Keith started in commercial real estate sales, which provided him with the foundation of knowledge to build a successful real estate investment company. He built Dual City Investments on the foundation of fidelity and integrity, and he is always looking for areas of improvement and a desire to do things differently. He has a diverse background in federal law enforcement, entrepreneurship, and education, and is a published author.
In this episode, he talks about the tax strategies used to invest in real estate and the funds you can invest in.
[00:01] – [04:01] From Federal Government Employees to Real Estate Investors
- He and his partner started with real estate syndication and exited with about 25 deals
- Keith is now focused on industrial assets
- Scaling on different classes without losing focus
- Sometimes the assets you didn’t think would perform are the ones who bring you cash flow
[04:02] – [10:16] Closed-End vs. Open-End Investments: What’s the Difference?
- Keith talks about the advantage of being a liquid investment
- There are significant differences in the structure, pricing, and sales of closed-end funds and open-end funds.
- The best time to move to an open fund
[10:17] – [15:22] What Is A 721 Exchange And How Does It Work?
- Not a fan of the 1031 exchange? Try the 721 exchange
- Keith will strengthen his marketing efforts
- Let the people know how they started, what they offer, and eventually work with accredited investors who believe in the same vision
- The one thing Keith believes he’d done well that people can emulate
[15:23] – [16:42] Closing Segment
- Reach out to Keith!
- Links Below
- Final Words
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Connect with Keith for real estate investment opportunities! Visit the Dual City Investments website now.
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Keith Nelson: If cap rates rise, and we’re in a closed-end fund that might hurt our exit in this fund we could continue to buy. So in turn with that 721 Exchange, we can offer units in our funds and absorb a property and then that owner their equity becomes you know, part of that fun, right so you know, then that’s tax deferred until they want to exit and then once they exit the regular you know, capital gains taxes will apply to them. But if they request you know, a cash out at any point, that portion of the cash out is going to be, you know, taxed as a as a regular exit on real estate.
[00:00:50] Sam Wilson: Keith Nelson has a diverse professional background, he has the experience needed to adjust and overcome obstacles and challenges that he is confronted with in the investment real estate industry. Keith, welcome to the show.
[00:01:01] Keith Nelson: Hey, thanks for having me.
[00:01:03] Sam Wilson: The pleasure is mine. There are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now? And how did you get there?
[00:01:10] Keith Nelson: Okay, well, if you want the full story is gonna take longer, 90 seconds. But I started in a car with my partner. We both worked for the federal government. We were on surveillance. So that’s where this whole concept started. How we got here, we’ve we started with syndication, real estate syndication, we’ve exited about 25 deals. And we’re currently on our second and hopefully final real estate fund.
[00:01:38] Sam Wilson: Second and final real estate fund exited 25 deals, what asset class?
[00:01:44] Keith Nelson: We started in multifamily. But we have experience in pretty much every asset class right now. So multifamily storage office, hotel, even land development lots. I mean, we’ve done it all.
[00:01:59] Sam Wilson: Right. Is there anything right now that you guys are particularly focusing on?
[00:02:06] Keith Nelson: Strong focus on findings on industrial assets. You know, with the latest bills passed about bringing manufacturing back home, I’m from the southeast. So there’s a lot of projects, I think they could plant like 5 million square feet of industrial development. So we’re focused on that right now. But it’s not the same, we wouldn’t, you know, take on any deal that had the right opportunity.
[00:02:31] Sam Wilson: How have you found an effective way to scale, you know, being so broadly focused? How, how have you done that? And because obviously, you guys have found a way to meaningfully scale into a lot of different asset classes. I guess, if I can find the right question, how have you found a meaningful way to scale into so many different asset classes without experiencing I guess, dilution with your focus?
[00:02:55] Keith Nelson: Great question. We, like I said, we started in multifamily, that industry got real tight. And we pivoted over to self storage that industry’s gotten real tight, real compressed cap rates. Really, we tested this model out on our first fund, which was a closed-end blind pool fund, and we started with multifamily. Then we went to class A office, we had a boutique hotel, and we had self storage with some landlords. And through COVID, we actually proved that concept because we saw our multifamily, which we thought was a very strong asset, you know, all the moratoriums they put on, people weren’t paying rent. So that stopped cash flowing. But our other assets sometimes is the one that we didn’t think would perform that great, such as a boutique hotel, where we’re carrying the cash flow or fun. So throughout COVID, we didn’t miss a distribution. So we had since exited that, but that kind of proved the concept. And we wanted to move that over to a more open-end fund, which we started now.
[00:04:00] Sam Wilson: Got it. And so the first fund you guys did was you call it a closed-end blind pool fund. How does that differ, you, said you’re in right now you’ve got to open-end blind pool fund. Is that right?
[00:04:12] Keith Nelson: Yeah. So so closed-end means we’ve raised capital for a certain amount of time. And then we have X amount of time to deploy that capital. But then once it’s deployed, you know, that’s it, there’s no more raising, you know, we have a set horizon on the fund. So we close it out after five years, and, you know, if successful, everyone made their, you know, 20% IRR and you know, they went home, but we feel like if we were able to continue to reinvest and compound those investments, we feel like we could have blown that up. We started we were going to launch our second fund right before COVID. And no one wanted to lock up capital then just no one. You know, everyone thought the world was going to end. As did I, I didn’t want to lock up my own capital. So, we went to more of a debt structure, we did that for about a year and a half. And we gave the people option of, hey, look, we don’t like, you know what we’re investing and you can take your money. So, so that’s what we, we structured our this other fund around where we’re more structured like a REIT than a private equity fund, but we are d it is private equity. And people have the ability to come in and out. So I tell people all the time, like, you know, look, if we, we start buying stuff that you don’t agree with, then you know, request your capital. So, you know, we plan for them. And we went, you know, for that not to happen, of course, but that was the benefits that we like to offer.
[00:05:40] Sam Wilson: Got it. Can you quickly break down for us the difference between the closed-end fund and the open-end fund? I mean, obviously, there’s the open, and then it closes, but well, I guess strategically what benefits you and what are some, I guess, things to consider on whether you pick one or the other?
[00:06:00] Keith Nelson: Yeah, so like I said, the compounding returns, right? So if we sell an asset in the open-ended fund, we could go redeploy that capital, right? So if there’s a margin that we’ve made on that asset, we go redeploy it, you know, put, leverage it, put that on it, and then the returns will hopefully go up for all the investors as well, the unit price of the units now. So instead of one sort of one cash out at the end of the term, you know, we leave it up to the investor where, okay, well, we reevaluate the share price after certain raises that we have, right? So we plan to do it yearly or not that we just launched it this year. So we’re not at that point yet. To answer your question, it’s the compounding effect of reinvesting capital after we get exited exit a property.
[00:06:49] Sam Wilson: This is kind of a newer, you know, I haven’t talked to a lot of people about this concept. I’ve never done a fund myself. So my question is going to kind of be somewhat from an ignorant point of view. But is there so on an annual basis, you guys reevaluate the share price, I guess, of the fund. So, you know, every 12 months, you say, Okay, well, last year, it was worth 10 bucks this year, it’s worth 12 bucks a share whatever it is, I’m just making it up. Is there a potential that you could ever have a run on the fund?
[00:07:18] Keith Nelson: Run as with the withdrawals?
[00:07:20] Sam Wilson: Yeah.
[00:07:20] Keith Nelson: But it is a private equity fund, we’re not a publicly traded REIT or anything. So you know, we specify that if we have the liquidity available, you can exit the money. But, you know, I tell investors all the time, like, Hey, this is not a, you know, in Oh, crap scenario, where well, World War Three breaks out, everyone wants to take their capital out, it doesn’t work like that, because there’s not going to be the capital there. Right? It just a benefit. We like to offer investors where, you know, if someone’s got money invested, and they want to know, by Lakehouse, or, you know, a Porsche or something, they have the ability to take it out. It’s not locked up for X amount of time.
[00:07:56] Sam Wilson: Right. But you guys still retain the ultimate yes or no authority on that? You can say, hey, look, you know, you can’t withdraw right now, because there’s just the liquidity is not there. Is that right?
[00:08:08] Keith Nelson: It’s actually written in there. If it is there, then we’re required to but if it’s not there, then yeah, no, we can’t, we’re not going to, you know, dilute, sell off assets to, you know, cash somebody out, because that could hurt the overall plan on fund. So, if the liquidity is there, we are, you know, required to meet that.
[00:08:28] Sam Wilson: Are there any reporting requirements that are different in an open-end fund versus a closed-end fun?
[00:08:36] Keith Nelson: No. I mean, the only other, I guess requirement is, we do use a third party service to to evaluate the unit price, or sorry, the asset values, and then it’s just simple math to do to calculate the unit price. But other than that, now, there’s, like I said, we’re still private equity. So we still, you know, it’s still a reg D filing, it’s not a it’s not a REIT, with REIT comes extra reporting and all that so we are still private equity just structured similarly to REIT.
[00:09:07] Sam Wilson: At what point in $1 amount, I guess, or maybe there’s a wrong question to ask but maybe I can think about it but assets under management at what point in in that process is it makes sense to move to an open-end fund is there like hey, you need to have 100 million needs to be you know, 2 billion, whatever it is like what’s the what’s the number for you where you figured out that it makes sense to move to this model?
[00:09:31] Keith Nelson: No. Like I said, we just launched this year. So we’re fairly new. There’s no minimum dollar amount tha, there is a minimum, I mean, it does make sense if you’re moving this structure to a private or public REIT, which we are set up to do on our docks. But we’d have to be over 100 million AUM to even consider that just because there are so many other extra expenses with running a REIT versus a private equity fund. But now similarly, it’s really not that much different than a typical fund or a typical syndication.
[00:10:03] Sam Wilson: Yeah, no, that’s really cool. Thanks for taking the time to kind of break down some of the nuances of that for our listeners, I know that’s gonna be an interesting topic, and something that we don’t get to talk about a lot. So appreciate you kind of sharing your thoughts on that. One other thing that we had talked about, that you guys have as an option in this fund is what you something about a 721 exchange, I think you had mentioned to me, before we kick this off, what is that?
[00:10:26] Keith Nelson: Sure. So I mean, I guess the backup, which goes along with the 721, you know, another benefit of us having this open-ended fund is we’re able to buy and sell through all the market cycles, right. So, you know, cap rates rise, and we’re in a closed-ended fund, that might hurt our exit in this fun, we can continue to buy. So in turn with that 721 Exchange, we can offer units in our funds, and absorb a property, and then that owner, their equity becomes, you know, part of that fun, right, so you know, then that’s tax deferred until they want to exit. And then once they exit, the regular, you know, capital gains taxes will apply to them. But if they request, you know, to cash out at any point, that portion of the cash out is going to be, you know, taxed as a, as a regular exit on real estate.
[00:11:16] ] Sam Wilson: So let me get this right, you’ve got a seller that wants to sell a property and they can sell that property into your fund, essentially tax free on that initial sale, is that right?
[00:11:30] Keith Nelson: They could exchange it right. And yeah, it’s not a sale, so we absorb their interest in their LLC, you know, sometimes we’d have to, you know, bring capital to pay off their loan or, you know, cash out a partner or something like that. But then they if they’re interested, they become an equity, part of, you know, an LP interest in into our fund. So that coupled with that open-endedness, you know, gives us the ability to just keep churning and compounding the returns. And, you know, it’s so far so far, it’s working out pretty well.
[00:11:59] Sam Wilson: And so from a tax deferral standpoint, that’s beneficial to the seller.
[00:12:05] Keith Nelson:That is correct.
[00:12:05] Sam Wilson: Right. Okay.
[00:12:06] Keith Nelson: So those people that are not fans of 1031, perfect, perfect for that, which I’m not a fan of 1031. So I found this, this code a couple of years back and figured out how to work it into, our private equity fund. And, you know, so far it’s, it’s, we’ve done a couple 721 exchanges, but like I said, we’re just kind of getting our wheels rolling here.
[00:12:32] Sam Wilson: Yeah, no, that’s really cool. That’s something until the day I’ve never even heard of. So that’s really cool. How do you have that conversation with the seller? Is that something you guys go to? I mean, is it every seller, you say, Hey, we have the potential to 721 exchange this?
[00:12:48] Keith Nelson: Generally will, we’ll want to buy that asset regardless, so we’d probably lock it up under you know, regular cash purchase. And then we may have that conversation. If it fits. Sometimes it doesn’t fit, you know, sometimes it fits great. Sometimes there they can increase their cash flow by coming over. Sometimes it doesn’t, you know, we’ll be honest and open with them and tell them it’s probably not worth it. So, depends on the situation depends on what asset it is.
[00:13:17] Sam Wilson: Right. That’s really interesting. One of the things we talked about off air was you guys are in the middle of a big marketing push. Sounds like you guys have done a lot of deals, you’ve done a lot in a lot of different asset classes. You got a lot of experience under your belt. What does that mean? A big marketing push.
[00:13:34] Keith Nelson: Well, for us, that means starting marketing. We’ve never, we’ve never done anything. I think this is like my third podcast, or, you know, in the like, the eight years we’ve been in existence. So yeah, we’re just we’re just trying to get the word out. Now. It’s, it’s, it started off as friends and family I told you, me and my partner, you know, we’re on surveillance and came up with this idea of, you know, what builds wealth and why are we sitting in a car, you know, eating pizza and using porta potties as the restroom, but, you know, real estate is obviously a huge wealth builder, and we kind of wanted to bring it to our friends and our family and that’s how we started. So we’ve grown just by word of mouth. But now you know, we’re looking outside for you know, more accredited investors that are like our plan and want to get involved.
[00:14:20] Sam Wilson: That’s really, really cool. When you rewind the last eight or nine years, you guys have been in business. What’s one thing you feel like you’ve done really well that other people should emulate?
[00:14:30] Keith Nelson: We take care of our investors. But that’s a cop out answer. I think we concentrate on really the assets and protecting our investor capital. And that kind of led us to the whole fund approach. Because when we did, we’re doing syndications, you know, we had three or four of them going at one time, and, you know, you might get one that’s lagging behind the other three, and that’s where all your attention and efforts going to and, you know, we just sat back and reflected once we did it, it was like, man, if we had them together, that would have been a really kick ass, you know, fund. That’s kind of where the whole idea came, came from. It’s protection of capital, like, my grandmother’s money is in our fund, you know, so, last thing I want to do is lose that. So, you know, that’s, that’s our focus is protection of capital, I think we do that better than most.
[00:15:21] Sam Wilson: That’s awesome. I absolutely love it. Keith, thank you for taking the time to come on the show today break down for us where you see opportunity. And you know, spending a lot of time telling us about how funds are structured, the division closed in funds, and opening funds and the nuances to opening and launching each of those respectively, the various asset classes you’ve been involved in where you guys are currently finding opportunity. And then you know, one way to find success, and that was by taking care of your investors. So thank you, again, for taking the time to come on the show today. If our listeners want to get in touch with you or learn more about you what is the best way to do that.
[00:15:57] Keith Nelson: Yeah, they can just go to our website and the numbers there are emails there. It’s dualcityinvestments.com
[00:16:03] Sam Wilson: Dual City Investments, we’ll make sure to put that in the show notes. I’m sorry. Was there something else you wanted to add to that?
[00:16:08] Keith Nelson: Thanks for having me, Sam. I enjoyed it.
[00:16:11] Sam Wilson: Absolutely, Keith. Thank you for coming on to appreciate your time today.
[00:16:14] Keith Nelson: All right. Appreciate it, thanks.
