This week Bruce Norris is joined again by Tom K. Wilson. Tom has been an investor for about five decades and has been investing in single families. He has grown into some other products as well.
Tom has gotten involved in things that Bruce has never done. He bought two commercial buildings to occupy, but he has never done apartment buildings and commercial products. Tom has morphed into these products, and Bruce wondered when he started this and how he has funded them. Tom said he started in 2000 buying multi-family for himself in parallel with building up a portfolio of 1 to 4s. He found since he accumulated a number of houses in Silicon Valley 30 years later that they were going up in value. He then studied the country to find a place where he could get higher cash flows where they would not depreciate as much in value. To his shock, he found he could sell a 1300 square foot home in Silicon Valley for the price of a 68 unit apartment house in Dallas. He remembers sitting down thinking he was calculating something wrong.
Tom still has this product, and it is still his highest cash-flowing product. He only had to sell one 1300 square foot house in San Jose to buy this 8-unit apartment house. This multifamily today is spinning off $100,000 a year. To be fair, people asked what kind of products he had the most success in from a cash-flow standpoint, and he told them it was a multifamily. They asked what has had the worst results, and the answer is also multifamily. In short, it is important that you pick the right market cycle, town, product, and property manager. You have all these legs of that stool.
You can have a bad product, and the best property manager in the world cannot turn it into something great. However, if you have a great product in a great market, a bad property manager could keep that from performing. It’s not about one or the other, you really have to have both. Tom had an opportunity to do a condo conversion. He had the resources he could leverage since he had done it before and knew how to do it. He bought a 51 unit product for $2.9 million and put half a million into rehabbing it and half a million into marketing. They sold it collectively for about $5 million. This is really dangerous when you are early in a new part of your career. It starts to look like everything you touched turns to gold. You can read about that in a book or hear about it at a Bruce Norris seminar, but there is nothing like feeling it in your gut when making a mistake like that.
They bought several multifamily properties and did some syndications that were mostly joint ventures. They worked out well, and he invested himself in a couple private placement memorandums that turned out okay. He mentioned in the last segment how valuable it is to watch markets and cycles. It happens not just with houses in California, but also all asset classes in all markets. He had a long run with having a lot of success with buying single-family homes and providing them for other investors. When it became more popular and more people, including hedge funds, were willing to pay more than what they were worth, it became harder to find products that were good enough for his investors and himself.
As that problem started to escalate, he started looking for how he could shift the model. He was always impressed with companies that could shift their model. Some don’t, that company dies, and the market changes. In the early 80s, steak houses went out of fashion because everyone wanted to start eating healthier food. Most of the steak houses went belly up, and Sizzler revamped all of their restaurants and put in large salad bars. Because of this, they stayed alive. He decided he needed to shift his business model for his company and start looking at commercial properties. He bought many multi-family properties.
Three years ago when he decided to shift the model, if he had started earlier he probably could have focused on them. What he found was that the cycles were such to where multi-family cap rates and returns were 1 ½-2 points lower than commercial non-multi-family. Industrial single tenant and industrial multi-tenant and office retail were having higher returns. He had already experienced this with his own portfolio of selling a $10 million partnership Class A property on Arlington for a cap rate of 6. He had folks in Dallas who had the most experience and wanted to team up with him on the model. He had the sources for deal flow while Tom had the clients who were thirsty for good quality investments. They started here, and now are about to launch number 16 in three years. Now they have $130 million under management right now and have been able to progress by changing the model and capitalizing on others who have experiences and expertise in areas where he does not.
Bruce asked Tom what the toughest thing is for him when it comes to doing syndications. He said the toughest thing is when he is managing other people’s money, he wants to be even more conservative than he is himself. He is willing to take more risk. However, when he is responsible for other people’s money, he wants to make absolutely sure he has covered every base that he can. He tells people a large part of the value they get by investing in a product Tom’s company offers to them is the 90% of the products they spend a lot of time trying to bet they never see.
Bruce said when the Norris Group offers trust deeds, people do not realize how many no answers they are given before they were offered a trust deed. You go through a lot of projects before you finally find one that will make sense. Tom said one of his sources literally gets 300 deals a day across his desk. However, he does not have to analyze every one since he knows what he can do and what he can reject. Tom said collectively his sources get a few hundred a day that come to them that are then funneled down to a handful. For every one that makes it through the system, there are 5-10 that go into a fair amount of due diligence.
Tom knows the former CFO of a Fortune 100 company who he will pay $2-$3,000 to do a deep dive on the tenants. They will get a lot of no answers, and all they have to do is walk away. The hardest part is doing enough due diligence and betting before the offers. You have to do a fair amount before you even offer it. You do not want to offer something, raise the money, then after 2-3 times decide not to do it. They won’t be too excited about that. It takes a lot of resources, and they accumulate a pretty big team that has expertise in all the different areas to bet a deal.
Taking care of other people’s money weighs a lot. This is why Tom takes this very seriously and works very hard to get investors the best and safest deals. Some who don’t hit the headlines. Tom actually has a couple cardinal rules for his team that should apply no matter what you are buying in real estate. First, he tells them to show him with one asset class and one market did during the crash. He asks them if they have the loan leverage, reserves, and comfort level that this product in this market can survive another downturn. He has a number of attorneys that assists and one primary one that does half a billion a year worth of syndications. Tom feels fortunate that he can get his time.
Tom asked one person he worked with, Curtis, about when they started it four years ago. He asked him the common denominator of all his clients for success. He said no one had asked him this before, but the most common denominator are those who purchased a deal with enough conservatism, leverage, and reserves to survive a storm. Tom tells his team it has to survive the next storm. History does not always repeat itself, but it is a good indicator to see how it did during the last crash. They will get together, and occasionally they will get to the end and see how it is struggling a little. They will then look at all the points and decide whether to go ahead with it or not. Tom will go around the table asking everyone if they feel confident enough about the deal that they would be comfortable offering it to their family and friends. If there is a five second pause, then the answer is no.
This is a good cardinal rule for everyone. Even with the deciding on houses, you would need to decide if you would feel comfortable with your daughter living there. Bruce had a series of questions, and this was one of them. If he was going to flip it, he would ask if his worker could get out of their truck and would need to lock it when they left.
Bruce and Tom next went on to talk about their journeys to Washington, D.C., Fannie Mae, and FHA. Tom mentioned before how much he valued relationship and tapping on the others who are experts in their field. He and Bruce both knew a guy named Howard Glum, an economist. For a number of years, Wilson Investment Properties was providing a weekly newsletter. In this newsletter, he provided most of the material for it. He had known the Chief Economist of the Mortgage Bankers Association, Dr. Doug Duncan, for a number of years. He introduced Tom to him back in 2007. Tom asked Doug if he would be willing to speak at his investment club, and to Tom’s shock he said yes.
Tom learned from this that Doug liked staying engaged with the main marketplace and not just sit in an ivory tower in D.C. When he came to that meeting, he had just been hired by Fannie Mae because they recognized that they would need to re-steer the ship. At that point, things had not crashed. However, they learned that he was a real estate investor and owned a couple rentals. They went to him after Fannie Mae dropped the loan limit and talked to him about it. The speculators were at the headlines while most investors were long-term hold folks who did not create this problem. Tom told Doug how they thought it would be better if there were products available to investors that would actually allow them to solve the problem and take down the toxic assets. Doug said this had some merit and went to see if he could draw up interest in this arena.
It was about 2-3 years later that this was fulfilled, which is about the right timetable for things to happen in Washington. It’s like changing the direction of a ship. Lo and behold, Tom stayed in touch with Doug and asked him other times to speak. Tom worked for years in high tech, and some of those years were with companies that provided products to the military. Because of this he had a sense of how slow the government could operate. He received a call that Tom had an audience. Originally his heart sank since he did not have much knowledge on the topic on which he was asked to speak. He liked to leverage others who were more knowledgeable than him. Bruce got his first call, and Sean O’Toole got his second. From here, he went on the plane with them to Washington.
Tom remembered the staffers apologizing that they did not have limos for them and stuck them in the big black suburban. They certainly had an audience, although the attitude of the audience was that they would talk about it but were not entirely sold. They were more concerned about how they could help out investors without wasting capital and without the perception of helping rich people get richer.
Bruce said the last meeting seemed different to him. He asked Tom his take on the difference between the two audiences. He said he did not know if it was more on how the market had changed or if it was Doug continuing to lobby for investors. When they got a call in November to come out for a dry run and then again in December, to their shock there was an audience of 60, including 20 VPs and CEOs sitting right up front. From that alone, it was clear that things were different more serious. Tom thought they were extremely receptive to their input. When they came back from their breakout groups, they had really good questions. Tom went there to talk from the investor perspective of what they wanted to buy more homes. Bruce came from the perspective of having a real tangible experience of what it was like to loan to investors. They were shocked to find how low a default rate he had after deploying $70 million.
Bruce said his favorite part was that they were actually listening. It did not feel perfunctory at all, but rather that they were really listening to their answers. Bruce said it was really fun to go to that for their industry. If anything comes up some day, that will feel really good. Tom was honored and thanked Bruce for going with him and speaking with him. It felt to him like Bruce had more direct experience, but they made a good team. Doug has been a friend to their industry and supported the I Survived Real Estate events. He has been out there sometimes where he will have to leave at 4 in the morning, and he is generous enough to still be answering people’s questions at midnight. Out of 100 events he speaks at a year, I Survived Real Estate is his favorite. It all started on the trip to Washington D.C.
For more information, you can visit Tom’s website at tomwilsonproperties.com. They have not been running quite as long as Bruce, but they have five years worth of radio shows on KDOW and podcasts with notable folks as Bruce Norris, Doug Duncan, and more. It is not commercially-oriented or pitching anything. Tom just likes to find people who are really experienced in sharing their knowledge and education with others. For those who might be interested in diversity of investments, you can sign up for their weekly newsletter for opportunities to buy.