Nathan Guinane is the director of investor relations and strategic partnerships at Divergent Capital Partners, a fund for investors to deploy money into apartment complexes. In this episode, Nathan tells us how he and his partners closed out their first fund’s equity raise, what insights they gained that they plan to apply to their second fund, and the advantages and challenges that come with focusing on 20- to 60-unit properties.
Nathan Guinane | Real Estate Background
- Principal and director of investor relations and strategic partnerships at Divergent Capital Partners, a fund for investors to deploy money into apartment complexes.
- Portfolio:
- 264 units
- Based in: Southfield, MI
- Say hi to him at:
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TRANSCRIPT
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless. This is the world's longest-running daily real estate investing podcast where we only talk about the best advice ever. We don't get into any of the fluffy stuff. With us today, Nathan Guinane. How are you doing, Nathan?
Nathan Guinane: I'm doing great. Thanks for having me.
Joe Fairless: Well, I'm glad to hear it, and you're welcome. A little bit about Nathan - he's a principal at Divergent Capital Partners. They've just close out their fund that has eight smaller apartment communities in it, and we will talk about that, and they are in the process of launching their latest fund, and we will talk about that as well. Current portfolio consists of 264 units; those are apartment community units. And with that being said, Nathan, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Nathan Guinane: Yeah, absolutely. So I got in real estate when I was 19; like everyone else, I bought a single family house, rented it out, then realized I needed some more capital, started flipping houses... I ended up flipping a decent amount of houses and bought more rentals, and after a few years I started getting into duplexes and smaller apartment units, like six, seven-unit buildings. But then about a year and a half ago, I partnered up with two guys I'm partnered with now, and we launched a fund, and like you said, we bought eight apartment buildings totaling 260 units, so anywhere from 20 unit to 60 unit buildings in that. And just between the three of us, we really complement each other's skill sets. We called it our test fund, it went really well; we were testing stuff out. So now we're launching fund two, like you said, and after figuring out what we liked and didn't like about fund one, we tweaked everything in the legal, and that's what we're pushing forward.
So our focus now is just getting that off the ground. We're actually working on our first deal, we're under contract on that, that will go into that fund, as long as everything works out with the deal. That's our big focus at the moment, is getting that off the ground, and then it'll be like a $25 million dollar equity raise, roughly 50 to 75 million in assets that we'll go out and purchase on behalf of the fund.
Joe Fairless: How much equity did you raise in the first fund?
Nathan Guinane: 5.6 million. Again, not a huge number; again, we kind of called it our test fund. By the way, between the three of us we have around $23 million of assets. So again, we ended up buying around 18 million for this fund. That's not included in the 20 million of assets collectively between three of us. We consider a semi-small fund, but we wanted to make sure everything worked right. We didn't want to commit a large amount of capital and then have some verbiage that wasn't good to us or to our investors.
Joe Fairless: Makes sense. And just so I'm tracking correctly, you said between the three of you you have 25 million assets. Is that in assets under management, or you personally between the three of you 25 million dollars?
Nathan Guinane: Yeah, that's personally owned between the three of us.
Joe Fairless: Wow.
Nathan Guinane: And that's all real estate. So that's anything from single families up to -- actually, one of my partners, he owns a couple 34-unit buildings as well... And then we have a bunch of duplexes and single family houses, different things. But this entity, which is the fund - it's the first time we've ever done a fund structure. Everything previously was either bought with our own money, or one-off syndications, kind of deal-specific. So we want to give our investors access to multiple deals with one investment, and give them that diversification, plus allow us to better manage their money by being able to capitalize on deals while we already have the money raised. That was basically the thesis on why we wanted to do that fund one, and it worked great, so then now we're actually doing what we consider a significant amount, which is a $25 million raise. We kind of have chunks of that lined up, and then obviously we'll continue to raise through it.
Joe Fairless: Lots unpack, and we will. One initial question is - you said you've found what you liked and you didn't like in the legal, and then you changed it from fund one to fund two.
Nathan Guinane: Yep.
Joe Fairless: What did you like, what didn't you like, and what was changed?
Nathan Guinane: The way we set it up was actually the investor got the first 5%, like a pref. We didn't take an asset management fee prior to that; so they got 5%, and then we kind of played catch up. We get 2%, which is kinda like our asset management fee, but it's afterwards, and then we split everything. Then we did a 70/30 split. So semi-traditional, but we switched the beginning.
The issue was we ran into some sophisticated investors who wanted to invest, but just got stuck on that, because not many people kind of structured it that way... And we did it for alignment, just so people we thought would jump on board easier, just so they could see we're not taking any dollars, literally nothing; not an asset management fee, or anything. That worked, but in the beginning it was a little tougher to have anyone except people that have previously invested with us join. We tweaked that... And then one more thing we tweaked - in fund two we're actually allowed to reinvest proceeds from capital transactions, a capital transaction being if we sell a building, or refinance a building; at our sole discretion, we're allowed to reinvest that, as long as it's within the timeframe of our fund, which is 10 years. So we like that, too. That way we can take advantage of great investments, and boost the portfolio on behalf of our investors, as well as increase their cash flow without them needing to put any more capital into the fund. So we made it a little more like what I would consider a fund to be, where we're able to actually reinvest that money at our discretion.
Joe Fairless: Any pushback from investors on that second part? Because from what I understand, if I'm tracking correctly, if you sell a property in the second fund, and instead of doing the return to investors based on the promote structure, you could buy another property and put it into the fund with those proceeds.
Nathan Guinane: Yep. So so far - and again, it's a skewed answer, because it's not fully out illegal. So people we've talked about --
Joe Fairless: Right, right. True.
Nathan Guinane: But the people we've talked to that have invested in fund one, they don't have an issue; they actually like it. Most of our investors that have invested in fund one and that have expressed their interest so we think they'll invest in fund two - not saying they don't care about the return of capital, but they're in it for a solid investment over years. Same thing with the fund; a lot of people target three to five-year business plans. With our fund we actually upfront tell people "Expect nothing less than five years", and we're actually shooting for 10 years. We actually have options to keep properties after 10 years, and investors can stay on board, and a very big chunk of our investors, their full intention's actually, they're hoping we do that, and they'll stay on with us past 10 years.
So semi-longer term thinking, which is cool; it lets us weather any storm. If we hit some kind of turbulence, it gives us an advantage over someone who planned to exit within four years, and their numbers are all kind of based on that. So it's something we actually really like; we're trying to gear people's minds towards longer-term generational wealth, let us take care of this, give you cash flow... And again, if we sell a property, we can return the capital; if something's present, we have the option to reinvest it into something.
Joe Fairless: And talking about competitive advantages, your portfolio for the first fund - let's talk about the first fund, where you bought 20 to 60 units. Can you talk about why that size of property?
Nathan Guinane: A big part of that is individually between the three of us we don't have a property bigger than 45 units previous to that fund. So it's it's kind of in our wheelhouse, for one. But two, the point in the fund was to give diversification to investors. And we wanted to keep it small enough that we weren't committing a significant amount of time to a bad structure. So we thought 5 million bucks, we figured we'd buy 12 to 15 million dollars of property. If we bought anything bigger, we would have been -- we'd have two properties. Does that make sense? And actually, beyond that, there are some really good advantages to being in that criteria section, one of them being if someone has $100 million and buying all kinds of stuff, they tend to not buy those. They kind of stay at 75 units and over. So you're kinda like playing in a field where the properties are too small for big guys, and they're too big for a lot of small players in the local community. So you get some advantages from that standpoint, too. So for anyone listening, that actually is a very good area to be in, if it aligns with your goals. But part of the reason for us - like I said, we wanted to have about seven to 10 properties in the fund. A lot of it was that.
Joe Fairless: Let's talk about on the management side, with 20 to 60 units. Can you talk about the challenges and how you approach it?
Nathan Guinane: Yeah, exactly. So one of our partners, his name's Travis; he's actually the oldest of the three. He's a licensed attorney, but he has a --
Joe Fairless: He's got the best hair of you three, too. [unintelligible 00:09:54.25] Top ten haircuts for 2023, I think, based on the picture on your website.
Nathan Guinane: Yup, that's him. So yeah, we always get that comment, too... He has a property management company, of that first fund... And same thing with fund two. As a group, the three of us decide property by property who's going to manage it. A third party... And when we consider Travis's management company third party, to an extent, because it is. So he actually manages about five of those eight properties. He has other properties around there too, obviously, that he manages... We have another property management company, a third party that manages the last three.
So basically, based on what property we find and what the business plan is, and obviously what area and all of that, we then go and figure out who's going to be the best to manage us. In our case, especially for fund one, Travis's group happened to be the best, at the time, and for those business plans. So we're open to third party management, which we do use in every regard. But management is a lot different. So hiring any property management company, even Travis's, who's our partner - they happen to have an expertise; like I said, all of the properties they manage are 50 units and under, so it's kind of in their wheelhouse.
The other management company too, they happen to be a couple properties that are a little outside of where Travis manages, and this management company does manage there, as well as other areas outside of ours... So we kind of added a vendor that can be trusted, and then they've proved it to us since then. So now we can see their track record, they're doing really well at the three properties... So it also expands our reach, because we can use them to manage those types of properties. Then we have one more property manager we have not yet used, but we intend to, as long as we find a property that fits that wheelhouse as well.
Joe Fairless: What is your role in the business?
Nathan Guinane: We each have our own roles. So my role, we call me investor relations, and I help on business development. One of my partners, [unintelligible 00:11:47.09] he actually is head of acquisitions. Me and him overlap in almost every platform. So he does investor relations with me too, and investor relations meaning we raise money, and we do the relations, updates, videos, all kinds of stuff on behalf of our investors, so they can see what's going on. So he's in charge of nurturing broker relations and that, but as soon as deals come in, we both underwrite it, see what fits, what doesn't fit, we send out our LOIs, and move forward from there. So me and him are kind of doing similar things, just we're each in charge of our own lane, basically.
Joe Fairless: With the 20 to 60 units buying criteria, what is the challenge in terms of finding deals with that size of property?
Nathan Guinane: One of the challenges ends up being a lot of those people manage themselves. So you run into a lot of bad financials; maybe missing half their leases, and a lot of stuff runs through them, so they don't have any systems... So a lot of those properties we bought, I would say six out of the eight, were not traditionally property-managed. So we had to actually help on the side of "Here's this handwritten rent ledger", we'd have to put it into Excel sheets, different things for our lenders... And lenders were super-helpful with that as well. But it can be a very time-consuming and big issue, and there's more unknowns, obviously, because there's less documentation on most everything.
That being said, it brings a pretty good opportunity, because in all that inefficiency and that type of stuff, there's a lot of value that can be found, and obviously systematized and made more efficient once you own it. And you can cut a lot of costs, and increase a lot of revenue. Those same people tend to under-rent their properties as well.
Joe Fairless: How do you find them?
Nathan Guinane: We do a lot of nurturing broker relations. So every single deal we consider off market. I'm gonna screw this up, but say five or six of those deals were through brokers, but off market. [unintelligible 00:13:46.23] And a couple were fully off market, direct to owners. But the brokers are one of the best ways to do it; you just have to create relationships and follow up, and prove that we know what we're doing. We basically underwrite everything. So anything that gets sent to us, as long as right off the bat it's not in a spot we don't want, or too big or too small, we underwrite everything, give our feedback, and say "Hey, we can buy it around this price." And it's great, because for a broker, it's huge value. They're able to turn around to off market sellers, and basically they're doing it on our behalf, and they say "Hey, I've got someone who will buy it around here", and if it's anything in the ballpark, we get a conversation going and kind of get a deal set up. So we just try to add as much value as we can to brokers, and anyone else who would know owners of properties like that, which - there's some CPAs and other things we're kinda close with.
Break: [00:14:36.19]
Joe Fairless: As far as adding value to brokers, will you give some examples?
Nathan Guinane: Yeah, one of the biggest examples is giving pretty much unsolicited offers, and when a deal comes to us, we give them feedback on everything. If the deal is not right for us, we don't underwrite it; we tell them exactly why it's not right for us, what about it we don't like. Anything that hits our wheelhouse, we give them an offer. We say "Here's our offer, here's the price." So again, they're getting feedback right away. I know a lot of buyers don't do that, and you kind of become less valuable of a buyer, because if a broker is sending you stuff and you're either not responding, or responding two weeks later, it becomes harder and harder, in my opinion, to send you stuff. The way we do it, we become very valuable, and we become really close with those professionals in the field, who carry a lot of weight... And that's their job, they're always calling owners, they're making relationships with every owner. So if there's a building you like, you can mention it to a few of the brokers, and one of them is bound to say, "Oh, yeah, I know that guy. Let me call him."
So anyway, that's our biggest value to brokers. And the other ones, we always do what we say. We've closed every deal, in all three of our individual careers, as well as the fund. I mean, that's not to say that if something's grossly misrepresented in a transaction, that we're not going to call it out and try to make something right or just back away from the deal... But as long as that's not the case, when we submit an offer, we're not doing it with the intent to retrade, or anything of that nature; we run our due diligence really systematically, and pretty clean. We don't bother the seller for anything we don't actually need. So the brokers never have to ask for something on our behalf that's off the wall, which can drive a seller pretty crazy as well, if they keep getting weird demands from the buyer. So we're a very easy buyer, on top of that, as long as we're getting what we need.
Joe Fairless: And what about the direct to owners? How did you find those deals?
Nathan Guinane: So actually, the ones for that first fund - it was the type of property that if someone went to buy it, you would just be like, "Oh, the owner must live in Hawaii, or something, and is not around." They're missing something; like, all the grass is nine inches high... And not saying it didn't get cut, but maybe it got cut a week too late multiple times; just stuff like that, where it's like super-goofy; we just add it to a list, and then that list, we figure out who the owners are... And again, if a broker has relationships - great, they can figure it out. But in some of those instances, we reach out direct to the seller, and we're just interested to have a conversation. And some of the times it's just purely timing.
One of them we called and the guy happened to have already tried to sell it, and the deal fell apart... So our timing was great. Other than that, those usually take a year, two years... One of the properties I think we reached out to probably two years ago before the fund was even a thing one of us was just gonna buy it... And obviously the seller's not ready, and then while we had the fund open, the seller was ready, which again, we called back; it's not a one-off phone call, it's reaching out multiple times, and then creating a relationship. And then eventually, on one of those calls, he kind of made an inclination that he might be ready to sell. We met with him, sat down, talked to him, tried to see what he wanted, and we were able to make something work.
Those are obviously far and few between, because you have to put in a lot of effort and show true intent, and not be super pushy. You just kind of have to be there as a resource. And again, it just all comes back to adding value. So the cool thing about our partnership, all three of us really agree on adding as much value as we can everywhere... So in every aspect, that's our goal. So with brokers, we try to give them as much value as we can, and it kind of comes back at some point.
Joe Fairless: As far as that phone call, once you get the information about the owner, what's the first contact? Is it a phone call? Is it a letter? Is it something else?
Nathan Guinane: We've tried a bit of everything. And again, my partner [unintelligible 00:19:26.09] is in charge that, but I roughly know what we do, and I've been on those calls, and things... We've done it every single way. So we've sent letters first, we've sent letters second, we've called first, called second... We do a huge mix of things. In that instant they probably got a letter before we called; and when we called, I don't think they realized the letter was us. But it's more of like "Hey, we own properties in your area, and we're just reaching out just to get to know you, and if we can add any value, if you need any vendors, let us know." And also, we usually backhandedly let them know that we still buy apartment buildings... But we're just not super-pushy. We don't call and say, "Hey, are you ready to sell? We'll give you X amount." We've done that before, and in different stages... But in general, we just trt to create a relationship, so we're always like top of mind to that guy. So in his head, he can say, "If I am going to sell this two years, three years, four years, this is the number I'm going to call, because I've talked to them now 10 times, or received these things." But yeah, we try not to be pushy salespeople, because then you just get hung up on.
Joe Fairless: Going back to the 20 to 60-unit range, and you said value can be found in these deals, because typically, it's not professionally managed, from your experience... You said two ways, and I know there are more, but two ways... You can cut costs, and also, typically, they're under-rented. For the cutting of the costs, can you give some specific examples of that?
Nathan Guinane: So one, on properties where it makes sense, we generally put like a water conservation program in, which is pretty much like swapping toilets that are from the '50s, doing all that stuff that tend to cut that utility cost by a lot. Those type of mom and pop owners - I've never seen one do it. That's one way. But more than that, and the bigger value is we do have a bunch of properties in the area, so we have very solid vendors within the management groups we use... So like our prices - and I'm just making it up, but say changing a toilet for us is $70 in labor, plus $100, so $170. Some of these like mom and pops, they're not actually changing it themselves; some of them are, but the ones that aren't, they call a one-off plumber who might charge them $400. And they're calling this carpet person who maybe their carpet installer's $1,900 on a term, whereas ours is $850. Our painters paint a unit for $500, theirs might be $1,500. Just basically we have very solidified contractors, and not so much contracts in place, but pricing in place, that we use everywhere... And you give them such good amount of work that those prices - they're very good, very competitive.
One of the buildings we bought, most of the guy's line items were a lot more than what we pay for things... And then there's other ways, too. But those are the two biggest that are impactful in dollar amounts. And then there's some preventative stuff that we do, that maybe they don't.
The other thing - the reason they tend to have less rent than, say, we get, is generally that's the only building they own. Maybe they own one more. So they're not like checking comps, they're not doing any of that; they're more like stuck in the day to day, where we kind of look portfolio-wide and we can say "Hey, in that area, those units should be $1,100. This guy is at $690." And I'm sure they realize $690 is low, but they usually say like, "Oh yeah, they should be $850." Well, even the $850 is still low. But half of the reason they're low is they don't want the vacancy, because then they have to deal with it... And some of these places got bought 15 years ago, so they're still cash-flowing for the guy, he's happy, and he's kind of keeping his own headache down.
So that's the third way, that's the raising the revenue. A lot of those owners, at least that we've targeted and have dealt with, they're just like missing the boat for whatever reason on what the rental rate should be. In general, it's more of a convenience thing.
Joe Fairless: Taking a step back, what's your best real estate investing advice ever?
Nathan Guinane: Finding great partners actually is huge. So before this partnership, I had a partnership before, and it wasn't the greatest thing. But I did a bunch of stuff all by myself. By getting partners who actually complimented me and have the same goal and vision, it's supercharged getting to my goals, as well as their goals. That would be it. Actually looking at partners, or in the backyard thinking a good partner might be great; or even a joint venture. Same thing.
Joe Fairless: We're gonna do a lightning round. Are you ready for the Best Ever lightning round?
Nathan Guinane: Yeah, absolutely.
Joe Fairless: Best ever book you've recently read?
Nathan Guinane: Two months I read a book called "What It Takes", Stephen A. Schwarzman, the Blackstone guy, the founder of that... But yeah, that book was great. It talked about starting Blackstone, all the way up till a year or two ago.
Joe Fairless: What was the takeaway for you from it?
Nathan Guinane: A bunch... So you kind of got to see them sort of fly by the seat of their pants in the beginning; they're now doing hundreds of million dollar deals now... But basically, they added in a bunch of systems on how to handle deal in-flow, how to quickly vet things out, how to present ideas, how to veto ideas, and how to accept them, and then what to purchase. That process. And then the bigger thing actually is how much he values his joint ventures, his partners, and his employees, and making a great environment to work with and for them. That definitely 100x-ed his business, was that... When in the beginning, that wasn't a huge focus. And then now, after reading the book, it sounds like that's his largest focus on the second half of that company's lifetime.
Joe Fairless: Best ever way you like to give back to the community?
Nathan Guinane: So the last couple years I just tried to help people that I think are similar to where I was at handful years ago. Just basically when they have questions on how to get started in real estate, or how to get farther, I try to answer as many questions I can; I have them call me, email me, and help them with that. Something that aligns with their goals and moves their needle forward.
Joe Fairless: What deal have you lost the most amount of money on?
Nathan Guinane: I mentioned a previous partnership; it was actually my first ever partnership. We bought a 13,000 square foot building in Detroit that was vacant. I called it a redevelopment deal, and I raised $1.2 million to do it... But I had two partners, that's how we did it. So the three of us came in, and we were kind of all active... And there was just nothing wrong with the deal, it was just a bad partnership. So after about a year, it kind of started breaking apart, and we broke up, sold the building; I lost $100,000, and each of them lost some money too, for sure.
But going back to the partnership, a bad partnership can be bad as well. So you've got to be very careful with what you pick, and who your partners are in the alignment. I think it was a misalignment of vision there; I was probably like 25 at the time, and I was too excited about the deal, and I didn't really vet the partnership as much as I should have, and ask questions that now I would.
Joe Fairless: Really quick, what's the one or two questions you would ask if presented a similar situation in the future?
Nathan Guinane: Yeah, I would actually ask about the downside. What happens if the market changes? What are we going to do with this building? What happens if something with the financing happens and we have to switch the route? Everything was very one track; it was like, "Oh, here's what the deal is gonna be worth when it's done. Here's the financing we're gonna get it." There was no alternative options. So when we hit those roadblocks and speed bumps that always happen on every thing ever, there was no backup plan pre-talked about, so it was hard to get everyone to veer and agree on where we were going. There were too many cooks in the kitchen with no previous agreements on anything. And actually, the legal contract too wasn't the greatest. So nowadays, I'd make sure all that stuff is fully in line before jumping in a deal.
Joe Fairless: Nathan, thank you so much for being on the show, sharing your journey with us. Congrats on closing out that first fund's equity raise, and good luck with the second fund, and thanks for sharing the insights that you've applied towards your business and buying the 20 to 60-units on the first fun, and some advantages and challenges that go along with that. So I appreciate it, I hope you have a best ever day, and talk to you again soon.
Nathan Guinane: You too. Thank you.
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