In this episode, we dive deep into the world of multifamily real estate with David Lilley, the CEO of REAP Capital. David shares his journey from single-family rentals to becoming a successful multifamily investor, emphasizing the importance of creativity and tenacity. He provides valuable insights into his unique approach of vertically integrating property management and construction into his investments. Discover how David has consistently achieved impressive returns for his investors and what it takes to thrive in the multifamily market.
Key Takeaways:
- Creativity and Tenacity: David emphasizes the importance of thinking outside the box and approaching real estate investments with creativity and tenacity. These qualities have allowed him to succeed and stand out in a competitive market.
- Vertical Integration: By bringing property management and construction in-house, David has gained more control over his investments and improved communication within his team. This approach has proven to be a key factor in his success.
- Philanthropy and Giving Back: David discusses his commitment to philanthropy, particularly his support for St. Jude Children's Research Hospital. He shares his plans for future nonprofit involvement, highlighting the importance of giving back to the community.
David Lilley | Real Estate Background
- CEO, Reap Capital
- Portfolio:
- Multiple properties in Texas
- Based in: Dallas, Tx
- Say hi to him at:
- Best Ever Book: The Hands Off Investor by Brian Burke
- Greatest Lesson: Your network is your net worth.
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Transcript
Narrator 0:00
Quick disclaimer the views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to Bestevershow.com
David Lilley 0:16
Get a mentor, not necessarily pay a bunch of money to be some syndication group where a lot of people have had success or bad things to say about that. But whoever it is fundamental.
Narrator 0:27
Welcome to the best ever show the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.
Ash Patel 0:40
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, David Lilley. David is joining us from Dallas, Texas. He is the CEO of Reap Capital, they buy value add multifamily and vertically integrate with property management and construction. David's portfolio consists of multiple properties in Texas. David, thank you for joining us, and how are you today?
David Lilley 1:07
Glad to be here doing great. Thank you.
Ash Patel 1:10
Good. David. Before we get started, can you give the best ever listeners a little bit more about your background? And what you're focused on now?
David Lilley 1:17
Absolutely. So my real estate investing career began back in 2013, or the purchase of a single family rental. Pretty soon, I made the decision that real estate was where I wanted to focus my investing where I want to invest my money. So the next step was how do we scale and I decided to just jump right into multifamily bought a six unit in 2018. And then each deal is just kind of grown from there. So at this point, we're value at focused, we've done self storage and multifamily but specifically focused on multifamily in the Dallas Fort Worth metroplex right now.
Ash Patel 1:52
You've been at this about 10 years, what kind of construction projects have you had to apply to these properties?
David Lilley 1:58
A lot of interior renovations some exterior projects, usually replace the roof and paint the exterior on each of these deals. So at this point, we've probably done 7 million in capex, something like that.
Ash Patel 2:12
And why do you self manage? And do all the construction when everybody else is outsourcing them?
David Lilley 2:21
Well, I guess I'm a control freak. That's probably why I got into this business to begin with. So I just felt like we could do it better, to be quite honest. And I'm glad we did, because I feel like it's made me a better operator, being more involved in the property management business. You know, there's a lot that goes on behind the scenes that you otherwise wouldn't be privy to. And now we're all same team. So if I was outsourcing to a third party, I would be worried about what they're not telling me. But now we're embedded there on our team. We're solving problems together. I don't have to worry about that.
Ash Patel 2:56
David, the arrow is no longer going up into the right with a lot of real estate assets, particularly multifamily. Do you think there'll be a trend with more operators bringing Property Management back in house?
David Lilley 3:10
I have seen that. I've seen that in Dallas with a lot of large firms. They've been doing that long term? I don't know. We're definitely facing some headwinds, but I think long term the fundamentals are good. So we're dealing with a short term, too much supply and not enough demand right now. Next year's probably not going to be any better, it's probably gonna be worse. But after that, I think we'll be in a pretty good place. rent growth will rebound. And no talent. I don't know. I think in the short term, you're probably right, that trend of outsourcing is gonna continue.
Ash Patel 3:46
Yeah, I would think if they bring it back in house, that's some margin they get to recapture. Have other operators approached your company about taking on their properties or teaching them how to self manage?
David Lilley 3:59
Yeah, not necessarily taking us being the third party manager. We do plan to do that. I don't think we're there yet. We're still trying to perfect that side of the business and grow our infrastructure and set us up. So we're ready to do that. But I know a lot of other founders, a lot of multifamily owners in Dallas, and I was just having this conversation yesterday.
Ash Patel 4:19
What advice would you give me we're looking to bring this in house? What challenges did you face?
David Lilley 4:25
So I've had that conversation many times with other operators that are looking to bring it in house.
Ash Patel 4:31
Alright, I'm going to respectfully call you out on something. You said that you're a control freak. And then you said you want to perfect the property management before you start taking it on for others. Perfection is the enemy of progress, right. So I feel like if you guys have already managed all of your units $7 million in capex, you're already there. You're able to take you could argue the properties to manage you could argue that yeah, so
David Lilley 5:00
We'll definitely strive for perfection and hopefully achieve excellence. I know that we're not going to be perfect. But I guess the truth is we don't want to sacrifice the performance of our investments at this point, if we're not ready to bring on other projects. I think that's probably really where we're at this point.
Ash Patel 5:19
David, how are you finding deals today? Or are you even looking to acquire deals today?
David Lilley 5:25
We are, we're in the middle of an acquisition right now, hopefully, it'll close before the end of the year. There's a lot being chopped off market. There's some deals hitting the market. So between those two, that's about 100% of our deal flow right now. A lot off market. And then the rest we see come out in the email blasts, and just broker phone calls.
Ash Patel 5:45
Is there a specific niche that you'd like to stay within?
David Lilley 5:48
I think we're 150 doors plus, ATS, we're really focused on 80s or newer right now we'll look at the 70s deals or older but the upside has to justify that risk. And we haven't seen any deals where that's the case. So I'd say 15, probably 20 to 30 million is kind of our sweet spot in DFW.
Ash Patel 6:10
I'm assuming you raise capital. What are you seeing from investors as far as sentiment investing in multifamily?
David Lilley 6:19
Good question. I think a lot of investors are really focused on cashflow right now. I feel like that's the number one metric that they measure the performance or success of an investment based off of. So I think they're really focused on cash flow, depending on what equity you talk to the institutional guys, they still want, basically, Unicorns of the deal. So we haven't found any that are really interested, it just seems like they're making excuses to sit on the sidelines, because no one wants to be the first guy to jump in and fail and lose their job or whatever. So other than that, I think at this point, people are kind of holding out for high teens, IRR and above. And that's kind of where we're at. We're being really selective with deals, it's got to be extremely compelling for us to take the jump this stage in the game.
Ash Patel 7:09
Have you done any pivoting in terms of size of deals or asset classes to find those returns?
David Lilley 7:18
Yeah, at this point, this year, we focused on 80s or newer. So before that it was late 60s, early 70s. What was the other question?
Ash Patel 7:26
Yeah. How about pivoting to other asset classes?
David Lilley 7:29
Okay, that's really been value add multifamily. So not a huge change there. Each deal. We've continually gotten into bigger and bigger assets. I think we're at the sweet spot where we want to stay at this point, like I said, between that 20 and 30, maybe 20 and 40 million 80s. or newer, I guess you could say we've looked at a lot newer properties. This year, we've looked at 90s 2000s, new Build Lease ups, because really, there wasn't that institutional competition, like there used to be. They're all sitting on the sidelines, waiting. And we felt like this was an opportunity to get into some new high quality deals. Ultimately, the 190s property that we really weren't aggressive on, we ended up getting beat out. But yeah, I guess that would be the answer your question. We've we've been looking at some new Class A stuff where we've never really entertained that prior to this year.
Ash Patel 8:25
David, we're in November of 2023. Do you still see a lot of people overpaying for assets? Are you losing invest in final?
David Lilley 8:36
No, I wouldn't say they're overpaying. I guess there's been two deals this year that we've got beaten out on. And I don't think they were overpaying per se, they're just slightly better terms than we had. So I think a lot of people, the people that are buying right now are being very selective. Because there's not a lot of buyers out there right now, not a lot of guys that can raise capital. And everybody else is just so focused on trying to keep their deals afloat that they're not looking to take on anything at this point.
Ash Patel 9:03
Normally, when I get bios ahead of these interviews, people want to write down how many doors they have the size of their portfolio. I don't have that from you. Is there a reason? Why not?
David Lilley 9:15
I don't think so. We're at 560 doors.
Ash Patel 9:18
What is the size of the portfolio?
David Lilley 9:19
We're at 560 doors in Dallas right now. We've exited five deals. So it's been hard to break that 1000 unit count because we're just trying not to deal so fast. So we've acquired 795 units, I believe, since inception. So that 560 is spread across four assets and Dallas.
Ash Patel 9:37
Yeah, I appreciate the humility because that's typically what people lead with is the Aum number of doors or value or whatever it is right? So good for you for being humble. What's one of the biggest mindset hurdles you've had to overcome to achieve the amount of success that you have?
David Lilley 9:58
People talk about impostor syndrome a lot. So I guess that's one of them just being overly critical. And it's hard not to pay attention to other people maybe being more successful and comparing yourself to them. But at the end of the day, this is why I got in this to begin with. I believe that, really, it's all about just getting out of your own way. I look at other people all the time meet really successful people that I'm just not impressed with. So I feel like if they can do it, there's no reason why I can't. But yes, I still get impostor syndrome all the time. But here we are.
Ash Patel 10:33
Yeah, a couple of my biggest mistakes is one. I didn't start raising capital sooner. It took me almost 10 years. And then I didn't go bigger, faster. What's one thing looking back that would have added to your success? Have you done earlier?
David Lilley 10:51
It's good question. It's tough to say. And I don't know. But I often think would it be different had I had another co founder or two other co founders in the business? I founded Reap Capital, I'm still the only partner in the business. There's no one else. So I've been going at this alone. I've got a great staff. At this point. We've got a total of 10 on our corporate team. But as far as another partner, that's what I think about, would we have grown at twice the speed or four times the speed, but even if so would it be worth it now? Would it be worth it to compromise my vision based on someone else's vision? So I'm happy with where we're at. I don't think I'd change a thing.
Ash Patel 14:46
Let's deep dive into that. I think we can solve that. There has to be a number of things that you either don't enjoy doing, or you're not the best at or combination of the two. And then you are obviously the visionary because you built this company. So I don't think you have to worry about competing visions. There's a book called Rocket fuel, where they talked about every visionary needs an integrator, you've somehow done both for many years. But I think you find that balance of somebody else who can fill the gaps.
David Lilley 15:27
Yeah, you're right. And that's one of the key roles that I've been thinking about filling, who is that integrator? So that is one of the things that I've been thinking about a lot.
Ash Patel 15:37
And it doesn't necessarily have to be an equity partner, but somebody that you can bounce ideas off of either a very senior level person or a partner. But it's a lot more fun when you go together, right?
David Lilley 15:51
Yes, it is. No, I would agree. Yeah, it's been on my mind quite a bit these days.
Ash Patel 15:56
Well, good. I think you're thinking about things the right way. Just fill those gaps. And even if it's not something that you might be good at everything. But if it's something that you don't enjoy doing, find someone to offload that is very good advice.
David Lilley 16:11
Yeah, I agree. 100%.
Ash Patel 16:13
What advice would you give somebody that wanted to follow in your footsteps in November of 2023? David, I want to be a multifamily syndicator. How do I get started? What's your advice?
David Lilley 16:25
I'd say get a mentor, not necessarily pay a bunch of money to be some syndication group, where a lot of people have had success. So bad things to say about that. But whoever it is, find a mentor. That's something I never had, just because I felt like I could figure it out. And if I had that one person that I could go to, for advice, I would have done that. I didn't want to be a part of a group, I probably didn't have the resources at the time to be a part of a group, because it's not necessarily cheap. But that's why I tell them find a mentor. They've learned about their mistakes that they made. So you don't have to make them yourself that can be costly.
Ash Patel 17:01
With the amount of success that you've achieved, I would imagine a lot of people want you to mentor them. How could somebody get your attention and earn your respect to where you would give up your valuable time and attention to mentor them?
David Lilley 17:16
I'd be happy to do it. People reach out all the time via LinkedIn or email or whatever, ask for advice. And I'm happy to help however I can. Your time and resources are limited. So I'm to the point right now where people aren't just blowing me up every day. Maybe they will after this podcast, I don't know. I'm happy to help them. Find me on LinkedIn, shoot me an email, and I'll always do what I can for fellow real estate investor trying to become financially free.
Ash Patel 17:45
David, are you looking or have you looked in other markets besides DFW?
David Lilley 17:49
We have our first two acquisitions. We're actually in Tampa and Phoenix metros.
Ash Patel 17:55
Okay, so you're open to a pretty large geographic area looking for deals.
David Lilley 18:01
I am yeah, at this point, we went in house with property management beginning of last year. So I feel like our networks are in Dallas. That's where most of my team is from and grew up. So we've got solid networks in Dallas, it's easier for us to source the talent to grow our teams. And it's just frankly, easier to build out the business being local. But there are some other locales that are high on our list, and we're interested in. But deal flow for us is pretty strong in Dallas. So that's arguably the best mark in the nation. So as long as we've got enough deal flow in Dallas, really don't have a whole lot of reasons to start looking elsewhere. But I'm sure we will, at some point.
Ash Patel 18:43
If you had to pick one, would you say your bottleneck currently is investor capital or deal flow?
David Lilley 18:49
I'd say equity. We've always been constrained by equity, because I didn't come from a big firm. So I think it's taken some time for us to prove ourselves I believe we have at this point. But there's others then that their next question is have you been around through a downturn, which hopefully, once we get on the other side of this, we'll be able to say? Yeah, so this has definitely been some good experience for us navigating all of this.
Ash Patel 19:16
Well, look, the last downturn was 15 years ago, there wasn't that many people that are still in the game that have been through that. However, I think a good way you can answer that question is how are you faring currently, because a lot of your fellow syndicators are not doing so well. And we're in the early onset of a recession. So for you, I think the way you answer that question is here's how our deals currently stand. Take it for what it is, but we're in the downturn. And here's where we are.
David Lilley 19:49
Yeah, I got a pretty short answer for that. We should have two sales this year. The ones under contract should close this month, but we sold one back in June. And as of that closing date, we had owned it 25 months, so two years. So you could say we bought it pick it the market, like a lot of other people did that are upside down in their equity right now. But we were able to sell that deal and make 36, 37% IRR and that to investors. So that proves that this next sale, it'll be around 19, 20 months of ownership, something like that returns are not going to be that impressive. But it'll be a win for sure. Double digits in this market. That's a huge win, in my opinion. That is unbelievable.
Ash Patel 20:32
On average, what is the IRR that your investors have received?
David Lilley 20:37
It's north of 40% 40.26, I believe.
Ash Patel 20:40
All right. Can I make another suggestion?
David Lilley 20:43
What do you got?
Ash Patel 20:44
Stop being so damn humble. Share some of these success stories.
Yeah, well, you tap those numbers. And then they just say, well, everyone's done well throughout the cycle. So talk is cheap.
Yeah, I get that. But on the deals that you're exiting now, look, a lot of other people are unable to exit right now, for a couple of reasons. One, they might be underwater, too. There's no buyers to make their sale attractive, a multitude of reasons. But the fact that you're doing it, I think speaks huge volumes about your success. So you got to fill that equity gap. How do you do that? How do you get more awareness to your deals?
David Lilley 21:31
So networking thing, we've been focused a lot about branding this year. LinkedIn is a good way to do that. And other social media platforms, podcasts panels. I was just on GRE A's multifamily owner operator panel this last week, that was good exposure, just trying to contribute and be a thought leader.
Ash Patel 21:51
What do you think? When you see other people boasting about their returns on social media? How does that make you feel?
David Lilley 22:00
It's good question. Obviously, there's plenty of market share for everybody happy for those guys. I'm competitive. So I want to thank, Okay, but what about all the unrealized deals? Where are you at with those? That would be my only thought really? What else? What about the unrealized losses? Potentially? Because I've got a competitive nature. That's it, but always happy for everyone else's success?
Ash Patel 22:23
Do you put out a newsletter?
David Lilley 22:25
We don't that's been one thing that I've wanted to prioritize and get to share my view of the market. And what I'm seeing, essentially.
Ash Patel 22:35
Yeah, I think you are a fascinating individual to speak with. And I think you have a lot of value to add to others. But you're not necessarily very outward spoken, you're not going to put a post out there saying our average return is 40% IRR. But in a newsletter, you can share a lot of those successes, along with maybe some hard lessons learned or a story of failure, and really get people to get to know you. So you got to do it. Man. People got to get to know you.
David Lilley 23:13
We'll get around to it. It's that funding gap, right? Yeah, no, no, no one.
Ash Patel 23:18
Set a goal, man set that goal over email on the recipient list for that newsletter. You got to put yourself out there. You've got so much wisdom and success. And I'm sure lessons to share with the world. I think that will help fill your funding gap.
David Lilley 23:35
All right, we'll make it priority.
Ash Patel 23:37
All right, David, are you ready for the best ever lightning round?
David Lilley 23:41
Yeah, let's do it.
Ash Patel 23:42
All right. What's the best ever book you recently read?
David Lilley 23:45
Bills that can doors autobiography. Really good one, a lot of gems in there.
Ash Patel 23:49
What was your big takeaway from that?
David Lilley 23:52
Be creative. He was a super creative developer and gotten to a bunch of other non development deals. So he was just a great investor because he thought outside the box. So creativity and tenacity is a big one.
Ash Patel 24:08
What's the best ever way you like to give back?
David Lilley 24:11
We've done it a bunch of money to St. Jude, they're probably one of our preferred places to go as far as philanthropy goes. Ever since you know, I've gotten there'll be two and for the November so ever since having kids, I mean, I can't think of anyone more deserving for donations and money than kids. But other than that, we've been thinking a nonprofit is in the cards at some point in the future. We'd like to give back in other ways and have more control over how that money spent. So that's definitely in the cards at some point.
Ash Patel 24:44
David, how can the best ever listeners reach out to you?
David Lilley 24:47
Go to our website, it's reapcap.com, r-e-a-p-c-a-p.com There's a contact section. You can schedule a call with me right on there or fill out the contact form and those details we'll get right in my inbox. So you can also find me on LinkedIn, David Lilley, and like I said, always happy to help in whatever way I can.
Ash Patel 25:08
Well David, I've thoroughly enjoyed having this conversation with you. Thank you for your time. I want to see you on that leaderboard of multifamily syndicators, you've got great things going for you. You've got an awesome mindset and you just want to do the right thing. So what a pleasure was talking to you today.
David Lilley 25:27
Pleasure being on we'll be on the leaderboard sooner or later on guaranteed.
Ash Patel 25:31
Good, best ever listeners. Thank you so much for joining us. If you enjoyed this episode, please leave us a five star review. share this podcast with someone you think can benefit from it. Also follow us subscribe and have a best ever day. Hi, best ever listeners Joe Fairless. Here again and one last thing before you go would you like to receive a short weekly email with proven tips from experienced investors free tools and resources and a roundup of the week's most relevant news and best ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and active investors who received the Best Ever newsletter. Just go to Best Ever cre.com Ford slash access and you'll get the very next one. I hope you enjoyed this episode. And as always, thank you for listening and have a best ever day
