Today we have Steven Libman on the show! Do you want to learn from a real estate equity pro who has launched his first fund and is raising $100 million? Learn the secrets to success that Steven Libman has gained over 12 years of real estate investing experience.

In this episode you will learn;

• Steven's journey into real estate investing
• why he and his partner chose to shift to a fund model
• their focus on impact investing
• what their requirements are for partnering on deals

Table of Contents:

• Where To Listen To The Podcast
• The Asset Classes of Real Estate Equity
• Maximizing the Income Return in Real Estate Equity Deals
• Real Estate Equity Provides Better Income Return
• Steven and Travis’s Real Estate Equity Partnership
• Build Your Wealth With Real Estate Equity
• The People You Do Business With in Real Estate Equity
• How to Find the Right Place to Invest in Real Estate Equity
• Good Underwriting Trumps Waiting In Real Estate Equity
• Set the Wheels in Motion
• How To Reach Steven Libman

The Asset Classes of Real Estate Equity

Darin: Steven Libman lives in South Carolina. He started investing in real estate 12 years ago as a wholesaler of residential homes. He's completed eight syndications and he's now raising 100 million into their first fund.

A little bit on how Steve and I know each other. We both were speakers at a multifamily conference last year in Charlotte and got to spend some time together and he's doing great things. And with that, can you share how many properties and how many units you're currently invested in?

Steven: Yes. We have about 11 properties, about 2,400 units. We exited probably 1,000 units last year before the market started to get real silly.

Darin: That's good timing, man.

Steven: It's good timing.

Darin: Good timing, right?

Steven: No crystal ball here. We just happened to start getting some silly offers. As you know, people were paying compressed cap rate prices and we decided to exit a few of those deals and it ended up working out really well.

Darin: Awesome. So you guys, can you share a little bit on your focus, both geography and I know that you're big on impact investing. Talk a little bit about that and we'll go from there.

Steven: We recently launched in December a $100 million equity fund. It's attributed to four different asset classes, student, senior, storage, and multi. So multifamily is really our most bullish asset class. We are looking for operators to partner with in the senior housing space. We've done storage before, so we've included it in the fund, but we don't have any storage in there currently. We sold about 400,000 square feet last year of that. And then student, we're actually pretty bearish on student housing except at division one football schools.

Better Real Estate Equity in Commercial Class Assets

Steven: I think education is changing. People through COVID learned that they could do more homeschooling, they could do more online classes, they don't have to necessarily go to the big school. I think even with my kids, my oldest is only nine, but unless she's going to be a doctor or lawyer, I don't know if she's going to do the campus life. That being said, you can't replicate a Clemson, USC game unless you're at Clemson. So we do purchase student housing complexes at division one football schools specifically, but outside of that we're bearish on the student market.

Darin: That's huge. I didn't realize that you had that large a fund, $100 million fund. That's a large fund. Most of the syndicators that have come on have been, the syndication model, one asset or maybe multiple assets but in one syndication deal. I have had a few people come on and talk about the fund structure. But I'd like to delve into that a little bit more. So one, did you ever do the syndication model versus on the straight asset? Why'd you go to fund and then how'd you grow it to be 100 million? That's huge.

Steven: We did do the syndication model to start. So previous to multifamily, we got started in the residential space. So we were wholesalers 12 years ago. We did some wholesaling and then we did flips. We flipped about 1,000 properties and then we moved into the commercial space after somebody said, hey, you should go buy an apartment building, you'll pay less in taxes. And we were getting slaughtered in taxes with the single family flips because we're paying ordinary income. Plus we are in New Jersey, so New Jersey state income tax on top of it.

The Advantage of Understanding Taxes in Real Estate Equity

Steven: So the government was our biggest partner at 44%. It was really killing us. And we just didn't know what we didn't know. And we started in, I was a real estate broker first, and then we did wholesale and flips. Then one of my buddies said, you should go buy an apartment complex because there's depreciation benefits. I started reading Tax-Free Wealth by Tom Wheelwright. And started talking to some CPAs and then finally just grabbed a copy of the tax code and started reading through it and saying, is this true?

Are there tax benefits for multifamily investors that don't exist in the single family space? And as you know, there are. And we were able to mitigate a large tax burden from almost seven figures a year to zero. This year will be negative 2.7 million. And that was when I had the aha moment that I think we built the wrong widget and we shut down.

Darin: At least you learned and then you pivoted. Right?

Steven: We learned a lot and there's stories upon stories in the single family space. But once we got into, so we decided to get into multifamily and we actually built three self-storage facilities managed by CubeSmart, down in Florida, with an experienced operator. We raised the capital, they operated and we joined forces. That was our first foray into commercial. Our first deal actually was 1,183 unit ground up self-storage facility. It was a pretty big deal. And we got our depreciation that year and recognized that, okay, we should be doing this full-time. So that was the pivot. So then we start.

Building a Good Relationship With the Investors

Darin: That first self-storage deal was a syndication model?

Steven: It was syndication. We brought $4 million through syndication to the deal. It was a $12 million total build on 14 acres, and we brought in maybe 35 investors. Average investment rate was like a hundred grand and it was a 506(b) syndication. And then we did that again six months later to build another one.

Darin: So the first one that you did, were you bringing the investors over that were investing in your wholesaling business?

Steven: Yes, they were already investing in our single family flips. So they were used to coming in and getting a return against preferred equity essentially. So we would get either a hard money loan or they would do the whole deal for the whole house. And then we were educating them exactly what we were learning about. I'd call one of my investors up and say, hey, we really appreciate you doing these deals with us. We were paying you eight to 10% as a first mortgage deed and we were flipping houses.

But every time I returned their capital, they'd say, when's the next deal? When's the next deal? We were only deploying capital for six months out of clip. I said, so we're going to pivot our business model. I hope you come along with us. We're going to now go into these deals, they're going to be three to five years. So your money's going to continue working for you without you having to get it back.

Maximizing the Income Return in Real Estate Equity Deals

Steven: Because if you do the math and you're paying somebody 10% on first mortgage, but you can only deploy it eight months out of the year, you're not giving them 10%, right? It's like six and a half. So getting to keep that capital working for you as an investor is super important. So they followed us willingly. They liked what the model was that we were going to be doing, and they said, okay, yes. We'll still do some single family stuff, but then we'll also put more diversification into passive long-term investments.

Darin: That's an interesting point that you bring up, that 10% return. Because I think if somebody was going from the single family to multifamily that they may have issues with, hey, my money's going to be tied up for three to five years. And yet you flipped it on its head like your money's going to be working for you for three to five years versus going back and forth.

Steven: Right. Because there's that loss of income through just having your money back waiting for me to close on my next deal. Even if it's one or two months out of the year, it still decreases your return profile.

Darin: That's interesting. Okay, so now you did the first one a syndication, the second one you did another syndication. How'd you end up moving into the fund structure?

Steven: We actually did eight deals through syndication.

Darin: Eight deals.

How Does Fund Model Benefit Real Estate Equity Deals

Steven: In these syndication models, you get a deal under contract, you work really, really hard to go find a deal, right? Kiss a lot of frogs, finally get something under contract and then it's like, okay, boom, now we got to go raise this capital and we have 45 to 60 days to do it. And it turns your hair a little white. You have hard money up, you have a closing deadline and it's a stressful race to the finish line. There was two real big reasons why we switched to the fund model.

The first was the idea is to raise enough capital and get enough capital commitments so that we can commit to deals based on the commitments that we have. So we know that we have 25 million committed in our $100 million fund and we're taking commitments in every day. And then the next round, the next deal that we have, we know that we have X amount of dollars to deploy. So get out in front of it a little bit in terms of, okay, we have commitments, now we know what deals we could do. So that's the plan. We just launched it in December, it's March now, has not happened.

Darin: This is the first fund?

Steven: This is our first $100 million fund. Everything else before that was syndication. And so the goal was to get out in front of the capital raise a little bit, it hasn't happened yet. We keep saying yes to deals. There hasn't been the lag that we've hoped for yet, but we're hoping.

Darin: You say yes, and then you're scrambling to get still into the fund so you have the capital.

Get in Touch With Experienced People

Steven: Absolutely. The goal is to make sure that we do get in front of that. It's only been a couple of months. So that was reason number one. Reason number two is a little bit different than I think a lot of syndicators or operators will tell you. And we did a SWOT assessment, strengths, weaknesses, opportunities, threats. So when you do a SWOT assessment, you're basically looking at all four of those different sectors of the business. And when you get to threats, you have to be real honest with yourself.

And even though we owned and operated $150 million worth of property, we recognized, this was two years ago, we recognized that a recession was coming. We thought interest rates would not stay this low for this long. And when we said, hey, what's the biggest threat to my money because we invest in our own deals and my investor's money. And the answer was us as operators. We hadn't been in market cycles long enough on the commercial side. Now, if we needed to, we would've never said that it was a threat to our business on the residential side because we'd been through slowdowns and recessions and downturns.

On the commercial side, we'd only been at it for five years and we knew that it was a good five years. Everybody's making money and things were good. And we just had the outlook that we really need to figure out how to partner with institutional operators. Meaning guys that have been in business for at least 10 years, 15 years, 20 years ideally, have at least $500 million worth of assets under management, ideally a billion. And partner with those types of operators who have seen slowdowns, recessions, downturns, and high-interest rates.

Managing the Manager for Better Real Estate Equity

Steven: I love the guys that we partner with that were working in 88, 89 when they were dealing with 18% interest rates because they know how to deal with six and a half percent interest rates. And that was the honest assessment that we had to do to determine, hey, let's just be a fund. Let's go. We're good at investor relations, we're good at managing other managers and partnering with these institutional quality operators.

We'll really mitigate our downside risk. And that was the decision that was made. We said, okay, Yes, let's not operate the day-to-day anymore. Let's just start on the fund side and manage the managers.

Darin: That's interesting. I didn't realize that was going to be the answer. I was thinking that you set up a fund and you were still operating, but you're setting up a fund and then you are partnering with other operators.

Steven: We co-GP on every deal, and our fund brings the entire check amount in a limited partner position. So the fund is not a profit center for us. We don't make any money through the fund. A traditional fund typically will pay, they'll operate with you, Darin, as the operator, and we'll say, okay, we're going to bring all the money. This is the type of waterfall that we want to see. These are the hurdle rates.

And then we'll arbitrage the difference between what you're paying us in the fund and then what we pay the investors. That's not how we have it set up. Our investors bring the entire LP stack and then we co-GP on the deal. And our structure's a little bit different so it's more economically advantageous for the operator to partner with us than in a traditional waterfall model.

Real Estate Equity Provides Better Income Return

Darin: Help me understand that. I'm thinking, okay, you're getting a piece of the GP, so you're getting a piece of the promote, that's how you guys make money. You don't have an extra split in the fund structure. The LPs are getting the same return that they would get if they were going direct to the operator.

Steven: Our structure is a little different and always has been because we started in the residential space. So because we were paying eight to 10%, our investors were used to lower returns. We've never pitched 18 to 20% per annum returns. We've always pitched, so the way our fund is structured, for accredited investors only, this is not a pitch to sell securities. But the way that we structure our limited partners is they make a 6% preferred return through cash flow.

We all know this, there's two ways to make money in real estate investments. You have cash flow, you have a forced appreciation. So 6% in a preferred position through cash flow. Another 6% in a preferred position that accrues until the exit of the deal. So essentially we have a 12% preferred return, which is a little bit higher than most, but leaves a lot more meat on the table for the general partnership.

Darin: Got you.

Steven: So they also have profit participation of between 5 and 15% of the total sale profit proceeds at the end, but we're targeting 14 to 16% returns for our limited partners.

Darin: I'm sorry. So they're getting something on top of the 12%?

Steven: They get typically a 5 to 15% kicker on the exit of the property.

Real Estate Equity Deals Are Safe Regardless of the Market State

Darin: Okay. And what about in terms of, is this preferred equity?

Steven: The 12 is pref. And then the equity kicker is based on the total profit.

Darin: So now talk about your, well, I don't know, was there more to add there or?

Steven: Well, I was just going to say, apples to apples, it's difficult to compare. So you have to model both out to make sure that it makes sense. But these operators typically make a little bit more by working with us and that's why we have the deal flow that we have. We turn down two, $300 million worth of deal flow a week, that pencil to 17 plus IRRs.

Darin: It's a good spot to be in. Because everybody with proceeds being cut on the lender side, being a pref equity provider is a good place to be, because everybody's looking for how do I make this deal work? And if you can provide an all-in lower cost to the operator, that's advantageous.

Steven: And even to the LPs, right? The LPs, they have a 12% floor. So in this season of capital preservation where we don't want to deal with the volatility of the market. We're finding a lot of LPs that have a lot of cash sitting on the table. They don't want to do bond ladders. They're banking system obviously conversations that I've been having. So a 12 pref to them is like, man, I'm making double digits solid returns, and you as the operator don't get paid until I make my 12%. That's starting to look pretty sweet in this market.

What to Look For in a Partner in Real Estate Equity Deals

Darin: Right. So what do the operators look like? What's your sweet spot for who you like to work with?

Steven: 10 minimum years invested, ideally 20. We like to see at least 10 exits, 500 million plus under management, operating in the Sun Belt. Core value fit.

Everything's great in terms of numbers and values, but core values, the people that you like to do business with. The people that align with your kind of, not just investment ethos but familial moral value compass, I think is super important.

We've done plenty of deals in the past with people that we probably wouldn't do deals with again, because stress reveals the true character of people, and this business has its stresses. I think there's a lot of people out there that talk a really good game about how to create partnerships and core value alignment and all those things. But until it hits the fan, you're not really sure who that person is. And then you really see their true character come out. We've met some really incredible operators that don't lose their heads, they don't lose their minds, they have a plan of attack. We execute on that plan.

And it's not to say nothing ever goes wrong, it's how do we deal with it when it does go wrong. Who are the guys you want to be in foxholes with? Those are really who we like to get face-to-face with, everybody that we're going to do business with. And we're not a Wall Street firm. It's family owned and operated. It's me and one business partner and all of our family capital's in it too. So we want to make sure that the people, the human element of it is something that resonates with us.

How the Partnership Came to Be

Darin: That's huge. You said you have one business partner. How did you and your business partner come together?

Steven: Interesting story. My wife, when she was a kid, got attacked by a dog and she needed plastic surgery.

Darin: It's a weird place to start the story.

Steven: It's a weird place to start. So when we got married, we adopted a black lab pit bull mix, and it was a puppy. And we rescued this dog and it started chewing on my wife a little bit as puppies do. And she freaked out. She went right back to the place where she was attacked. So we were like at this crossroads of what do we do? We got to get rid of this dog, she's not going to be able to mentally deal with this.

And somebody said, hey, before you do that, why don't you go out to this guy's house? He trains puppies for a living, he does it on the side, he's really good at it. And we went out there and after six or seven weeks I started talking to the trainer that was there and found out that he was doing some underground utility work. He was digging ditches and putting in pipe and his family was in real estate.

His name was Travis and he was training my dogs. We just hit it off. I was a real estate agent at the time, and we started talking about, well, hey, have you ever done any flips? Have you ever done any wholesale deals? Have you ever done any developer buyouts?

Steven and Travis’s Real Estate Equity Partnership

Steven: We became friends and we would get together on the weekends and we'd have a bottle of wine and talk about, hey, it would be pretty cool if we did this thing together. We wrote a loose business plan on how to wholesale and flip properties. And tragically he lost a friend of his who was only 28 years old, and she passed of stage four cancer at a very young age. And at that time we were doing our first wholesale, we both worked full-time jobs, but we decided to do a wholesale deal with each other.

We made $16,000 on that deal. We split the money 8K to him, 8K to me, and he'd just lost and buried his friend. And he said, I'm going to go to Costa Rica to surf for a month. And he called me from Costa Rica after two weeks and he said, hey, you and your wife got to get down here. We flew down there and he said, look, we already have the business plan, I think life is too short to work for anybody else. What do you think? And we both came home, we both quit our jobs, burned the boats, and started our business. That's the origin story of when me and Travis got to meet.

Darin: That's awesome. I think that's inspiring too for listeners that, look, at the end of the day, I don't know about you, but I have a lot of people that ask me, well, I'm new to this world and what value can I provide?

Don’t Let Life Push You Around

Darin: Here's a guy who was training dogs, but he was a good guy and he built trust with you and you guys decided to build a business together and he obviously has held up his end of the bargain. You guys have grown tremendously together. I love stories like that. I love when people take a chance on somebody that doesn't necessarily fit, check all the boxes. But you just have that gut feeling that this person is going to make it, they've got grit.

Steven: That's it, right? That grit and perseverance. He knew the ugly end of a shovel plenty of times. And we've been in flips where we were scraping windows at 11 o'clock at night with razor blades after we painted them. And now he runs the underwriting and asset management side of the business and hundreds of millions of dollars worth of real estate. It's been incredible to see just how we have both grown together. Growth is a core value of both of ours, we don't sit in one place very long and we're reading, we're learning, we're growing, we're trying to find mentors. That's been everything. Now we're family.

Darin: That's huge. I was just at a party this weekend and talking to a guy. He's a C-level guy, smart guy, and he's just like, “The people that are successful, they're learners, they're curious. They're always trying to get to the next level. And they're not looking back as much as they're looking forward and how they can continually have more impact.” You surround yourself with those people and then you just naturally become like that. But it's amazing how many people just let life push them around.

Life Is a Journey of Continuous Learning

Steven: That's it. They'll just stay in the same place for a long time. I never realized how prevalent that was. What was really eye-opening is when we started interviewing people for the business, I would always ask as one of my interview questions, what's the last book you read? And man, some of the answers are shocking. I haven't picked up a book since high school. One guy told me he watches the news every night. And I was like, yes, but I want to know what the last book you read was. He's like, I don't have time to read. I just watch the news.

And I was like, wow, man, what a skewed sense of perception that will give you if all you're doing is watching the negativity on the news all the time. It's very interesting. Growth orientation, for my wife too, that's such a core value. You want to be around people that are growing and learning and you also have to be humble enough to know that you don't know everything so that you can grow and learn. That's the other side of growth, is humility, because you can't think you know everything and still be a good learner.

Darin: Absolutely. I've got two kids in college now, and I say to them, look, it's a bummer when you're in high school or college, you're forced to learn and you like some subjects and you don't like others, but when you get out, it's all on you. You could be the guy that never picks up another book, or you could be the guy who's like, look, I'm interested in this and so I'm going to go learn from other people that have already done that.

No One Becomes Rich Just by Saving

Steven: That was the hardest thing for me, was getting out of college and stagnating for a little bit. I wasn't a business owner. And what hit me was somebody told me, they were like, you don't grow automatically anymore. And I said, what do you mean by that? In high school and college, you almost feel like you're growing automatically because you're forced to learn those things. So when you're done with it, at least for me, I was like, oh good, I'm not being told what to learn anymore.

But then as I got into sales roles and I wanted to become a better salesperson, I would start reading some sales books. Some books on persuasion and some books on just sociology, how people interact. And I really started loving that and going, oh wow, I can learn whatever I want now, nobody's going to tell me. But there is that period of time where you need to recognize you're not going to grow automatically either. You have to have a desire, have a passion, and want to pursue something to learn. So figuring out what that is is an interesting process too.

Darin: Absolutely. And it can change and morph as you go along. Hey, you mentioned business owner, I want to get your take on something. I asked somebody that I know, is actually a family member, not in my family, in my wife's family, who's very well-to-do, and asked him, do you know anybody who just became wealthy by saving? W2 employee and then save. So do you know anybody that falls into that category? He said no.

Build Your Wealth With Real Estate Equity

Steven: I would say no by saving alone. Do I know W2 employees that took those savings and invested them wisely so that they could become wealthy? Absolutely.

Darin: Absolutely. If you invested in assets that can appreciate dramatically and we're focused on cash-flowing assets that have tax incentives as well, which is huge. I think about it and I'm like, the people that really have gotten wealthy have invested, they've built businesses. Some of them have gotten lucky and have been in the right tech company and got stock options.

Steven: Sure.

Darin: But it's typically something that you can sell, something that has value you, you're an owner of something versus just putting your money, 10%.

Steven: I saw this, you see it circulating on social media from time to time where people are like, I've never known anybody that got rich by not going to Starbucks today. And that's a potshot at Dave Ramsey, right? So two things on Ramsey. One, I disagree with him on some things. And two, I think he serves a really important purpose in today's America because we are a nation of debtors.

I would say that for 80% of the population, he's probably doing a great service because people just do not know how to manage money. So they need these very simple tactics and truths. And frankly, when I got married, I did the Dave Ramsey envelope system, right? We were newly married, we were 24 years old, we needed to figure out how to budget. But he stops short. He stops short of how to create wealth.

Find the Right Investment

Steven: If you listen to him long enough, you'll hear him say that you just put your money into a 10% mutual fund and you'll be in a great place and buy your real estate cash and all that stuff. It's almost like he sloughs it off as that's what you do if you ever get there. But that's not what he does.

Darin: Right. What he does is different, but you know what, he's created a niche for taking like you said, it's probably 80% of the people. There's a lot of people that would say, look, what Steve does, that's for a different group. I'm not in that group. For people who invest in syndications, there are people that are like, that's too complicated. That's for other people. And yet people, I don't know what he invests in, but I'm guessing he's in the private markets as well as being in mutual funds.

Steven: There's no doubt that he's in real estate and things like that. So anyway, I think he solves a good problem. But no, I think what he teaches people in terms of you can save and be a millionaire, that's probably true. The millionaire next door that gained a lot of popularity now, but a million dollars today isn't a ton of money. I don't know a lot of people that could retire with a million dollars in the bank and not actually be counting down the days until they run out of money. Unless it's in a decent interest-bearing account.

Learning Lessons in Real Estate Equity

Steven: I have pastors that have invested with us and they'll put a million dollars in savings after 40 years of working into a deal like this. And they can live off of the 60, 70, $80,000 a year in cash flow and not touch the principle balance. I think if you put it in volatile stock markets, so back to Dave Ramsey talking about 10% mutual funds, Morningstar averages like 3.4% in 401(k)s and 6% outside of 401(k). So can you find it? I don't know. I've emailed the show a few times asking what the name of the 10% mutual fund is, but I haven't gotten a response.

Darin: You haven't gotten the response, no.

Steven: I haven't.

Darin: So talk about some learning lessons. You did eight syndications before this fund. I'm an LP and a GP in a lot of different deals and my experience is that not every deal goes up in a straight line. There are hiccups along the way. So if you could share some.

Steven: Be wary of the operators that don't share their failures. I think if everybody always has rose, I have rose-colored sunglasses on. But I surround myself with a team of people that tell me what the reality is all the time as well. I think the biggest learning lesson in just the multifamily space for me, in general, was picking bad partnerships. Liking somebody in the initial conversation and going, we should do a deal together. And then all of a sudden we're in a deal together and they didn't have the operational expertise that we needed when we were asking for reporting.

A Good Partnership Will Help You Navigate Real Estate Equity

Steven: It was always late or trying to shine what was good on the property and eliminate what was bad with the property. Operators can't put that stuff under the rug. I think picking the right people that embody your core values. I teach entrepreneurship at a local homeschool co-op for a bunch of homeschooled kids, and I start every single semester with the same conversation about core values. It's like, hey, you got to come up with three to five values that you value over everything that are deal breakers for you.

We hire, we fire, we promote, and we demote on these core values and if you don't embody them we can't do business together. And then you have to figure out how to get somebody to not just wag their head at you and say, yes, I embody those core values. You have to have some litmus tests for it too. But if you can find your tribe of people, life goes so much smoother. Not that the deal goes smoother necessarily, it's just that communication is better, the integrity, the accountability, transparency, those types of things.

So be careful of who you partner with, because I think this space is getting not saturated, but there's a lot more people that are coming into the space that are new. There's gurus teaching from the stage about how to do this business, which is fine. I love that. That's how we got into it. Masterminds and mentorships and all those things were great for us. But partnering with people that have the same skillset as you, probably not super smart. Partnering with people that can talk a good game but have zero operational expertise, is probably a bad move.

The People You Do Business With in Real Estate Equity

Steven: I think just picking your partners slowly, really spending time. I would not do a deal with anybody that didn't get on a plane and at least go out to dinner with and meet their family. And that's a learning curve. That wasn't the first couple of deals that we did, but the cost of a plane ticket and the cost of dinner to go meet their families.

My wife, I always like to bring my wife too if I can, just because her intuition about people is good. Women have good intuition. That's been the biggest learning curve. Because the biggest pain points that we've had in our business have been having to buy people out of bad partnerships or having to take losses personally. Not to the investors, but because we had to sell a deal early just to get out of the partnership. We've only had to do that twice, but they were painful times in the business.

Darin: Right. Well, that answers some of the questions, because I'm like there's a fine line between you have to take action. Some of those learning lessons you wouldn't have learned if you didn't actually partner with some of those people.

Steven: That's true.

Darin: I'm in a lot of LP deals and GP deals and there's certain GPs that I probably won't invest with again. It's not necessarily because the returns weren't good. That's one of the beauties about this business I think, is that you can pick people that you like to do business with.

Steven: Absolutely.

How Steven Chooses His Partners in Real Estate Equity

Darin: Each person just clicks with different people. But that's one thing. And then two, some of those things you can't really see until like you said earlier. Until you hit the pain point and then all of a sudden the true colors come out. So going slower is one item that you can take. Going to dinner with their family is another. Are there other things that help you make that decision upfront?

Steven: I'd love to talk to some of the other people that they worked with. And I know we get to hand-pick our referrals, but I think having those conversations is an important piece of the puzzle too. This is for me as a GP, when I go and partner, because we're going into business together. As an LP, I want to know the character of the people that I'm working with, but I'm not involved in the day-to-day. I feel like it could probably be a little bit different. But I think GP or LP, asking for references from people that have gotten capital back from you, not just invested with you, right?

Oh yes, this guy just invested with me six weeks ago. Well, he's in the honeymoon phase yet, he doesn't know what the problems are. Who have you gone full cycle with? Give me a couple of references. I like to ask people what their reinvestment rate is. How many of the clients that you've had in the past have reinvested with you? They should know that percentage I think, that's probably a pretty common KPI to track, what's our reinvestment rate? And I think that tells a story, right? It's like, about 80% of the people reinvest with me. Okay, great.

Present Yourself With Your Partner’s Merits

Steven: Where the other 20% go? Why do you think they left? And there could be legitimate reasons or not. But asking those types of questions I think are always, they tell a story. So reinvestment rate, let's get belly to belly, let's meet each other's families, talk about core values and just let people know what deal breakers are for you. Integrity is one of my core values, if you ask me to lie to the bank I'm not going to do it. If you ask me to make something seem better than it is to the renovation company, we're not going to do it. We want to find partners that are okay being transparent.

Darin: That's awesome. I love that advice. That's very helpful. Now what I would add is, because if I'm a brand new person listening, I'm thinking to myself, well, I don't have all that experience, I don't have the turnover. But you could be partnering with somebody that does. Most people that get into the multifamily syndication world, you're not going to win a deal unless you're partnering with somebody that has a good track record. So you could ask those things of that person. And then when you have investors that are asking you, you could just be transparent. Look, this is my first deal, but I'm partnering with a guy who has had five exits and he's got a 90% retention rate on his investor base.

Steven: Absolutely.

Darin: And that's how you would sell to your network. Hey, look, you're partnered with solid people.

The Importance of a Pleasant Personality

Steven: I love that. That's exactly what I did in the beginning. We had investors from the single family world. But some people were like, yes, but you don't have experience over here. And that's why we partnered with people in the beginning, was to say, hey, well they have a lot of experience. I love that advice. And then if you really want to close the sale, I think just say, hey, I'm also going to get you on the phone with them. They're going to talk you through it.

And then I have these two or three character references of people that I have done business with in the past, or I have done this with in the past. I'm going to call my college professor. Whoever it is that can give some character references to, because I think that speaks volumes of a person too. Okay, I appreciate the fact that it's your first deal. We're covering the operations side with this person that has a bunch of experience, but what about the character piece? And then give some character references. I think that would be helpful too.

Darin: I love that. I've had people ask, well, what about people you worked with in the past? I wasn't even thinking about them, but I'm like, yes, I've got bosses that have invested with me. Well, that says something, right? That's very cool. Now you said Sun Belt states, can you define where you guys own in on?

Steven: We like Texas, Florida, Georgia, South Carolina. We like Arizona, it's just hard to find deals there. Basically the drivers are economic and population, just like everybody else.

How to Find the Right Place to Invest in Real Estate Equity

Steven: It's like where are people moving from? Where are they going to? I'm from Jersey, I landed in South Carolina. There's a reason for that. So finding places to invest where populations are growing and economies tend to follow the people, are mostly where we like to invest. We just got a deal a couple of days ago from somebody and it was in Missouri I think.

I really like the operator and I really like everything that they stand for and they give back through their deals and all this other cool stuff. But I don't know anything about Missouri. I was like, I think we're going to pass on this deal just because I don't know anything about where, and not that we can't underwrite that. We can go and find out if those areas, but it would be the only deal that we had in Missouri. We try to keep them relatively geographically together just so we can go see a few of them at a time.

Not to say we wouldn't do a deal like that, but what’s right down the fairway. When we want to start taking risks, I think is when you start making mistakes. It's like, this is a new deal, this is a new area, we don't know anything about it, but let's try it. I think that's when you have some more risk. And right now we don't have a ton of risk tolerance just because of the economy.

Darin: So for a lot of us that are in the space, it's just a no-brainer, right? Economic drivers, population drivers. But for people that are just getting in, they don't necessarily understand all that.

Have the Wind at Your Back

Darin: Investing where you've got wind at your back. You've got people that are moving in, you've got companies that are moving in, you've got jobs that are being created, you've got income that's going up. All of that is in addition to partnering with good operators and being in a good area and all that, it's wind at your back. I saw the difference during COVID, you couldn't evict for somebody not paying, but there were people that just skipped out in the middle of the night.

I had a property in Dallas, it was south of Fort Worth, and if somebody skipped out. We had a line of people that were ready to move in. But if we were in an area, geography where people were moving out to go to other locations, we might not have had the same scenario. It might have been hard to replace that person.

Steven: We bought a property in Daytona Beach, Florida, just pre-COVID for 42 million bucks and 18 months later had a 59 million exit. Talk about wind at your back. Everybody's like, oh wow, you guys killed it on that deal. Yes, we did a great job underwriting it and purchasing it at the right price point. But let's be honest, my three-year-old would've made money in Florida pre-COVID, just because they blew up, right?

And the trends were already there, so it's not like there were no indicators that we were going to do well there. But again, just looking at and understanding those metrics and going, we have a high likelihood of success here.

How Not to Lose Money in Real Estate Equity

Darin: High likelihood of success. But I've talked to so many syndicators and when people are buying a deal, they still are nervous. They're ready to do the deal but nobody knows for sure if you're buying at the top of the market. The wind's going to keep blowing or you're going to hit a hiccup.

And that is the difference I think between people that truly get into the sponsorship role and those that can't, is that if the sponsors feel like there's a higher likelihood that this is going to go well, then it's going to go bad. And if it goes bad, I'll pivot and figure it out. Where there's other people that they just can't pull the trigger, they can't take action.

Steven: I think if you're underwriting to today's metrics, obviously proformas are based on five-year holds or seven-year holds or whatever you're proforma’ing for. As long as the underwriting is reasonable, but today's numbers work. I know that I have a debt service coverage ratio today that my income today will cover the debt today. Just simple things like that. How do I not lose, right? Warren Buffett says the rule number one about making money is don't lose money.

How do I not lose money in this deal? What are the things that can go bad where we're not losing money? I think bridge loans right now are scary for people. You're getting into these resetting loans at double, triple the interest rate that they got initially in at. Nobody predicted that. We didn't know that when you bought a property two and a half years ago or two years ago, interest rates were going to triple.

Adjust Real Estate Equity Depending on the Market Situation

Steven: So now what? Now they either have to subsidize it with more equity getting into a longer-term loan or they have to sell the deal or any number of things. But does the deal carry itself today? I think is number one. Can we make it work today? And there's guys I know out there doing heavy lifts that are doing bridge loans and they're comfortable and confident in it. And they have more reps under the bar probably than I do on those heavy turns.

Right now we're just looking for cash flow today, existing cash flow with some economic upside where we know that it's undervalued on the rent. But we know that today the deal is safe, long-term debt, today's income based on today's debt service. And then, okay, now are we confident about how we can decrease expenses? Let's not even talk about increasing rents yet. Portfolio wide, is the operator maybe operating at a higher expense ratio than I would be able to inside my portfolio? If the answer is yes, then great, there's value right there and you're widening that NOI gap.

And then if we can push rents, great. How high? We don't know. Well, we should know based on today's market rate. If there's a gap between today's market rate and where yours is at, then great, we can increase NOIs too. I think there's plenty of reasons to talk yourself out of doing a deal I think. Especially when you're new it's very easy to not want to take any of that risk, which again, partnerships.

Good Underwriting Trumps Waiting In Real Estate Equity

Steven: Especially if you're newer to the space, having guys that have seen it, and it's reps onto the bar, the more deals we do, the more confident I am that we'll do deals.

I know one of the questions you like to ask is, should we stop buying? Should we wait? No, never. Good underwriting trumps waiting.

Darin: There are syndicators too that have pulled back and they're like, I'm waiting for the market to correct.

Steven: I'm just going to wait.

Darin: I'm sure you hear it all the time, is you mentioned the bridge loans. People are waiting for all these bridge loans to come due and operators to be in trouble and they're going to have to drop their pants and sell at really discounted rates. And that may come or it may not.

Steven: If I'm the operator, I'm doing a capital call and I'm not selling it to you at a lower basis, I'm going to stay in it, right? We're going to recapitalize the deal, we're going to reposition it, we'll stay in longer term. I don't think that people are going to lose money. Some people will, right? Always. But I think with these resets, I think there's 680 billion of commercial bridge loans come due in 2023.

I think there's going to be an opportunity for sure. If I was the guy who bought it two years ago, I don't think I'm taking a loss. I might not be giving the same projected returns to my people, but I don't think my investors are going to be taking equity losses. I think we're just probably not going to make as much as we wanted.

Recognize and Capitalize on Opportunities

Steven: But yes, I think there's opportunity. I would love to be sitting on more cash this year. I think there will be opportunity there, I think there's already some recaps that I'm seeing in the market that we're getting called for where some institutional guys are trying to get their cash off the street.

Now, why is that? I can only speculate, but I think big hedge funds right now would rather be in a cash position than in a particular real estate position. But here's the good news. Those operators that are calling me and saying, hey, they're liquidating all of their positions, it's almost a billion dollars under management. I can buy stuff right now for 20% discounts because I'll get in on the basis that they got in at 18, 24 months ago because I can recap that deal and they have to get out. So there's opportunity for sure.

Darin: Absolutely.

Steven: And I encourage people to recognize that recessions make more millionaires than break them. So you just got to be able to recognize those opportunities and capitalize on them.

Darin: Absolutely. Well, talk about that, the fear. Are you still afraid? How'd you push past fear to get to where you're at? Because that's something that holds a lot of people back.

Steven: I think you have to recognize that fear is a feeling and emotions make terrible masters, but great servants. And you have to recognize that there's fear involved. How do I mitigate that fear? Do I still get scared? Yes, of course. I have a deal closing in 30 days. I have half a million dollars up hard. I'm about 35% into where we need to be for the capital raise.

Let Discipline Beat Motivation in Real Estate Equity

Steven: We just started raising, but it's like, is there a whisper of fear in the back, like hey, you could lose this half a million dollars? Yes. So how do you push through that? Get around people that have helped you do it before, right? Make sure you're talking about it. I think naming it and claiming it is really important to be like, no, I'm just afraid of this thing, and that's all it is and now I can move on. I was talking to my team about this a little bit this morning.

How do you go overcome anxiety and stress and worry? Worry is worthless. Worry just steals today's joy from today. It doesn't actually help you do anything tomorrow. So what negates fear and what negates worry? Action. Every single time. When I don't, don't feel motivated to go to the gym in the morning, you know what makes me feel better? When I get up, I put my pants on, I go to the gym. I don't feel like it until I'm there, but once I'm there, I'm like, cool.

And then Jocko Willink talks about this all the time. Discipline beats motivation every time. I don't feel motivated to pick up the phone and call a bunch of investors today necessarily, but I have a deal to close. And once I start getting on the phone and start talking to people and start just having the conversation, again, I'm like, okay, I'm over that. That was just my brain being stupid.

Darin: Absolutely. You brought up Jocko. He was a speaker at the conference that Steve and I were both at. And at the end of his talk, he went into Q&A.

Go Out and Get It Done

Darin: I don't know if you remember this or not, but somebody asked him, what's your morning routine? That's a popular question to ask people who are successful, how do you start your day and what's your routine? His answer was really interesting to me. It was like, you know what? The alarm goes off, and I just go and work out.

He's like, I don't think about it. I don't have a debate with myself like, should I work out? Should I not work out, should I do this first, should I do that? I just hit the alarm, get up, go work out. And the other thing I wanted to ask you was like when you were back wholesaling, this is interesting to me, is that you were doing your first wholesale deal. Compare that fear to this deal.

Steven: Man, I'll tell you, I would say the first wholesale deal was scarier.

Darin: Yes.

Steven: And I had no money on the line. I had $1,000 deposit up to hold the deal, but it was day 13 of a 14-day due diligence period. And I remember being out with Travis and just pacing around the dock, on the water, just trying to get this guy to close, and I'm trying to make concessions. I need this deal, I need this guy to buy it, I don't know what I'm going to do. And I was so stressed out. He ended up buying it. And now, this is a $30 million deal that we're closing in 30 days and it's a $12 million equity raise, and I'm not stressed about it.

Set the Wheels in Motion

Darin: It's because you've done it over and over and over and it becomes less scary. Now, there's still fear, you mentioned, and there's still fear, but I had the same thing. My first investment was a duplex, a new construction duplex, so there wasn't even going to be a lot of maintenance on it. And it was like 50 grand. My wife and I were investing in it and we're getting a loan for the rest. And I was scared to do it because I had never invested in any real estate other than my home. Now I'm wiring 100 grand here and 50 grand there and 75 grand there, and then being a GP in this deal and that deal and the other, and it gets easier.

But for somebody that's looking to just break in, I think understanding that there's a lot of momentum that can be built after doing your first deal no matter how small. And that you gain confidence from going through the process. And so now you guys are raising a $100 million fund. I could maybe talk to you next year and you guys are raising a 250 million fund or 500 million fund. The next thing you know you're one of the big, big, big boys. It's crazy.

Steven: We had a guy call us for a $95 million equity check. He's got four deals right now and one's 95 million equity, one's 27, one's 25. And I literally just said to my team, I was like, look, we're going to fill this $100 million fund up this year.

Always Look For Possibilities to Grow in Real Estate Equity

Steven: And then next year we're going to have to probably do a $500 million fund, because we're not going to be able to. Because I don't want the size equity check to eclipse the size of the fund. Meaning my maximum on this deal, on this fund would only be a $20 million equity check, because I want to be able to put at least five diversified deals within that fund. I don't want to have a fund that does two deals.

Diversification is part of the reason that we started the fund. So it's like, all right, well, all right, let's get to the 100 million by December and then we'll look at a bigger one next year so that we can do 30, 40, $50 million equity checks. Because it's the same amount of work, not the capital raise piece of it. We're still learning how to do more of that on autopilot. But the asset management, the property management, the sponsor management, it's the same amount of work on a 66 unit as it is a 980 unit.

Darin: Right. Let me ask you on the fund structure though, 100 million going to, thinking about going to 500 million. Are all the investors, your typical high net-worth accredited investors that you'd see in a syndication deal? Or are you starting to go to family offices and institutional money as well?

Steven: We haven't gotten institutional. I love retail investors. I would like to do a CF fund next year, which is similar to a Reg A, except you have to be registered with the SEC, but it allows you to bring accredited and non-accredited together. It's called a Reg CF.

The Secret Knowledges in Real Estate Equity

Steven: I really want to do that. Because when we started this business the heart was really to help the everyday investor, get out of Wall Street. And now for this fund, it's accredited. We're doing a 506(b) single syndication deal on a one-off deal because I have a bunch of non-accredited investors still that want to deploy capital with us that can't get in the fund. But yes, when we started we wanted to help the everyday average investor that didn't have access to this type of deal flow create some generational wealth for themselves and for their families.

We went the accredited route so that we could do some advertising. But I think the next one that we'll do will be both for sophisticated and accredited investors. Because I really think that it's important to give access to deal flow like this to the average American investor.

Darin: Absolutely. I knew nothing about this until five years ago when I got involved in multifamily. I'm like, I cannot believe that this is a secret. You actually have to know somebody to get invited to one of these deals.

Steven: I'm still blown away.

Darin: It's crazy.

Steven: I have to get reminded often that it's become so common knowledge to me that I have to be more curious with potential investors because I just go down the rabbit hole. And talking about depreciation and tax benefits and cash flow and they're like, wait, you can invest in apartments. And I'm like, way down the road. I have to remember that this wasn't common knowledge to me or you or anybody before they got introduced to it.

What Steven Likes to Do for Fun

Steven: So you just have to make sure you're walking slowly through the halls and asking people, how much do you know about this?

Darin: Absolutely. So what do you like to do for fun outside of work?

Steven: I just picked up golf. I've moved to a beautiful golf course community here in South Carolina. I have not golfed, but I started golfing this year and I've dropped my handicap from 30 to 20 in the past nine months or so. So I'm starting to enjoy the game. My wife and I go out and play. We'll walk nine or 18 holes and get some exercise in together, and it's a nice date on a beautiful golf course.

Darin: You're outside. So if I come down to the Carolinas, I got a deal in Greenville and a deal in Spartanburg, so I don't know how far I am from you.

Steven: Greenville is only about two and a half hours. Spartanburg's a little closer too.

Darin: So we could play some golf, I'd love to get out there.

Steven: Oh man, I live on these two beautiful Tom Fazio private courses. They're amazing. So anytime you're in town, definitely let's go hit some balls.

Darin: Awesome. Hey, if listeners want to learn more about you, reach out to you, what's the best way for them to contact you?

Steven: If you go to our website, investingwithpurpose.org. One thing we didn't get to touch on was a little bit of the impact that we'd like to do.

Darin: Talk about that before we end, because we did say we were going to talk about it, but we didn't.

Using Real Estate Equity as Means to Help Others

Steven: Well that website does a great job of explaining it. But essentially the why behind our business. The real big reason that we do what it is that we do is, we have been giving an ever-increasing percentage of company profits away through our donor-advised fund. And we now fund over 27 nonprofit ministries and different nonprofits around the world. Just last year we funded over 27 of them, over 100,000 people were served. That's just an incredible feeling for us and our team. 100,000 people, and that is some 9,000 children getting fed every month.

That is some 40,000 people getting fresh water through a well that we dug in Western Africa. We actually bought a van and funded bulletproof vests and blankets for Ukrainian refugees when Russia, a pastor called us that we knew and said, “Hey, I'm driving people out of this war zone and I need a van. I need more vans, I need bulletproof vests.” And I didn't have an idea of where to get bulletproof vests.

So I called up another nonprofit and I knew that this guy used to be in special forces and now he runs a nonprofit. And I said, hey, do you know where we could get bulletproof vests? And I said, he's got bulletproof vests, but the lead time's like four weeks and the invasion's going on right now. What do we do? And within three days he had a container ship filled with bulletproof vests and bulletproof blankets to wrap kids in, in these vans, running them through this war zone to get them out.

Building Wealth to Change Other People’s Lives

Steven: So just amazing, amazing nonprofits that are on the front lines around the world that we get to fund. And we started through some prayer going like, Lord, how do I get to give more abundantly before I make it, before I financially make it? We just said, let's partner on every deal. We'll do 1% of this next deal, the economic benefit of this deal will go towards your donor-advised fund and we'll start funding nonprofits. And now that number is well over 10%.

And every deal that we do, we try to push that number up. Our big, hairy, audacious goal is to give 80% of our net company profits away through the donor-advised fund. And that doesn't affect investor returns, but they get to partner with us on those really cool things. We send monthly newsletters out about all the nonprofit work that is getting done because people have decided to invest with us. And it's been incredible to watch it grow.

Darin: That's huge. And look, you, I've interviewed a lot of other people that have become wealthy through these real estate deals. And this is what I tell listeners, is that, look, in the beginning, you just are trying to figure out how can I create wealth for my family? Right?

Steven: Absolutely.

Donor-Advised Fund

Darin: And then the second piece of it comes in where all of a sudden your network says, hey, I saw you do it. Can you help me? And then all of a sudden you start helping other people grow their wealth. And then the people that have been in the business for a while and they really have made it, then they really start having excess funds to do impact stuff. To touch more and more people around the world. And so this is just another example of that, and that's very admirable that you guys are doing that.

Steven: We love it. And it builds an amazing company culture. We know what we're doing it for. We know that urgent needs arise all the time and we want to make sure that we're ready and willing and able to give when the opportunity arises. It's been really cool. And our partners, our investor partners join us too. They say, hey, I saw that cool thing that you were given to. Can I give to your donor-advised fund as well? It's tax-deductible. They get additional tax benefits through putting money through our donor-advised fund. And then, yes, it just goes out to wherever the greatest need is.

Darin: That's awesome. Well, listeners I hope that you enjoyed that one. Steve, I really appreciate you coming on. I look forward to seeing you at the next conference, and I would like to get out and play some golf.

Steven: If you're heading out to South Carolina, definitely hit me up, we'll go out and head some links.

Darin: All right, sounds good. Listeners, until next week, signing off.

How To Reach Steven Libman

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