Eric is the founder of Rev Projects and focuses on purchasing commercial buildings in the Bay Area. In this episode, Eric will teach us how to finance large commercial projects, how to grow an investor base, and will even give us a roadmap for those who are interested in investing in commercial buildings in the Bay Area as well!
For people in the business for several years, the Bay Area is considered one of the strongest markets in the world. Even after the Great Recession and for those going through a downturn, the core nature of the market means that developers would not be losing so much money.
Eric lives in San Francisco and prefers to be close and hands-on with his projects. Having a family, he avoids needing to fly back and forth for out-of-state projects.
Most developers do syndications outside of the Bay Area. But Eric likes the challenge of searching hard for opportunities to make a project work through sweat and effort even without the market momentum.
His early projects were short-term ones where he did a value-add to grow the cash flow. This involved renovating, leasing up then selling a property. The first project he did was cleaning up an undermanaged live, work loft to meet the needs of the market. It was important for him at the start to show that value was created for his investors.
Now that he has more flexibility, he focuses on medium to long-term projects. He’s currently working on a student housing project close to Berkeley, which will bring in great cash flow. Since it operates as a dorm with single-room occupancy (SRO) units, the Berkeley project has a very fast turnover allowing them to renovate 52 out of the 120 units in the property.
Eric looks at the long-term prospects of a neighborhood and decides on a deal by deal basis whether they’d hold on to a property short-term or long-term.
Eric heard about the Berkeley property through a broker he had previously worked with on his first project. The broker brought the deal to him off-market before the 2018 elections when tighter rent control laws were being hinted at. The broker trusted that he would move fast and do what he said. Eric closed on the deal very quickly.
Eric makes a lot of decisions based on his gut feeling and knowing that he can get in there. But he passes on a lot of deals. After looking through several deals, he’ll usually know which one he feels good about and chooses that one.
Early on, loan brokers were very helpful to him. Finding the right lending relationship is important. After one or more successful deals, it’ll be easier to do another deal with the same lender. For first time relationships, it takes marketing a project and finding a reputable lender who understands the market.
For his student housing deal, he got a floating rate. With the renovations they’re doing, it is more of a construction loan. The length of the term is two years. Later on, they might put on medium to longer-term financing. The downpayment was 30-35% of the initial loan-to-cost ratio (LTC). Interests get charged on whatever they acquired and whatever is in their balance. Drawing on the loan adds to the balance, which will have an interest in the new balance every period.
Construction loans work by giving you upfront money to acquire the property. Since work will be done to renovate the building, a budget or estimate will be made. A loan draw request is submitted once some of the work is done. After reviewing it, the lender would fund their account. Inspections could be done by third-parties to make sure everything is done to code, which will also add to the costs to be funded. Drawings add to the borrowed funds.
Coming from a real estate background, he already had a couple of colleagues and family to support him. Some of his first investors that he didn’t know just took a risk on him.
Later on, as he made more successful deals, investors trusted him and continued to invest in his projects. He worked by building relationships and letting them grow.
For his first deal, he had 7 investors. After the first deal, he got 25 investors for his second deal. The communication aspect of how he was operating his deals and being honest and truthful with how the project is running allowed him to grow his investor base. He got 55 investors for the student housing deal.
The jumps in the number of investors who believed in him and his work were a natural reflection of the outcome of his deals and the process of treating his investors well.
Eric has a part-time intern who helps him with his financial projections, social media stuff, and website. When it comes to maintaining relationships, he does it alone. He enjoys having conversations with his investors and makes it a point to send out notes, make phone calls, or give them a tour of the property. But there are also some investors who are happy with just getting regular updates.
Since his investors come from different backgrounds, he gets to learn about some of the things they’re doing.
Some operators prefer to deal with just the asset manager in charge of the fund. But Eric likes where he’s at right now. In the future, he may consider working with funds.
Eric made a decision to work as a developer and business owner. You can work with a partner or work on funds. He chose not to work with a partner but instead contract out all his work to architects, construction companies, and property management companies.
He also chose to work on fewer projects that he cares about. There is no one way of going about things. It is up to you which way you want to go.
Coming from an institutional, real estate background, he learned how professionals do research, how they present and communicate to investors, and how to analyze projects. Moving to middle-market real estate, he had stepped out of a very polished world and went through a learning opportunity. Entrepreneurial folks should consider this as one of the steps to becoming an entrepreneur.
It’s important to not have an ego when you go about things. He never forced the need to do big deals off the bat.
Hard work, background and experience in the industry, support from friends, and market conditions all contributed to him getting his first deal. He kept things organic and let the deals and investors grow naturally. Providence and luck also helped as his first project was being marketed by a broker, and he made the winning offer.
For those considering the jump, think about what would be the worst-case scenario if things didn’t work out. For Eric, it was going back to working in another real estate company. So he took the risk and quit his job.
In the beginning, he spent most of his time reaching out to people, talking with potential investors, finding out what’s happening in the market, and looking at deals. It was an open creative process of trying to build something.
Once he had a project, he became focused on the value-add component. His job is to execute the strategy by creating something new or better by changing, growing, and finding solutions.
Being hands-on, his day-to-day involves talking with contractors, financing, bidding out stuff, asset management, and project management.
With a couple of successful deals under his belt, he is now building relationships for the future. He is on the lookout for new opportunities to become available.
He’s also remodeling his website, engaging in conversations such as this podcast, and promoting on social media, all to keep people updated.
Eric found his construction crew the same way he found investors, by going out and meeting people. It’s important to meet them and see their work. Now, he already has a crew working with him on the Berkeley project.
Rather than going on Yelp or starting from scratch, he talked with real estate groups, developers, and architects. He interviewed them whether they have time to do stuff for him. Referrals to experienced developers are better especially for those starting out. Once you’re on the market and know a couple of people, it becomes a web that builds on itself.
People buy things for different reasons. Other people just want to put some capital out there in a 1031 Exchange and get out of a deal. So they’re looking for a new deal and need to invest it somewhere with cash flow.
For Eric, he wanted something different. By renovating, creating, and developing, his projects had an upside because of the value-add. Another developer saw the value he added and became interested in his project. It really all depends on who the buyer is and the situation.
There are two origins you can consider starting from to get to where Eric is now.
One way is to go about it the same way Eric did. Get a real estate job maybe in an institutional real estate company and consider it as a classroom for you. Learn a lot of things including financial modeling.
After some years, you’d have the relationship set up which could be a partner you want to work with or an investor who invested in that company before who may want to invest with you.
Another way would be to start in real estate by getting a house. Later on, build multi-family homes. As you continue, create connections with architects and those in construction. Keep growing with friends and family and more people will pitch in.
Whatever origin or background, make sure that along the way you are developing skills, knowledge, and experience. Push yourself onto something new. You’re always going to have a job or success in whatever you work on by creating value.
Gain knowledge and experience through podcasts or getting mentors. Always look for something a little different, a little larger, or a little outside your comfort zone. Do something you’ve never done before.
The deal itself doesn’t matter as much. It matters more whether you’ve learned something. It’s a stepping stone journey with each stone getting you to the next stone.
Slow down. Some people overestimate what they can achieve in the short term and underestimate what they can achieve in the long term.
Be aware of what will happen in the next ten years, and invest in yourself thinking about yourself in ten years. But plan for the next 2-3 years and look for the next stepping stone.
The more important things are people. Spend time with your family. Create deep, personal relationships.
Life is more than the work we do.
Treat investors like friends and not dollar signs.
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