Spending All Your Money On Rentals?! Real Estate Syndication with Drew Kniffin

Talking to Drew Niffen today, the president of Nighthawk Equity. Fantastic investor and local to us. So this is an actual friend of ours. Extremely excited to share his story and his knowledge with you guys. He's going to be joining us on the channel for the next 4 weeks. So welcome back.

Welcome back to the channel. My name is Cody.

This is Christian.

And today we're joined by Drew. Drew, Drew, welcome to the channel.

Thanks, guys. I'm glad to be here. It's going to be fun.

Glad to have you here.

You've done quite a lot.

So I have. I've kind of gone around the whole investment cycle. Been doing this for a long time. Started with sort of the accidental landlord story. Then I gave my wife a heart attack when I was like, hey, I just bought a rental property and I used like our last nickel for that. All the way through syndications. And I've had some real wins and I've had some losses and it'll be fun to talk about it together.

Well, let's talk about that. So you got started and you spent all of your money and so you probably just gotten married. You spent all your money on rental and said, surprise, we're broke.

It's basically right. Yeah. So I mean, it actually starts out before that. We bought a home in like '06 together, a condominium. And long story short, we wanted to move out of it in '08. And I kind of looked at my mortgage statement and it said I owe $250,000. I looked at Zillow and it said the house was worth $200,000.

Oops.

Uh-oh. What do I do? And I was like, I'll just rent this thing, like with no master plan. And I rented it and it was a nice place, kind of a Class A kind of condominium. And the rent paid the mortgage, you know, and over the course of 3 or 4 more years, the the principal of the loan got paid down and the market normalized is after the great financial crisis of '08. And long story short, instead of paying a $50,000 check when, like, when I sold the home because I rented it out, I got something like a $70,000 check back to me at sale. So it was $120,000 swing, which is a lot of money for anyone, but especially at that time in my life, it was like magic. And so my basic thought was if I could do one of these, What if I could do 100 of these? And that just kind of started the wheels rolling.

So you bought 100 condos then?

I did not buy 100 condos, right? But the next one was just a single-family home, right? So, you know, to what you guys were saying a few minutes ago, my wife and I were saving for a down payment for our first home actually out here in Seattle. And like a few months before we bought that single-family home here in Seattle our own home, I wrote a check on my first investment property. So it was a 3-bedroom, 2-bath out in Minnesota. And I bought it all cash. I bought it from HomePath, which was the clearinghouse for Fannie Mae and Freddie Mac, all the homes they repossessed during the Great Financial Recession. I bought it all cash for $105,000. I fixed it up so that it was financeable. There was a couple problems that made it unfinanceable for conventional markets. And then I got it appraised for like $170,000 or $180,000. I put a mortgage on it and got all my cash back out, I think 2 days before the money was due for the home that we now live in, right? So it was one of those things where I was, I just had to go for it. And I still own that home to this day. It was one of my first, it was basically my first rental and it's been phenomenal over the years. And then on and on and on it went from a duplex to a tri to a quad and, you know, forever.

So teaser for the next episode, we're going to deep dive syndication, and Drew is a master of that game. So we're going to get really deep into that. But generally, so you went from a condo to single family, it's a small multifamily. At what point in your career did you switch to a syndication model and what did those first deal sizes look like once you started syndicating?

Yeah, the first one I did was the first syndication I did. And just for all the listeners, syndication is basically, hey, let's all pool our money together and buy something that we couldn't buy by ourselves. That's all it is. You're just teaming up to buy big things. And I did that when I ran out of money, right? So I did a 3, I did a 6, I did 9, I did a couple kind of buying wholesale, turning into better, you know, better financing it, all those sort of smaller things. And then I basically ran out of money. And at that time, one of my friends had just quit his full-time job at Target Corporation and was syndicating 171 units. This is in Minnesota. And he said, hey, why don't you see if you can do this with me and reach out to family and friends and see who wants to invest? And at that time, I knew enough about what I was doing to sort of speak about it confidently, to talk about why it made sense, talk about why the fundamentals were on our side and got a couple of investors. Right. And sort of the magic is you went from, you know, buying, going through great effort to buy one unit at a time or three units at a time. And it's, I won't say it's the exact same effort, but it's sort of similar. But you bought 171, you have scale, and you also have gone from all of the legal framework that oversees single-family residential into commercial. And that's a much easier sandbox to play in because there's so much consumer protections and banking rigors around single-family that really cap you. And then when you're in the multifamily space, when you're in the commercial space, there essentially is no limit, right? As long as you can raise the money and the deal makes sense, you can go for it. So that's sort of the story.

And then what's your portfolio look like today? What have you built to over the past— how many years you've been doing this since 2008, right?

Yeah. Oh, it's when it got started, right? So we're 15 years in something like that. You know, over the course of that time, I've probably owned 2,000 to 2,500 apartment units or rental units. Again, people say that number and it can be like a puff in your chest or I'm so great. I mean, these are syndications, so I might own 5% of this deal or 7% of that deal. So it's never like I own all of it, right? But over that time, yeah, I think it's about 1,200 right now. So we sold off a lot of them, but there's 1,200 units in the portfolio right now with my company that I'm a managing partner in, Nighthawk Equity. We have about 1,200 units that are all in Atlanta. And then I have a couple like legacy properties, like the syndications that I mentioned that are still in Minnesota. So it's a little combination of the two.

And what's your strategy with your investors? We'll talk more about this in the next episode, but do you try and buy them out? Do you ride it with them until you sell the property? What's your guys' mission overall at Nighthawk?

Yeah, I mean, we want it to be a true partnership, right? So there are those models, I think they're pretty cool, where essentially investors invest for 3 years, you buy them out, and then you can hold it for infinity. But we don't do that, right? So we'll buy the asset. If things go well and we can execute on our plan well, we can increase the value, refinance it, get all the investors' money back to them, but they still remain owners of the deal until we sell it, and then we're all out together. So it's usually about a 4 to 7 year intended hold, and these are all value-add deals, right? So think of like a house flip, right? So you find a, a house that's tired, been mismanaged, no one's looked after it, and it just needs some love, uh, interior renovations, exterior renovations, landscaping. It's just like that but on a much bigger scale. Um, so that's what we're trying to do is, is take these older properties, inject a lot of capital into them, $4 or $5 million at a time, fix them up and make them better for the whole community.

While you've sold down about half the portfolio, what is next for Drew Niffen?

Oh, you know, so our company, what we've always wanted to do in the long term is be a preferred and trusted supplier of alternative asset investments for our investor communities. We have a large community. People have heard us on our podcast, Apartment Freedom Through Multifamily Investing. And they got to know, like, and trust us and put a lot of money with us. Right. And it's all been multifamily and it's multifamily because if you look over financial history, it has been a phenomenal, like, get rich slowly mechanism. Right. There's a lot of reasons we go into it. There's a lot of reasons why it's a great asset class. At the same time, as far as what the long-term mission is, it's to offer people broader investment opportunities beyond just multifamily, right? So if you're Baskin-Robbins 31 flavors, right, you don't just want to serve vanilla ice cream or just serve chocolate. You want to serve a lot of different ice creams to the person who likes ice cream. And so we want to provide a lot of different investment strategies to the investor who thinks there might be a better way than the conventional mutual fund, 401(k) type investment.

Okay. And for you personally, do you have any aspirations to own those legacy properties, 150 units, 200 units by yourself? Or are you content with doing it in the group setting and doing that for the foreseeable future?

You know, I— so here's the thing. I think I would say keep it with the investors because here's the challenge, right? If we say to our investors, we are going to bring you the best opportunities we can, and then half the deals we take down personally because they're so good and the other half the deals we give to investors, investors are going to say, hey, are we getting like the B-team, the junior varsity squad deals? And you're keeping the best ones to yourselves, and that's a conflict of interest, and it wouldn't create that, uh, that trust which we're trying to build so much. So I wouldn't say that we're going to do that, um, but what we might do is try to find those different investments that might work for people have a different risk appetite, uh, you know, investment horizon, people that are more focused on cash flow than they then want huge yield. There's different interest depending on people's age, where they're at in life. And so we want to hit all those needs.

Now I have two questions. So the first one's going to be an easier one. Uh, Nighthawk Equity, where did the name come from? I've always wondered that. I've never asked you.

Yeah, we get that once in a while. The answer is it came from nowhere. It just sounded like a good name. There's no great story behind it. There's no, uh, aha moment. Uh, sometimes people confuse the thing of like knights like Knights of the Round Table. There's no K on the front, it's just Knight and Hawk. And, uh, it's worked well for us. So sorry to disappoint, it's just the name that's worked well for us, uh, over the many years.

Well, that's funny. The reason why I asked, because I haven't played video games in a long time, but when I was growing up, that was my, that was my video game tag. And then I talked to my little sister, and Nighthawk is her video game tag. Total coincidence, also no reason behind it. It's just a great name. I use it, my sister uses it, you use it.

Yeah, there's, there's a box wine that you can buy at Target Corp, and it's like Nighthawk wine. And every once in a while someone will like send me a picture of it or bring me a box of it just for, for good luck. So, uh, no, it's— I'm happy to get free wine from it, but there's no, there's no, there's no grand story behind it.

That works. Well, the other piece, uh, that I am curious about on a tech standpoint— so Cody and I have a buy and hold model. So what we do is we buy and hold Ideally forever, will rarely ever off a property. When you're working on a 3 to 4 year cycle or 4 to 7, the 4 to 7. Yeah, you're— it's still a relatively— it's a midterm horizon. You're not quite market agnostic. How is the changes in environment from, let's say, where we're at a year and a half ago to now, has that changed anything in your strategy or how has that affected your business on a 3 to 7 year cycle as opposed to strategy where you hold forever.

Yeah, I mean, you guys, you, we, the three of us have talked about it in person and we went to go see one of my properties just across the water from where we all live recently. And you guys basically convinced me at Starbucks to adopt sort of a buy and hold forever strategy on that asset. So I actually, that's kind of where I'm at on that one. I was like, yeah, these guys make a lot of sense. So I think there's a lot of power to that when you're syndicating. That's a hard sell to investors. Yeah, for any investor, give me your $100,000 and I'm going to hold it for 30 years, right? Just no matter what the projected returns are, that's going to cause a lot of caution from people because the illiquidity of investments is already a departure from the normal mindset of, if I don't like my General Electric stock, I can just sell it tomorrow and have it be cash in my account in 3 days. So part of it is just driven by the timetable that makes sense for investors. Another part of it is that generally your value-add strategy is— I don't know if exhausted is the right word, but it's executed in the first 24 to 36 months. You buy all these units, you fix them all up, you're able to re-lease them, turn over the tenant base or keep the existing tenants in there, and you really push the value. And now you're no longer accelerating value, you're more on cruise control. And so for the velocity, for the purpose of velocity of money, investors can tend to do better if their money is being put back to work in new assets to fix the problems that are in those assets, right? So that's a lot of the reason behind it. As far as like how this market cycle has impacted that strategy, I think, you know, we are not immune to the interest rates. That are out there, right? And if you have to refinance an asset that you originally bought with 4% debt and now it's 6.5% debt, well, that changes your debt service coverage ratio, it changes your loan proceeds, it changes a lot, right? And so interest rates, if you look back in history over 50 years, have never gone up as fast as they just have. And so we weren't expecting that, right? And so this market makes you think a little bit about your debt strategy and the longevity of it. You know, you guys talk about how can I buy the asset, how can I hold it forever, right? Well, you can hold it forever if you have fixed debt that you know you can cover. That's the beauty of the model you guys talk about, and there's a lot of legitimacy to that. Um, and so we've, we've thought a lot about our, our debt structure and whether it's adequately match to the overall investment strategy. And we're underwriting deals differently now than we were 24 months ago in light of that. So that was a little bit long-winded, but I hope that makes sense.

Makes sense to me.

All right.

If it doesn't make sense to the people listening, you can watch it again.

Yeah. And I think from everything that I've seen, you guys have done a fantastic job. Real estate is harder for everyone, including us.

Our ability to pull capital or refinance If we were refinancing in the 3s and the 4s, we would have so much more liquidity.

It'd be stupid. Yeah. Like Cody and I do a lot of value add on long-term holds. Our ability to pull money to do significant renovations we wanted to do is down. Yeah. Is massively down. We could pull a ton of money to fix up our buildings and we'd have a whole nicer portfolio with a lot more stability.

Yeah. Without a doubt. 7 figures. And for you guys' portfolio, 8 figures, if not more.

Yeah. There are some people who really pushed those margins and didn't put the safeties that I've seen you guys put on for your deals. We see some large syndications, some huge ones have gone under and already succumbed to the variable rate debt. You guys have done a better job from what I've seen protecting your investors on that by just negotiating deals with better margin, more experience on the front end.

Yeah, by no means are we perfect, but I'll just tell you a story. A syndicator friend of mine was a part of a syndication and when they put the property under contract, the price of essentially the insurance policy on interest rates going up was making this number up, but call it $200,000. Yeah. They built it into their model. Okay. Between the time that you go under contract and the time that you buy the asset, 60 days, 90 days, and in that time, it's right when the market started to realize, hey, rates might go up. The cost of that debt product went from $200K up to about a million bucks. Okay, so we know a lot. Okay, now, um, uh, they are like, we didn't put that into our model and we don't think rates will really go up that much. So without telling anyone, they didn't buy it. Okay, and their lender didn't check on it. And within the GPs, some GPs made the decision and didn't tell the other general partners about it. So you, you roll the tape forward 12, 18 months, and the, the cost of servicing the debt goes up like this, up to infinity. And they thought they were paying, who knows the numbers, $100,000 a month. Now they're paying $300,000 a month. And it's like, hey, didn't we buy that industry cap? Oh well, you know what, we did, right? So that's going to be a really nasty story when it all plays out. That's like watching a car crash. I can't pay $800,000. Come again, what's that?

I was saying, why would you pay $800,000 to save $200,000 a month? I mean, what kind of math is that, right?

You know, but here's the thing, here's the thing. All this stuff looks obvious in hindsight, but nobody had a crystal ball, right? That's why the markets were pricing these insurance policies so cheaply, because they didn't think that rates were going to go up so much. But, and so I don't point the finger and blame per se, but it is one of those things where we just need to reduce financial market risk as much as we can 'cause we cannot control that and put our energies toward controlling operational risk, which we have much higher degree of control over. Can we lease units? Can we install new floors? Can we find tenants? Can we service work orders? Those things we can largely do. Interest rates, I mean, that's like controlling the weather. It can't be done. And so, that's what you want to de-risk as much as you can.

And that's fantastic. And one of the things that these markets do, and this is why I actually love market cycles, like I like down cycles, is the people who were making silly decisions or weren't working on the operations because the market was carrying them, those are typically your people that you see aren't playing in the next market cycle. The people who survive the downtimes, when you can weather the storm, you are the companies that stay around longer regardless of what your model is. You fine-tune those things. The best operators survive. And that is my favorite thing about any market cycle is it actually does trim the fat organically. And so I see you guys as a group that's going to make it through no problem. You guys are handling it. We're doing it on our model. It's like, okay, we need to buy deals. That are maybe a little bit smaller total project if we want to hold them forever because we can't do these huge capital renovation projects anymore because we're just not going to pull the money out. Yeah, we do years.

We couldn't afford to do a 100-unit right now.

Yeah, we just can't. Yeah, I'll tell you guys, I studied economics. I knew kind of monetary theory and all this stuff from college. I thought I understood it all, but I never understood it as fully as I do right now as I've seen it play out. In the markets that we live in. I'm like, oh, it really works. They're really powerful in slowing down economic activity. So it's been quite a lesson to learn. And hopefully we really internalize those things, as you're saying, Christian, and we can be even better in that next market cycle.

Awesome.

Well, everyone, this is Drew Niffen. In our next episode, we're actually going to deep dive a little bit more of syndication, the technical— what is it? Is it the right model for you? Where you use it? We're going to talk about all of that. So stay tuned. If you haven't yet, check out our free course in the comments section below, Multifamily Strategy. And Drew, where do people find you? We're going to include your links in this video, but Instagram, Facebook, website, where do people find you?

You know, I'm pretty active on LinkedIn right now. So LinkedIn, if you look for me and Drew Niffen, NIDOC Equity, you'll find a lot of activity there.

Fantastic. Perfect. Everyone click that link and we'll see you on the next episode.