Our Biggest Mistakes Revealed & The Price We Paid

Mistakes made, uh, things that we've learned going— our seller finance guys, we've bought about 200 units. Drew has a ton more units as a syndicator, manages a whole bunch of real estate. We're both going to be sharing today, uh, mistakes we've made, how you can avoid making the same thing, because this is, uh— I just tell you right off the bat, this is going to be hundreds of thousands or millions of dollars of savings if you, uh, if you walk away with some good lessons here. So Drew, welcome back to the channel. I'm Christian, this is Drew Niffin. And here we go. Drew, I'm going to softball this. I'm going to start with the mistake we made so that we can, we can start with the negative and then I'll ask you some of the things that you've done, what you've learned. But going to my first deal ever, something that we did is we, we didn't know, we didn't know about structuring capital. We actually put a buyout, which we thought made sense, 2 to 1 in 5 years. What we failed to do is put like a graduated scale on there. What ended up happening in our deal is we wanted to refinance. We were in a position where we actually wanted to buy out all the investors 6 months in. To buy them out, we basically had to give them a 2-to-1 in 6 months. So we raised capital at, you know, 200%, which is a wee bit expensive right there. We probably could have done it very easily where everyone got, you know, say $25,000 on their $100,000 in 6 months. We could have written it with a stepped-up buyout.

Um, we could have said, let me go back to Simon, I'll invest in that deal, no problem, man.

Yeah, exactly. Wow. And all of them— the other bummer is all those investors, um, they're used to insane returns with us. So while they're very happy and now very liquid, uh, raising money from them again, going like, hey, you know, I just doubled your money in 6 months, this next deal you're gonna make 12%. I was like, who's excited about that now? So keeping those expectations— one, keeping expectations realistic, and then two, Spending more time thinking through what happens in a different scenario. As an equity partner in a deal with a ton of upside, 2 to 1 in 5 years is extremely reasonable. Not having any contingency or plan for, well, what if we want to buy them out earlier? There's our first few hundred thousand dollars. And I'll tell you, going on our 2 years in the partnership, we could have used a couple hundred thousand dollars multiple times through our adventure. Quick lesson for, uh, for everyone watching, uh, deal structure matters. If you can get a mentor— and it does not have to be a paid mentor, like I'm not pitching multifamilystrategy.com, uh— if you can find someone who's done what you are trying to do, who can guide you through these things, that is what you want to do. If you can find that guy in your market who's already done it, um, find that person because that person is going to save you hundreds of thousands of dollars if you're doing deals the size Drew is, they're going to save you millions of dollars by helping you on the structure of these things.

Yeah. I one time had a mentoring student, he was underwriting a deal, was about to put it under contract and he looked at the taxes and thought he'd underwritten it completely and I think he had city taxes, but he didn't have the county taxes. And so that doubled his tax rate and that took all his cash flow out. It basically turned it from a great deal into a non-deal., and it was just that one, it was just that one instinct. I was like, I don't know if that's the full, full amount. Right. So it's, it's, it's quite easy to make mistakes and it's quite easy to share your lessons learned, right. To help someone avoid those mistakes. If you can find that person, if they, if they can invest that time in you, it's, it's well worth it.

Yeah. And you can, I don't say you need a mentor to make it like Cody and I really didn't have a mentor. Like we, we had a lot of people who came along the way, but we didn't have a dedicated person. If we did, we would've saved a lot more money. You can still succeed. So I'm not saying don't try if you don't have that person, but it's like really focus on getting that person early because that's going to make all the difference.

Yeah, yeah, yeah.

Yep, yep, yep. Drew, we're going to try to get at least 2 nuggets out of you on this one. But looking back at your 15-year investment career, are there any highlights of like, wow, I wish I knew this before we made this mistake?

Sure. Yeah. Yes, there are. We are only limited by time as far as things that I can think of in my memory. But one mistake, there's only one deal that we never closed on and it was two properties, one syndication. It was in El Paso, Texas. And so not a primary market,, right? And, but the deal was really good. Like we really believe in this deal. And long story short, we, we never closed on it and someone else ended up buying it. And then that person made, since it's gone full cycle and sold and they like made $20 million on the deal for, for their partnership. So that one's, that one would, that one hurt, right? But the lesson there was, it's like, it's like, build your machine as you're building your deal appetite, right? So we had been buying smaller deals, like $4 million purchase, $5 million purchase. And then this one was like a, I forget, but maybe, maybe a $24 million purchase. And we had not built the muscle, you could say, or the machine to raise capital, right? And so we thought we could raise the money and then trying to communicate the value of El Paso again, which isn't Dallas. So some people are just kind of like, where is that on a map? We had a hard time raising the money, right? And then we pivoted to working with basically an equity broker, someone that would help you sell the deal to institutional money. And that person was good. We tried it. And long story short, the institutional equity partner at the last minute, like they made promises and all this stuff, sort of didn't meet us at the altar to consummate. The relationship, right? And so we had put our earnest money down, non-refundable earnest money, 6 figures, locked in, right? So we have these lessons, right? Maybe if I'd had a mentor at that time, they would've said, they would help me structure that differently. That one was really painful. Well, go ahead. I'll let you respond, whatever. But there's a lot more thoughts on that.

Yeah. I'm curious on the earnest money. Was any of that capital raised or is that your and the partner's money? That was all GP money?

It was ours. It was ours. 100% GPS.

Yep.

I think that you legally, it depends on how you write your subscription agreements with your investors. I think that it is theoretically possible that when investors submit their money, if anybody's listening, if you are considering being an LP in a deal, you might want to ask the question, is my money at risk as far as earnest money goes? But no, this is our mentality regardless of what the paperwork says. Our mentality as general partners at Nighthawk Equity is one of the services that we provide to our investors to serve up the deal on a platter to them is that it's our risk capital. It's not the investors, it's ours. Part of what we get paid for is finding the deal and then securing it by putting up the earnest money to make it available, get it under contract, and present it to investors. And that one did not go as planned. So that was, you know, lessons learned the hard way on that one.

Oh, understood. We have the same policy. And for Cody and I, since a lot of these are seller finance, I mean, that's what we're doing. We're packaging. We have the earnest money, we have the deal, and the debt's already completely figured out. So when you're coming in, A lot of our deals are 10% down. So we're like, look, we've already done 90% of the deal. It's, it's overclosed. This is what we're looking at. We're looking for 10% of the deal and the last person to close this out. That's, that's typically how our raises go. But that is, uh, for everyone listening, best practice: if you're going to lose money, make sure it is your money. Yep.

Yeah, if you can do that, that's, that's the way to go for sure.

Yep. Yeah. What else did you learn on that deal? Was there anything in particular outside of like What is the takeaway for you on that deal that someone can apply?

I got a couple lessons there. The first one almost sounds cliché in our space of partnerships, right? So I really feel like for me, that was the cementing moment for our partnership. Even when we lost money, the deal didn't fall through. There was no one that kind of turned guns on each other and said, well, you screwed up, or you said this, or you pushed me to doing this deal and I didn't really want to do it. We all sort of just took it sort of quote unquote as men, right? And just said, we live together, we die together. And there was no blaming. And we've gone on to do a lot of deals since then. And the trust was really built on going through that trial together. So that was a big lesson, right? And another lesson, there's kind of two chapters to our company, Nighthawk Equity. I call it Nighthawk 1.0 and Nighthawk 2.0. And in 1.0, we were geographically diversified. And I mean that in a bad way, right? There was no strategic scaling to our company. There's one asset over here, there's one asset over there, there's different property managers, we're working with different banks. Nothing is scaled, right? And so in the last 4 years, we've done almost all our deals in the same metro area, Atlanta, because now we have the same vendors, the same floors, the same property manager, the same bank. The same brokers. We can sell the fact that we know this market in a way that if you're just like, hey, I'm going to go do a deal in El Paso, it's like, well, what do you know about El Paso? And likely the answer is not much other than I got this offering memorandum through an email and it looks pretty cool. And so we've been much more disciplined in what our bullseye looks like through that experience.

Yeah. I was saying that I absolutely love one, solidifying partnerships that I've had the same thing, a deal fell apart and then no one turns on each other. It's like, hey, it didn't happen. The money's tied up and it is what it is and it's our money to lose. And that is the sign of a strong partnership. When you're looking at markets, I am so, so, so, I think it's critical to come in and go, hey, I master my market before I move to another market. You can still migrate, but it's like master your area first. People who spread out everywhere, seem to be the first people who implode. We're just about there on time, but I'd love one more quick nugget from you. Do you have any other big disasters or takeaways where you're like, man, this one hurt and I can save people some pain?

I'll say one more thing. I think this is on target, but investors tend to just look at the return. The projected return is 20%, the projected return is 25%, but they're not looking at what we've thought about a lot more, which is risk-adjusted return. So if there is 30-year fixed seller financing at 3%, then even if the projected IRR is 10%, the risk is lower because the capital structure is fixed. I might rather take that deal than a deal where the, you know, syndicator is going to do a ground-up development and there's no cash flow until the last day. The projected IRR is 40%. It's like, well, risk adjusted, maybe that 40% isn't as valuable as the 10%, right? And so when people just look at projected returns, they're not looking at the whole equation and they're not making educated decisions. So I'd really encourage people to think of it in that more wholly encompassing way.

And what you're going to find, we learned this really early, is sometimes just because someone wants to put money in a deal, you end up putting an investor who would love to do a different deal with you with a different structure. You put the wrong investor in the wrong deal. Because of the risk or the way the deal's being run. We had someone who wanted to be more active in a deal where Cody and I are the managing members. It would be too many cooks in the kitchen. The deal was fantastic. It's actually one of our best deals we've ever done. However, they didn't get what they wanted, which was to be a more active member of the LLC, which is a similar example of like there's a different risk tolerance, there's a different adventure, and there's a different payout needed for each investor. It's really important to factor that in because if someone's super excited about this deal, they put in money, and it is one that takes more time, it's ground-up development, and it has more risk. I mean, that's someone that could really get burned, as opposed to someone who's like, hey, um, if it didn't turn out the way I wanted, I wanted the higher risk, it was fun, let's roll again. Um, it really depends on personality types, and that will help you protect the capital when you go to raise, is aligning the right individual to the right deal.

That's—

I love that. When you learn that on a smaller scale, I'm sure when you have more investors on the same deal, that importance is amplified.

Absolutely. Yeah, no, I agree, man.

Well, Drew, thank you so much for joining us on this series. I hope everyone learned a lot from this because there is a lot of these lessons. These are really the lessons that save you multiple six figures. So learn these, watch this video twice if you have to, like and subscribe. And if you guys have questions for Drew, check him out on LinkedIn @drewniffin. He is a very experienced investor and really generous with his knowledge. So grateful to have you, Drew, and we'll see everyone on the next episode.