Unlocking the Potential of Syndication

Today’s guest is Jim Lee. 

 

Jim began his investing journey of a 2 bed/1 bath condo and now, through real estate syndication, he has invested in over 600 units in the past 2 years where he has participated as a general partner/limited partner.

 

Show summary:

Jim Lee discusses his transition from managing a two-bedroom condo to syndicating large-scale properties, and the importance of education and networking in this process. Lee also talks about the challenges he faces in the current market, such as rising insurance costs and managing capex and reserves. Despite these challenges, he emphasizes the importance of transparency with investors and shares strategies to mitigate risk. He concludes by stressing the importance of relationship-building in the real estate community.

 

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Intro (00:00:00)

 

Transitioning to syndication (00:01:59)

 

Insurance Costs and Financial Struggles (00:11:41)

 

Strategies to Mitigate Risk and Increase Revenue (00:14:39)

 

Lessons Learned and Future Investment Approach (00:15:58)

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Connect with Jim: 

https://twitter.com/FormosaInvestin

 

https://www.linkedin.com/in/formosainvesting/

 

https://www.instagram.com/formosainvesting/

 

https://www.facebook.com/formosainvestin

 

https://www.formosainvesting.com

 

 

Connect with Sam:

I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

Facebook: https://www.facebook.com/HowtoscaleCRE/

LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/

Email me → [email protected]

 

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Want to read the full show notes of the episode? Check it out below:

Jim Lee (00:00:00) - We're the one making the decision. The LPs have no saying in it, so we should be taking full responsibility on this. Only if we'll go to LP, only if we really need to. Only we're going on on on the verge of default, you know. So hopefully that doesn't happen. But you know, that's, that's, that's that's you know, that's that those are the people that we look for. We that share the same value as we do.

 

Sam Wilson (00:00:21) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big.

 

Sam Wilson (00:00:33) - Jim Lee began his investing journey of a two bed, one bath condo, and now, through real estate syndication, he is invested in over 600 units in the past two years, where he has participated as a general partner. Jim, welcome to the show.

 

Jim Lee (00:00:47) - Thanks for having me, Sam.

 

Sam Wilson (00:00:48) - Absolutely. The pleasure's mine. Jim. There are three questions I ask every guest who comes on the show in 90s or less.

 

Sam Wilson (00:00:54) - Can you tell me where did you start? Where are you now? And how did you get there?

 

Jim Lee (00:00:58) - I started working at Loop Net. I graduated 2010 back in 2000 right after the subprime subprime mortgage crash. 2008 followed by the European debt crisis. It was really difficult for me to find a job, but I was fortunate enough to land a job at Loop Net, working as an inside sales rep. Um, that from there, it kind of taught me everything I need to know about real estate. Spoke to property managers, real estate investors, lender agents on a daily basis, learned the importance of having multiple streams of income. So I got in myself into investing in a two bedroom, one bathroom condo. 600ft² did everything from A to Z. Was very actively involved. And then I transitioned to become a syndicator because I realized that, you know, I started to build system around just making my first investment more passive, where now I'm just doing it on a bigger scale with economy. With syndication, we're able to do to economies of scale.

 

Jim Lee (00:01:59) - We're able to just scale it a lot easier with, you know, what, the team that's going to be managing your projects and basically, you know, with more helping hands, I think it's we're able to create a bigger pie for everyone to split.

 

Sam Wilson (00:02:16) - What year did you buy that first condo.

 

Jim Lee (00:02:20) - 2015.

 

Sam Wilson (00:02:21) - 2015 okay. Very cool. And what year did you decide to get into Syndications?

 

Jim Lee (00:02:28) - 2020?

 

Sam Wilson (00:02:30) - 2020. So you bought a condo in 2015. What did you do in that five year window where you just operating as a broker in that time frame, or what were you doing in that five year period? Yeah.

 

Jim Lee (00:02:41) - So for the first year I was very new to real estate. I bought the condo without knowing much, and after I bought it, I realized how much I didn't know. And that's when I picked up the the purple Bible that everybody Red Bishop ordered. And from there, I kind of started to learn more about real estate. And like you mentioned, I also got a real estate license on the side between 2018 to 2020, I tried that was my very first pivotal moment to shift from a W-2 employee to an entrepreneur.

 

Jim Lee (00:03:18) - So I try to make a career out of it and it wasn't a good fit. And that's when in 2020, during lockdown, one of my investors introduced me to a podcast show called Real Estate Guy Radio Show. They talk about syndication all the time. So that's how that's what intrigued me. And I started to pursue that passion.

 

Sam Wilson (00:03:35) - Got it. No, that's really that's really great. What when you when you became a realtor, were you doing residential brokerage? Were you doing commercial brokerage? What were you working on?

 

Jim Lee (00:03:45) - I was focused on residential.

 

Sam Wilson (00:03:46) - Okay, okay. And you figured out that wasn't a good fit for you? Why not?

 

Jim Lee (00:03:52) - Um, part of it is because I came from a sales background. I've been doing that for seven years of my life, and being a realtor is you really you need to get. Well, for me, I had to get comfortable being uncomfortable with just going out and meet people face to face on a constant basis. And I was trying to get used to it, but I wasn't.

 

Jim Lee (00:04:15) - It wasn't it was definitely not a thing that I excel on. And, you know, I realized that's something that I can do for the rest of my life. I can do it temporary, but it's not sustainable. And that's where I kind of shifted, because I'm more of a black and white type of person, you know, um, you know, I love numbers. If the number makes sense, it works. Whereas being a realtor, it a residential realtor, I feel like there's a lot of emotional sales, especially dealing with first time homebuyers. I'm not saying, you know, dealing with investors. There's no emotional don't but don't, you know, trust me, you still have to sell emotions. But not as bad as, you know, first time homebuyers.

 

Sam Wilson (00:04:58) - No, it's a different beast. That's that's for sure. And hats off to you for even trying it. I got my real estate license, I don't know, ten years ago. And I never once thought that I had the skill set to deal with the general public buying residential real estate.

 

Sam Wilson (00:05:15) - I was like, this, I just, I can't I don't have that skill set. So anyway, good for you for at least giving it giving it a go. But then you said, hey man, you know what? There's got to be a better way in Syndications. How have you broken into Syndications? What are you guys buying? And really just give us kind of your current business plan if you can.

 

Jim Lee (00:05:33) - Yeah, absolutely. So how I broke into syndication is by just constant education since 2020 to, you know, going out to network with the right people, um, syndicating with other multifamily syndicators that been in the industry, doing it for a while. And I actually had to find a business partner. I believe he's been on your podcast show before. His name is Chad Zdenek. He's my business partner, and he I met him and I met at one of the networking event, and we clicked because there was a lot of value we can add to each other's life. And the part I was missing was, you know, the track record, the experience and so forth.

 

Jim Lee (00:06:16) - And Chad has been syndicating out here in Long Beach, California for, you know, four years prior to we met. So that's how we're able to connect. And then we both syndicated the two deals together last year. They're both in Florida. 1111 deal is 200 unit in Orlando, 400 unit in Jacksonville. And um, the business plan is, you know, to operate out of state for the time being. We like to be the lead sponsor in our deals, um, in California. But right now it's just very difficult to syndicate deals out here. And for the returns to return on investment to make sense for our investors. And on top of that, with all the regulation, the you know, it's just not a politically, you know, tenant friend, you know, landlord friendly state, so to speak. So we had to explore out of state and partner with other lead sponsor out of state to basically, um, leverage their, their network and their boots on the ground to be able to syndicate out of state because in, in the deals out of state, that's where we find that, you know, we're able to mitigate risk for our investor as much as possible.

 

Sam Wilson (00:07:27) - Yeah, absolutely. So you found a sponsor you wanted to work directly with out of state. What's that relationship been like and how did you vet that particular sponsor?

 

Jim Lee (00:07:40) - So the relationship we've met these guys. Like I said, you know, we've been going consistently going out to networking. We go to multifamily investor nation events. We go to real estate guy events. We go to that summer event, think multifamily. And it's the people that we constantly see over and over and over. And that's where I think we start to begin to build more trust. The more we see each other, the more we're able to communicate and get to see what they're doing and kind of just speculate, you know, over the years, and what we typically look for is, you know, people that share the same mission and value as we do. That's the most important part, taking care of our investor, putting our investors before anybody else. And I'll give you a good example of the first deal. We partner in Orlando, the lead sponsor.

 

Jim Lee (00:08:28) - We had a capital call recently. And um, basically, instead of putting the pressure on onto the limited partner, the lead sponsor decides to put it amongst the general partners, you know, to put the pressure on ourself because we're the one making the decision. The LPs have no say in it. So we should be taking full responsibility on this only if we'll go to LP, only if we really need to only work going on on, on the verge of default, you know. So hopefully that doesn't happen. But you know, that's, that's, that's that's you know, that's those are the people that we look for, we that share the same value as we do.

 

Sam Wilson (00:09:04) - Well, let's dig in on that. I mean, there are there is pain in the marketplace. You know, we're seeing we're seeing things such as what you just mentioned, you know, internal capital calls, maybe not necessarily with us, but we are seeing this across just the general market. There is some pain existing, you know, with rising interest rates, with short term debt coming due.

 

Sam Wilson (00:09:24) - You sounds like you've picked some great assets in great markets. What is happening? I guess that maybe if you can get I'm not asking you for the inside. Down to dirty is probably not things you want to talk about at, you know, in depth. But maybe what are some things that are happening in the market right now that are causing you guys to currently have a capital call? And then what's the plan to really turn that around?

 

Jim Lee (00:09:48) - Yeah, absolutely. So, um. First off, you know, there are $2 trillion of commercial debt that's expiring in the next year. That tells you a lot of people are, you know, going to need to refi like we do or, you know, just at this high interest rate. So what can you do in this circumstance? Right. Well, you have options. You can either cash in refi, you know, raise more capital and then get a new loan. Or you can, you know, sell the property at a loss. Depending on if we sell the property as is right now, we'll still get 75%, 80% back.

 

Jim Lee (00:10:26) - But that's not the goal. The goal is to push the deal forward to to 2025. Survive until 2025. Um, and I'm talking about in terms of people is on variable interest rate. Now if you're on fixed rate, maybe that's a agency debt. That may be you're better off at this moment. But both my deals are very aggressive because my first two deals, you know, I tend to want to be aggressive. I'm targeting value at classy multifamily apartments building 1970s. So there's always that value add component to it. So it's it's basically how you manage your your CapEx and your reserves on top of the rising debt costs. What's happening with our deal is that, um. Like you mentioned, Orlando, Florida is a very, very strong market growing cop population. Job growth is growing. Everything is growing. Economy is growing. Um, our rent before taking over the project was $850 on average per unit. It's gone up to 1350 for the renovated units. So 55% increase. It's great. With all that being said, um, the insurance has pretty much killed us.

 

Jim Lee (00:11:41) - Yeah, right. So like we have I think our insurance went up by, I think three times or nearly four times of what we used to pay on top of that, like you mentioned, that just keeps going up. So we're upside down by 10,000, even though our occupancy rate is at 94% occupancy rate right now. So 10,000, I'm talking about 200,000 per month. And our debt, uh, our expenses at 2000, 10,000 210,000. So so that's what's going on. You know, I think amongst the GP, we can definitely cough up the money. That's not a problem to push us over. But we do. We we do try to be as transparent to our investor as well. Hey, you know you're not going to see any distribution anytime soon. You know, because we syndicated this property last July, everybody was, you know, everybody thought that they were going to get the distribution sometime around this, you know, this year, a year later. Right. That's what we've been telling them at Valley.

 

Jim Lee (00:12:44) - Yeah. Takes 3 to 6 months to stabilize the property etcetera, etcetera. But at the end of the day it's the market condition that that also, you know, hold us back. But we, we want to let them know that we're doing everything possible to mitigate this risk as much as possible, basically by cutting down, you know, the simple things that, you know, what an asset manager would do is just cutting down costs, increase revenue in any way, evict a tenant that's not paying. Um, coming up with, you know, strategic plan, you know, creative ways to make more revenue by maybe inserting, like a car washing machine or pet washing station or, you know, just give priority parking spots to the carports, the garage that charge a little extra, you know, just think of creative ways to make more revenue.

 

Sam Wilson (00:13:36) - That's right. Drive revenue. One of the things you mentioned there, I was kind of you know, it's always interesting, I think, to look at deals that have, you know, some stress on them.

 

Sam Wilson (00:13:46) - I'll say that and say, okay, what what of this could we have foreseen? What of this? Did we not foresee in some of that being, you know, either either bad bets and or just market forces that you can't control one of those I think that you mentioned, that's probably a huge one is your insurance. I mean, we've seen insurer after insurer after insurer drop the Florida market entirely. So what you have and I think we brought some some insurance agents or brokers here, commercial brokers on the on this show or they've talked about the Florida market and how you have all these insurers that have left, which leaves the only few remaining that are there just taking rates and just, you know. Sending them skyward. How? Other than increasing revenue mean is there is there anything else you can do on that front to kind of help absorb some of that unexpected cost?

 

Jim Lee (00:14:39) - Um, well, the main thing is just right now, in our massive management call, all we are trying to figure out is how to, you know, cut down bad debt, um, the evictions and basically people not paying.

 

Jim Lee (00:14:55) - And that's, that's the only that's the only strategy moving forward is to to increase revenue and cut costs at this moment and then explore some good refi option because our occupancy rate is high. Ah, we've renovated two thirds of our apartments already, so 150 units out of 200. So we're we're really in a good shape. It's just the market condition that's, that's, you know, crushing us at this moment.

 

Sam Wilson (00:15:24) - Right? I mean, yeah, to get a 55% rent bump is is impressive. And to stay again 94% occupied, assuming that's, you know, that your economic occupancy is somewhere close to that is it's pretty great. I mean, that's pretty great for anybody, especially in a class C apartment right now, because that's the you know, those are some of the assets that are getting hardest hit when you look back on this investment and maybe just what you see in the in the market in general, what are what are some of the things maybe that you have extracted from this as lessons that you apply then to future deals you're looking at?

 

Jim Lee (00:15:58) - Oh yeah, definitely diversify your portfolio.

 

Jim Lee (00:16:00) - And that's what real estate syndication does for you, right. You can invest in different markets, different asset class and different syndicator. And I think moving forward am not always going to be bullish on variable, you know, variable interest rate. You know bridge loan debt I'm going to definitely explore those agency debt. Um have some of those in my portfolio in case the market shifts like this. Um, but yeah that's that's that's number one for sure. And then number two is don't get too aggressive with your renovation. And I think, I think what put us in this spot also is because we exhausted our CapEx. You know, we we we could use that money towards the towards, you know, paying off the debt. But instead we kind of went we kind of overshoot ourself. And uh, it was a little too aggressive on that. And yeah.

 

Sam Wilson (00:16:54) - Got it, got it. Yeah. You didn't have enough in reserves is what I hear. Is that because you spend all of it on CapEx and then you go, oh hey, we still we still have debt to pay here.

 

Sam Wilson (00:17:02) - So that's not going, which is interesting because it's like you want to improve a property. You would think as quickly as you can in order to raise rents. But it is that like it's that like one it's do something level out, then add a little more level out, add a little more and level out as opposed to just burning through it, getting it renovated, raising rents and then going, okay, because there's there's that short term liquidity crunch, maybe that, you know, you just have to try to avoid at all costs. So that's that's really, really interesting. Thank you for taking the time to break down some of those things that the lessons that you've learned. I mean, I think that's that's the name of the game is that there's, there's every education has a price. Right. And it's and it's this is just how did someone put it. They called it Wisdom's tuition. So it that's you can't you can't get around it. All of us are learning lessons all the time.

 

Sam Wilson (00:17:55) - So that is wisdom's tuition. Jim, is there anything else here on the show today that you'd really love to make sure that we highlight, talk about, just cover what it is that you guys are working on some next, next things you're covering one. One last thing you'd love to share with our listeners.

 

Jim Lee (00:18:10) - Um, I would say the biggest thing that I do differently versus others is I invest in people I know as real estate investors. We all like to invest in assets that produce an income, that income stream and hopefully, you know, have enough of income stream that eventually replaces your salary and you become financially free. Yeah, that's the goal. That's the end goal we get, I get it, everybody wants that. But I believe in building relationships. I put relationship first before anything else. And I invest in people as in, you know, I think it's very important to invest in your community, invest in your network, invest in mastermind groups, invest in, you know, having your own local real estate meetup.

 

Jim Lee (00:18:54) - Invest in people. Because when you do so, you're going to generate returns on investment that you you can't. For me, it's hard to calculate to to to measure that. But it's gone. Gone me very far. It's and it's, it's something that I would highly recommend that everyone do.

 

Sam Wilson (00:19:13) - Fantastic. Jim, thank you 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?

 

Jim Lee (00:19:21) - Um, they can check out my website, Formosa investing.com. They can also follow me on social media, Twitter, Instagram, Facebook, LinkedIn. Formosa investing.

 

Sam Wilson (00:19:31) - Formosa Investing.com. Jim, thank you again for coming on the show today. I certainly appreciate it.

 

Sam Wilson (00:19:36) - Yep, absolutely.

 

Sam Wilson (00:19:38) - Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. 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.

 

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Sam Wilson (00:19:56) - 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.