Rule #36 of Real Estate: Don't Die - Garrett Lynch and Christian Osgood

The day of closing, we're getting ready to close, the seller just goes MIA. We don't know where he is. He pops up 3 days later and he calls us and he says, hey, sorry, there are gangs. I got, I got into it with some of the gangs on site. They came in the office trying to kill me. Oh boy. So, so we still closed it.

Hello and welcome to the Owner Meeting Podcast. This is Christian Osgood, your channel host, joined today by Garrett Lynch with Nighthawk Equity. Now, a little fun history here. His business partner is actually a good friend of mine from the Seattle area. So Nighthawk Equity is not new to, uh, this channel, nor is it new to me. This is actually a group that I like quite a bit. He also works with Michael Blanc, who is probably the most prevalent of people in this group, excellent marketer. But in the education space, in the apartment buying space, these guys do a lot. I have shared on this channel a few times my thoughts on syndication, and there are some pros and cons, and there are a lot of really bad syndicators out there. This is one of the more prevalent groups on how to syndicate, and they teach a lot of best practices. This will be an interesting episode as I am typically a joint venture person, but I have some friends who do syndications quite a bit. So, we're going to ask some questions around syndication. We're going to talk about Nighthawk Equity and what makes that group different from a lot of the other groups out there. Everyone, welcome to the channel. Mr. Garrett Lynch.

Christian, thanks for having me, my man.

Dude, it is really good to see you. Your partner, Drew Niffen, in the Seattle area has been a friend of mine for a while. I've run into him many meetings. We've had a chance to speak at one of Michael's events. It's fun to actually have you guys on the channel talking about what you do. Our mission here is to undermine some of those online gurus. And this will be an interesting episode because you're associated with Michael Blank. And Michael Blank, I really like this guy. He's one who people have had questions like, is this a guru? Is this actually a real syndicator? You guys have a structure where you have some really good operators on your team, including yourself, people with a lot of experience. I found there's 3 things that make any sort of education group effective, which is you have the information, which is like 10% of it. You can't apply information you don't have, but you need to have the information. Then you need to have the ability to actually get hands-on with actual operators, people who know what they're doing. And then you have to have some amount of community created around it. That seems to be the ecosystem that actually works. Otherwise you end up kind of like a celebrity church where you have one pastor and it lives or dies by the one guy. I like your ecosystem a lot. For those who don't know you already, give us a little bit of your background, specifically in multifamily. What is your operational experience?

Yeah, so I started this business 13 years ago. I started, I was 26 years old and I basically had a friend. So I went to work for a guy actually that had like 1,000 apartments and I was working at that company with a friend. And we realized that when we were working for him, we're kind of learning what he was doing. We're like, hey, we can do this too. We have connections, we have, you know, ability to raise equity and all of that. So, and ability to find deals. So we ended up venturing off on our own and I started in the place where no one says to start, which is D-class properties. So I was like, I know how to, Wholesale D-class stuff in the worst areas of Chicago, in the deep hood. And let's start buying those and owning them because they're on paper, they look amazing.

D-class in Chicago is hard, by the way. That is, of the markets you could do that in, that's a hard class. We do a lot of business in Class D, Class C- properties, and then in a hard market.

Yeah, Chicago is very tenant-friendly and not landlord-friendly. So, mm-hmm. We're buying portfolios of 2, 3-flat single-family homes in the hood with a very tenant-friendly situation. So evictions over there still are taking a year. And a lot of the people there, they'll, even if they start off with a good payment history, their credit score's low and they eventually lose their job or something happens and they can't pay you. And so we had to flip our entire portfolio over to Section 8. Pretty early on. So I had about 350 apartment units, all Section 8, like with vouchers, uh, in 2, 3 flats and single-family homes. And so that's really how I got started. And it was very difficult to manage these things. We tried to hire a third party in the beginning, and it just didn't work out because there's so many things that go wrong, uh, when you have D-class assets. So we ended up self-managing. And then Bought a couple of properties in the 'burbs. We're like, okay, you know, these are a little bit better than the stuff in the hood. And then we went, then we found a real nasty property in Memphis. It was 380 units. And that deal was not that much more than a deal we just bought that was 72 units in Chicago in the suburbs. And we're like, huh, let's go for this one. And it was the epitome of D-class, but we bought it. And it was 3 days before— So we were actually the day of closing. Okay? We're getting ready to close. The seller just goes MIA. We don't know where he is. And we're like, "Okay, what happened? Like, where's the seller?" He pops up 3 days later and he calls us and he says, "Hey." "Sorry, there are gangs. I got into it with some of the gangs on site. They came in the office trying to kill me with assault rifles, trying to kill me. And so I had to skip town. I'm hiding in Montana. Maybe I'm not in Montana. I don't know. I can't disclose my location, but let's close the deal. I'll close it in 2 days." Oh boy. So we still closed it. He still closed it and I was like, what are we in for? And then I tell this story on, you know, on my podcast and others, but it just got crazier and crazier from there. Just trying to make this property a winner, that took a lot of time up. And while we were trying to figure that out, we went on and kept buying properties in 10 different markets across the country. We were in just random-ass markets. We were in Columbus, then we were in Tulsa, then Oklahoma City, in like Houston, Dallas, like wherever we could find a deal. We didn't even really underwrite very well. We just, we just said if we could buy a deal that's $20,000 to $35,000 a unit, we could probably make money. And that's how we went about buying these things. No, no, like really intricate underwriting. We just went and bought stuff and it was real looking back and it was really interesting time. And then we self-managed all of it. And some deals made money and some deals did not make money. And it was just purely speculation the entire way. And so cut my teeth on that was the slumlord business that I was in. We didn't put any money back into the properties. It wasn't my choice. I didn't want to do that. So things didn't really work out at the end of it with my partner at the time. So we split. And then I ended up finding— I ended up like just going and traveling after that. So I had a bunch of money dumped on my head after we split. And I went like one-way ticket to Thailand, first class, got there and just started jumping around, really around Asia and Australia for as long as I could. I'm like, I'm just gonna travel until I can't travel anymore. And sure enough, around like day 100, I was like, okay, I am gonna come home 'cause this sucks actually. I wasn't producing anything to the world. Like I was just consuming, consuming, consuming. And so when you're not doing something that's making you a better person or pushing you in a direction that makes you feel productive, it really starts to eat away at you. And so like, then I realized like at that point, I always thought the endgame was go sit on a beach, make so much money you just go sit on a beach and do whatever you want. Well, I simulated that while on this trip. I went to Bondi Beach and I sat there for 10 days and I was like, This sucks. This is not what I thought. So came home, moved to Arizona, time to get back to work. I need to find some partners. I need to find some property. And I found Michael and Drew and they had just started Nighthawk Equity, but they were doing like small student deals. And so I came in and I was like, hey, I've already done this. You're doing it all wrong. Let's see if we can, you know, just do one deal together. And if we can do one deal, maybe we'll do more, you know. So I brought a deal, put it under contract with them. They were going to raise the money. I was going to do everything else, basically. And then we ended up not closing that deal, losing the deal and losing $350,000 earnest money. Oh, first deal together. Crack, you know, and it was under contract for a year. So that was a, that was a tough pill to swallow. But we didn't want to kill each other after the end of that. So we ended up going out and buying another 14 deals together.. And that's where we're at today. So it's just kind of gone from there, but it's been a wild ride.

Gosh, a million directions I want to take this. I'm going to go with the most recent thing you said though. So one year under contract, like a $300,000+ loss. That's expensive. What made that deal fall apart?

So it was a two-property deal in a I would say tertiary market, really. And whatever you want to call El Paso, Texas, that's, that's what— where we were buying it.

So it's a random market, secondary, maybe secondary, tertiary market, something.

It was random, right? So, so it was a 2-property deal. We were getting it at a great price. It was actually a really good deal. But they were, you know, C-class assets. The location— not a lot of people are familiar with El Paso. So we had to like sell everyone on that. We also, we put it in our contract like right around Christmas or before Christmas and we're trying to raise during Christmas. So it didn't launch right. I was able to just through like creative, being creative, keep extending it and extending it to get, keep us under for a year and only give up $350,000. It was like a $9 million raise. It was a $26 million purchase. And I didn't know that these guys had not done a deal that big yet. And so it was going to be difficult to raise that much. The thinking was, oh, this network is vast and we'll have enough capital raisers and this and that that'll come in and it'll work out. And then when I got into it with them, it was like, oh no. So we ended up going the route of private equity. So going after like institutional capital and we ended up finding a broker that put together a package that was shopping it to different equity groups and we finally found one. They signed up the deal. They put it They put in their notice that they were going to essentially an LOI to partner with us. They did their due diligence. They got all the way 3 weeks to closing and then they just bailed. And then we were like, well, we're out of time officially, time to pack it in. So we ended up losing, yeah, $350,000 earnest money, big hit. And then just did a deal like right behind it, so it kind of like eased the blow a little bit. But, but it was a rough year trying every time to get that thing. It was that we were trying to do a little seller financing in there. We were assuming a CMBS loan on one of the deals. So it was like a whole thing. It was not— learned a lot of lessons on that deal, but it didn't go well.

So this is actually one of the things that people have a tendency to do in a model with syndication. For those who, you know, those who are just listening for the first time when we're talking about syndication. In its essence, it's a way to crowdsource deals. You're going to come in, you're going to raise capital, they're going to be limited partners, you have a group of general partners. It— and the nice thing with syndication is that it plays very well with all types of creative finance. You can get very creative on your equity side and on your debt side. So for us creative finance people, as you're buying larger deals, it is a way to take a network Customize the capital to the actual opportunity, both on the debt and the equity side, which is why I like you were talking about, hey, we were doing some creative finance. The fun thing with deals, and I think you kind of alluded to this already, you're going to where the opportunities are. And this is something that I believe is true. You start with the deal, then you find the debt, then you find the equity. It's so much easier to tailor the money to a deal than try to tailor a deal to the money. And it sounds like you're following that flow throughout most of your deals is I have an opportunity and then we're going to tailor the actual offer to the opportunity as opposed to—

one thing that I, I've learned was that if you try to complicate the capital stack, like that we were basically trying to— we had one deal priced, uh, under value and one priced over because of the way that the current debt was on each one. And we were trying to do a creative finance on the, on the one with the lower— the, the higher value so that it would make sense. And there are all these like moving pieces to it that made sense and it would have worked, but when we tried to translate that to investors, they didn't understand it. And so a confused mind says no, right? So they just didn't get it, a lot of them, I think. And then they were like, "If I don't get it, why am I investing in these?" And as much as you talk to your blue in the face, if you can make the capital stack simpler and have a format, okay, even if it's just seller financing, I'm getting seller finance guys at 5%. This is an awesome deal. When you start trying to get too crazy with it and raise large amounts of capital and it's not very super straightforward, you can run into issues.

I did that on a resort that we purchased. Uh, mistake number one was being a multi-family guy and buying hospitality. Turns out totally different businesses. Uh, do what you're good at. That was lesson number one. Uh, lesson number two, I got really creative in the, in the way that we raised it. Uh, we played around with special allocations, uh, for the actual cost seg. And there's a few other things. We— it was basically 3 different seller finance contracts. 2 were technically a land contract, 1 was traditional seller financing. Then we layered in some special allocations for the tax based on— what we ended up with was a really complicated transaction, and we did close it. And while it's a working deal, it had complications consistently because we got too creative. And so I had that same lesson in my career of I, I've, I've worded it like this. If it's simple, if it's, if it's simple, it's repeatable. And if it's repeatable, it's scalable. I'm in the business of scalable businesses. I don't want to customize all of my deals so much that they're this crazy, only I could have done this deal because it's so like, that's a really hard pitch. If you have something that's easy to explain, people, essentially investors, they want to know what is the opportunity. And I found that they're like 85% sold there.

Right?

If you have a cool building and you can communicate the project, people want to be part of the project. So you're almost there. They want to know next, hey, you're not going to lose my principal. And then they want to know how they're getting their return. I found when it gets really complicated, it's step number 2 where people are like, man, I just don't understand it enough. I'm not sure how my money is secured. And that's where that question mark makes it really, really hard to raise. So that's the flow I've always found. If it's simple, people are like, okay, I understand what I'm doing, how it's backed, and I have a reasonable chance of getting the return that we're targeting. You're pretty much going to get a yes. Money's easy to raise. If you complicate your deal, it's right there on step 2 every time. An easy raise all of a sudden becomes an insurmountable raise.

I mean, a lot of LPs out there are educated somewhat. And if you start talking out of some crazy setup that they have no clue about or they can't easily follow or can't easily research, it can lead to the confusion. That we found on this deal. And so we were like, okay, let's— like, I've seen opportunities in all shapes and forms since that deal, and all the time. I mean, they come in, oh, look at this, you know, vacant motel or whatever, go buy it, turn it into multifamily, or whatever it is. Like, there's, there's all different things that we see— hairy deals, hope note structure, all these things. I, I Often, like, I'm not even— I'll look at them for 2 seconds. I'm like, nope, that's not it. It's not in the wheelhouse. Keep going. And we know, like, what we're good at now. So we're like, one of our competitive advantages is our construction. So I can go and take a super hairy deal and turn it into something amazing fairly quickly. And we can do, like, occupied renovations, things like that, that other people just can't do. That gives us a competitive advantage in the market. And so we're going to use that to our advantage to pick up some of these deals at a low basis. Use our construction ability, knowledge, and skills to go do these projects at a lower basis so that overall, we're all in the project less than if we were to go buy something at a premium. And so, we're following those steps in primary markets only, not going back to secondaries, all that stuff. So, once you kind of figure out what you're good at or try to become good at one thing, and that's your, that's your, you know, competitive advantage, you got to double down on that. And that's what becomes scalable.

And that's the fun thing with business, right? You're competing against others and wherever you can find your edge is where you're usually going to succeed the most. When people ask me like, should I buy in-state or out-of-state? I'm like, well, buy where you want to buy real estate is answer number one. Answer number two is probably if you're providing housing for humans, I would probably buy in places where population is generally going up. I mean, that just makes some logical sense to me. Outside of that, it's like if you go outside of your market, you can absolutely do that, but you're losing one of many of the competitive edges you have. If you can invest in your own backyard, that's one advantage that one would have. Then you kind of stack the other skills. What am I good at? I do a ton of Section 8. I'm really good with working with housing and I can get very creative with housing. I can pull in pricing from adjacent counties like I understand how the program works. I actually sold the CoStar data when I was a CoStar rep to every housing authority in Washington State. And then we rewrote how data's sold to these places. So I'm like, this has been my career. I'm really, really, really good at that. I have a competitive advantage there. You have construction. How did you develop, just as your team, how did you guys develop that competitive advantage in construction where you're like, hey, compared to others, we're really freaking good at this?

Doing it the wrong way, unfortunately. There wasn't really a good playbook. So, we hired a guy that was an absolute disaster as a construction manager and he was not good. And so, we ran up running into all these issues and we're trying to renovate apartments at scale. So, we had 1,000 apartments or something we're trying to renovate. At that point, I think it was 50 a month or something and it was just chaos. And when I was like, okay, because this is such chaos, where— how do we need to shift this model, this business model? Obviously the person's wrong and it's running it, but like, what can we shift to make this, you know, whether this guy's there or not, it still goes, right? And so that was the hard thing to figure out. And so what we did is we sat down went step by step through our process. Where are we having issues? What can we change in our process to make this more efficient? And it took many months to figure out and we would meet the same team every week, spend an hour and go through, okay, we do this, then we do this. How did it work last time? Okay, then we do this. Okay. This all happened once we got that guy out and then we made a couple more bad hires, but every time, We had do or die. We had to renovate apartments to stay on our business plan. So no matter what, we had to do it. And we're like, okay, what are the two metrics that we follow? Like how should we know if we're doing a good job? Well, they have to be two things. Let's simplify this. On time and in budget. Those are the two things that we're going to focus on. And that's where we need to hit those two things. And if we can do that, then we'll win. Right? And so, The on-time part, what we did is we shifted away from doing the model of, of match your construction labor with your material. A lot of people do that, and we had material showing up late, and then the contractors weren't there, and it was like this whole thing we were trying to do in-house. You end up losing money doing it that way. So we flipped it and we said, okay, we're going to do a different model. We're going to have one guy that's a construction manager. He has an assistant And then we have an admin for them. And we're going to take this, we're going to build a bench, a deep bench of GCs that know how to renovate apartments. And then we're going to put 2 of them on our property at the same time and they're going to compete against each other. And if one fucks up, then they're going to go, we're going to give it to the other one. And then we're going to make them all sign contracts with liquidated damages in the contract. So, if they go one day over, this is uncomfortable to do at first, they go one day over, we're charging them each day until they're finished. Guess what started to happen? Well, with the competition and with those contracts in place and a new manager overseeing it, we started to crank units out. On time and in budget. And so once we hit those metrics, like, okay, every— we're bonusing you on that. We started to do that consistently, and then we're like, well, let's try for more now. Now that we've got this thing running like a machine, let's try to do occupied renos. I bet we can do it. Let's just try it with 10 units. Sure enough, figured out the systems around that. We're able to knock out 10 units in 3 days. And that speeds up your revenue velocity. Mm-hmm. So now a lot. Yeah. So either that person's renewing at the new rate and you don't have to repaint the unit or redo the floors or any of that stuff. So you actually save on your construction or they're moving out and you're able to lease in advance so someone can move in like right after that with a quick turn. Yeah. So, so once we got the basics down, like, hey, let's do we can do these renos in velocity and get them at a good cost and hit our target budget and be on time, then we can start adding things on top of it. And that's what gave us the competitive advantage. But a lot of people struggle with this. And I think it took a lot of time to figure out how we were going to maneuver this differently than other people out there that are trying to do the same thing.

And one thing that— and this is really an argument for buying larger multifamily. You can get— these contracts aren't small contracts. Like, this is, this is serious money for some of these contractors. If you're someone who's still trying to invest in like single-family and duplexes, it's— there's just not enough competition. There's not enough money on the table to really be in the driver's seat. Your GC, for the most part, on small real estate is the one driving the project. You do not have a lot of flexibility. You get into some of these larger projects, even for me, a mid-size— I did a 30-unit hotel conversion. There's enough money going on with that deal where we can get a little competitive and you have pressure on who gets the bid and how they're gonna run the project and what your parameters are. Uh, you said something really important there is like, yeah, when you started it was a little uncomfortable. It, it's a, sometimes it's kind of weird to propose like, this is how it needs to be done, but you sat down with a team, you identified what does this need to look like, and then you just made it happen. And that's especially when managing others.

That's everything. Yeah, I mean, there was, there's all kinds of issues. Like the way we were blowing our budget a lot was, um, we, we were signing these units up and then there would be a bunch of change orders, right? And so our budgets would blow out. And the reason is because we weren't doing pre-walks. Now every single unit gets a pre-walk with a defined scope and we have no more change orders, right? So that now we can stick within our budget. As an example. So there were little nuances and things we figured out along the way. And by the way, what you said about the scale, that's true. I've never flipped a home because I don't have— well, first of all, I don't have any connections out by me that I haven't put that together. But I only know how to do the big construction projects where I have leverage and I can push people around like a gorilla.

So it's so much easier with scale. I always tell everyone, skip, skip the small deals. It's just, they're harder to do. Less predict— yeah, it's commercial real estate. Guess what it's designed to be? A business. You can run it like a business.

We go in and, and I like, we can now renovate a 200-unit complex in like 2 to 3 months, the entire thing, top to bottom, like paint the whole thing, do the roofs, do all the, all the deferred maintenance, all that shit. Like we're It's, it's actually incredible because we've just— I mean, a lot of it's the relationships you've built along the way, but we have a lot of leverage. Every time when we go do DD on a property, we have 4 contractors bidding it all out. So while we're in a contract, we're putting everything together. Day 1 when we close on that thing, they're starting, and we've already— we know that they're good. We know they're not going to screw us over. Um, sometimes we don't give them everything. We'll give them some stuff and some to this guy or whatever it is, but Um, we, we've got the sequence down, and, and so we're just, you know, banging these projects out, and they're multi-million dollar projects. One, one deal we spent $7.5 million on it, um, and $4.5 million of that was on the outside. So that— it's so much easier. Like, I can just— once you have that down, it's like, you know, you get, you get your groove, and it seems insurmountable, especially if you're just getting started, to do these big, big construction projects, but it's like, need new landscaping, need the trees trimmed, you know, and you'll get your vendors there, and then you just have to put together your budget and stick to it.

You talked about some structural issues, you talked about contracting issues, you talked about property management issues, you talked about hiring issues. Uh, starting a business turns out is very hard. As you're setting up all these systems with Nighthawk Equity, how long as a group did it take you guys to really hit your stride where you're like, we have the We have the people in place, we have the systems and processes that we need to effectively get this to where today you're like, hey, we can do a massive building, we can renovate this thing in a quarter. Like, that's, that's an incredible velocity. Yeah. How long did it take you to actually go from, hey, we have an idea and we're, you know, we've set the team to, hey, we're actually performing where we envisioned we should be performing?

I mean, probably realistically, probably took like 3 years to build all that out, to figure it out. Um, if I'm being realistic about it, yeah, I did. It was, it was— you have two things twofold. The interiors are completely different than the exteriors, and you have to run them in tandem. And you can't get your rent premiums on the interiors really until your construction project's done on the exterior. So you have to get knocked that out as fast as possible. You can— so you can start getting your rent premiums. There's some proper— like, a lot of properties, if they're under construction and you're trying to even if you renovate the apartments, it's hard to sell them because no, people don't want to live in a construction project, right? So it was out of necessity that we built that and it was just doing it. Reps of, you know, when you're scaling, you're doing reps over and over again. You got new project, new challenges, and we got enough reps in over a 3-year period. And finally it all kind of came together to a point where it's just a well-oiled machine at this point.

Now, the property management side, I ran into the same thing in my business where I could not find the manager, first manager ever actually stole all the security deposits and fled the state and disappeared. That was my first experience. Second experience, they just could not figure out the leases or the maintenance. They just couldn't do it. I had a hard time and I do tertiary markets where it's even harder to find a good property manager. We had the same solution as you eventually. It was, hey, we just took this thing in-house. Have you seen a lot of benefit now? Like, do you look back and say, man, I'm really glad that I did that? It's one of the questions I get all the time is, should I go into PM? And if you go into property management, it's a low margin, low thanks business, especially if you're doing third party. It really only makes sense, in my opinion, if you're managing either completely or primarily your own portfolio. Is that a decision where you look back on, you're like, man, I'm glad I did that? Or is that something where you're like, man, if we had the person to outsource that to, we would have outsourced it?

So I think I'm doing it two ways. Like, the first time I actually self-managed everything, and it wasn't like a situation where I can look back defiantly at that, uh, decision and say, oh, that was the best thing we ever did. So this time we're actually— we've done it third party, right? So we have more scale and stuff. Um, we don't actually self-manage. Now, there's, there's definitely issues with that. Uh, you're going to be changing PMs likely multiple times, which we're dealing with a situation like that now. And that's the hard part about it, is those companies have their own culture and they can change on a dime and, and screw you. And you're just, you know, especially depending on how big the company is. So I, I think there's no— there's not much of a financial benefit other than your properties will likely run more efficiently if you can figure out how to, how to do the PM stuff properly. But it could take you years to figure that out., right? So you, maybe you pick it up quickly or maybe it takes you longer to figure out how to get the people in place. You know, you're building a whole other company, a whole other engine that's very complicated between the HR, the back office, the accounting staff. You have a lot of people. This business in general is difficult because it's so people-intensive. And so, part of the reason for us outsourcing that is I didn't want to deal with all the HR. Like, I don't, you know, all you're doing when you're hiring a third-party company is you're, you're buying them for their HR abilities and their accounting. That's really it. So you're outsourcing that, but that has its own challenges. They're not, they don't have the brain. You have to be the brain for them. And as long as you can double down on and invest in your asset management resources, you can often curb that and control that situation. But so I have a lot of big friends that are big, big in the space that's still third-party managed because they just got their asset management down like to a T. And that's, that's one thing you can do. But if you're going to do self-manage, a lot of people also have friends that have just self-managed because they're like, you know what, this is way better. I can control my destiny. I can fire people fast. I can hire slow. I can do it however I want to do this. I have the ability.. And so even though we're adding a bunch of people in the mix, it's worth it. So it's really, you cannot do it realistically unless you have kind of scale in a region to some degree. You can try to do it, but it's gonna be harder. So with, with enough scale in a region, then you, you can potentially go and go vertical, which we're, we're kind of in a phase or where it's possible for us to. We're pivoting to a kind of a hybrid version of that now. But it's, it's really, you know, it's really difficult to get, get into that seat. Once you do, a lot of people are happy with it and they're like, you know, I couldn't see it another way. This is how you need to go forward. I think there's pros and cons to both sides.

And to your earlier point, I think it comes down to competitive advantage. Property management, you said this perfectly. There's two different, two different brains on this. You have left brain and right brain. You have a very exact accounting, and then you have a very not exact human element where you have a lot of people. You're coordinating owners, tenants, employees. It's not a super— it's not an easy job, and it's one that does take a lot of people because it's very rare that you'd find someone who's really strong in accounting and really strong in people skills. It's usually going to be building a team, and the team usually— one department usually doesn't get along well with the other because they think about things completely differently. It's a hard business. You focused, from what I'm hearing, most of your attention onto, hey, we're going to be excellent at renovations, we're going to get our competitive advantage down. It doesn't make sense for a company that's not, you know, that hasn't been established forever to go like, hey, we're going to focus on being really good at property management, we're going to be really good at acquisition, and we're going to be really good at renovation. You choose the things that you're the strongest at and you take all the other bottlenecks and you put it somewhere else. I like the, I like the model of third party there. Is that having done both? So, so you've had a company where you've self-managed, you've done that. Is— how do you feel as an owner? I hear a lot of people just ask, is it worth it? And I'm like, I mean, is it worth it? Do I make money? Yes. Do I love doing property management? No. Uh, having been on both sides of this, if you were to build the business again, are you happy with your current decision to have it in third party and the way that that's operating?

So I I hate the property management business. I would never go near it ever if I didn't own apartments. I absolutely despise the industry in general. I think it's just really difficult. Yeah. You've got, I mean, for a lot of reasons, but you've got employees that you're dealing with that you're hiring somewhere between $40,000 and maybe $90,000 on your payroll that you're dealing with that are on-site. Those people can be fly-by-night. They can be, you know, nothing special. They can be amazing. You don't, you don't really know what you're gonna get. There's a lot more, a lot higher turnover in that business in general. So that's the challenge with it. That's why part of the reason why I went to third party the second round was because I didn't want to deal with all that. I'm like, I just, let's, let's try to keep that away from us as much as possible. I think it shifts with the seasonality of where you're at in your business. So now, having gone through that for a number of years and dealt with these third-party companies, which they all suck, by the way, all of them, there's not one good one that I could point to and be like, oh, that's an amazing company, they hit it on all points. They all have deficiencies. I'm now in a, in a place where I'm looking to be more hands-on, uh, have more say We went with like a big box company and it was, you know, they're very set in their ways, right? So it's changing with the season. We're sick of that now. We're like, okay, you know what? Done. We've pushed on these guys enough. It's time to move into another chapter. And, you know, I basically went from self-managing to the complete opposite. And now it's kind of a hybrid version where we're bringing on someone that has a smaller management company. That is going to manage our sites, but we're going to have more of an infused partnership with that. So it's, it's shifted, right? And I think that I, I don't really regret any of, any of it. I think at the time we needed to have self-management because we had so much D-class that that's what made sense at the time. We went into more C and B-class assets and A locations in this so that there was more of a fit These, these companies have, you know, some of them have 200,000 apartments. All those are all owners. You know, they're— some people are perfectly happy with that setup, right? So it's, it's just whatever season you're in and where you're at in your business and what you value, that's the decision you're going to make whether to self-manage or not.

Two questions wrapping up here. One that I ask everyone. I think that we can learn so much from people who've succeed in business, things to do right. One thing that needs to get shared more, and this is why we host the Owner Meeting Podcast, if we can save people money or time or just general pain on the biggest mistakes we make, I mean, we opened this with a, you know, a $350,000, like, oh, that didn't come together. That's expensive. If there's one thing, and it could be that thing, but if there's one thing either monetarily, emotionally, just one thing in business where like I call it the stupid tax. It's when you don't know what you don't know, it's the most expensive it'll ever be. Is there one stupid tax that you paid to build the business to where it's at today where you're like, boy, if someone could avoid that, they would save themselves a whole lot of pain?

Yeah, there's a lot. I think the main one, which I mean, this was just like, We alluded to this earlier, but I would avoid going into— I would buy the highest class asset that you can to get your foot in the door in the game. And I would, even if you're starting with a small property, if you can just focus on location, like buying a decent area, there's so many downstream negative impacts to buying in a bad area that you don't even realize. That don't show up in your pro forma. So your pro forma may look great, but—

and they don't even show up in the first year or two of operations sometimes.

Yeah, right. You can't account for the shooting that happens on the block or the resident that comes in with a 500 credit score because there's no one else that's calling in above that, that credit score to rent your apartments and then they just destroy your whole property and then they can't afford to pay it and you have to redo it. Right, so we would renovate these 2 and 3 flats to the nines and then bring in, you know, even Section 8 tenants and they would just destroy it because they didn't care. And then you had to go rehab the whole thing. There's all your cash flow going towards that now, right? So there's just a lot of— and then the other thing is D-class is very, very low. Like the equity doesn't go up on your property very quickly. It's, it's A-class, you have the biggest equity swings. D-class, the lowest equity swings, highest cash flow potential. So we wanted to finally exit these things and we're like, all right, let's get out of these. We lost money because, because a lot of the deferred maintenance issues and then the people destroying the properties and all that stuff. So and then didn't go, didn't appreciate enough. So we ended up exiting at a bad, in a bad spot. And listen, some people love the D-class. That's all they do. That's all they know. I was one of those people. But if you're able to start higher than that, that's what I would— I would go in that direction instead because it'll just save yourself a lot of headaches. I don't— I will never go back to that.

And I agree with that. I look back at the projects that we've done and even the ones that have made a lot of money, the difficulty in like— I'm thinking of like hotel conversions where I mean there's a there's a certain low class of, of tenant that you tend to attract to that. Again, someone who couldn't rent anywhere else, and they've made a lot of money. I've made a ton of money off of converting hotels, millions and millions of dollars, and I've been able to buy them without partners. Like, there's been some advantages. I still, going back, I would have, I would have been happy with a slightly lower return and an easier project than those. They're super hard. They're, they're not that fun. And I have yet to find one city where we have renovated a property and made a turd beautiful where the city was actually grateful. It's— no one appreciates you. You do a good thing, but you have to feel good about it for yourself because no one will appreciate you. Your tenants don't appreciate it. And it is rough. I think that's a great piece of advice. I'm not a big Class A guy myself, but if you can buy a higher class property, You can buy a Class B property in a great area and you can make that deal cash flow where you're not going to bleed money on it. That is the type of deal that you should strive for. Buy the nicest property without sacrificing cash flow. Buy the nicest property in the nicest area you can. I think that is super sound advice. People do look at those F-class properties and on a spreadsheet it looks amazing, right? It's just like, wow, we're going to make a killing. And one, it's not worth getting shot to do real estate. So if you're gonna put your team or yourself at risk, not a great thing. And then two, yeah, it's the unexpected things that a seasoned investor would expect. It's just gonna eat you alive.

You're gonna find— man, think about like how— who's gonna work at that property? Probably a bum. Who's gonna live in the property? Probably a bum. So you've got bums all over the place that are, that are all around you and you're trying to get stuff done and then you add a layer of crime into it and it's just a disastrous recipe for disaster. Uh, even if the numbers look amazing, you cannot find quality talent. It's like going into a— this is why we don't go into tertiary markets anymore, because the labor pool is so low you can't find quality talent. People still have to live in these properties and they still have to run them, and if you can't find the quality people to go do that, it's going to be really hard for you. These things are— they live and die by the people that run them.

And that is, uh, that is exactly why as a tertiary market guy, I had to be the PM company. Property management had to be my competitive edge because I had to control it, because you cannot delegate. I have not found anyone anywhere who I've been able to delegate property management to in a third-party market. They come in way under market rent. They don't screen people correctly. Their contractors are terrible. They upcharge you everywhere. It never makes sense. I've never seen a third-party market where you can successfully just offload that and be good. It's the only way to win in those markets, which is, which is a tough, tough thing. And if you don't want to be the one in PM, buy it, buy in better markets. Or I won't say better market, buy in different markets that are better fit to your skill set.

Yeah, primary markets, you'll find enough labor pool, like your labor pool will be there. We're in one of the best secondary markets in the country, Huntsville, Alabama. And it's still hard to find resumes for people because there's just not a lot of people that live there. There's only 450,000 compared to a major metro with many millions of people. So there's less people to pick from. And that's when you're self-managing, it's, it's a little bit easier to churn and burn to get to find the right people or make the right decisions on how to keep your costs down. Like there's a lot of things you can control a lot easier when you have your management company versus, you know, like you said, there's only a handful of management companies and if they're even worth anything is a question, right?

In those kind of areas, man, I love, I love working with operators. I can talk to you all day about this stuff, but But we are up on time. So final question for you. How do people reach you? How do people learn from you? How do people participate with Nighthawk Equity? If someone wants to get connected and continue the conversation, where do people find you online?

Yeah, you guys can go to— you can email me actually if you want at garrett@nighthawkequity.com. That's with an N, not a K. Garrett, G-A-R-R-E-T-T, at Nighthawk, N-I-G-H-T-H-A-W-K-E-Q-U-I-T-Y.com. Uk-equity.com or go to nighthawkequity.com and set up a call with us if you're interested in talking about investments. Perfect.

And as I said at the beginning of this, his business partner Drew is actually a friend of mine. These are great guys. Like, Garrett, it's been awesome getting to know you. Uh, Drew's a— Drew's a great friend. These are quality— I can speak to the quality of the people. You guys are great people, uh, great people to be around, great people to know. If you guys want to get further network, uh, details and the email will be in the show notes below, or if you're watching on YouTube in the description. If you guys have watched all the way through, we interview all the owners for you so you busy people can have the owner meeting brought directly to you via podcast, via YouTube, wherever you're watching, listening right now. So if you made it all the way through, like, subscribe. We appreciate your support and we'll see you guys all in the next episode.