Pivoting from a different business to real estate can be a challenge. But if you can create and maintain relationships in the space, you are going to find yourself on the path of real estate success. Join Sam Wilson as he talks to Zain Jaffer, investor, entrepreneur and partner at Blue Field Capital. Originally a Silicon Valley entrepreneur, Zain has pivoted towards real estate and he shares his journey towards financial freedom in real estate. Tune in to learn more from Zain’s story of success.
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How To Achieve Real Estate Success Through Relationships With Zain Jaffer
Zain Jaffer is a lifelong entrepreneur who started his first venture when he was a teenager. He cofounded mobile advertising startup, Vungle, which was acquired by Blackstone in 2019 for $780 million. Shortly afterward, he started Zain Ventures, his family office that boasts a diverse portfolio of real estate investments and tech startups. He also can be heard sharing his insights on the PropTechVC Podcast. Zain, welcome to the show.
Thank you for having me.
Zain, it’s the same three questions I ask everyone who comes to the show. Can you tell us where did you start? Where are you now? How did you get there?
I started in the UK as you can probably tell by my accent. I was in the tech industry. I was building websites and trying to hustle to make some money. Eventually, after a series of startups and many failures, I hit it pretty big. For years of not taking a salary as a founder, I saw all these people in real estate getting cashflow, leveraging up, taking advantage of tax-advantaged situations and assets would appreciate. I was like, “I want to get a piece of that.” When I had my exit, I decided to get involved in real estate because it was so different from being a founder.
For the people who are in the founder tech startup space, that seems so sexy, the glitz and glam. You’re in tech startups and you’re looking at this side of the equation going, “That’s where I want to be because that seems too predictable.”
I’m sure I can say our now and not your because I’m in the real estate industry. There are horror stories of tech founders who make a bunch of money, invest it into real estate and lose so much. There are a lot fewer stories of real estate people starting companies but there are a lot of stories about people getting into real estate. I struggled along the way but I found my groove so I love it. It’s an amazing asset class.
Real estate is very cliquey. It’s a lot of relationships. People always do business together.
Talk to us about that groove. What was that like? Certainly, hearing stories of tech founders who made a pile of money and then lost it all, that’s not exactly the warm welcome into the real estate world. It makes me go, “I want to get in.” Talk to us about how you got in and found your groove.
On that warm welcome, everyone who goes into real estate used to expect that the first few dealers are going to lose money. Unfortunately, if you come in with a lot of money, you’re going to lose a lot of money. That’s why it’s safer to sometimes come in as a syndicator or agent and climb your way up the value chain.
For me, I came with a lot of biases. Coming from tech, things move very quickly. Everything is urgent and needs to be dealt with now. As a founder, I’m optimistic. Coming into real estate, it was a hard lesson to learn. Things don’t move quickly. There is no urgency. Things can always wait unless it’s a tenant. You’re taking that phone call at midnight when the plumbing isn’t working. You can’t be so optimistic.
I’ve encountered a lot of dishonest people being in the real estate sector. I was quite dismayed at how much dishonesty there is and how easy it is to get taken advantage of especially when you call out. For example, I’m calling from California. The number code comes up as California and the inside joke in the industry is, “This is Silicon Valley’s 65045 number code. Prices go up 20%.” They’ll ask how much it is.
I felt that and had to try to keep a low profile to begin. I felt like I was getting taken advantage of by a lot of people, especially with the type of investing I did. I would go into tertiary and secondary markets, not immediately but eventually. In those situations, I felt that people could tell I’m not from here. I fit that stereotype of someone who is in California, trying to expand into these secondary markets everywhere. Vendors are charging you a fortune and people are milking you I feel.
It’s interesting to hear a different perspective on this because, for me, I find this to be one of the most collaborative industries in the sense that so many of us can work together on the same project towards a common goal. From capital raisers to deal finders, sponsors and property managers, I feel like it’s very collaborative on that front. It’s interesting from the outside end to hear a different perspective going, “There are also some sharks out here to look out for.” Were there other things that made you feel like it was maybe dishonest or people could be dishonest in this industry? How did you overcome those?
Before we dive into that, I appreciate it. It looks collaborative from where you are. It’s still the same when you’re in the tech world too but for a new person to break into that circle, it’s hard. I felt real estate is very cliquey. It’s a lot of relationships. It’s people you’ve worked with for a long time and people always do business together. When they do business together, that’s when they’ll cut each other a good deal and there’s a lot more honesty.
If you’re seen as someone from out of town or someone who doesn’t have staying power then you’re more likely to get taken advantage of. I find this in every industry. The dynamics are such that when you’re a vendor in the industry, you’re always doing business with other vendors and you get certain hot deals. Even in the tech industry, if you’re selling your company or raising finance once, you’re probably not going to get a good deal. If you’re buying companies all the time or you’re an agent, you’re going to get much sweeter deals. I don’t think people were dishonest as much as I was too optimistic. When you look at proformas, it’s your job to be skeptical and suddenly realize, “That proforma is if everything works out perfectly.”
I don’t know anybody who believes in a broker’s proforma.
Out of town, when interest rates are so low and you’ve got access to capital, you’re like, “I can generate a good return on this.” Also, you get focused on metrics like cap rates or one metric too much like cash-on-cash returns and you lose sight of the bigger picture. Those were some of the amateur mistakes I made coming in. It’s about the business partners you work with too. You’ve got to make sure that things are aligned. For example, I dealt with some construction people who weren’t very honest and things overrun significantly.
Those were very important lessons to be proud of because my real estate portfolio is growing significantly. I even propped it up, which was a key way to mitigate risk and find out the partners. I’m part of a platform. I’m a general partner at a private equity real estate fund called Blue Field Capital. I don’t just do family office investments. I do more investments through the private equity fund. That’s where I’m like, “I was an amateur coming in by myself. I have business partners and have access to all kinds of things I didn’t have access to. I can see why this is a game where it favors people who have relationships.”
I don’t know that’s untrue across any industry. Life favors relationships and it’s certainly there. Talk to us about that transition. You’re trying to get into it. You say, “I’m not loving what I’m seeing,” but yet you’ve moved forward and then joined the team with Blue Field Ventures. I’m not sure if you started that.
I’m joining Blue Field Capital, which is a private equity real estate fund. It has multifamily, hospitality, industrial warehouses, senior care facilities and some student rentals. We’re looking at some fun assets too like trying to roll up single-family rentals, ground-up construction of townhomes, also ghost kitchens and emerging assets like that.
The biggest learning I had was that when I came in, I diversified my family office pretty effectively. I was an LP in a bunch of funds, Bridge, Blackstone, Blue Field Capital as well and then I decided, “Let me do my stuff.” I did a variety of things. I bought single-family rentals, did hard money lending, started buying multifamily apartments and Section 8 housing. You name it. I was doing it.
The year-end came and I’m working hard trying to make this real estate sweat for me. I get the key ones from my phones and I’m like, “They’re outperforming me. How is this possible?” I put a fair amount of my net worth into funds but I wanted to leave quite a bit of side for me to play with to learn real estate and I couldn’t find them. I’m paying acquisition fees, management fees and a carry. As an LP, I’m making more money. I should have given all my money through these funds and gone to the beach and relaxed instead of I’m here dealing with the heartache of construction projects that aren’t going well.
My real estate projects were cashflowing but even then, the return did not compare. That was very humbling for me. That’s when I contacted one of the funds and Blue Field was one of these funds. I was like, “How are you doing so well?” COVID hit and I was like, “I’ve got a lot of Class C and people aren’t paying their rents anymore. Those special funds that the government is supposed to disperse aren’t being dispersed.” That’s when I decided, “I’m going to join Blue Field and do more things with Blue Field.”
If you don’t visit your properties and fly out frequently enough things get neglected and community communication starts to break down.
I can see when you have the access to debts and better access to equity capital, you’ve got all the partners coming in and construction people that you’ve worked with. In some cases, generations. Some of the partners of Blue Field have been doing this their whole life. It’s like, “I can see now.” They’re so rigorous with underwriting. Proforma is a proforma. You tear them up, rebuild them from the ground up and walk every single unit. It was those lessons where I felt like, “I’m learning a lot here.” That’s when I realized the transition into joining a platform makes more sense.
Have you unwound your other holdings on the family office side? How have you gotten yourself free from that working yourself to the bone, owning your real estate side?
I brought in better property managers. I felt like the managers you have on the ground are very important. I also felt that with anything. If you don’t visit and fly out frequently enough, things get neglected and communication starts to break. I haven’t sold off anything. I bought everything in cash. I didn’t use any debt. I’m proud of that and that means I have the holding power. I’m determined to fix these assets. I also bought a lot of assets that are very much like Section 8 housing. There’s a nice feeling about that. I’m in this tough asset class, learning a lot and making a societal impact in some way. You don’t have to evict people the way others might and you could work with tenants.
I enjoy that aspect but at the end of the day, every tax season comes and I’m flooded with IRS fines because some of my returns are late. I was overloaded with paperwork. I do probably want to get out of this eventually but I’ve got a plan in place. I’m excited to see progress, the cashflow increase and some appreciation come from. Everything is hot. We bought everything pandemic and before pandemic the family office. Everything was going up in value. I’ve had offers too. Those are more than what we paid for some of these assets but I want to see these assets improve. Some of these places were bad when I went to do the site visits. I’m seeing them improve and it’s exciting to clean it up.
What gave you the confidence to move forward with such troubled assets? Even for me as an experienced investor, I still walked from some of those things.
I grew up in a poor neighborhood. I’m not fazed as much. I’ll tell you something actionable here. It’s such an amateur mistake. I got obsessed with the price per unit. I was doing small deals here in San Francisco. I had this arbitrage. I figured where you can buy these things called TIC, Tenancy In Common units. The resell values are lower and it’s hard to get financing on but I would buy them with cash and then cashflow them. I would get a 5% cap rate or higher on condos and TICs. That was doing well pre-pandemic and it’s still doing well too even though everyone is leaving.
I didn’t want to go and stop buying 50-unit to 100-unit buildings in California. That would have been sometimes hundreds of millions of dollars and I didn’t want to take that type of risk. What do I do? I look at the price per unit here and I’m like, “These are several hundred thousand dollars a door.” Versus places like Texas, where I started buying and I was picking up things for $40,000 a door. That’s what happened.
I was like, “I can have hundreds of units.” I ended up buying 400 units across five buildings to the family office in Texas across different areas. You get obsessed with price per unit and that’s not the best way to look at it. That was one mistake. Had I known better, had business partners and relied on those representations too much, I probably would have gone to Houston and Austin and spent $200,000 to $300,000 a door because Austin rents are up at 20%. I can say that with hindsight about every asset.
With Blue Field, what’s your role there other than a capital partner or maybe a limited partner? Is that it? Is there more to it?
I’m on the investment committee. I’m a general partner and involved with everything. Sometimes I’m flying out across the country to look at assets. Everyone has to find a role for themselves and we’ve got a good mix of skillsets on the team. We set up a fund as well. It’s an opportunity fund. I brought some tech people in too as LPs, where we can go and buy assets that we think will do well for COVID. It’s pretty much everything. I’m doing site visits, analyzing the financials, interviewing property managers and figuring out what to do there.
I’m a tech guy so I have this itch. I also set up a venture capital fund with Blue Field, where we invest in technologies that can help our portfolio. It’s things that can cut our operating expenses and technologies or things that can improve our revenue like amenities. There are a lot of startups that are trying to help real estate owners maximize the value of their assets. I can’t help but be attracted to that. I also run the venture capital fund. We’ve made investments in a variety of technologies that we’re using to give ourselves an edge to improve our NOI.
What parts of the real estate industry do you see as the most glaring opportunity for tech to be disruptive?
We’ll talk about multifamily last because that’s my passion and what’s Blue Field’s focus. It’s things like hospitality assets where you don’t need a check-in desk sometimes. You can have contactless check-in and automate things through smart access control systems. That’s an opportunity I’m seeing in that asset class, for example. I’m seeing new uses of real estate, repurposing big-box retail into industrial warehouses, co-living spaces and co-working spaces. In multifamily, I see opportunity everywhere in every part of the value chain.
How do you find deals? That’s where it starts. In this business, it comes down to three things, finding deals, getting access to capital and funding your projects and managing those assets effectively. I think about technologies that can help there. Finding deals is all types of AI technology that you can use to underwrite and analyze projects. When it comes to raising equity capital, it’s an investment management platform so that you’re not using a spreadsheet like so many funds out there. You’re using something more sophisticated.
Start small and try to find a partner, especially if you’re new. Find a partner that complements your weak areas. It gives you a lot of leverage and allows you to do more.
Running the asset is my favorite part. We’ve made a ton of investments in some. There’s one company we invested in where tenants get a cashback if they pay their rent sometimes. We might incentivize tenants to say, “If you replace the AC filter rather than us spending a couple of hundred bucks and then a maintenance tech out, do it yourself and we’ll give you $50 in your app.” The customers for this company, Stake.rent, which we invested in, 84% of them have more money in their app than they do in their own savings account.
This is the problem with technology and this is the solution. Technology, the problem is, a lot of Silicon Valley tech people might fit into that stereotype living in luxury apartments and building technology for Silicon Valley. They don’t realize that Mass America, your average renter has a net worth of $6,300. Mass America lives in workforce housing. That’s where the technology can make an impact but a lot of VCs don’t appreciate the value of a $500 saving for a renter.
There’s one company we’re looking at, JoinRoost.com, where they allow tenants to tap into their security deposits when they need it. What is a tenant supposed to do? Go take a payday loan and spend 200% to 300% APR? Why can’t you take some of your security deposit back out and pay a tiny fraction of the APRs that exist? Technologies like that can help improve your rents and create a better resident experience, which is where my passion is.
It will be interesting to see where this goes in the future. It’s interesting also that you said there’s a disconnect between the tech world in Silicon Valley and then the rest of the country where it’s like, “Why does this even matter?” It matters quite a bit. It will be tremendously fascinating to see where this goes in the future and how that technology changes things. I believe we’ve had a previous guest on the show that spoke about automated underwriting. Automated going out and finding deals can cut a tremendous amount of time off the front end of even filtering through deals. How are you implementing that? What difference does that make?
This is a world of opportunity. On one side, deals die because you’re too slow. Not just die. Frankly, you die if you buy a bad deal and make stupid assumptions. At Blue Field, we’re very conservative in what we’ve been on. We put a lot of energy and emphasis on having good underwriting technologies. Sometimes this isn’t even about the technology in getting comps. It’s about going into the most basic assumptions. I’ve lost deals. We’re probably losing 9 out of 10 deals because we’re not bidding high enough.
You think to yourself, “What is the secret sauce? How are these people bidding 10% or 20% over our bet? How is that possible?” It’s a bubble. Honestly, it is what I’m seeing out here. You ask these people and I’ve asked them like, “How did you underwrite this?” What I’m hearing is, “We have to modify the model. We’re assuming the interest rates are going to stay the way they are forever, cap rates are going to continue to compress and rent inflation is going to continue to go the way it has.”
Also some of these guys are large institutional players. They can get away with providing a single-digit IRR to their investors. We underwrite for 15% net IRR to investors. You can’t compete with these funds with nonsense underwriting, overpaying and putting earnest money deposits that are high non-refundable. It’s the Greater Fool Theory. I’m not wanting to try to call the market but this doesn’t feel healthy to me.
We’re trying to stay disciplined. All the underwriting tech in the world is useless if the GPs are getting FOMO and if you’re getting pressure from your capital source to deploy capital. The LPs are like, “We’ve committed $10 million with you or more or less. We want to put it to work and you have invested that.” The pressure is to go do more deals.
Also, the incentive for most GPs is to charge a 1% or 2% acquisition fee on the asset. The more deals they do, the more track record they can build. I don’t want to play that game and our partners at Blue Field don’t want to play that game. We’ve delivered a net IRR of about 33% realized to our investors even before I joined. For years in a row, investors have multiplied their money with us. We don’t want to give in to this situation. It doesn’t feel healthy to me.
That’s interesting that you say that. I didn’t plan on going there what your view is on the market. Other than staying disciplined and buying only the deals that make sense, are there any other strategic initiatives that you are employing, preparing you for a market correction?
Anyone in the investment management game who is doing what they do is also guessing where the market is going. We’ve taken an approach to go after assets that are at the right size. They’re not too big or too small. It’s a little bit too big for mom-and-pop guys and most of those people who want to sell. It’s a little bit too small for private equity. We’re talking about assets that cost between $5 million to $50 million. That’s our sweet spot and where we try to deploy capital. $5 million is too small for us for buying all cash. $50 million is about the right size and I will only put in $10 million of an equity check.
We’re still buying after secondary and tertiary markets where there’s fundamental solid population growth. There is good diversification of the job or the employment situation. You don’t have too much concentration in one type of employer base. The fundamentals need to be good. I’m also looking at other asset classes. The cost of construction is going down relative to the purchase cost of new buildings or it is a brand-new construction. That’s tough for us because we have some funds where we want cashflow. I can’t do those deals in those funds because the cashflow is not going to be there if it’s construction.
We have all of these side deals with different LPs where we’re building townhomes, for example. That’s a niche I love. With COVID, people want more space. 1,000 square feet to 1,800 square feet townhome with a garage with some land is appealing. Some of the things we’ve done are 100% occupied. They produce cash in year 2 and year 3. You have to get through the first year of a cash-crunch situation. We do things like that and we typically wouldn’t have done in the past.
Zain, this has been a blast. I’ve certainly enjoyed it. Thank you for taking the time to cut you out of your day to come on the show and give us an inside view of what it looks like to come out of Silicon Valley. Start a family office, get involved in real estate some of the things you’ve loved and haven’t loved so much and the pitfalls that a lot of us need to avoid. One of my last questions is always this. If there’s one mistake you can help readers avoid in real estate, what would it be? How would you avoid it?
Start small and try to find a partner, especially if you’re new. If you find a partner that complements your weak areas, it gives you a lot of leverage. 1 plus 1 is always more than 2 usually. Don’t get obsessed with economics initially. Get a track record under your belt. The more deals you do and track records you have, the easier it is to raise capital. I’m telling you that as an LP. I invest a lot, probably less so now than I did previously but I’ve invested in probably twenty different real estate people or funds. A track record is important. It’s not like a startup. I don’t want to be the first check and pay for you to figure it out.
The next question for you is this. When it comes to investing in the world, what’s one thing you’re doing to make the world a better place?
Outside of the affordable housing situation and investing in those types of technologies, I have a foundation. A lot of what we do is anonymous but we’re going to be releasing some things publicly at some point. I’m the executive producer as well in a few climate change documentaries. These climate change documentaries are focused globally in areas like India and look at the actual impact of the people on the ground, the villagers, fishermen and fisherwomen. That’s becoming a bit of a passion for me.
Zain, I have certainly enjoyed this. If our readers want to get in touch with you or with Blue Field Capital, what is the best way to do that?
You can follow me on Twitter @ZainJaffer. I’m on Twitter quite a bit. My family office portfolio is Zain-Ventures.com. If you want to get in touch with a startup, I mentioned Stake.rent. I’m interested in that. It works well for affordable housing. The other one was JoinRoost where people can tap into the security deposits. Both of these we’re using in our portfolios and it’s part of our secret source on that asset class.
Zain, thank you so much for your time. I do appreciate it.
Thank you so much.
Important Links:
- Vungle
- Zain Ventures
- PropTechVC Podcast
- Blue Field Capital
- Stake.rent
- JoinRoost.com
- Previous Guest – Reid Bennett on Multifamily Investing and the Affordability Housing Market
- @ZainJaffer – Twitter
- https://www.Linkedin.com/In/zainjaffer/
About Zain Jaffer
Zain Jaffer is a lifelong entrepreneur who started his first venture when he was just a teenager. He co-founded mobile advertising startup Vungle, which was acquired by Blackstone in 2019 for $780M.
Shortly afterward he started Zain Ventures, his family office that boasts a diverse portfolio of real estate investments and tech startups. He is also currently a partner at Blue Field Capital. Zain has become a respected voice in real estate and can be heard sharing his insights on the PropTech VC podcast.
