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Wealth Building: Lessons Learned From Investing in Notes & Commercial Real Estate

Dave Van Horn
4 min read
Wealth Building: Lessons Learned From Investing in Notes & Commercial Real Estate

Recently, I had the great privilege to visit with Brian Adams — a CPA who previously worked for a major law firm, until one day he discovered his true calling, investing in large apartment complexes. I was following Brian on BiggerPockets, and he probably had one of the longest threads I’d ever seen (“I quit my CPA Job to buy Large Apartment Buildings“).

Fortunately, Brian and I are friends, and he lives in my locale, so I have a slight advantage when it comes to picking his brain. He agreed to let me ask him about his business model and how he raises capital for these larger projects, and I was amazed at the many similarities between his approach to commercial real estate investing and mine to note investing. Regardless of which area of real estate investing you’re into, these actions may help you gain some momentum on your own wealth creation journey.

First, let me start by saying that Brian got interested in commercial real estate when he noticed that many of his wealthiest clients had significant assets on their personal balance sheets by investing in large apartment complexes. Not only that, he saw the freedom of time they had, and he too, wanted to build wealth in a similar way so he could spend more time with his own family.

Related: How I Acquired 18 Units (& Quit My Job) 2 Years into Buy & Hold Investing: An Interview

Getting Educated in the Space

Similar to investing in notes, real estate, or anything else for that matter, Brian knew that he would need to get a lot more educated in commercial apartments. So, even though he knew how to read the financials, he started to learn everything else he could.

He started small by investing in a duplex, but he quickly jumped up to going after a 130-unit apartment complex. The important thing was that he wasn’t afraid to take action.

Even though this deal didn’t go all the way through, he didn’t give up. The next deal he pursued was with more experienced investors, and it was for a 270-unit bank REO (Real Estate Owned). What better way to develop a track record than to partner with folks who have already done it?

Working With Investors

Working with investors is another area where I see some best practices that could really be applied to any real estate endeavor.

In Brian’s approach, his first step is not about himself; it’s about the needs of his investors. We both utilize private placements and there are differences in our actual fund terms, but I love the way he looks at what motivates his investors and what financial challenges they have.

For example, are they looking for passive cash flow or tax benefits? Or, do they just want to put their money in a self-directed IRA? Maybe they just want to compound their wealth.

He considers it his job to go out and find a deal that can satisfy these needs, and all of this is prior to him forming his syndications.

Due Diligence

Of course, any time we’re looking for deals, we must do our due diligence and research.

For note investing, you may be checking values, lien reports, credit, occupancy, etc. With apartments, you could be looking at economic and job growth, census data, as well as the deal itself.

Also, with commercial, you’re looking for properties where you would have room to increase NOI (Net Operating Income), whether that’s by increasing rents and decreasing expenses, or just by adding value in other ways, like taking care of any deferred maintenance.

This is similar to note investing, in the sense that you can buy a non-performing asset where you have room to increase the value of the note. We just happen to rehab the paper instead of the property.

Biggest Challenges

A few of the challenges that Brian mentioned are also similar to some that we experience in the note business.

Of course, we both have to find deals, and for apartments, he uses lots of marketing — whether that’s direct mail to current owners or building relationships with commercial real estate brokers and attorneys. This is similar to note investing, where you may be building relationships with banks and servicing companies.

The second challenge is capital. We both utilize private capital because banks are reluctant to lend on distressed debt in the same way that they are reluctant to lend on the future value of an apartment complex. They would rather lend on its current value and condition.

Execution is the third challenge. For us, it’s rehabbing loans from nonperforming status to performing. For him, it’s turning the properties around. Since most of his projects are out of state, much of this is accomplished by utilizing a good property management company. We’re similar in this regard, as we outsource to various boots on the ground as well, such as property preservation companies and door knock services.

Related: How to Build Credibility to Make Your First Big Commercial Real Estate Deal

The fourth challenge is exiting the deals. For notes, potential exits could be selling the note, selling a partial, utilizing collateral assignments, etc. For Brian, he can either make improvements to the apartment complex and sell it after improving the Cap Rate, or refinance the property and take out the private investors to keep the complexes as part of his long-term hold strategy. Also, when exiting a deal, it’s usually best to have another deal waiting for your investors.

Final Words of Wisdom

So whether you’re flipping notes to acquire your own and build up a passive, cash flowing portfolio of paper, or whether you’re looking to do the forced appreciation model of apartment complexes, as Brian says, “Take five minutes and figure out your purpose and passion (maybe even get a coach), understand your why, have a clear focus, and don’t listen to negativity, and you’ll be well on your way to building real wealth.”

Investors: Can you relate to the strategies and challenges described above within your own niche?

Be sure to share your experiences below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.