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May 24, 2022

How To Ask The Right Questions To Win Competitive Deals With Dustin Lapacka [EP102]

Want to know how to win competitive deals? Dustin Lapacka is a multifamily investor with over 2,000 units. He knows the ropes of how to win a competitive deal. In this episode, he’s going to teach you how to ask the right questions so that you can get ahead in the game. By asking the right questions and building the right team, you can build relationships with brokers, management companies, attorneys, lenders, and investors that will help you land your first deal. You don’t want to miss this episode – it could be the difference between winning and losing your next deal. Listen and learn!

Table of Contents:

How Dustin Learned to Ask the Right Questions and Won His First Deal

How Dustin Learned to Ask the Right Questions and Won His First Deal
Photographer: Felicia Buitenwerf | Source: Unsplash

Darin: A little background on Dustin Lapacka before we start the show. Dustin lives in the DFW area so he knows how competitive deals can be. He used grit, determination, and perseverance to stay the course. He’s won his first deal after three years, all while holding down a W2 job. Now he's closed on 15 multifamily properties for over 2000 units and he is not stopping.

I joined a multifamily mentorship group, the Brad Sumrok group about four years ago. When I did, I started looking at the people that were doing deals and Dustin was one of them. I was looking at videos of him online. They have these bus tours and they would be videoed and I'd see him. He's been around, he's done a lot of deals and I'm very interested in this conversation. So to start out, how many properties and how many units are you currently invested in?

Dustin: I'm in about 2150 units, just shy of 2200 and it's about 15 properties.

Darin: I have to thank you because the listeners probably don't know this story. Some of them may have heard the story on how the podcast started. We were going head to head on a deal about an hour south of Dallas and I lost the deal. I was going to partner with Nathalie and you and Deepika beat us out on that deal. After that, I was like, "All right, what's next?" I ended up starting the podcast next. If you guys didn't beat me out, this podcast may not have even started. I guess I have to thank you in a roundabout way.

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The Catalyst

Dustin: That's a great story. I didn't know that was the case. That was really the catalyst to kick this thing off.

Darin: I guess that's a good lead way. Why don't you talk about that deal?

Dustin: Oh, that would be Kenwood Heights. I don't want to rub it in Darin, but this is one of the best-performing deals out there right now.

Darin: I love that deal and that little market. I've seen the numbers, you guys have killed it. Tell the listeners about it.

Dustin: It's 211 units. It was built in multiple phases from the early 60s into the mid-80s. It's in two different locations in town, too, but it is centrally managed with one property manager, one office. The play is just to bring it up to market. As it had been run down for a long time, the previous owner had spent $4 or $5 million renovating the exterior and the interior of the property. By the time we bought it, there were probably 75 units that had not been renovated at that point. It was primarily done.

All we had to do was pick up the ball and run with it. Because it was a small town, there wasn't a huge amount of interest. The pricing was not outrageous like in Dallas, Fort Worth. We just stuck with the same management company, with the same game plan. So we brought the rents up to market rent, which was just over a hundred dollar rent bump. That's without really doing anything, just maintaining the status quo and continuing to update units as they became available. Now, we're more than two years in and we've been consistently producing 20% annual returns to investors on that asset.

A Very Attractive Deal

Darin: A few things you said there, one was it's about an hour south of Dallas so it didn't have as much interest from investors. Some people bypassed it. That was one of the things that I loved about the deal, there wasn't as much competition. You also said that you guys got in at a lower per unit basis. If I recall, it was like 55K a door. Now things in Dallas are trading 150 a door. That's very attractive.

The other thing that I really liked about that deal was it was a smaller market. There wasn't a ton of inventory and you were the lowest priced rents in the market. So there wasn't any other real competition other than maybe a duplex here or there. But for a large property, there wasn't really anybody lower than you.

Dustin: That really speaks to all the reasons why we loved it as well going into this place. Not only was that the lowest entry point into the market, the most affordable living option for anybody coming into that town, but that town has virtually no available housing. It's like 97, 98% full. There's just nowhere to live. That's one of the reasons why we really like that market. You got to live somewhere.

Darin: If somebody's going to move, say you do the rent bump and somebody says, "Okay, well I'm not going to pay it." Where are they going to move?

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Dustin: They have to leave town completely.

Darin: That was a very attractive deal. I'm happy for you guys. But I'm also happy because I've had a lot of fun with this podcast and met a lot of great people from it.

This Is How a Story Ends When You Ask the Right Questions

Darin: When I started looking at videos when I first got involved, I saw a bus tour. I think that you got under contract on your first deal and then it fell out for some reason. Is that true?

Dustin: Absolutely. This is a long story. It's a great story and it ends well. So that makes it a good story only because it ends really well.

Darin: You've been in the business for a while, so you've stuck it out. So it couldn't be all that bad.

Dustin: It was around Halloween, October of 2016, we were supposed to close. What happened was, I got this property under contract. It was a little 50-unit property built-in 2001 in a suburb of Dallas. On closing day, we found out that the seller had a lockout on his loan. That is to say the lender would not allow the seller to sell the property until that time expired.

It was a 12-month lockout. They had recently refinanced the property. It was a couple going through divorce and they needed some cash so they refinanced the property. They didn't really go through the loan docs in great detail. What happened was the lender said, "No, you cannot transact. This is not going to happen."

So it was a breach of contract, seller default. My lawyer advised that I get a different lawyer and sue the seller for specific performance so that they would sell me the property. I listened to legal counsel and I started that process. In the meantime, I had all my investors who had lined up and invested with me so we could purchase the property. What I did is I sent everybody their money back.

This Is How Being a General Partner Is Like

This Is How Being a General Partner Is Like
Photographer: Taylor Nicole | Source: Unsplash

Dustin: All the investors got every dime of their money back. I took all the loss, which was about $65 or $70,000 at the time, and that was after I got back my earnest money. That was like my lender fees, my good faith deposit, my due diligence costs, my legal retainer. They’re all these extra fees that you have to pay out of pocket when you're a sponsor for one of these things.

That's why you're the general partner, you take the risk of something going wrong. You put all your money where your mouth is when you buy these properties, and that's what happened. I put all my money into this thing and then it just falls apart with the seller being unable to perform. Everybody got their money back except for me and we went ahead and sued the seller.

This thing dragged on for five years. The lawsuit just kept going on and on. One thing that thank goodness I did, at the beginning, I had a conversation with my lawyer. I said, "Look, this is not a pay-as-you-go. This is, you get paid when we win type of thing."

Darin: It was a contingency deal.

Dustin: There was no way I could afford to pay this guy as we went on because who knows how long it was going to go? I thought it was going to be two years, but turns out it was over five. We had two mediation attempts. First mediation, we just couldn't reach an agreement. About a year later, we were set to go to trial and then COVID happened. The judge said, "You know what? You boys go and figure this out. COVID's here."

The Good News

Dustin: Basically, you're not coming into the courtroom and this is going to get pushed back indefinitely. Meanwhile, the judge was also encouraging us to find a resolution before going to trial.

Second mediation happened, it must have been September of 2020. Finally, we came to an agreement and the agreement was that I would purchase the property. They’d finally let me purchase the property and I would assume their loan. They had a CMBS loan on the property and there was a large defeasance penalty for an early transaction to terminate the loan. So they wanted me to assume their loan, which was CMBS loans are challenging to say the least.

So I agreed that I would assume the loan at the purchase price that we had from 2016 minus some of the anticipated defeasance cost that I would incur when I sold the property later. That ended up being a purchase price of 3.1 million for a 50-unit deal built in 2001. I finally closed on it in July of 2021. It was an unbelievable journey that's just so long. Now, the good news is, the property is worth around 8 million or so. I'll be selling it this summer.

Darin: You'll really only own it for a year.

Dustin: Just over a year so it's all capital gains. Then my investors and I will reap a handsome reward for going through five years of litigation.

Darin: Did you bring on all the original investors back into that deal or were they new investors?

Dustin: No. It had been so long, a lot of these people didn't invest anymore or there was something else. So it was basically very close like family and just a couple of friends.

It’s Smart to Ask the Right Questions

Darin: Yes, because I don't remember getting that email. I would've liked to have partaken in that 3 million to 8 million in one year.

Dustin: Yes, just a couple of phone calls is all it was and it was done.

Darin: A few things that are funny there. One is, from the listeners' perspective, you heard him get a contingency agreement with your attorney. Look, it's not just real estate, but almost any type of real estate legal issues. It can start small and then all of a sudden you've ponied up a bunch of money. Then you don't want to back out because it's going to be lost money. That was very smart on your part.

Two, you said it was a small property, a 50-unit property. I remember seeing that video and you were pumped up about getting your first 50-unit property. It's so funny to see investors transition their mindset. Now you're in 2150 units. But that first one, 50 units, that was a big deal at that time.

Dustin: It's huge, yes.

Darin: Now you're doing 200 units, 300 units, and it's like you don't bat an eye.

All the Grooming Required to Get Your First Deal

Dustin: That progression is funny. Right now, I'm in the middle of my 10th syndication. I'll close out here shortly. This is 418 units in Fort Worth, it's almost a $55 million deal. So you think about that transition at just a short time from 2016 where deal number one was happening or it didn't happen. I didn't get another deal. My first closed deal was actually at the end of 2017 in Arizona. That was the first deal that I ever actually successfully closed.

Darin: End of 2017, how many units was that?

Dustin: That was a 70-unit deal in Glendale, Arizona.

Darin: You have been looking for how long?

Dustin: Three years. I was also working a full-time job at the time. So I would work on my day job, in which I was a regional sales manager for a global elevator company. I covered the Southern half of the US, everything from Hawaii to Puerto Rico was mine. Everything south of the Northern border of Oklahoma, if the US just cut it in half, I had the Southern half.

I was traveling all over the country talking to general contractors looking at building designs and selling elevators with my sales guys. Then at night in the hotel is when I would underwrite deals and send notes to brokers. I’d communicate with potential investors and do all that type of grooming that's required to get your first deal. That's why it took so long. In hindsight, it's always 20/20. Back then, the market was so good to buy in. I wish I could have bought everything under the sun back then instead of working my day job.

It’s Hard to Ask the Right Questions

It’s Hard to Ask the Right Questions
Photographer: Tingey Injury Law Firm | Source: Unsplash

Darin: You didn't feel like it at the time. That's the hard part. Everybody looks back and says, "I wish I backed up the truck and bought everything.” But when you're doing it, you're wondering like, "Is this a good deal or not?" Talk about limiting beliefs. So much of getting into the large-scale multifamily business is believing that you can do it. It’s believing that you're qualified and that you're deserving or that you can actually come out the other side and you persevered for three years.

I've seen a lot of people come and go in this group and a lot have that mindset of it's going to be a year. But you get into year two, I see a lot of people drop off. So talk about limiting beliefs and perseverance.

Dustin: I'm glad you mentioned limiting beliefs because this mindset in this game is so critical. Think about this for a second. Set the stage. You're going to go and talk to a broker about buying a multimillion-dollar property. In many cases, if this is your first deal, you have no real experience. Your net worth is far below what is required to float the loan for this thing. You're going to be the point guy that's putting everything together, that's going to make this work. Double investors money and cash flow on top of that, keep all the paperwork straight and keep everybody happy.

Most of the time you don't know how to do it. There's always deal number one where you're the guinea pig. You don't really know exactly what you're getting into. You've read about it. But there's no experience of actually jumping in head first and making it happen.

How to Get Your Head Right

Dustin: If you don't get your head right, you're not going to get the deal. Don't think the broker can't read right through that too.

Darin: The broker can tell whether you're confident or not.

Dustin: The first deal that I got in Arizona, it’s the deal that I actually closed. My first one that I closed, again, I was living in Texas and I wanted to buy in Arizona. I just lost a deal in Fort Worth similar to your situation. I’ve lost it to a friend and I said, "I can't believe I lost that."

Darin: I thought we were going to win too. I understand it.

Dustin: I go to Arizona and luckily at the time, I'm working full time. I had a new sales rep in Arizona. I'm spending a lot of time there training the sales rep and looking at the market in general for construction. Of course Arizona's blowing up, they're building everything. I started looking at multifamily out there and said, "Wow, this is an excellent market to get into." Then I started making some contacts with the brokers.

They knew my association with a multifamily group in Dallas. I started underwriting deals that started to make sense. Then I started having some detailed conversations with the brokers about how things would work, how to operate this property. Asking all the right questions to send the signals that you knew what you were doing. Even though at the time I had no idea what I was doing.

Ask the Right Questions and Win the Deal

Dustin: It was just I'm following a script to use the lingo, ask the right questions, and speak with the management company so you know additional local questions that may be pertinent. What I did, when it came time to win the deal, I had a bid that was very competitive. The seller wanted to make sure that I was going to be okay, I was going to be the guy. I asked my lender to call the broker, or I should say my loan broker called the broker and said, "Yes, it's all lined up. It's ready to go for Dustin. We're all set."

I showed up on site to tour the property with the broker. When I did, I also brought the management company who I had previously spoken to. I arranged what we had in-depth conversations on where we could take the rents, what we would have to do, what that neighborhood looks like, the whole nine yards. So they knew exactly what was going to happen. Phoenix is not a really big town, so all the brokers know the management companies too.

You show up to a property, the loan brokers have already called ahead and you show up with the management company who says, "Yes. This is just like we talked about. We're going to do this, and we're good to go." Once we leave, the broker gets this impression, "Wow, this guy Dustin is professional. He's planned out. He knows what he's doing and this is a sure sale so that he's going to get his commission and the seller's going to be happy." By setting the stage there for that first deal, it worked out really well.

Limiting Beliefs

Darin: You did a lot of great things there. In multifamily, people always talk about it being a team sport. We were talking about limiting beliefs. I'll have people that'll reach out to me on Instagram and, "I'm too young. I’ve never done it. I want to do it, but I can't." What you did is the advice I usually give: don't sell yourself, sell the team.

The team is the property management company. If you're involved with a mentorship group, it's the mentorship group's reputation. It's the lending team that you're working with. You did all those things and implanted those, where the broker saw that you were already entrenched with them. You're riding the coattails of your team members. So you won that deal. Were you partners with somebody on that deal or did you do that one on yourself?

Dustin: No, I did it all by myself. My first deal, I was the solo GP out of state working a full-time job.

Darin: So it can be done.

Dustin: Yes, and that's what I tell people. Now I'm a coach with the investment group too. So people always say the same thing, "How do you do this? I have to partner with so many people. Or, I want to do a deal by myself, but I live somewhere else." I will just tell my story. "Look, you can do it. It's just a matter of getting your mindset right and ponying up to it." Somebody's going to do it, it might as well be you. I can tell you, I'm not special. I'm not the smartest guy in the room, ever.

Ask the Right Questions to Boost Your Confidence

Ask the Right Questions to Boost Your Confidence
Photographer: Bethany Legg | Source: Unsplash

Darin: But you know what, if you get around enough people, that helps give confidence too. You see all these other people doing deals and then you're like, "I can do it too." Now I always give counsel that in today's market, it’s so competitive. As a new person, you can't do a deal by yourself, you have to partner with somebody that has experience. But it's interesting that you didn't, and I don't know if part of that was timing. It was 2017 when you did that deal. You got five more years of different syndication groups and now things are so competitive.

But maybe you can still do it on your own. I know how the brokers work. When you get in the best and final and there's two or three groups left and then the seller says, "Who should I work with?" The broker wants his commission and he doesn't want to get egg on his face for the deal falling apart. So he's going to pick somebody that he knows if they're in that group.

Dustin: There's a lot of truth to that. Nowadays it is different than it was in 2017. I bought that deal in Arizona for about 70,000 a door. It's 70 units, it was like 4 million bucks or something. It really was not a huge deal. My raise was just over a million dollars. Nowadays, everything is 150,000 a door in DFW. It's just a different dynamic and there's a lot more money involved. Just by virtue of that, most likely you will need a partner or two.

Darin: So you do that. Did you sell that deal?

Doubling People’s Money

Dustin: I did. I kept it for 26 months. We more than doubled everybody's money in 26 months.

Darin: Doubling people's money, let's talk about that a little bit. When I first got involved, I couldn't believe what I was hearing from passive investors and from GPs in terms of the returns. It was 2018. I met some people in the group that were like, "I was buying at 30, 40 a door. I'm out." And I'm like, "Well, I'm in." I bought at 80 door, but you never know if you're at the top or not.

But then I saw it happen both in my passive investments and in my GP investments. It’s really true that you're able to double your money. And the business plans, it always shows five years, but because the market's been so good, people have been flipping these deals in two, three years and doubling money in two or three years. That's 30, 40% returns annualized. It's crazy. Some people just don't even know that this world exists.

Dustin: It's a shame, isn't it? Think about this. As a general partner, as a sponsor, it's your duty to inform people. Inform limited partners what kind of opportunities there are outside of investing in stocks and bonds or whatever else is out there that produces trivial returns in comparison to what's possible. Now, it's real estate so there's risk. There's always risk. But with multifamily, there's so many opportunities for that forced appreciation. We can go in, we can update the property, we can modify the property, we can raise those rents and with cap rates so compressed, it has such a tremendous effect on the value of the property. That's how you win.

Not Everyone Knows How to Ask the Right Questions

Dustin: You have a team of experts around you. Everyone sees the same vision for the property. For lack of a better word, everyone's singing off the same sheet of music. You get to the end game a lot faster than planned if everyone's in line. You're having weekly or biweekly calls with the management team and everyone's shooting for the same goals. You force that appreciation which can be very quickly. Then you can be in and out of these deals in a short amount of time and keep your investors very happy in their capital cycle.

Darin: A lot of people think that, "All right, well, I'm going to start with single family." Single family, haven't been in it for a few years now. I never bought single family as an investment, but if you buy a single family, say fix and flip, you're buying it. You're going to look to renovate it and then turn it in three or four months. But the value of that is going to be dependent on the comps of the properties around it. Where in these large-scale multifamily deals, when you talk about forced appreciation, it's based on the income.

You could have two properties that were built the same year, sitting side by side, in the same area. One could have fantastic net income and the other one, a dismal net income. The one with a fantastic net income is going to be valued significantly higher. It’s going to be valued based on the income of the property. That's where your forced appreciation comes in.

The Business Plan

Darin: The other thing that's interesting, that people that are just getting into it can't really understand, is that many times you can almost prove out the business plan before you buy the property. You're talking about, "We're going to raise rents by a hundred dollars per unit." Some people may think, "Well, that's just hoping that you can raise rents, but what if people don't?" What they don't know is that you've already gone and looked at three or four other properties in the area that are already achieving those rents. You already know that the market can withstand that rent bump if you do the work to upgrade the units.

Dustin: Yes, that’s right. With light value-add syndication models, we don't look to reinvent the wheel. We go down the path that's already been proven out, as you say. Then we do look at other properties nearby. We walk the other properties nearby so we can see exactly what is bringing in that higher rent. We don't want to over-improve the property. Many times we're talking about 60s, 70s, 80s, maybe 90s built properties that are working-class homes for people. We don't need to put quartz countertops, stainless steel, and smart everything in there if that's not going to be appreciated and paid for by that demographic.

That's why it's critically important to understand what the comp set for your property is and how high you can push that rent. You can't push it too high because then you're going to be out there all by yourself. You're not going to achieve your business plan. I do one more thing, like with the example of Kenwood being the lowest price property in that market.

People Who Ask the Right Questions Get Invited

People Who Ask the Right Questions Get Invited
Photographer: Markus Winkler | Source: Unsplash

Dustin: I like that space. That's the same model I'm using right now in this 418-unit property that I'm in the process of buying. It's the lowest entry point into that market.
That allows me to halfway bridge a 4 to $500 a month gap to where the competition is. I can raise my rents $200 and I can still be hundreds of dollars less than the competition.

That just means that there's going to be a line out the door of people wanting to move to my property. Because I'm going to keep it nice, I'm going to keep it clean, I'm going to keep it safe. And it will be a nice place that people want to live. So long as I can provide nice, clean, safe, affordable housing for people, everybody wins.

Darin: I feel bad for people that don't get invited. These deals, you have to get on somebody's investor database and get the email. It's not something that's just broadcast to anybody. Now I get a ton of emails on it, but five years ago, I didn't. You became a coach within the investment group. One, why did you do that? Two, what advantages have you seen since doing that?

Dustin: I like to help people out. That's first and foremost, I want to be able to help people. Like you said, not everybody knows about this. While I'm not the most articulate guy, I'm also a pretty simple guy. I can explain things in a manner that makes sense for the most part. Coaching folks on how to underwrite these things and what the big picture is, I can have a decent amount of impact. I can show people how to look at deals, how to win deals and talk them through the process. Whether it's through the acquisition process, the operations, or eventually when you sell the property, how to properly dispose of the asset. I'm happy to help with that.

Secondly, it keeps me in tune with the latest and greatest underwriting. There's a lot of people that are amazing underwriters and they have incredible vision for properties. I would never get to see that if I wasn't involved with those folks in the underwriting process upfront.

How Iron Sharpens Iron

Dustin: It's like an iron sharpens iron type of thing. There's so many incredibly smart people out there that do amazing things with their underwriting that I just simply would not have thought of on my own. I can get a lot of learning from these folks. Of course, I can help them and maybe give them some other ideas too.

Some of the stuff is phenomenal. I get great contacts. It just helps us as a community become a lot stronger, more efficient and ultimately more competitive to win more deals. As you said, it's incredibly competitive and we are the little guys.

The syndicators are the little guys. We're fighting against big institutional buyers who just come in with big pockets of money. It's hard to win against someone like that unless you have a leg up in some little tiny detail of what could be on the property.

Darin: I didn't even think of that. In the podcasting world, I get to learn from every guest that comes on. Some people may listen to one or two episodes and I listen to every one. I never really thought of that as a coach. You're getting to see how each individual person underwrites the deal and they may do two things that you didn't think about. Then you have one or two things that you tell them about. Over time, that could really be an iron sharpens iron. How long have you been a coach?

Dustin: This is my third or fourth year now.

Darin: I've seen as an advantage for a lot of coaches, that I don't think new people can really win a deal in today's competitive market.

Who Coaches Get Involved With

Darin: A lot of coaches I've seen have partnered with newer people, so they do a lot of the leg work. I don't know if this is your strategy too, but a coach may say, "I'll partner on that deal.” Now you have intimate knowledge of that property, of the underwriting of that submarket. You've also spent time with the person that's presenting the underwriting with you. You're like "I'm comfortable with the person, I'm comfortable with the submarket.” Now, all I have to do is present my resume and my track record and be part of the general partnership team. That's a win-win.

Dustin: I have been asked obviously to be partners on many deals. As a coach, we're very selective of who we want to work with. Not just who we want to work with, but the deals we want to get involved in. Just like anything, we have our careers, so to speak, our goals we're trying to meet. If the deal that's being presented or the offer that's on the table doesn't necessarily align with your long-term or my long-term strategic initiatives, then it's not going to be a match. It's not the potential GP partner's fault, it's just the stars didn't line up for this deal.

So please, if you have a coach. If someone in the audience has a coach and they ask their coach to partner with him and the coach says no, it's not necessarily just because of you or the deal. Maybe it just doesn't line up strategically.

Darin: I've also seen some coaches where they've ended up partnering with one or two other people, then they just keep that team going forward. That happens also.

The Benefits You Reap When You Ask the Right Questions

Darin: Those are some of the benefits of being a coach and I love how you started it. You like to help people out. Because there's a big difference between getting your first deal, that 50-unit deal, and then owning 15 properties, 2150.

At some point, there's a financial gain. Then there's a piece that's just like, how do I give back to other people and to this world? That's what I heard in that first comment that you said, which is fantastic. As adults, after we get to a certain age, there is a piece that is how do I help other people? Even if there's no financial gain, you just get a ton of joy out of helping somebody, if you see them take that knowledge and actually apply it.

Dustin: I do actually get a lot of joy when I see that I've worked with somebody or a couple of different people on a property. Then the next thing I know, a month later, or three weeks later, I get an email that said our LOI is accepted. We're going to be funding. There's a lot of satisfaction that I get from that when I'm helping folks underwrite these deals and I see them succeed. It's great. Of course, there's no financial benefit to me, but it's great to see people succeed.

I want to see more people succeed in this business because I don't want it to be constantly big institutional ownerships where these guys own 10, 20, 30,000 doors. There needs to be individuals like you and I that can go in and syndicate or buy 50, 100, 200 units and live on it.

Coaches Love to Ask the Right Questions

Dustin: Being a corporate slave sucks, let's be honest. I did that for far too long. Now I know better. There's a better way to live than doing that.

Darin: A lot of people are scared to make that jump. But talking about that word coach, my son is a junior in college right now. It's been a while since I've been a coach of his baseball team. I remember there would be kids on the team that on day one, they could barely throw the ball. Near the end of the season, all of a sudden they're playing third base. They make that long throw across to first and get the guy out. That joy. Being a coach is a little bit different than a little kid throwing across. But you're still getting to share in that victory and so that's pretty cool. Talk about where you guys find passive investors.

Dustin: To get a lot of passive investors or to get passive investors in general, you have to be social. There are lots of meetup groups out there. With COVID, there's a ton of virtual meetup groups out there. It’s strange, but we all started getting used to it. Getting out in front of people, getting to meet them, shake their hand, tell them your story, understand what they're looking for in an investment and help educate them. In my opinion, that's how you find passive investors.

These are passive investors that as long as you perform, they'll keep coming back. The holy grail for a general partner is to have passive investors who continue to come back and say thank you for doubling my money in 2, 3, 4, 5, 6 years, let's do it again. What's the next journey, what's the next adventure?

Open Communication

Open Communication
Photographer: Kaleidico | Source: Unsplash

Dustin: Part of that is communication throughout that ownership period. As a general partner, you need to communicate with your passive investors. Let them know what's happening on the property. Give them, if there are nice pictures you can show, if there are updates, what's happening with the CapEx. They're your partner in this, they want to see how the property is being transformed. They want to see your vision and their partial vision come true with what's happening on these properties all across the country whether they're in your backyard or whether they're across the states.

It's a good opportunity to really grow that relationship by having that open communication. If an investor calls you, call them back and talk to them.

How many passive investors have you talked to that have said "I can never get a hold of my general partner. They don't call me back, they don't answer my emails." That's not cool. That is not how you build relationships. That's not how you're serving your investors and that's not right.

Darin: Not all passive investors, but especially the ones that have been in a few deals, they understand there's going to be some hiccups. If you communicate that to them, they're going to appreciate it much more than if you go hiding. COVID is a perfect example. Nobody could have forecasted that COVID was going to happen. There were some general partners that said, "This is what we're doing." And there were other general partners that didn't want to engage with their investors. It's going to be a deciding factor whether they come back or not on the next deal.

The First One Is the Hardest

Darin: So how do you scale? You started with 50 units and now you have 2150. Many people talk about the first ones being the hardest. After that, number two, three, four come so much easier. How did you scale?

Dustin: There is some truth to that statement. The first one is the hardest and then you're rolling on that momentum. So long as your momentum doesn't stop, then you certainly can build off that and be successful. Scale is a tough question. I'm trying to figure out how to scale myself. I've been growing, incrementally, two or three properties a year. Part of that success is driven by reliable partnerships.

Dustin: Just like you mentioned that some people work well together and they stay together. My current partner, this is our fifth deal that we're doing together. I enjoy the relationship. She's good at things that I am not good at. That's very helpful, especially when there's more than one property involved. There's a lot of that give and take. We all wear hats all the time. It certainly does help when there's someone who's very focused on, say, getting K1s out the door and working with the CPA. Me and CPAs, I work with them when I have to and it's forced and they can feel it.

I have my personal CPA who I love dealing with, I love the guy. He's awesome. But when it comes to some of the properties and getting those K1s out the door, it's a burden and it's a hassle. It's just challenging. I don't like that fight, but my partner is really good at it and she does great.

Ask the Right Questions That Build Long Term Relationships

Dustin: I'm happy to focus on operations while she focuses on getting K1s out the door during that time.

These partnerships, they have to have purpose, we have to have similar visions, moral and ethically aligned. I tell a lot of people who worry about or have discussions about getting in partnerships. This is like marriage, it's a long term relationship.

If you don't like the person that you're going to be hanging out with for the next five years, it's probably not going to turn out very well. Make sure you can spend some time with them and get along with them because you're going to be spending a lot of time. I talk to my partner more throughout the day than I talk to my wife. She's at work and I'm juggling 2000 doors every day trying to get everything going. Luckily, I have a great partner and I talk to her and her husband all day long.

Darin: I've heard that from different people that have come on the show. They said, there's the synergy of what you like to do and what they like to do, what you’re good at and what they’re good at. Hopefully, you match up well. But there are also values. How do their values stack up to yours? And do I just enjoy talking with this person? Do they view the world the same as me? That's a big deal. When you come to a crossroads on how you handle a situation, if you guys are on completely different wavelengths, it's difficult. You can't get out of it for two, three, four, five years.

The Bonus

Darin: Now, the bonus is that if you have one transaction and it's not going that well, you're probably not going to partner with that person again. Your current partner, you said you were doing your fifth deal so that tells you that you guys get along well.

Dustin: Exactly. Just think of some of the trouble that you avoid by having that same moral and ethical compass. Imagine for a moment that my very first deal that didn't go through, the 50 unit property. I was not obliged to return everybody's money a hundred percent. By the operating agreement, I could have metered out the losses per their investment percentage so that we would've all shared the loss. Had I had a partner that would not have agreed that the moral and ethical thing to do is to return the money, that could have been a huge problem.

Darin: That goes with reputation risks. Because you did that, people talk. People are like, "Dustin was stand up. He sent back the money and I hear that he's in this lawsuit. I heard that he lost 60 or 70K but he didn't take any of it from us." That helps you build your reputation in the industry. When investors know that you've got their back, that's a big bonus. It gives people comfort to do business with you.

Dustin: I'd say that's one of the big things as a passive investor to look for. Make sure that the person you're doing business with, that you're entrusting a substantial sum of money with is someone of moral and ethical character. Just make sure that they're going to do the right thing.

The New Skillset

The New Skillset
Photographer: Greg Bulla | Source: Unsplash

Darin: I asked you about scale. You got 2150 units. What's the next big stretch goal for you?

Dustin: Right now, after I close this deal?

Darin: This small little deal of 400 and some odd units.

Dustin: After this deal closes, my partner and I are going to take a step back. We’ll look at what we need from a business standpoint internally. Now we're going to start staffing up. We're going to hire an asset manager, someone to manage a brand name, like social media type presence. In today's world, you got to be in front of people. You got to have eyeballs on your name brand. Right now, we don't have that because I am not a big Facebook or a LinkedIn person. I'm more of, roll your sleeves up and get something done versus post it on social media or TikTok. I need someone who can do that. That's a skillset that not only am I not good at it, I have no clue about any of that stuff.

We're going to look at that piece of it because that is going to really be the linchpin for future growth. It’s being able to attract new limited partners via social media and show that we have a presence. Show how we perform and show how we have performed and how we intend to continue to perform. That allows us to tell our story more live as it happens as we're updating properties and cleaning up and improving properties and just making them a better, safer, cleaner place for people to live. If we can show that more often, live, that's going to improve our brand name.

Ask the Right Questions That Attract More Partners

Dustin: That's going to help us attract more limited partners and in turn, help them hopefully become financially free. The goal is just to make it better for everybody. The next step is to figure out how that works, what we can do to make that happen and then implement.

Darin: Somebody on the show pointed me to a book Who, Not How, and that's basically what you're talking about. It’s like, "As you get larger, it's who can we hire that can take some of this off our plate? Who can we hire to get our social presence out there, who can we hire to do this? Who can we outsource to do this?" That's part of the scaling issue.

Dustin: It really is, and that's a challenge. That's a challenge for me because I've always been a one-man band. Now, with my partner, we're like a two-man band. We're trying to figure out what's the right way to grow and serve our investors. I should say protect our investors and serve our investors, but also grow the portfolio and help everybody else.

Darin: When you say investors, there's two kinds of buckets. There's the investors that already know you guys. Maybe they've already invested in one, two, or three deals. Or maybe they're looking for your next deal to get into. There are people that already know you guys. Then there's this whole other bucket of people that may have invested in multifamily. They don't know you, or they just don't even know how to invest in multifamily in a syndication.

Getting Busy With Life

Darin: How you attract those buckets over to you guys, that's the piece that you guys are looking for. What do you like to do outside of work for fun?

Dustin: I have two kids. My two girls are eight and 14. My 14-year-old plays tennis. She's in swimming, she is in a percussion band in school and that also has turned into a rock band. It’s like the School of Rock. She plays there.

Darin: They're not practicing in your house.

Dustin: No, but I got a full drum set upstairs. It's right above my office too so when she's playing the drum, I feel the bass drum and my glasses are jumping across the desk. That's keeping us very busy. My eight-year-old wants to do everything the 14-year-old wants to do. We're trying to get her involved in stuff like that as well. It's very busy around here.

Darin: If people want to get to know you, what's the best way for them to reach out?

Dustin: We have our company's website called Common Sense Ventures. That's probably the easiest place to learn more about us. You can email me, dustin@commonsense.ventures and fire away any questions you want.

Mixed Emotions

Darin: I appreciate you coming on. Like I said, I have mixed emotions. I would've loved to have gotten that deal that you guys got. At the same time, I'm also happy to have the podcast. I think you're a great guy. Listeners, if you're on YouTube watching this, you can see him, but he's sitting down. Dustin's a tall dude. Were you a basketball player?

Dustin: I was a basketball player in high school. I wasn't any good, but I did play basketball.

Darin: Six what?

Dustin: 6'3.

Darin: Looks like 6'5. In any event, I really appreciate you coming on. You shared some fantastic stories and I wish you and Deepika much success moving forward. Listeners, I hope that you enjoyed that one. Until next week, signing off.

How to Reach Dustin Lapacka

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Darin Batchelder

Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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