the beginning stages we were, like I said, just kind of buying different assets and kind of doing it as we went. And it's gone great, right? I mean, we have, we've provided some great returns to investors, but I've found that investors like to see someone that's an expert in a niche, right? Capital is attracted to experts in a niche. So for us now, it's like that's what we defined our niche as, and that's what we're going all in on and becoming experts in that industry. So yeah, I mean, that's, that's what, that was our experience across those assets.

Well, give us just a bit of a description in terms of You said a Class B industrial. What kind of facility is a Class B industrial?

So generally built before the 1970s. So it's going to be not the big box you see that are going up on any major interstate, no matter where you live, right? You see these big boxes going up. That's going to be more Class A big box. And our investment thesis, right, is the 20K to 150K square feet. So how often do you see warehouses being— when you see a new warehouse being built, right, it's generally going to be 150K square feet and up. They're building those like crazy, right? Because that's where the economies of scale are in development. That being said, where is it? There's still going to be plenty of tenants out there that want the smaller space, right? Not every tenant needs the big box. And if you look at the data, the tenant demand continues to increase in the smaller sector and is actually decreasing in the larger sector. So all the data points to, you know, there's more tenant demand, there's more rental increases, lower vacancy in that size bucket. So that's what really attracted us to that size bucket. And a lot of times less competition too, right? Institutional capital's not going to come in and buy these $2 to $10 million deals like we are. They want the $10 million plus deals. So there's slightly less competition, right? It's going to be too big for the individual investor oftentimes and too small for the institutions. So it creates a nice buy box for us where, you know, I'm happy to talk through a lot of the other benefits of just Class B industrial in general. But it really creates a nice buy box for us. And the reason why we niched into there—

Are they, are these typically warehouse or are they, are they a factory or what, what is going into these facilities?

Yeah, light distribution, you know, distribution, light manufacturing, I should say, and storage. Right. It's those sort of tenants. We've never really done any like heavy manufacturing warehouses where you got cranes hanging from the ceiling and all of that. It's more so going to be light manufacturing, you know, general warehousing, storage.

Are they generally single tenant facilities?

A mix. Yeah, we have a mix of our portfolio of single tenant as well as flex industrial, which is great, right? And where we have, you know, 5, 10, 15 tenants throughout a 50,000 square foot warehouse. And I think that that's a great, if I could say, you know, the number one sector I like most in industrial, you just don't see a lot of it available. Is the, you know, 2,000 to 10,000 square foot units within a warehouse. There's so much contractor garages are often referred to where you just have a nice clean warehouse, a little bit of office, a bathroom, and a drive-in door or a dock door. There's always going to be demand for those spaces because if you look at that sort of tenants that operate in those, right, landscapers, HVAC, car mechanics, right, that stuff's not going away. All right. There's a lot of stuff that's going away in the world, but That stuff can't be replaced. So there's always going to be demand for those sort of spaces. So I'm super bullish on assets that we can find that have that sort of breakout.

Well, you had said there's several other reasons that you do industrial. Just take us down that list of pluses on industrial.

Yeah.

So, and specifically around Class B industrial. So one point I like to make is the sticky tenant base within Class B industrial. So if you look at a lot of times the sort of tenant that's in a Class B, right, it's going to be, like I said, light manufacturing, distribution, that sort of tenant base will continue to grow. So even if their business grows, right, and they have a 50,000 square foot warehouse, but they just brought on a new customer and now they need 75,000 feet, that sort of customer or that sort of tenant is not going to want to upgrade from a Class B facility to a Class A, right? They don't need the shiny offices and all the shiny stuff that comes with a brand new build. They want to stay in that Class B space, but they might just need more space. So it's a very sticky tenant base that operates in this Class B industrial, and that's been a, we've seen it directly firsthand with our tenant base. And that's really one of the main reasons I like it. I mean, there's lots of reasons. I mean, if you just look at industrial as a whole, right? I mean, you look at the e-commerce boom, the reshoring movements. I mean, there's all these factors that are just continuing to drive people to the industrial asset class.

In terms of the demographics of the communities that you are looking for these facilities in multifamily, it's always population growth, income growth, rental growth. Generally speaking, communities of 200,000 or greater. What's kind of your buying criteria in the industrial area?

Yeah. So similar fundamentals, but I would say More importantly for us, it's, you know, being close to a main corridor, right? So you want to be close to the interstate because obviously with warehouses, right, they need truck access and they have materials go in and out. So you want to be close to a main corridor within 30 minutes of a metropolitan area is generally our goal, right? So we look at stuff, you know, within 30 minutes of Milwaukee or 30 minutes of Madison or something that's going to be close to a main corridor. You can certainly find good assets that are out in the middle of nowhere and you'll see some great cap rates and great cash-on-cash returns. But the hard part is leasing, right? And to me, that's the biggest difference between industrial and multifamily is it's much, much easier to fill a vacant apartment than it is industrial, right? With a vacant apartment, you could throw an ad up on your phone and you'll probably have someone calling you the next day like, hey, I'm interested in renting this. Leasing out a 100,000-square-foot warehouse is not like that, right? There's a lot more Generally, the longer lead time to find a tenant, there's going to be more work. Oftentimes, you have to put a lot of capital into the space to bring a new tenant in, lease negotiations. I mean, there's a lot more that goes into it. So the biggest thing with industrial is you want to avoid vacancy at all costs.

Yeah.

I mean, I would think that that would be one of the bigger drawbacks on that is that oftentimes they're single unit, but you're talking about 6 to 8 tenants, but even 6 to 8 with just one of those tenants vacating, that's a huge, huge, huge loss of revenue at one time there. So I'm sure in your underwriting you are accounting for those risks and underwriting according to that. You had mentioned that there's a whole lot of going into the preparation of the industrial space for a new tenant. Is it not the case that a lot of that expense can be put upon the tenant rather than upon the landlord or the owner?

It's a good question. I mean, it's really a negotiation. I mean, there's, you know, right now the landlord is going to provide TIs, tenant improvements is the word they use. So it's going to be pretty tough to get away with no tenant improvements at all. Generally, that's part of the negotiation, right, is longer-term leases, higher rent rates, right? Those sort of things are going to buy the tenant more tenant improvement dollars to add to the space. But oftentimes, you know, the landlord's paying, you know, it could be $50,000, $100,000 to the tenant, right? To upgrade. And whether they do that work directly or just give the check to the tenant and they do the work, I mean, usually the tenant has a little bit stacked on top, right? They're going to take care of it. I mean, the landlord a lot of times will just do what's called a white box, right? Make sure everything's freshly painted white, cleaned out, right? All the major CapEx is taken care of and the tenant might come in and kind of fill out the rest. But You know, it's really common theme where the landlord's at least going to have some sort of dollars going into the space in order to sign that new lease.

And then what about ongoing maintenance? Is that landlord or is that generally tenant responsibility?

So it's one of the beautiful things about industrial is usually they're triple net leases. So with a triple net lease, the tenant is responsible for everything like property taxes, insurance, General maintenance, right? If the toilet breaks or something like that breaks, tenant takes care of it. Snow removal, landscaping, right? All that falls onto the tenant. With a triple net lease, the only thing the landlord is responsible is for structural improvements, right? So if the roof goes or there's a, you know, oftentimes if like the roof, the HVAC units go or things like that, that'll fall onto the landlord. But triple net leases are great because oftentimes when you're especially in a single tenant asset, if you got a, you know, 3, 5, 7, 10 year lease, And your roof's good and your parking lot's good, it's really going to be pretty hands-off.

Yeah. What is the major thing that someone considering industrial, what should they be most cautious about?

Really underwriting the tenant. I mean, I think the biggest thing you want to be cautious about is vacancy factor. If you're coming into a deal and there's a few years left on the lease and you're never really going to go into a deal And these are a lot of the deals we do, right, is value-add deals, or there could be just a few years left in the lease and we're going to renew that lease, or we're going to bring in a new tenant. And it's just really being conservative on underwriting that vacancy factor and how much it's going to cost to bring in a new tenant. You know, someone that's looking to get in, you just really want to make sure that, like, we use a year-long vacancy period to fill the space. We're going to assume a very conservative TI dollar to come in, CapEx dollar, all these sort of things to protect our downside. But that's just something you want to make sure, like, you know, you're going to do due diligence on the tenant, right? In apartments, you're not necessarily going to look, you know, you're going to look at their credit score and some of those things, but you're not going to ask for a personal financial statement from the tenant, right? With a— when you're doing due diligence on the tenant in an industrial asset, you're going to look at their company financials, right? Do they have a personal guarantee on the lease? All of— how much cash do they have in the bank, right? What are their assets worth? All of these sort of things play a huge role because if their business pulls back, And they go out of business, right? You want to make sure you have a way to get paid for the 3-year lease they have left.

Interesting information. And thank you so much, Brock, for being with us today. We are visiting with Brock Mogensen. You can find him at smartassetcapital.com. Thanks so much, Brock, for being with us. And Enlightened Investors, thank you for tuning in and taking your time to be with us. If you've enjoyed the show today, please Like, share, and subscribe, and go to your favorite podcast app and leave us a rating and a review. Until next time, live abundantly, and we'll see you in the next episode.

Enlightened investors, wait, wait, don't go just yet. I just want to remind you about our recently launched webinar that you will not want to miss. If you're at all curious and would like to learn more about how real estate investing can diversify your investment portfolio, alleviate the anxiety associated with Wall Street swings, leverage your 401s and IRAs to substantially increase the return on your investment, and do all of this with turnkey, hands-off, passive real estate investments, then you'll want to immediately go to stevetucker.com/webinar. In the webinar, we'll also address the common dubious investment schemes, that you want to avoid. To access the webinar, go to stevetalker.com/webinar. I look forward to seeing you in the webinar.

Thank you for tuning in to Real Estate Investing Abundance, brought to you by Steve Talker Capital, a company working for passionate professionals like you to develop financial independence built on solid passive real estate investments. As part of our In our efforts to make the world a better place, Steve Talker Capital contributes to activities and organizations committed to better understand the equine. These endeavors attempt to enhance the human treatment of horses worldwide. Steve Talker Capital, working for a world where all creatures, great and small, flourish abundantly. For resources to develop your financial independence, connect with us at stevetalker.com.