Earning through passive investing is a dream for many, but how do we do it wisely? In this episode, we welcome Lee Fjord to discuss the importance of evaluating deals thoroughly before submitting an offer. He mentions why he avoids anything with a shorter-term horizon in order to keep his deals flexible and able to meet the needs of his clients. Listen in for more practice advice when approaching property investing.
Lee Fjord is a results-driven, goal-oriented professional real estate agent and investor with a “go-getter” attitude, currently focusing on brokering commercial real estate transactions throughout Greater St. Louis and surrounding markets. He approaches each client with the goal of meeting or exceeding all of their expectations to ensure the creation of “long-lasting” and trusted relationships.
[00:01] – [12:43] Pay Attention to Debt – Impact and Implications
- The caveat to purchasing older properties
- Lee on the types of debt to avoid – shorter-term horizon and less security
- Realizing the value of the assets and the impact of debt on cap rates
[12:44] – [21:58] How to Build a Business to Sell
- Lee shares his thoughts on growth markets around the US
- What it takes to scale a management business
- The key to building your team is to find those with relevant experience
[21:59] – [24:11] Closing Segment
- Reach out to Lee
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- See links below
- Final words
Tweetable Quote
“Focus on the type of debt that you’re placing on the property. Because at the end of the day, that’s what’s going to, you know, save or kill your deal… If you didn’t plan that out accordingly or properly, or you didn’t execute your business plan perfectly to hit that, you might be in for some trouble.” – Lee Fjord
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Connect with Lee Fjord on Linkedin. Check out his website and email him at lee@greenforestcapital.com.
Resources Mentioned
Built to Sell by John Warrillow
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Want to read the full show notes of the episode? Check it out below:
Lee Fjord [00:00]
We focus on the bottom line of the debt, you know, focus on the type of debt that you’re placing on the property. Because at the end of the day, that’s what’s going to, you know, save or kill your deal. At the end of the day, if you’ve got the wrong data on whether that’d be the rate or the terms, or the horizon. If you didn’t plan that out accordingly or properly, or you didn’t execute your business plan perfectly to hit that, you might be in for some trouble.
Intro [00:26]
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson [00:38]
Lee Fjord is a multifamily syndicator based out of St. Louis, Missouri. He’s the founder of green forest capital, and they do value-add multifamily assets in the Midwest and the Southeast. Lee, welcome to the show.
Lee Fjord [00:49]
Sam, thank you. Thank you. Thank you. Thank you. I’m really excited to jump on the podcast and bring some value to your audience.
Sam Wilson [00:58]
Oh man, this would be a good time. Three questions I ask every guest who comes on the show in 90 seconds or less? Where did you start? Where are you now? How did you get there?
Lee Fjord [01:06]
started in the trenches as a property manager. I, you know, am now a full-time investor syndicator with 588 doors under my belt. Roughly five deals have gone full cycle on a 38 unit that doubled in value in 30 months. And I got there by partnering with amazing folks who rely on me and my team to be able to execute, you know, the business plan with them and on the RAF.
Sam Wilson [01:36]
Love it, man. That’s fantastic. And you guys are exclusively focused on the multifamily market.
Lee Fjord [01:42]
Absolutely. So, bread and butter value at apartments in the Midwest and southeast. That’s what we do workforce blue-collar housing. We provide wonderful, clean, modern places for people to live and grow and become the best versions of themselves.
Sam Wilson [01:59]
When you say workforce housing, it conjures in my mind, a 1960s 1970s build classy c minus needs a lot of work. dispel that myth for me, if you can, please what is workforce housing to you.
Lee Fjord [02:15]
So workforce, and I consider more blue collar housing where it is, you know, it’s the it’s the place where the guy who changes your oil lives, it’s where you know, his wife or fiance who is the assistant manager at Applebee’s lives you know, where they, you know, maybe they start a family or maybe it’s the place where you’re, you know, a postal worker who is now you know, retired and living on fixed income lives out, you know, the remainder of their years until they need you know, a place to place to go so those are kind of the two major demographics that we provide housing for our people that are eventually going to be homeowners and people who are no longer able to maintain or want to maintain a home but aren’t a class people they aren’t granite countertops and stainless steel you know appliances type folks, they’re you know, regular everyday people age we generally focus on 1980s or newer, we try to buy newer assets because they carry with them a lot lower level of deferred maintenance, you know, so on and so forth. So 1980s or newer, generally is what we try to try to focus on
Sam Wilson [03:29]
what are you guys doing? I mean, the theme that all of us here probably at every conference every podcast we listen to we hear workforce housing or we hear the term affordable housing, which I don’t even know how you define what affordable is but I digress. Affordable housing all these things it’s like how are you finding opportunity right now are you finding assets that pencil that then you know are able to meet the demographics needs that you you guys serve? I guess I see a lot of garbage assets out there how are you guys finding the right assets in today’s market being as competitive as it is?
Lee Fjord [04:07]
My trash bin is full of garbage deals that I’ve just thrown you know, you look you evaluate your view, you toss you look, you evaluate your review you underwrite then you toss you look you evaluate you underwrite your submitted offer you toss it, look you underwriters, you submit an offer, you get approved, then you do inspections, then you toss. I mean, it’s a process and it’s a full time job of you know, picking the needle out of the haystack the right opportunity. We don’t buy deals that Jen that don’t work or at least obviously everyone wants to say we do that or you do your best to do that. But at the end of the day, we have some pretty stringent requirements on the type of asset that they were willing to acquire. I agree there’s a lot of people that did dumb deals over the course last couple of years. You know, we we focus on the bottom line on the debt you You know, focus on the type of debt that you’re placing on the property. Because at the end of the day, that’s what’s going to, you know, save or kill your deal. At the end of the day, if you’ve got the wrong debt on whether that’d be the rate or the terms or the horizon, if you didn’t plan that out accordingly or properly, or you didn’t execute your business plan perfectly to hit that a year, and you might be in for some trouble. So yeah.
Sam Wilson [05:25]
Absolutely know that. That’s super insightful. Tell me about what you guys today is, oh, we’re recording this October 25, of 2022. So I’m not sure exactly when this will go live. But for those of you who are listening know that this is relevant as of today. So tell me what are you guys seeing on debt terms right now? And how are you securing that in such a way that it makes sense to you?
Lee Fjord [05:48]
Each deal is different, but one, and generally, a different type of debt type is applied to each deal type. So what I will say is we don’t do any form of bridge debt, we don’t do non recourse bridge debt that has a, you know, a shorter term horizon on it. Historically, we do either longer term agency debt options. Or we will do bank debt, where we literally put our name on the line, where we put our deposits on the line with the bank in order to negotiate better quality terms with that local lender, which not a lot of syndicators are willing to do. But we are on the right deals on the right side and the right areas. So bridge bank is how we do it bank that right now we’re seeing in the mid to low sixes. So like six and a quarter, six and a half is what I’m getting right now on bank on bank debt quotes. And then on agency, it’s slightly lower, we’re in the high fives, you know, on on agency debt options, which considering that literally in December, a year ago, less less than a year ago, we locked in a 10 year note below three and a half. So for three and a half to five and three quarters is a big deal.
Sam Wilson [07:12]
That’s a really, really big deal. What has that done to your projections, if anything?
Lee Fjord [07:20]
so we focus on the value of the deal and what size of debt we can do. So the proceeds on the loan are going to be I don’t know, let’s call it seven and a half million, the most I’m going to be able to pay for that property is $10 million. Now the brokers right now, which I used to be one with a publicly traded company, right now they’re trying to sell buyers on Oh, no, it’s just lower leverage, you just the property still worth 12, you just can only get seven and a half and dead on it. So it’s still it’s still a $12 million property even though it doesn’t qualify for the right amount of leverage. Or you can go get bridge that good luck with that, too. So no, prices are coming down sellers are realizing that you you know the value of your asset and is based upon the amount of debt you can take on it. So what’s literally cap rates are directly correlated to debt cost. So yeah, those two are projecting five, four, and a quarter four and a half cap rate exits now or next year, or good luck to them.
Sam Wilson [08:31]
Man that’s in this is a point of contention, where I hear this argued both ways. You know, in in Illinois, anybody’s necessarily 100%. Right. But I have to agree with you. I mean, it’s like it just doesn’t make sense. I had somebody shipped me a deal literally this morning. And it was just the the bike cap rate was below the cost of or I guess above the cost of debt, whichever one Oh, look at that. Yeah, he was like wait, like, the day I buy this. I’m paying more for the debt than what this produces like this is I don’t care what the value add plan is like, now we’re gambling. That’s assuming that you can go and execute a value add plan and increase revenues, blah, blah, blah, and then cover that no, like, it’s just not going to work. And I think I think there will be a reckoning, it’s going to take a minute to use to use a term. But it’s it’s going to take a while for this to work out. We’re finally I think sellers are going oh, I’ve been sitting on this for a long time and I can’t seem to move it was because you’re asking too much for it doesn’t make sense.
Lee Fjord [09:30]
Yeah. Well, you know who the last person is to find out how much the property is worth. Right? Who’s that? The seller?
Sam Wilson [09:40]
And I think I think that’s painfully true. One thing I want to circle back on is your story of coming from the property management side of things. I’ve often wondered. And maybe that’s the entrepreneur and me but there’s always a head scratch when I’m like, wait, you understand everything about this business? Why are you still in the property management side? Now? I’ve been out, that’s the business they built great. But a lot of times I see people working in property management, and they know more about how to own and run a big multifamily property that I would argue.
Lee Fjord [10:12]
Yeah. Oh, yeah, you learn in the field; that’s where I learned, yeah.
Sam Wilson [10:17]
How did you then get the bug and say, “Wait, I want to, you know, move over to the ownership side and not be in the employee slash property management side?”
Lee Fjord [10:26]
I was lucky enough to have someone come into my life who kind of brought me under their wing and told me, you know, Lee, this is great, what you’re doing, you’re learning all these skills, but what are you gonna use them for? And it was like, and then it was, I don’t know, and he goes, eventually, you’re gonna own things. And I go, Okay, tell me what that’s like. And he’s like, Well, I got started, essentially, you know, from the bottom where you were. And now, you know, at the time, he was the guy who doesn’t even have to bother posting about their plane on on Instagram, or Facebook, because he doesn’t care. You think he’s got the place and Aspen and the place, beachfront house in Malibu, and literally, he’s one of those people that couldn’t care less, right. And that’s who I would eventually want to be as the guy who, you know, couldn’t really care less and learn from him. It was you own things. That’s how you, you know, how you become wealthy and not by feeding things or building a, you know, theoretically building a property management business, but you’re just building the business, what do you do with businesses, you run them, and you sell them? Right? And you make take that money, go buy things with it? Right? So then you own it. So the only reason why you go vertically integrated is to sell the business and he who builds a vertically integrated business in order to make sure it’s done right or whatever. It’s like, no, now you’re, once again, you’re still doing it wrong. You build a business to sell just like you, you know, that’s what you build a business for.
Sam Wilson [11:58]
Yeah, no, that’s, that’s absolutely right. I think it was. influential book for me was John Warrillow is Built to Sell never read, it was like, Oh, I actually owned a company at that point in time when I read that book, gosh, going on a decade ago now. 13 years no, yeah. Anyway, a while ago, and it was kind of the lightbulb moment was like, Oh, wait, I’m building this so I can sell it like that’s that’s the that’s the point of it is to is to build this to sell it and then setting it up such that I could sell it was was a great a great first move. And that was that was really influential for me how you guys are kind of buying things that are maybe off the beaten path of other investors like a lot of people who you mean if I hear Dallas Fort Worth multifamily syndicator again, it’s like that’s great. Now you guys are doing it and you’re crushing it. But there’s more markets than that. And you guys have found a unique way to get into some smaller niche markets maybe that don’t have the demographics that a Dallas Fort Worth might, how are you underwriting those in such a way that you feel like it makes sense but then also not just justifying it but then making those opportunities work.
Lee Fjord [13:11]
So we I love growing tertiary markets outside of, you know, top 40 MSS. That’s what I love, where the people live, where the growth is generally happening is you know, where you can really jump in and make a big splash is in those municipalities that are you know, 50 to 100,000 You know, that is where I find you can still buy assets directly from the original owners where you can go find a mom and pop sitting in the office chain smoking marbles, maybe not them but you know somebody I’ve seen it before. Sure, I haven’t bought one from one of those yet but you see it all the time in these smaller markets. You do have to plan accordingly for your exit though you have to determine who your future buyer is ahead of time and what are they or how are they taking out debt what is their most likely level of you know, spread between rate and cap rate that they’re willing to you know, adhere to or or apply the purchase towards, and we increase that spreads. So normally the spread is 100 basis points. Sometimes in a major MSA like Dallas or Atlanta that’s growing or whatever it might be more like 75 So if you’ve got 5% debt you can buy a deal it’s a five and three quarter cap whatever. So ours is spread a little bit wider it’s more like 150 basis point spread. So you know if we are buying it we believe that in debt or is going to be five and a half we plan for a seven cap exit you know and if we do better that’s great. But we generally also look for below institutional size investment properties but also above you know your standard mom and pop so we only look generally for 100 Plus, occasionally we’ll make a small exception, like on this current, you know, future one that’s just below by about, you know, five or six units, whatever. But I’ve tried to do it with the 70 unit, I’ve tried to do it with a 76 unit, I’ve tried to do it with a 38 unit, and it just doesn’t work. So you gotta go 100 Plus, or compile multiple assets. And we like, yeah, you know, county see diverse, diverse economy, in, you know, areas that are a little bit more landlord friendly, as well.
Sam Wilson [15:32]
Yeah, absolutely. Now, have you guys built since you have a history in property management, are you guys vertically integrated now?
Lee Fjord [15:37]
So we rely on third party, professional management groups to be able to jump in and run the day to day aspect of the asset, you know, well, and execute our business plan. My role is putting together deals, finding creating relationships with investors, and then asset managing the deal, and then executing the business plan, making sure that we are building putting the roofs on properly with the right contractor make sure that all that is done. Management is a very low margin business. Our company they recently took over the 138 unit earns 3.5% of the gross monthly 3.5% of the gross, okay, yep. I mean, that’s after all expenses and everything. And that is directly our full profit margin or whatever. But when you add it all up that one property, that one three and a half percent, it barely equates to a full time salary, level of income for that company and profit. But if you eventually you have to scale, you have to have you know, whatever 40 projects that you manage in order to have it make sense, right? Yeah, yeah. Theoretically, one day, but I don’t know, I’d rather build a, you know, a brokerage business because quite honestly, the profit margins on brokerage are much, much greater brokerage, or construction or, you know, whatever.
Sam Wilson [17:14]
That makes a lot of sense. Thanks for taking the time to break that down for us. Tell me what are some things from your experience in property management, maybe that you look for that other people may be would not.
Lee Fjord [17:27]
they need to have direct experience in managing perfectly similar assets in the exact same market. So if I’m looking for someone to manage my 138 unit in Arkansas, they need to already be managing 100 Plus apartment complexes within a 45 minute radius of that exact property has to because the last thing you want is to bring somebody in who has to create all new relationships with service providers, whatever, staffing, that’s the that’s the bottom line with management, it literally all comes down to who is your who are the people, the boots on the ground, people making sure to execute the, you know, the top of the funnel business plan? And how well are they trained? And how well are they managed? And how much? You know, how often are they, you know, increasing the amount of training and expectations and all of that? How professional are they? Are they college grad type people? Are the AC certified people? Are they just some guy with a rusty pickup truck and some person who has a residential real estate agent license?
Sam Wilson [18:39]
Like, understood? No, I think that’s that’s incredibly helpful. Have you ever had trouble finding a management company that met your criteria?
Lee Fjord [18:48]
Oh, absolutely. And in that case, I won’t go into the market. If I don’t have a management company identified who’s ready to take over an asset in that map in that township or municipality or location, then we just don’t we’ll, you know, that’s the most important the most important part of the business plan. It’s not can I get the money from the investors? Is it in a you know, is it in you know, Texas, like, not every part of Texas is good, by the way, just let you know, there are some some really bad places in Texas to invest your money that aren’t very far outside of Dallas or Houston or Austin, like, good luck. So you know, it just so long story short, the manager if you don’t have that lined up and you don’t have a qualified manager, then we don’t go there. We’ll just pass on the deal. You know, but usually that’s part of the process in establishing the markets that we look for deals is do we already have a manager there ready to go?
Sam Wilson [19:47]
Yeah, that’s that’s awesome. And would you recommend that to somebody that that’s kind of where they start?
Lee Fjord [19:52]
Always. Build your team and not just have your you know, like your, like sponsorship group? you’re you know, but all your all of your subcontractors, your insurance broker, your property manager, your, you know, your loan broker, make sure that you have someone who is lined up ready to go experienced and doing stuff. And who is ready to go to, you know, go to that property or knows how to do it already. And also a team who qualifies to build your team based upon the types of deals you want to do, or limit the deals you choose to look at to the deals you can take down or have experienced doing.
Sam Wilson [20:35]
I think that’s great. That’s great advice. A when you rewind your investing career, what’s one thing you’ve like, you’ve done really well, that other people should emulate?
Lee Fjord [20:44]
One thing I’ve done really well, you know, I, I have done my best to create connected personal relationships with my, with my management staff, with my partners with the subcontractors that I work with. You know, it’s this isn’t just it is real estate is not, you know, Monday through Friday, nine to five, you get to know people in the evenings and the weekends and, and in the early mornings before the sun has come up. And that’s when you get the extra mile out of people and with people you know, they want to see that you are willing to do it. I literally was the guy at my very first decent sized property picking needles out of the bushes with my well not bare hands. I was wearing gloves. But that’s just the type of property that you start I started with I started with a D that I turned into a sea. And you know, it started with cleaning out the landscaping and getting rid of all of the the needles and the band aids.
Sam Wilson [21:59]
Absolutely. It’s in your reps in you’ve got to get your reps in. And that’s yeah, kudos to you for for pressing on and getting beyond beyond that stage and then finding a course now your guys’s niche in the in the criteria that you’ve really developed it sounds through a lot of experience, you know, the criteria used to buy and just how you you know work with property management you’ve shared so much with us here today, just on your investing journey. That’s been super insightful. Thank you for taking the time to do that. Lee, this has been an absolute blast. Thanks again, for coming on the show here today. Last question for you is this if our listeners want to get in touch with you or learn more about you what is the best way to do that?
Lee Fjord [22:38]
The best way is on I’m on my website. It’s green forest capital.com. You can also find me on Facebook. There aren’t many fiords li fjord FJ already out there. You literally typed that in. And pretty sure I’m the only one that I know of. So find me on Facebook, send me a message. I personally know all of our investors, they have my cell phone number we are we love partnering with people who are not interested in being a landlord driving around town and a rusty pickup truck with a weed whacker in the back. You know your time is better spent allowing and working with other people who have already made the mistakes Been there done that and can help you avoid those things. I wish somebody would help me avoid them. But instead I just became the guy who does them does learn from my mistakes.
Sam Wilson [23:34]
Absolutely. And we’ll make sure we include that there also in the show notes Lee, thank you again for taking the time to come on the show today. I certainly appreciate it.
Lee Fjord [23:43]
Thank you.
Sam Wilson [14:34]
Hey, thanks for listening to the How to Scale Commercial Real EstatePodcast if you can do me a favor and subscribe and leave us a review on Apple podcasts, Spotify, Google podcasts, whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show it helps us both attract new listeners as well as rank higher on those directories so appreciate you listening thanks so much and hope to catch you on the next episode.
