Moses Kagan - Building Adaptive Realty's Property Management Business

I don't think that you can build a long-term sustainable real estate private equity platform doing work that's not compensated in market rate fees. It's just not like, it's not a sustainable thing to do.

Welcome to season 2 of Owner Occupied on the business of property management. Owner Occupied is a show about property management in the real world. I'm your host, Peter Lohmann, co-founder and CEO of RL Property Management. For season 2, I have a different guest each week and we go deep into conversation about what actually works when trying to build and scale your property management business. Thanks for listening. Now let's go. Welcome back to Owner Occupied. I am beyond excited to introduce Moses Kagan to the show. Moses, thank you for joining us today. Couldn't be happier to have you on as a guest. If you don't mind, just give a 1 or 2-minute background for those who may not be familiar with you.

Yeah, happy to be here. As you know, I admire you very much, so this is an honor for me.

Thank you.

So quick background, I have been buying and renovating and managing apartment buildings in Los Angeles since early 2008, have renovated in that time 100 buildings. Along with the real estate private equity activity that we were doing, we simultaneously bootstrapped a property management business, and that business is currently up to about 110, 111 buildings and approximately 800 units in, call it, 7 or 8 neighborhoods in Los Angeles.

Perfect. Okay, awesome. That's, that's where I'd love to start is the property management side of your business. Naturally, that's of high interest to me and probably my listeners as well. So awesome. 110 buildings, 800 units. That's a very serious property management business. Are you able to share like what percent of that is third party?

Yeah, it wasn't always like this. Currently, it's about 50/50, third party, in-house. It's— that's on the unit basis. On a building basis, it's more like 50 in-house, 60 third party.

Okay, perfect. And something you and I have chatted about on Twitter here and there is the value of working with third-party clients who are significant in size and sophisticated. I'd love to ask you a little bit about, like, how many units per client on average for your third-party business And then how you found those clients, how you work together, and how you seemingly have found just a fantastic group of third-party clients for your management business.

Yeah. So I mean, let me start out by saying that one of the things that makes property management so difficult, of course, is that you're stuck in the middle between owners and tenants. And so there's this— your organization pays a tax in the form of communication with owners whenever anything out of the ordinary happens, you know, a leak, you need to replace an air conditioner, or whatever it is. And so what we— what one of the ways that we have kind of like built our business in order to avoid that tax is to try to focus on larger owners who own many units so that— and who are owners of many units for a long time, like they intend to be permanent owners. And so what that does is it allows for the development of a high level of trust between our organization and the owners because they're like, they— we have all their stuff, they have a lot of stuff, they really trust us, they're in constant communication with us. But what it means is that they, they— those sorts of people don't really— like, they trust us to do all the little stuff. Yes, we're going to talk to them when there's bigger things going on, but, but on the small stuff, there's— we don't pay the tax that I think a lot of other property management companies pay. So, long-winded preamble to the answer. The truth is, embarrassingly, that I don't know what the actual number of units per third-party client is, but it's high. Our largest third-party client owns approximately 180 units.

Okay. So that's like, yeah, that's like almost half your third-party business by unit.

Yes.

Okay.

Yep. And then we have another that's probably like in the 50-ish unit range.

Okay, so it sounds like you have like 20 clients, not like 220. So we have like 220 clients for ours.

Oh yeah, no, no, we're, I mean, no, we're like, we may even be fewer than 20.

Okay.

You know, we want to be managing on behalf of professional investors, not a bunch of like one-off, you know, single-family homes or small apartment buildings.

I love that. It's something I've observed about the property management business, the third-party businesses. It's not quite B2B and it's also not quite B2C for, at least for a lot of property managers, including myself, it's really like B2A. You're not dealing with professional investors. I'm not by and large. My clients have a day job, they do something else and they own a few properties on the side. It's also not like B2C though. It's not exactly like a main street retail product because it is, every individual property is itself kind of a micro business. So it, there's a lot of challenges around that, but it sounds like you've had a lot of success in actually working more with professional investors, which is fantastic.

Yeah. Let me tell you, you asked how we got there and maybe let me answer that question before we move on. So early on in my investing career, we saw far more good deals than we had the ability to raise capital for.

Those were the days, right?

Oh, goddamn it. Yeah. I'm going to start crying on this podcast. So what we ended up doing in order to just to eat, to survive while we were sort of growing our capital base, was a lot of what we, at the time, we called fee-for-service. Now I would, because I'd never had heard of anyone else doing it, we just kind of made it up, But it turns out that the technical term is fee development. And so what we were doing is on behalf of several clients, one, the largest one, and then some other smaller ones, identifying buildings that were good deals, that were cheap and to which we could add value in an accretive way. And we would identify the building, actually sometimes the clients would identify it too. It was sort of a two-way street. It was actually a very interesting collaboration in that regard. But basically One side or the other would identify the deal. We would underwrite it as if we were gonna run it like a real estate private equity deal and syndicate it. Instead, they would just buy it. We would often, but not always, get a buy-side brokerage commission. And then we would enter into what was effectively a 2-page contract, actually 2 contracts, effectively a 2-page consulting agreement, which I'll get to in a second, and then a property management agreement. And the consulting agreement was basically like, look, we're gonna pay you $100 grand or $150 grand or whatever to do this building, like help us buy it, help us design a renovation, help us find the contractor, hire and oversee the contractor. And then when the project is done with construction, it will go into your property management portfolio. So that is the genesis of those big portfolios. We did a bunch of these, like we did, I think we probably did like 30 of those fee development.

I had Gary on all those.

Oh my God, I'd be so rich. It was infuriating. I mean, we added, The comical part, I mean, I would not, I mean, this is, it's an okay way to get into the business to do it a few times because you learn on someone else's dime, right? And you're so, but—

You're also getting cash right away. You don't have to wait.

Totally.

Yeah.

Yeah. But I mean, you can get a fee. If you syndicate, you get a fee. I mean, it's objectively a stupid business. We did so much work and we made, you know, we made a lot of money cash-wise, but it's super tax inefficient too. So, but anyway, it was what we had to do 'cause I couldn't, I didn't know how to raise the money. But anyway, so those buildings became the core of our property management business. And as you noted earlier, this was at the time when we had very few units of our own and we built this 180-unit portfolio on behalf of this third-party owner. So for the entire first half of my property management career, the portfolio was like weirdly out of balance where we basically had one client who was, was the vast majority of the revenue. And then the strategic challenge became like, how do we grow both our own investment business and the other third-party clients to balance them out?

Got it. Okay. Love it. I want to go back to something you mentioned earlier, which is there's a tax for third-party management in the form of communication and just interface with the property owner. That's a fantastic way to put it. And I think about this often. The analogy my partner and I sometimes use is I think Warren Buffett famously described a tax on a public company in the form of the CEO having to do a bunch of extra stuff that he wouldn't or she wouldn't have to be doing for a private company. And that's kind of how I think about the third-party management tax, which is, hey, Mr. Owner, There was a water line break. Now we're going to have to do this, we're going to have to do that. Are you okay with that? Well, I want you to use my guy. And by the way, we have a home warranty and all this other stuff. So I've sometimes tried to quantify this. If we owned all the properties we manage right now, would our effective management fee be 20% less, 30% less? I sometimes try and think about it in that way.

Yeah. I mean, that's the benefit of owning half the buildings or half the units we manage is unless something is really complicated, our head of property management doesn't come to me because I just trust her. If I didn't trust her, she wouldn't be running the property management business. So of course the complicated stuff comes to my desk, but we've just basically removed that tax on half the portfolio and it definitely makes a huge difference to Effect— what you're asking about is really like, what is the profitability of a property management company, or what is the effect of that tax on the property, on the profitability of property management company? And I'm saying because we've cut out that layer of interaction pretty much entirely for half the portfolio, and to a large extent for the rest of it, our business is like— our property management business is unusually profitable because the tax we're paying is low.

Got it. And so does that imply then that you essentially charge yourself a market rate PM fee for your own deals? Okay. Yep. That was what I was wondering.

Yeah, no, 100%. Yeah, I mean, yeah, I think you probably heard me talk about this before. I don't think that you can build a long-term sustainable real estate private equity platform doing work that's not compensated in market rate fees. It's just not a sustainable thing to do. So yeah, so every one of our, every one of our deals pays, you know, market property management.

I don't want to stay too long on this because I know there's a lot of great discussion about fees elsewhere in podcast land. I will say I agree with you. I want to put an objection or two to you that I often hear, which is usually something along the lines of either A, I'm early in my career, I want to get a track record, I want to do a home run for these investors. That's one I sometimes hear. Another one I sometimes hear is, well, I don't mind giving the property management away at a discount or at cost because that's just like more money that I can reinvest in the deal and it keeps my investors happy and they're going to bring me more investors and ends up working out in the long run.

Yeah, I mean, look, you— everyone's got choices to make about how much they want to subsidize their deals, but you should just understand that that's what you're doing. I mean, when we were growing our property management business, so remember we bootstrapped it and there was no outside capital. And so it was deeply unprofitable until we reached probably 400 units and maybe a few, a little fewer than that. There's a kind of a cost allocation question which we can talk about. But yeah, so what we were doing insanely is the property management business, which we wanted to build, was like net unprofitable. So what we were doing is doing all these fee development deals, taking in cash fees, and using it to subsidize a money-losing property management business. So we're basically getting paid by rich guys, but then taking the money out of our own pocket to subsidize the property management on behalf of the rich guys. It was a deeply painful situation to be in, but that's effectively what we were doing there. It's the same thing. We were Look, people have to do what they have to do, but again, my goal in real estate private equity, my professional goal is not to stack up a bunch of cash necessarily. My goal is to build a very large portfolio of apartment buildings, maybe some other assets someday, and to build a property management company that allows me to effectively service those buildings. And so that means that the platform has to be sustainable. We can't be getting bailed out of our negative cash flow situation over here because we sold something over there. The whole thing has to be built to be survivable, to be durable, and that means charging market fees everywhere.

Chris Powers summarized this really well. He said, "Fees pay for great people and great people drive returns." And you want those people at the helm of the property management business, whether it's property you own or you're managing for third parties, either way.

Yeah, you're just like, I'm trying to, we keep the best people in our whole organization have been with us for a very long time, and we need to be able to continue to pay them well and give them more interesting things to do and whatever. And anyway, they need to feel like They're not worried about where their next paycheck is coming from, whether based on whether we can sell some building or not, or the market. You know, we just, we're trying to build like a permanent edifice here, and so it needs to be built on a good foundation.

100%. So you're pretty outspoken about your approach to investing in buildings in Los Angeles. You go in, you do a very significant, practically down to the studs, if not actually down to the studs, remodel. Rebrand just totally, you know, these pro— this is not like lipstick on a pig. This is legitimate value add in the original sense of the word. I think you guys do a fantastic job of that. If, if you're listening and you haven't seen some of Moses's team's work, definitely go check that out. What I'm curious about is your third-party customers, your third-party property owners, do they all share that same approach? And if not, how do you handle managing somebody else's property that they haven't reinvested in the CapEx, new plumbing, new electrical, newer facades. Do you find that challenging or are they all kind of—

Yeah, the answer is we don't do it.

Okay.

We don't do it. We're interested only in managing high-quality buildings, you know, that we're owners who want to own them for a long time, who want to maintain them, who want to keep the buildings looking good, who want to keep attracting really good tenants paying, you know, market-leading rents. And keep those tenants happy.

Like, there's no—

and, and there's— we can talk about— there's like, all of those things are related to each other, and it makes for a virtuous cycle. And I'm just like, not gonna break that really for anyone. So that's the answer. So, and then the practical answer is to say that because the, the core, the nucleus of our third-party management business is those buildings that we did the gut rehab on for the owner. So they're renovated to our standards. Now, some of them are a little older now and there's, you know, they don't look exactly the same as our newer stuff or whatever, but it's fundamentally, yeah, they've got new plumbing and electric and everything was done with permits and all that stuff. So they're, you know, they're great buildings to manage. And then when people come to us to ask us to manage property on their behalf, the first question is just like, let's see those rent rolls and addresses and let's go take a look at like, are these things like, Are these great buildings generating great per-unit rents? Because that's what drives the management fee, and we can talk about that. And then at least as importantly, are we dealing with an owner who is a grown-up and understands that you're going to have to put money back into your buildings to keep them running?

I've had problems with this in the past in the sense that I find it difficult to suss this out or tease this out on initial phone call and maybe a walkthrough. I feel like the customers or the clients that we interact with, they all promise the world, right? "Oh yeah, we're going to reinvest in this and we're all about the tenant. We want to make sure that they're well taken care of." But then they sign up as a client. Now all of a sudden they're calling you because you spent $20 too much on getting the grass cut or something.

I think you just got to fire clients like that immediately. Yeah, there's no— that's just like, that's your time. Um, as you know, the management business is you're basically renting your time and the time of the people who work for you, and you just like can't have it being sucked up by people who are making stupid choices. Like, it's bad for you, it's bad for your employees, it's bad for the building. It's like, in other words, it's like they're the own— the owners who act like that are doing the wrong thing for themselves on top of everything else. So they're ruining your life, they're ruining their own properties, they're making life miserable for the tenants, that's someone else's problem. We're not going to work for people like that.

100% agree. And you guys are in a great position where you don't need the business, right? You don't have some goal to grow the third party to X units because that's really not your main thing.

No, I mean, we do the third party because it's useful to have the scale. I mean, remember that we were building— because we do these art, we have historically done these art projects, these gut rehab deals that take forever and the pace of growth in our self-owned business has been not that fast. We are at whatever it is, 400 units now, but it's taken a long time to get there. We are just now at the point where we could probably jettison the entire third-party business if we wanted to and be more or less break-even on the internal business. That's not my intention. I'm happy to do third-party management for good owners. There's some good things about it. But I'm just like not, I'm like utterly unwilling to tolerate any kind of nonsense in doing it. And I want to caveat that by saying that we have some, some of the original buildings from when we were first getting started, some of our, the very first buildings that came into our property management portfolio were like, I used to broker, so I would like help someone buy a building and then they would hire us to manage it, right? And some of those early buildings are actually not renovated to the standard that we would ideally like them to be. But like those people trusted me to help them buy buildings and then manage them at a time when we were, we had no reputation, we had nothing. And so even though those buildings are like a disproportionately large pain in my ass, I'm not gonna like abandon people who were loyal to me when I didn't, you know, when I was first starting. So we're gonna just pay a little bit more of a tax for those.

Hey everyone, I'd like to give a quick thanks to our sponsor, for today's episode, and that is Elevate and Delegate. So some of you may know Bryan Stellentrop through Twitter. He's become a pretty good friend of mine, and he's got a really fascinating story if you haven't heard that. So look him up, and if nothing else you take away from this, follow him on Twitter and start to engage with him because he's a really smart business thinker. Recently, Bryan started a VA or remote team member placement service called Elevate and Delegate, and they take care of everything from bookkeeping to customer service, operations, analyst roles. So if you're looking to save money on wages, which for many small businesses dominates your expense line, you can't afford to overlook international labor as a solution here. So if you are looking to save money, in your small business, you can't afford to not at least reach out and start this conversation with Bryant. He's done over 50 placements this year and it's only April. So if your small business is dominated by labor, which most are, and you're looking for high-quality, English-speaking, highly educated international labor, some people are calling these VAs. We're kind of moving as an industry, at least in the property management world, toward calling them RTMs or remote team members. But if you're looking for somebody like that, I highly suggest reaching out, contacting Brian either through Twitter or check out his website, elevateanddelegate.com. Now let's get back to it. And thanks for sponsoring the show. Let's zoom in for a minute on a tactical question that you and I, I know, are coming at from opposite directions, which is compensating leasing agents. So our leasing agents are compensated on just a straight hourly, 40-hour-a-week basis. There's no commission at all. I think maybe you might be 180 degrees out of phase with that. I'd love to give you a chance to share with the audience your philosophy behind that, how well it's worked for you, and just sort of why you're set up that way.

Yeah. So we are 100% commission-based. All of our leasing agents are licensed. So they, in California, to do leasing for commission, you have to be licensed. So they have to go through all the courses and everything.

So they're 1099 or W-2?

They are 1099. Real estate agents have a weird treatment in California. They're like, they're 1099 sort of for some, for sort of tax purposes, but they're sort of employees for— anyway, it's complicated and not worth talking about. But the short answer is they are licensed sales agents. They are compensated 100% on commission. The commission is typically like 23% of the first month's rent on a 12-month lease. And so with a minimum, I think the minimum is $450. So in other words, if we end up managing cheaper units and they, we gross them up. So the result of that, and so their typical check size for closing a lease is probably like somewhere between $600 and $800. That's how the math works on the 23%. The 23% of the first month's rent is just a total historical artifact of a negotiation we had.

It's a really specific number. Yeah.

We were trying to back into a number that made sense on one of the earliest buildings we managed. Anyway, it all worked out like that. So the leasing agents are making— I actually just okayed a bunch of payments to them. They're making, depending on the month, somewhere between $2,000 and $5,000 a month. And they're working part-time, they're working nights and weekends. And so why are we set up that way? Well, one, I've always believed that it's all really about showings. Like, if the marketing is right and the pricing is right, then you should be getting a bunch of calls, right? And if you're getting a bunch of calls, then the question is like, are you scheduling tours? And when are you scheduling tours? And sometimes the person calling is going to want to see the place on Tuesday night at 7:00, and they're the only person who wants to see it then. And the question is, is the leasing agent going to get off his or her couch and go meet the tenant and show it when the chances of closing any particular tour are not that high? It depends on the unit, it depends on the agent. There's a ton of variables in the close rate, but Basically, like, the expected value on that, or the expected value is actually quite high because it's a big rent, so it's a big commission to the agent. And actually the close rate is pretty high. So from their perspective, on a per-hour basis, that like, if you multiply their commission times the percent close rate, it actually is very high expected value for them to get off their butt and go show it. Like, they're gonna probably earn like $200 an hour or something for the hour it takes them to go show the place So they should do that. But because of human psychology, there's also a high probability that it doesn't close and therefore they've gone and done nothing. So anyway, I want them to get up off their butts and go show it. So I want—

They're certainly not going to get up and go do it if they're making $20 an hour flat rate.

Yeah, no chance. And so I want the expected value to overwhelm the laziness.

Got it. And when you have a new listing, do you make that available to all your agents? It's like whoever gets it gets it, or how is that all set up?

No, no, we have a head of leasing who apportions the upcoming vacancy among the team, and we make— there's a couple of different factors going on there. One is obviously we want everyone to eat, right? So like, we try to make it— we don't want anyone to go for a while without any work from us. That's not fair. So we're trying to keep everyone eating. We also, we're a scattered site property management company like yours. So, you know, lots of buildings, relatively small. And so frequently we're gonna have like, we'll have one vacancy, like we'll have a one bedroom available in one building and then maybe we'll have like another one bedroom or a couple of other one bedrooms in other neighboring buildings. And so what we wanna do is group the listings so that the agents are in a relatively confined geographical area for their showings. And ideally also so they're showing the same type of units because the kind of person who's looking for a 1-bedroom in Silver Lake is probably gonna go look at all 3 of the 1-bedrooms that we have available. So we want them to be dealing with 1 agent through all of that.

Like kind of get like territories in a way, but not set.

It's not set. And like it, you know, but, but we are trying, the other consideration to make it explicit is, we do try and apportion the opportunities such that people are traveling as little as possible from their own homes. So we have a guy who's really good in Highland Park. Like he's gonna get most of, he lives near Highland Park. He's gonna get most of the listings in Highland Park because, you know, it just means if he is, we're trying, again, we're trying to maximize the, get off your couch.

Complicated traveling salesman problem. Like, well, he lives over here, but he's got 2 over there. Like he's on vacation, but.

Yeah, yeah, no, no, literally that's, we have a head of leasing and that's like a big part of his life is monthly doing that game. And what we're trying to do is keep, 'cause the benefit of all of this, right, is for $20 an hour or $25 an hour, I couldn't hire these people. We're getting like really smart, motivated people who, are either working in a creative job where they want to be a— we've had such good luck with musicians and writers. Oh yeah, because it's LA, right? There's all these people who are creative, who have a dream. They want to be an actor, they want to be a musician, whatever, and they need a survival job.

So it's like they don't want to work for a property management company. What they want to do is check out cool buildings around LA.

Well, they, no, what they wanna do is make enough to live so that they can pursue their dream as an actor. And they wanna be able to go to auditions during the day and not be locked into like sitting at a desk at a certain time or whatever. So we get the, so the particularly enterprising ones, we get 'em and they're just like, again, they're people we couldn't hire, but because it's like a flexible job where the actual earned hourly rate is probably like, and it depends on the month, right? Like if they happen to get lucky and close a lot of things quickly, the hourly rate can be like $500 an hour or something like that. Just insane. So, I mean, it also can be worse depending on, but, but so we're able to get people who we would not be able to employ to do this job because it's a great flexible part-time job for someone who's got some hustle.

I'll describe briefly how we're set up because it couldn't be more different. So we primarily lease units using ShowMojo, which is like a self-showing lockbox service. We run around all— every time we have a vacant unit, it's ready for rent, we place one of these electronic lockboxes on the door. It's tied in with our online scheduling website thing so that if someone is looking at our rental listings, they can click, I want to see this house. And it will present them with days and times that are available, which is pretty much all day, every day. And they can select like an hour window, they enter credit card info,, and it will approve them to go see the unit at that particular time, which could be as soon as like an hour from now, like on their way home from work or whatever. So then they go there, they're given a temporary code that only works for that 1-hour window. They let themselves in, they see the unit, and then they let themselves out, lock the key up on the way out. It sounds completely ludicrous and it sounds like we'd be getting ripped off left and right and doors would be unlocked and lights would be on and all kinds of crazy things would be happening. The reality is it actually works really well. Now part of why this works for us is because we're a bunch of homes and like fourplexes where they all have exterior doors, and that makes this a lot easier. We also do some agent showings. We have an option for most of our properties where if you want an agent to show it to you because you don't like this technology thing, you can still set that up. And our agents are compensated, like I said, just basically salary or hourly at 40 hours a week. And they make the same whether or not they're in the office or they're showing the unit. And we don't generally have an expectation that they'd be working. I think we generally like them to work one weekend day for at least an afternoon. And then I think we try to make them available until 7:00 PM or something like that. But I don't know, it's worked for us. I think some of this is market, some of it's different property type. Some of it is just, hey, that's what's worked for us.

I am aware of some Los Angeles landlords, particularly of —let's call it more generic buildings where the rents are— like, there's a bunch of buildings that are where the owners own them for a long time, his basis is really low, he doesn't necessarily need to get absolute top dollar—that have done systems like yours, and it's worked really well. The truth is that it would probably work well for us, but I have always just been of the belief that, like, high-end stuff wants to be sold as opposed to bought. Yeah. And there's a lot of, you know, we're dealing with a lot of people for whom our units are like, you know, their first or second apartment in adulthood. And there's just like, we find ourselves in the position of having to like socialize a bunch of 20 or, you know, 23-year-olds, 24-year-olds into like, what are the expectations of a tenant when you move into an adult apartment? And so having an agent who's like, sits there and goes through the lease with them and explains how the deposit works and how the pet deposit works and here's what the rules are and here's who you call and you have to set up your utilities and all of that stuff. It's like a very good, it's a good touchpoint. So it's good for the sale, I think, but it's also good for the process of like socializing them into acting the way we want them to act.

Love it, love it. Okay, so if someone's looking at what you've built at Adaptive, and specifically I mean the 400-odd units that you own outright or with partners, and they, they like, they, they like what they see basically because the idea of owning half the units that you manage is fantastic, not only from a my life is easier on a day-to-day basis standpoint but also from a long-term wealth creation standpoint, What would maybe be your advice to someone who's managing a few hundred units, maybe owns one or two small buildings, but wants to kind of move in that direction? Like, what are— what's something practical that you could start to do if you wanted to, to take more ownership of the buildings that you're managing?

Yeah, well, I mean, I think unless you've got a ton of cash sitting around, I mean, I think that you're, you're effectively forced, if you want to do that, into the syndication business. I mean, you can learn about syndication business in a lot of different ways. I learned about it mainly by reading books. There's a book called Principles of Real Estate Syndication by Sam Freshman, who basically invented it on the West Coast. He's an absolute legend, still kicking. God knows how old the guy is, and he's just a dynamo. Has got extraordinarily wealthy. So he wrote a book, Principles. That book's a little dry, but it contains— it basically gives you the idea, and it also contains some absolutely insanely brilliant little dark magic tips, some of which I don't think I would feel comfortable using, to be completely honest. But you're like, "Whoa, okay, that's how that works." So yeah, it's just super dry books. You have to go through it, but then periodically you'll have this moment and be like, "Oh, now I see why you're so rich." So anyway, so that book. Then there's a book called, which I recommend to everyone, called Investing in Real Estate Private Equity by an author, who is using the pseudonym Sean Cook. That guy is a partner and an acquisitions person at a large, well, let's call it a mid-size real estate private equity firm that buys up a lot of apartment buildings. Okay.

Is this guy on Twitter? Anon? He's not on Twitter.

No, he's not. He should be. He should be. And I actually have been meaning to reach out to him because he and I, I wrote him an email to his pseudonym email address and I was just like, your book is great, blah, blah. And we ended up, he unmasked himself and we ended up having an interesting a few conversations. I really liked the guy a lot. So that book is a really good primer on the business. And it's actually written mostly from the perspective of a prospective investor, like a passive investor into syndications. It's not like a how do you syndicate deals book. It's a, as a prospective investor in someone else's syndicated deals, how does this whole thing work?

Like, how does it work? Oh, like how to be an LP?

Like what, how does it work? Yeah, yeah. Yeah, it's really an explanation of kind of like a plain vanilla real estate private equity deal. Why is everyone doing this? How do the different pieces fit together and how do those pieces incentivize different actors in the dance to dance the way that they dance? I should have said dancers, not actors. So it kind of gets at the actual moving parts of the real estate syndication business. So I can't recommend it strongly enough. And then I will give you one other book that's excellent, although a bit outdated now and cheesy as hell. Multifamily Millions by this guy Dave Lindahl. When I came across that book, I didn't know that there was such a— no one had ever said the words value-add multifamily to me. And I just had started buying apartment buildings and fixing them up because they were cheap and the numbers seemed to work. And I remember being in a bookstore seeing this blue book that said Multifamily Millions, which already is an insanely cheesy title. And I look at it, I'm like, this is describing what I do. And again, it's a little dated because it was written, I guess, pre-Great Financial Crisis, but that's a how-to-syndicate book from the perspective of a syndicator. Okay, perfect.

I love those book recommendations. We'll make sure to link those in the show notes. All right, I want to pivot a little bit. You're very public on Twitter about sort of your sense of duty to your family and your family's legacy. And sort of, I think it was your grandfather who, by way of a grocery store and a few other things— Great-grandfather. Great-grandfather. Yeah. And that was kind of like the seed capital for your first real estate deal, if I'm remembering the details right. Yep. And I love how you talk about this because I get the real sense that You view yourself as kind of a temporary steward of your family's wealth and values, and you have a deep sense of obligation to the next generation. And a lot of that resonates with me. My question is around how do you think about demonstrating the values of frugality and hard work to your kids while basically not living like a pauper? In other words, Like, I grew up, my dad was always like, don't buy popcorn at the movie theater. That's a complete ripoff. Like it's 10 times the price, right? And like all these little things like coupons and like, not that we were like struggling by any means, but the values were so clearly demonstrated by my parents. They never went on fancy vacations. They didn't buy exotic cars or anything like that. And so now that I'm coming into adulthood and I have a little girl, and I'm thinking about my own life for the next 15 years while she's at home, I don't know that I want to be quite that frugal. I might want to like live a little, like maybe enjoy some of the hard work that I've invested all these years. And maybe I do want to have a nice car. Maybe I do want to go on nice vacations. But I worry a little bit about what kind of a message is that going to be sending to my daughter or to my kids? And are they going to now grow up with a different mindset? Because I've really benefited from that mindset, especially when I think back in my 20s, I was super frugal because that was the example that was set for me. That allowed me to take money from my engineering job, invested in real estate. It compounded super, super early, and I'm like just now really tasting those fruits. So kind of a long-winded way of asking, like, how do you think about this in your own life? Or is this something that, you know, you're giving some thought to?

Yeah, I mean, definitely. And my upbringing was a little bit different. My parents saved a lot. They both worked. They bought some very small apartment buildings. We lived in upstate New York, which is in Troy, which is not a fancy place at all. My dad was a college professor. My mom climbed the ranks in New York State government, and we would sort of live on one salary and then they would save the other. And then when they had enough, they would buy a small apartment building. And so my parents, they had, I don't know, maybe 10 or 12 units at maximum, something like that. So not like, very much like they self-managed and very much like a side hustle. They're not like financially sophisticated real estate people. It was more like the way immigrants do real estate, like buy a fourplex, live in it for a while, then we would move and keep the fourplex. Pay it off. Yeah, like, oh yes, yeah, they were not, yeah, they weren't like, yeah, doing lots of refinancings.

They're not doing interest only.

No, no, to put it mildly. So they lived frugally and set a good example like that for us, but they also spoiled the shit out of us, to be completely honest. I went away to boarding school. I had my parents' credit card from, I think, when I was 15 years old, because I needed to take the bus and trains and stuff to get back and forth to school. So I had their credit card, and if I went really crazy, they would eventually yell at me, but really, They totally, I mean, they spoiled the crap out of me. I didn't have any student debt. I didn't, you know, and I think that is a, it's a risky gambit to be completely honest. I mean, first of all, they invest a lot in education, which I think is inarguably a good thing to do. And I spend an insane amount of money on that for my children and I'm happy to do it. But so that was smart. And then in terms of like hooking your kids to the high life, right? They were basically underwriting a lifestyle for my brother and me that was considerably fancier than the one that they themselves were living, which is a weird thing to think about. Okay. But like, we were, you know, I was going to New York City and like going out to sushi with my friends from Andover and never felt like I was being deprived of anything, even though my parents were probably even by then, like, not as wealthy as the parents of my friends. So they hooked us on a pretty nice lifestyle. But when we got to adulthood, it was basically like, look, we're not going to support— go get a job. Go figure it out. And they did. I don't mean to say they didn't help me, help us. They did. But it was really like, okay, yeah, we'll top things up in certain ways. If you don't have health insurance, we'll kick in for that. They helped. I don't mean to minimize it. But there definitely was a moment of like, look, there's no chance that we're wealthy enough for you not to do stuff. So you're gonna do stuff. And then the question is like, okay, I got used to this lifestyle of like basically being able to go out to whatever restaurants I wanted to go to, like not really think about bar tabs, not whatever. And then now I'm in adulthood and like, that's, I don't know, like I would like to continue that lifestyle and therefore I better do something about that. And so I think if my personality had been different, I think it very much could have gone another way. In other words, I could have been a really spoiled little jerk and tried to lean on them and extract money from them. And I don't know honestly what would've happened. In real life, what happened is I went the direction of being like, okay, I gotta make some money. And my friends were all ambitious people who wanted to make money too. So that pulled me along. Anyway, that's, so anyway, so that's my story. With my children, they're growing up spoiled. I mean, there's no question. Like, they're in fancy Los Angeles private schools. Our house, I'm divorced from the mother of my older two sons. Their house, you know, she married a very successful guy. They have a nice life there. We have a nice life at our house. Our youngest son has a nice, like, these kids are getting spoiled rotten. And so the bet is that they will respond to the challenge of being pushed out into adulthood and having to do something in a way that is similar to how I responded to it. But what I've told them is, look, I don't really need them to go, unless they want to, to go out and make a ton of money. I'm not like, that's not, I don't regard that as the only useful thing that people can do with their lives. I think people should go be teachers and doctors and God knows what. I mean, that's obviously, society needs that. So my view is what I've told them, and it's true, is as long as they're doing healthy, productive stuff, then I will be happy to help support them. Not drop them in the lap of luxury or whatever, but like, If they want to be a teacher and they're teaching, obviously I'm going to help them. Anyway, so that's how I'm handling it. That was a long-winded answer, but that's kind of how I'm thinking about it.

I want to take a moment and thank The Found Gen for sponsoring this episode. Some of you may know James Shulman from Twitter. He's pretty active on there and he's a great follow if you're not following him already. James and I met through Twitter about a year ago, and I've been working with James and his team at The FoundGen for just about a year. So you can think of them as a fractional CMO and marketing department. So James and his team handle a ton of marketing work for our business. Let me just give you some of the capabilities that they have, and this is all the work that they're doing for us. They're handling content creation, so they're writing in-depth, detailed articles that get published through our email newsletter as well as our website on our blog. And you can check that out at rlpmg.com/blog if you want to get an example of content that they write. So it's not just fluff, you know, someone Googled for a few minutes and wrote a few sentences and fleshed out into a full article. These are legitimate content pieces that I feel comfortable publishing on my website. They also handle social media posting, podcast publishing, email marketing, which I just mentioned, webinars, any graphic and design work that we need. They're really just a full marketing department for us. Knowing that my marketing is being handled by professionals takes a huge weight off my back. It lets me focus on the business instead of working in the business. Contact the FoundGen and they will conduct a marketing audit for your business. You can learn more at thefoundgen.com. Now let's get back to it, and thanks for sponsoring the show. I, I took a note when I was kind of prepping for this, and I heard you say on one of your podcasts that you were a guest on, you said wealth is downstream of values. And I wrote that down because I thought it was very profound, and I'm curious to ask you kind of a follow-up question on that, which is what are some of the values that you're going out of your way to express or to share with your kids, to go on what we were just talking about?

Oh, man, you name it. I mean, so generically, what are the values? It's obviously the classic ones that we all talk about, integrity and hard work and reliability and keeping your word, doing what you say you're going to do. There's a real negotiating ethic, for better or worse, in my house. My kids have been trained. There's not My parents were never dictatorial towards us, and I don't know if they could have been or not. Like, Kagan boys are just— at least, I don't know, there haven't been a lot of girls yet, so we'll see. The Kagan boys that I know are not like the most— not the easiest people to boss around. So I don't know if my parents could have, but anyway, they didn't. And the same in my house. Like, even when I try to be dictatorial, my kids are just like not that afraid of me. And so everything's a negotiation. And so, yeah, so that's— so, and I, and then me, I mean, like, so I want to— I'm sure all those values, I'm like, yeah, I like— I want to tell them, but I do that by telling stories. The stories range from like a lot of stories about their great-grandfather Morris, who we talked about before, came here with nothing from Russia when he's 15 and sort of built a life and a fortune and all that stuff. My father was born in a refugee camp in Germany. His parents were Holocaust survivors, so we spent a lot of time talking about things like that. So I want them— I'm trying as much as I can to make their grandparents and great-grandparents and my parents who are still alive into living, important characters in my children's life, even the ones who are no longer with us. So I want to situate them in a familial story. So there's that going on. And then I want to tell them about Elon Musk and Bezos and Buffett and people who've gone and done really, really big things with the idea of making it clear to them that that is possible. Love it.

And stories are powerful. I mean, the human mind is wired to respond to specific characters in specific situations rather than just generic, "You should be honest." When you tell a story of somebody in your family who— and it's not just being honest like someone asks you what the weather is and you tell them the right answer. It's like the nature of a value is that you're willing to sacrifice something else that would be better for you in that moment to uphold the value. And stories are a powerful way to convey that, I think.

Yeah, no, totally. And I mean, I I over and over and over repeat to my kids the connection between integrity and our business. Like, in other words, I just say to them over and over and over again, the only reason that our business exists and you guys get to live the lifestyle that you lead is because people have trusted me with a lot of their money and a lot of their buildings. And our continued existence in the way that you know it fundamentally depends on maintaining that trust, full stop. A. And B, if you guys would like to do big things in the world, then you will require the cooperation of other people. That's just— that's the way the world is, right? And if you would like that cooperation, there are certain ways that you need to act in order to secure it. You know what I mean? One of them being keeping your word. There's a whole being reasonably nice to people and actually listening to them and all that stuff. But trying to connect the values to the real-world implications of living or not living those values.

Man, it's so difficult. I remember being young vividly and hearing— I was in Boy Scouts. I was an Eagle Scout. Trustworthy, loyal, helpful, friendly, all the all the values that come in that system and grew up, um, definitely hearing that a lot. And even early in my career, I was living those values just kind of out of a default. It was just like that was what I was used to and I was comfortable with. And it wasn't until maybe like 10 years in the working world before I kind peeked up above the water, looked around, and I was like, oh, now I understand what all that was about. Because the folks who just have an unimpeachable character and have operated that way through their whole career, that's like compounding somehow. And like now, 10 years in, they're reaping massive rewards from folks who are 10 and 20 years ahead of them because they now have seen that person for 10 years, they trust them, and they're willing to take them under their wing as a mentee or give them a chunk of capital or whatever it is. And it was so hard to— I just had no concept of that when I was 22. I'm like, "Okay, yeah, don't lie on my timesheet at work. Okay, sure." I don't know. It's very interesting.

Yeah, well, listen, I mean, if you think about how compounding works, the difference between compounding a few percent and zero, or the difference between compounding 3% and 1%, it's not super apparent in the beginning, right? The lines look pretty similar and it takes a while.

And there might be even like, someone who's cheating might get ahead for a while, right?

Yeah, totally. So it just— but you start getting— I'm 42 and you start getting well into adulthood. And you just, you see the implications or the outputs, I guess, of your compounded behavioral choices. And that's true in business. It's true in, I mean, for better or worse in my case, because obviously I got divorced. It's true in your marriage. It's true with respect to your health. The people who've taken care of themselves at 42 look a lot different than people who haven't. All these, you really in your 40s, I think, start to really get a sense for for that power. So you're early, 'cause I know you're a lot younger than me. You haven't even begun to see the impact of what you're going to see. 'Cause it's not just you, it's you having a reputation for being a competent steward of things for other people, reasonable and honest, hardworking, whatever. Your friends do too, and all of their reputations are growing, and you will be in a position to help each other. Like that's that Charlie Munger, like, a seamless web of deserved trust thing. Like, it's not the, the power and the network compounds as everyone does the right thing and helps each other and whatever. And it, you know, I'm just starting to get into that part of the curve, and it's remarkable what my friend— the positions that my friends have worked themselves into because they basically have been working hard and doing what they're supposed to do since they were 22 years old or whatever.

I want to talk for a minute about kind of the difference between a third-party PM business, bring it back to property management for a second here, and a real estate private equity business. And so when I think about a third-party property management business, one of the things that's really attractive to me about it is it's saleable. I could, if I'm not, I don't have any plans to do this right now, but I could make one or two phone calls right now and be in contract to sell this business in under a week. I'm pretty confident. And part of that's the market dynamics right now, but part of it's just that these are third-party contracts that I can assign. It's literally written in the agreement, this is an assignable property management agreement. That is, I think, not the case with the real estate private equity business. This is something that you're in for the long run. Now, maybe there's some exceptions. I'd be curious your thoughts on this, but I think the general understanding is, hey, you're taking capital from LPs, you're investing in properties, you're maybe managing them in-house, maybe you're not managing them in-house, but regardless, you're not going to like sell that GP business to some guy from California, right? So I have to admit that when I think about going all in on like a GP business, that gives me pause because, hey, what if I get sick of it in 5 years and I'm like, you know what, I'm just tired of being responsible for other people's money. "Now I'm kind of stuck with this. I mean, I guess I could call them all up and try and work something out." So tell me a little bit about, am I right, wrong? How do you think about this?

Well, you're right in the sense that it's pretty hard to sell, although not impossible to sell a GP business. I can't imagine a scenario where we would do that. Or I could imagine a scenario where we brought some young person up through and they worked for us for a very long time and we had a lot of trust in them and maybe they sort of end up becoming a minority partner in the GP interest in older deals, and then they start doing their own deals, and there's kind of like a handoff that way. So that's the succession plan. I mean, that's the succession plan if it's one of my kids or if it's someone who's not one of my kids. So there is a way to get out of it, but I don't want to get out of it. I have always, or at least as long as I've been thoughtful about my career, and this is probably going back to like my mid to late 20s, I have always just wanted to build a big— an empire is the wrong word because what I have is like a little duchy, a little fief. It's not an empire, but it's growing and it will continue to grow and it's going to grow. This is a very morbid thing to say, but I'm probably going to die behind a desk like this because I like doing this. I don't regard being the steward of other people's capital and buildings as in position. I regard it as an honor. And my lifestyle is great. I am very handsomely paid for being someone that other people can trust with their assets. And hopefully one of my kids is smart enough to realize what a great business this is and they'll want to take it over. But we could, in extremis, could we figure out how to sell off all are part of the property management, I guess. But the point is that they hired us for our judgment, and we intend to give them that judgment. And I mean, all of our contracts are month to month anyway. We don't lock anyone into anything. So it's not even like, would it be— we're not thinking about it like, oh, we're going to sell this, we can sell this thing. I mean, because we're effectively re-earning the client's trust every month.

Anyway, I think that's a fantastic outlook. I admire that you have gotten so clear on that desire or that perspective for what sounds like the remainder of your career. I don't think I often run into someone who's like, yeah, this is— I'm good. This is it for me forever. Like, this is totally fine.

I'm just going to need to meet more people who have good real estate private equity business. Okay. That might be— you literally— I'm trying like It would be better to own Google or something. That would be better. But from a— I think you would really struggle, really honestly struggle to find a job that has better risk and lifestyle-adjusted financial characteristics than the job that I have created for myself. I have a nice life and I'm running at a speed that I can continue running for 3 more decades, 3 and a half more decades. God knows, I mean, some of these people do this business into their hundreds. I mean, it's just when you have a good team around you and you have people you like working with and you're doing something that you think is worthwhile, why would you stop? What would I do instead?

[Speaker:TREY_LOCKERBIE] Tell me a little bit about your involvement operationally in the real estate private equity business and maybe the property management side of that. Are you I know you kind of famously are still making decisions on tenants, mostly because the crazy laws in California and LA make it basically like a one-way decision for the next 5 years or whatever. Yeah, it's a life estate effectively. Yeah. But other than that, I'm curious how much you think about in the world of small business, which interesting thing about third-party property management, it's like the intersection of real estate and small business. In the small business world, there's a lot of discussion and just activity around this idea of Do you want to work in the business or on the business? And like, how do you get an operator in place? And, you know, can the business grow and thrive without you? Like, is this something that preoccupies you very much, or you just kind of found a good mix there?

No, I mean, I work in the business too much. Both. I probably work maybe a little too much on in the real estate private equity business and a lot too much in the, in the property management business. Viewed from the perspective of what would be optimal for me, okay, from a financial perspective. But A, I don't mind it. I just don't mind it. So if there's a complicated question, I would prefer that it, and I'm sitting here and I got nothing to do, and I would prefer to be involved in that decision-making. And does that sort of stunt the development of other leaders in the business? Yeah, probably somewhat. I'm just not trying to— I'm not a good enough businessman to be— I'm not trying to optimize for scale, if that makes sense. I'm optimizing for some other things, like really not screwing up, which we still screw up plenty, but at least when we screw up, it's because I made a dumb decision, not because someone I trusted and I wasn't really paying attention to did something that was big. There are big— in our business, particularly with rent control and its and our business is so highly regulated, there are big mistakes that people can make. And so I like to keep an eye on it. But the other factor there too is that we have not been in a great buying environment for some time. And at least the last couple years. And so I'm just not as busy in the real estate private equity business as I have been previously. For a long time, we were buying a deal, whether ourselves or in that fee business that I was talking about before, we bought a deal once every 6 to 8 weeks for a decade or something, or for, I don't know, 7 or 8 years. It was the pacing. We would have multiple escrows all the time, just constant deal, deal, deal, deal, deal. And it was crazy because I was doing that and bootstrapping what was initially a nonprofitable property management business and then eventually a profitable one. So that was really hard work. Now, part of what's going on right now is the pace has slowed down in the acquisition, so I've got more time, so I'm going to be more involved in the property management than maybe I would optimally be.

No, I think you're obviously very clear on— I mean, it's intentional. I think what's lost is folks who are operating in their business, but it's not intentional. They're just kind of on cruise control and they haven't even acknowledged that there's a way to not do that. But it sounds like you're like, "No, there's totally a way to not do that. It's just not the path that I really want to take right now." Yeah.

And I mean, I wrestle with it because I'm like, I am consciously making suboptimal financial choices. And sometimes I feel like I'm doing it out of I can give you a bunch of reasons why it's good for our investors and owners for me to be more involved in the day-to-day. That's good. But maybe that's a rationalization. Maybe I'm just too scared to let go of the reins and delegate more. So I don't know. Look, I don't mean to say that I'm perfectly zen about this. I— there is a status quo. I am constantly thinking about whether that status quo is good or bad. And, you know, sometimes I feel like I get to a place where I'm out of balance and I'm not doing the right thing and I need to, you know, course correct. And that's just— that's— but isn't that just life?

Yeah, it totally is. I love it. So I'm going to close with a question on, on marketing. So kind of a hard pivot here. So you rather famously grew your real estate private equity business by blogging. You were pretty early in blogging and prolific. You can still go to your website, kagensblog.com, is that right? And go through a whole history of your evolution and thinking about buying property and managing it, everything like that. And I think I've heard you say more than once that was highly effective at getting you investors and probably some third-party management business. So I guess my question is, to bring this to 2022, do you feel like that's still an effective path? I guess the root of my question is, how does somebody who is trying to market a smaller property management business or even a smaller real estate private equity business, do you feel like that's still a valid path today, starting from like where where you started, like, hey, yeah, that still works, you should start blogging, or do you feel like, hey, no, things are different, here's what I would do today?

Good question. I read the book Permission Marketing by Seth Godin. Now that is what set me on the path of blogging. And the fundamental idea of that book is that old school advertising is you pay for a TV commercial that interrupts and pisses off the people who are watching the thing. And you just carpet bomb and spend, okay, and you're effectively renting people's attention. And Godin, with the advent of the internet, was basically saying, look, instead, teach, provide valuable information which people will actively search out. In exchange, ask them for their contact information to continue sharing high-quality information with them, develop a relationship with them, and they will want to do business with you. And that is content marketing. And you own that audience as opposed to renting it. Now, blogging works really well because it's your own platform. There's danger. There are much better sources of traffic. There are much better distribution channels. Twitter has been an amazing distribution channel for me. I'm sure that TikTok and Instagram are doing the same thing for other people. And LinkedIn. There are all these social channels that provide amazing distribution. The problem is that because someone else owns the platform, you're fundamentally at their mercy. Like you don't own anything. You've got this audience, but it's kind of built on quicksand. So I love blogging because it's yours. You own the domain, you own the backlinks. So I think that blogging does provide a good base, but what you're really trying to do, like, basically I think you can replicate that with an email list. So the question is, what you're really looking for is you want people's contact information and permission from them, hence permission marketing, to contact them. That's really like the, what you're looking for is emails or maybe cell phones, but like probably emails. Freely given to you, not like bought from some weird list. And so what I think is best today is probably an informative website that establishes your credibility as an expert, okay? And then serves as like a central hub where you have a mailing list, an email capture for your mailing list. But then I think probably what you want to do is to build an audience on one or more of the social channels. Use that as the top of the funnel to drive people to that website email capture. That's— I think that is— I think that's the right way to do it.

I, I love that. I think that's a great way to sort of modernize the, the generic just blog about it advice. So thank you for that breakdown. Awesome. I think we're gonna wrap it here. Moses, thank you so much for coming on the show. We appreciate your time today. This is This has been a lot of fun.

Oh yeah. Well, thank you very much for having me.

Thank you for listening to Owner Occupied. I hope you have enjoyed this episode. If you like the show and want to get connected to the community, you can follow me on Twitter @PSLohmann and subscribe to my email newsletter on my website, PeterLohmann.com. I try to share as much valuable property management content as I can on a regular basis. Thanks again for listening and have a great week.