REIA 196 David Robinson: Small Multifamily versus Commercial Multifamily

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors. So happy to be back with you again today as we take a look at small multifamily versus commercial multifamily real estate investment. David Robinson is the CEO and founder of Canova Capital LLC, a boutique real estate investment firm. He is an active investor, broker, and podcast host. As a broker and investor, David has been directly involved in over $350 million in real estate transactions. At Canova Capital, David oversees all due diligence, capital raising efforts, investor relations, and asset management for his firm. He is definitely a very busy man. So David, take us into the show and share an experience that helped you to be who you are today.

Yeah, as I think about that question, I have to go back to when I was roughly, I had to have been, oh, 19 years old, I believe so, and had recently graduated from high school, was going to college. And working for my dad's small mechanical engineering firm, and part of my role was doing some administrative duties. And he had these very large calc books that needed to be bound and organized correctly. And I, after multiple times of screwing this up, you know, binding them incorrectly, organizing them incorrectly, there was a bit of a blowup, and that day my. dad fired me from his mechanical engineering firm. And that was the moment I knew that I was unemployable and that I would be on a more of an entrepreneurial journey from there on out. But that was definitely something that set the tone for my future professional life.

Well, that is interesting. Fired by your dad at 19 years of age. Well, obviously you've come a long ways since that little setback in life there. So tell us, David, your entrepreneurial experience, particularly in the realm of commercial apartment building investing, in which you went into your first deal, a $2.2 million deal with only $10,000. How in the world did you manage that?

Well, I mean, if you want to dive right into that particular deal, we can talk about some of the nuts and bolts, but ultimately that was my first foray into commercial real estate. My professional background had been in, on the residential side, of the brokerage business. Ultimately, at the beginning, a sales agent with a focus on foreclosure prevention and short sale transactions, and then transitioning to more of a management role, leading sales teams and managing a national franchise brokerage. Then transitioned about 5, 6 years ago exclusively into multifamily property and started to focus on multifamily and commercial. And this particular building was my first foray into buying commercial multifamily property for my own personal portfolio and found the deal through direct mail. This was an owner that had this property for roughly 20 years. It had been passed on from their dad to 3 siblings. I connected with one of those siblings who was more of the manager of the property, and we stayed in touch. My initial offer was rejected. We stayed in touch after a handful of months. Ultimately, she came back and said, hey, we think we're more motivated at this point in time to sell, not necessarily motivated from reducing her price, but motivated to actually move forward with the sale this time. So we put together an offer that made sense for them and for me, which included a fairly lengthy due diligence period for myself. Meanwhile, I had identified a couple partners who would be ideal partners for this particular property. They owned multiple other assets that were very similar to this. Keep in mind, this is a 14-unit, so this is, you know, small commercial. This is a 1960s, 1970s vintage, 2-story brick construction, flat roof, 2-bed, 1-bath units type product, right?

C-class property.

Correct.

Where was this located?

This is just south of Salt Lake City, Utah.

Okay.

And I don't know how in-depth you'd like me to go, but ultimately I structured the deal where I put $10,000 earnest money down. It was Purchase price, I believe, was roughly $2.1 million, and put $10,000 earnest money down. I did put some additional money into the due diligence process. You know, have an inspector come out. You know, pretty standard stuff: roof check, plumbing check, that type of thing. And brought my partners in on this deal. They were actually again, they were ideal for this property. I knew they would be ideal for this property. I actually wouldn't have moved forward with the purchase if they weren't involved, simply because it wasn't. perfect for me, but it was perfect for them because they owned multiple other properties very similar to this. They had a property management company that focused on this type of asset. And so they had the ability to manage it very well, whereas that wasn't necessarily what I was interested in at that moment. So we put together a joint venture where they were actually going to be bringing all of the equity to the deal, which consisted of a bunch of one property, a 1031 exchange out of another property. So they brought roughly $1 million to the table. From that other exchange, and we negotiated an equity position for me in the deal, and they actually reimbursed my initial costs in the deal. So roughly $15,000 of initial costs from the earnest money and the due diligence. And we put the partnership deal together. We had plenty of time. I had plenty of time to structure the deal and go through our own due diligence and make sure the partners were on board and all the financing was in place. We got financing through a local bank that my partners had a great relationship with. We were putting a— my partner specifically put Putting a big chunk of equity down. So I think we were, you know, getting roughly 65% loan-to-value. So bottom line is that's how we structured the deal. And I carved out an equity portion of the deal for myself. And we closed on it and continued to manage it. And over some time, I actually had the partners cash me out of the deal. So they bought me out of the project. And I rolled my equity. We had structured— I intentionally structured to where it was a tenant-in-common structure, which would allow me to 1031 exchange into something else. And since that wasn't an ideal property for me, I chose to have them buy me out after a period of time, which they did, and I moved on.

Just out of curiosity, what was the equity position?

10%.

10%. Not bad. Plus the, plus the 15.

Yeah. Well, I got that back.

Yeah.

Yeah. Yeah. So really no money into the deal personally. Some time and effort. And some sweat equity, but that allowed me to roll into another property, you know, later on.

Well, yeah, a smooth transition given your background in brokerage and in commercial real estate to start with. So I'm sure it was a good experience for you and you went into it really pretty cautiously with knowledgeable partners who put up all of the equity. Quite a good deal for you there. A good way to do that, which is a good example for anyone who has not been into a commercial real estate endeavor. It's a perfect roadmap. So thanks. before sharing that with us. So you were able to raise $1.4 million in 48 hours, and this was your first syndication and your first capital raise. How did you go about that?

Yeah, to explain that, I think we need to back up a little bit and maybe give some context in my business. So there's really 2 facets to my business. The first is our brokerage services here locally in Utah. So We are a small boutique firm that focuses exclusively on multifamily property and small-scale multifamily property in particular. So anything under $5 million in value, all the way down to your typical duplex and fourplex. We work with buy-and-hold investors who are looking to acquire small-scale multifamily property for their own personal portfolio. And so I've had the opportunity over the last 5 years to have conversation after conversation after conversation with many investors or would-be investors and chat with them about their real estate investing goals. And as initially, they're most likely reaching out to me because they want to buy small-scale multifamily property for their own personal portfolio. As we get into that conversation and I start asking a series of questions to understand their needs and what they're trying to accomplish, it really comes to the surface that they actually don't want to own that fourplex, that sixplex, that eightplex. That duplex. They want all the benefits of owning real estate, but they don't necessarily want to actually physically own the property and have to deal with the challenges that come along with building a personal portfolio. Whether that's you know all the T's that everybody talks about: the toilets, the termites, the tenants. Even if they have third-party property management in place, there's still active management that goes into these type of deals. And so there's a significant portion of the investors that are in my network that I determine. Really had no business buying their own multifamily property. And after we discussed that, and I, and it became clear to me that there was a large portion of my investor network that fit that profile, I started to look at alternative options to help them become more involved in real estate investing, but more passive. And to be honest, this wasn't something I was aware of, even being in the real estate business, I wasn't aware of really passive investments through real estate syndication and investment funds. So I went down this path, I actually started to go down the path of learning more about helping my investors invest in turnkey single-family rental properties. But that wasn't really a match for me and what I was familiar with and what I was passionate about, which was multifamily. That led me down this path of becoming more aware of real estate syndications and investment funds, and being able to invest in large commercial assets completely passive. So I went down this path of really trying to learn as much as I possibly could about real estate syndication and investment funds and how those vehicles could be powerful wealth-building tools for the portion of my investors who really didn't have any desire to own small commercial multifamily. So, to set that stage, that's the reason why I even got into the space. The next question was, how was I going to be involved in an opportunity like that? And ultimately, it came down to I started to get really clear on that aspect of my business. So, the first aspect of my business was brokerage services here locally in Utah. Small-scale multifamily with private individual buyers. The other aspect was private equity and partnering with quality top-tier operators in other parts of the country, or syndication sponsors in other parts of the country who were entrenched in their local markets, who could help my investors achieve a blend of both cash flow and appreciation. Here in Utah, we're in a high-growth market, There's a lot of great reasons to be buying real estate in Utah. But if you're looking for any reasonable amount of cash flow, you're probably not going to find it here. And so a lot of my investors wanted to participate in more cash flow-oriented projects. So I set out to find experts in the Midwest who focused on commercial apartment buildings and identified a handful of potential partners, explained to them that I had a significant investor database. that would have an interest in participating in those, and that I would love to partner with them on a future opportunity. That's how it initially started. One of those individuals eventually reached back out to me and said, hey, I think I have an opportunity that we could work together on. I flew out to Kansas City, you know, previewed the property, became familiar with the deal, had fostered a relationship over about a year's time with this particular operator, and felt like they were a match for my goals and my values, and decided that this was a deal that I'd be willing to work with them on. So, we ended up packaging the deal, presenting the deal to my investor network. And keep in mind, you asked about how I raised $1.4 million for this particular deal without any prior capital raising experience or syndication experience. And it came down to the year prior to that moment where I released this particular deal, right? There was a lot of conversations, a lot of prepping my investors, a lot of educating my investors about what real estate syndication was and passive investing was. And some of the pros and cons and who might be interested in this and who should probably avoid it. And putting and setting that foundation in place allowed me to— once we had the entire deal packaged up nice and pretty, all the details, the business plan organized and well thought out, all the underwriting and due diligence done, we rolled that out to our investor network. They were prepared and ready for it. And within 48 hours, we had, you know, $1.4 A little over $1.4 million reserved on that particular deal.

Well, David, thanks for the background on that. I hear a lot of times, we've had over 300 guests on our show here, so I hear oftentimes, I raised millions of dollars on my first raise, and I never hear the background story, and I'm always really quite suspicious of that. So thanks for laying that out and making it clear that it didn't happen by magic, that you had actually spent a year, at least a year, maybe a year and a half, 2 years actually building the ground. groundwork for that first capital raise. With that background, it makes perfect sense that you were able to do that and do that successfully your first time out of the gate there. Well, tell us about your 3 basic strategies that you use to find off-market and undervalued multifamily property. Yeah.

So, you know, being a broker in the small-scale multifamily space, you know, part of our role is to identify opportunity. Right? And I have a large investor database with a lot of investors that have an appetite for this particular product. And so, you know, everybody's looking for a magic bullet, some unique strategy tactic that they're going to be able to implement, that they're going to be able to find an off-market undervalued deal before everybody else without anybody else knowing. And the reality is that, in my opinion, that doesn't exist. But there are 3 proven And the first one is direct-to-owner prospecting through the telephone. It's, I know it's so unique to actually pick up a phone and call somebody and say, hey, you have a property on 123 Main Street. Would you have an interest in selling that property? Now, obviously there's more that goes into it, but direct-to-owner prospecting through phone is one. We can talk about some of the details about how to do that. The second is direct mail to owners. And the third simply is my existing investor database. So buyers of multifamily property often have property that they are looking to sell or exchange out of, and they become sellers as well. So those are the top 3 that are proven to work over and over again. It does take time, it does take effort, it does take systems and processes, but absolutely they work. So direct-to-owner phone calls and direct-to-owner mail.

So direct-to-owner prospecting through actual calling is your number one in terms of— what do you mean by number one? That brings you the most prospects, or it is the one that you put in the least amount of expense and time?

I wouldn't necessarily rank those in any particular order. Those are the 3 strategies that we use. I would probably say the direct mail is more effective from just a leverage standpoint because it doesn't— it definitely costs more depending upon how you're going about it, right? If you're, if you're the one actually direct-to-owner calling, well, that's pretty inexpensive. It's just a matter of time, maybe a few different tools and resources. If you're doing direct mail, it's a very costly endeavor, but it's highly leveraged, doesn't take virtually any of your time. So there's a pro and con to both. Now, if you're hiring for direct-to-owner prospecting through the telephone, well, that gets expensive too. So it really— I wouldn't say that there's any particular— it depends on what your goals are, how much time you have, and how much money you have. that you can devote to that particular strategy.

Out of the two of those, which one would you say is the most effective?

For us, the most effective is direct mail.

Okay.

But I wouldn't say that it provides the highest margin. Direct mail obviously is more costly. It's just more leverage. And so we have— we put more effort in direct mail at this point in time than we do for phone prospecting.

Well, give us some detail on your processes in terms of calling your direct-to-owners.

Yeah, pretty simple. Ring, ring.

And, and you're doing the calling yourself?

Yeah. Ring, ring.

Okay. Well, that is going to be very time-consuming.

Well, no, no, no. I'm saying let's, let's role-play it, Allen. You're an owner of a property. Okay. Hey, Allen, this is David Robinson. I'm a real estate broker here in the Valley, and I believe you own the property on 123 Main Street. Is that correct?

That is correct.

Great. Well, I specialize in properties very similar to that, and I was just curious if you have any interest in buying another property that's similar to that.

Not at this moment.

Great. Wonderful. So there you go, right?

There you go.

That's the pitch. So really my goal isn't necessarily to approach it from, hey, I want to buy your property today, right now, this second. My goal is how do I add value to this particular owner? And they're often more open to buying something else first, right? Because in many cases, the biggest challenge they face is if I sell this existing property, where do I go from there?

Yeah.

And so if we can help them sort of put in their mind and help them realize the process of, hey, we can help you exchange into something else, well then all of a sudden the conversation about selling that property becomes more viable.

Yeah.

So that's just one tip. That's a very basic script that we use. Obviously that conversation can go many different ways. One of those is, no, I'm not interested. And you know, there's a few ways you can take that, but there's also a couple different tools. So when we pull a list, we generally will go to like a, You know, a bulk data provider like ListSource is one where you can pull data. We also go directly to the county recorder's office and pull data. I have to do something called a grammar pull. Don't even know what that means or what it stands for, but basically it's a process of pulling data directly from the county. We take that data and then we get it cleaned up, which means we run it through a few processes. We try to eliminate all do not call numbers. We try to identify true owners. Some of these are through LLCs, and so you have to go through a process. Actually, many of the own of these properties are held in entities, and so we go through another arduous process of trying to identify who the true owner is and then identifying phone numbers for those owners. Once we have that data all cleaned up, then you can roll it into a three-line dialer. There's a handful of those out there, but Mojo, M-O-G-O. is one of those. And you roll them into the dialer. And then that's a very effective way to make a lot of calls to prospective buyers and sellers of multifamily property.

How do you find trust owners?

So there's a website called OpenCorporates. I believe it's just opencorporates.com. And it's an arduous process. We have a VA, a virtual assistant, who will go through the process of doing manual research. There's probably a better way on this, to be honest. I think LexisNexis has some sort of service or tool that's incredibly expensive that will do a lot of this for you. But for our purposes, we have a VA that goes through and does all the searching and tries to identify true owner. And then from there, and once you get on opencorporates.com, you'll, it's pretty self-explanatory about how you would be able to go and find the true owner and break it back down. But that's how we do it.

Yeah. I haven't found a good way to find the actual trustees and so on and so forth. It's easy to find LLC owners, but I don't know how to—

Yeah. And some you can't break through, right? Some they have it set up They have a third party, unrelated third party, that's the manager of the entity and there's no way to connect with them. And so direct mail is potentially a better route. And then if you're really motivated and you have a very small geographic targeted area and a very specific property type, then maybe you go as far as knocking on the door, talking to a tenant, getting the property management. I mean, these are tactics that you would use if you are very clear on what you're trying to accomplish. And if you're You're wanting to buy a particular property in your area.

Yeah. David, wonderful information. Tell our viewers and listeners what you have to offer and how they can get in touch with you to take advantage of that.

Well, I really don't have anything to offer other than you're welcome to reach out and connect with me. If you feel like I might be able to help you in any way, shape, or form, you can connect with me through canovocapital.com. That's C-A-N-O-V-O capital.com. So, canovacapital.com. And you can also reach out to me on LinkedIn. Those are probably the 2 best places.

Enlightened Investors, it's been a delight being with you again today. David, thanks for sharing your wealth of information.

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