JF2167: My First General Partnership Deal With Alexander Felice #SituationSaturday

Alexander Felice Real Estate Background: 

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“Start off small to get your reps in first, proof of concept, before doing bigger deals” – Alexander Felice

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Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. My name is Theo Hicks and today I’ll be speaking with Alex Felice. Alex, how are you doing today?

Alexander Felice: I’m extremely well. Thanks for having me.

Theo Hicks: Absolutely, thanks for joining us. So Alex is a repeat guest. So make sure you listen his first episode; it’s Episode 1614. Since today, I didn’t know it’s Saturday, we’re gonna be doing a Situation Saturday where we talk about a sticky situation that our guest is in, and have a conversation about any challenges he’s facing and what he is doing to overcome them. So that’s gonna be the focus of the conversation today, but before we get into that, let’s go over Alex’s background as a refresher. He’s a career banker working in risk analysis for SBA lending; he has six years of real estate investing experience, his portfolio consists of eight BRRRR deals and a 24-unit multifamily. He’s from Fayetteville, North Carolina, and you can say hi to him at brokeisachoice.com. So Alex, before we start talking about your sticky situation, which is your first JV deal, do you mind telling us a little more about your background and what you’re focused on now?

Alexander Felice: Yeah. So I got into real estate trying to — I had a job I hated, so I had to get out of it. So I started buying single-family homes, because I was broke, and that’s all I could swing, and that went well for a little while, but it doesn’t take long before you realize that there’s no economies of scale, which is probably something everybody who listens to the show already knows or has figured out – that you have to go to big multifamilies to get the economies of scale. So after about eight of them, I started moving towards that, but it’s a challenge to grow, for me at least, to go up to– some people do hundreds of units in their first bid; that was not something that I was capable of, so I switched into slowly going towards multifamilies, and lately, I’ve been doing flips. I still want to do multifamily, but I’m just gonna go a little bit slower than I had anticipated, but yeah, that’s the transition that I’ve been at.

Theo Hicks: Sure. So you’ve got the 24-unit multifamily. Is that the JV deal?

Alexander Felice: Yeah, last June, we closed on a 24-unit multifamily. I did it with four other people, all of which whom I met on the internet, which was neat, and our original intent was to syndicate, but the 24-unit at a million dollar purchase price, it didn’t warrant the cost to do that. So we JVed it, and it’s gone reasonably well, with some hiccups.

Theo Hicks: Sure, yeah. So before we get into the hiccups, I want to just set the stage a little bit more. So you mentioned it as a $1 million purchase price. What was the original business plan?

Alexander Felice: So the plan was, it was five people who had never done this before, and we all have the same idea – multifamily, buy for cash flow, value-add if we can. We wanted something that– we were worried about preservation of capital first, and more so than anything, I wanted the experience. I have a giant ego and so I was trying to make sure that I didn’t let that run the show. I said, “Look, I just need to get one of these. I need to get five partners that I know I can return money to, and get the experience,” and then– I have a long life ahead of me that I can buy bigger, bigger deals. I didn’t want to go off and buy something that I couldn’t handle the first one. So idea was to get my reps in, proof of concept, get one done so that I knew I could do it and then the sky’s the limit.

Theo Hicks: How did you find the deal?

Alexander Felice: Broker. We were talking to brokers for probably four or five months, just looking at everything. One of the partners was just looking at deals, looking at deals, looking at deals. So this one, he brought to me, my partner; he brought it to me and we looked at it. It was in an area that we knew well that I already invest [unintelligible [00:06:19].18]. It was about what we wanted to do, and I wish there would have been more value add, but it was a deal that we knew we could make money on and we said, “Okay, let’s snowball.”

Theo Hicks: Perfect. So a million dollar purchase price, found it through a broker. The last thing I want to know is about your partner. So you said you met him on the internet. Do you mind walking us through that? I mean, a lot of people do that as well. I actually met Joe through the internet and I’ve been working for him for four years. So I’m just curious, can you walk us through how you met those four people in more specifics?

Alexander Felice: Well, on my website, what I’ve been doing as an experiment for three years now, interestingly, is I put up on the contact page — so the first thing you see is, “Do you want a video chat with me?” There’s no strings attached, there’s no nothing, no cost, no– I don’t sell anything. So I just put it on there and see who will reach out, and sure enough, I booked a month out for Thursday nights, and strangers just going on the internet and they video chat me and I do deals with some of them. So these are four people that I met through doing video chat with me, because they just wanted to be interested in what I was putting together.

I’m very transparent on my website about the deals that I do and how I do them, so it resonates with certain people. So people reach out to me and over time, it was, “Hey, I want to do multifamily next,” and so you say that to people enough– the rule of investing or the rule of networking is, just tell everybody what you’re doing. And so I’m very loud on social media, and I’m very loud on the internet, and it attracts the people that I needed. So over time, I got four other people that wanted to do the same thing as I did. They wanted to be part of what I was putting together, and it’s not more complicated than that. It’s just you have to put yourself out there and you have to be consistent, you have to be loud, and it inevitably will attract the people that wanna do the same thing as you.

Theo Hicks: Can you give us an example of you being very loud on social media?

Alexander Felice: I don’t go– No, I guess not. I wear a lot of bright pink. I say things that other people think they’re controversial. I don’t think any of that I say is controversial, but I’m very unapologetic on the internet and I’m not good at marketing strategy. I’m just good at saying my authentic thoughts and I’m just good at saying them loudly, and I do it quite often.

Theo Hicks: Perfect. Okay, so we’ve get the context for the deal set–

Alexander Felice: For instance, my website is called Broke is a Choice; that’s a jerk thing to say to a lot of people. That’s the thing I mean, where broke is a choice, but it’s a little bit rude; that’s my style.

Theo Hicks: Yeah, I like it. So when I first read that, I was like, “Ah, it’s a really cool website. I like that.” I think it’s a lot of attention because of that website.

Alexander Felice: There you go. That’s it.

Theo Hicks: And in the pink too. I’m sure the pink helps as well. Okay, so 24-unit, four partners, including you. We talked about how you met them, purchase price, how you found the deal. So the deal’s purchased. You mentioned that it’s going relatively smoothly. Maybe explain to us what happened after you bought the deal.

Alexander Felice: So I’m a career banker, so I should have known this, but I made– one big error that I made was, I didn’t anticipate the maintenance costs to go to escrow to the bank. So we have a certain percentage that goes to reserves to the bank every month that comes out of cash flow. Well, I didn’t anticipate that in my projections. So that cost every month, plus insurance on year one charged me for year one and year two. The bank took the second year to an escrow. So I have about 10% of my gross potential income that comes out of cash flow every month. Is it the end of the world? No, not a little bit, but it does reflect on my ability to pay out investors cash on cash year one.

Theo Hicks: I’m sorry, but before you continue, I’m just confused. So it was reserves — so you’ve got reserves coming out each month. What about the insurance? You’re saying it was a lump sum?

Alexander Felice: No. So say I have $13,000 a month in gross potential rents. Well, I have $500 a month that goes to the bank for repair escrow. Now that’s pretty standard. I just fumbled it, I was paying attention to a lot of the things. So I put that into the projection. So $500 a month comes out and it goes to the bank. Now that’s our money, but we don’t get it every month. We won’t get it till whenever, probably two or three years down the road. The second one is $715 in insurance. Now, we pay $750 in a month in insurance for year one, but the bank is taking an additional $715 a month for escrow to pay for year two. Now that’ll come off at the end of year one, but for that first year, we have $1300 a month that comes out of our cash flow to go to escrow costs; that’s 10% of gross potential rent. It’s not painful, but it’s really annoying.

Theo Hicks: It wasn’t disclosed to you by the lender at closing?

Alexander Felice: It was probably something that would have been caught by anybody who’s done this before, and I should have caught it myself, but when you’re doing these deals your first time, and everybody who had done this on this team was a first-timer, it’s one of those things that just slipped by us, and I wish I would have better accounted for it. It’s not the end of the world, but it is very frustrating, because it messes up my year one cash on cash returns for investors.

Theo Hicks: 100%, yeah. Okay, any other challenges with the deal?

Alexander Felice: Yeah, it’s too small. I’ll never do 24 again; that’s ridiculous. It’s way too small. Most of our problems were scale problems. I’m trying to think of some good examples, but my first thought was to go to multifamily for economies of scale, but I don’t think you’d get economies of scale until you get to probably– now that I look back, probably 100 units is what you really need. Maybe a little less than that, but 24 is not enough, at least not for us. The rents are $600 to $625. I’ll never do that again. I don’t want anything less than mid-market rents, and that’s in my market $1,100 to $1,200. Maybe some of that is personal reasons, personal approach, but these are the things that I learned. Went too small, we were too timid with the money, we should have gone bigger, we should have been bolder, and I think it would have actually made us more.

Theo Hicks: Are you managing the deal yourself or is there a third-party management company?

Alexander Felice: We have a third-party management company.

Theo Hicks: Okay. Do they have someone on-site?

Alexander Felice: No, it’s not big enough to do on-site management, in-house, to do it full time with them. So we have a third-party management company. I love them; they’re working out fantastic, they’re taking great care of the place. Actually, our expense ratio is less than the previous owners who were self-managing. So I don’t have a problem on the expense side. What I have a problem really is– so we bought it in mid-2019 at, now we know, at the top of the market. I knew it then, but mania gets, I think, everybody in the beginning at least, “I should just pay less.” But the property is being run as well as it possibly can be, in my opinion. We just have the deal up a little bit shaky. And we’re going to end up making good money in this property, I just look back and think of all the things I could have done better.

Theo Hicks: Yeah, totally. So you’ve got four other people. What is everyone’s role in the joint venture?

Alexander Felice: So my main partner – we have somebody who does the financial side, so they’ll do my books, and then another guy just helped us get it and he’s helping us get the next deals, and then some people play less of a role than I would have liked, but I’m okay with that. So I just do– I manage the property manager and I manage monthly reports. My other main partner does the accounting books, and then another guy’s doing acquisition side.

Theo Hicks: Did everyone involved invest money in the deal?

Alexander Felice: Yes, I did this so everybody went in equal, or very close to equal. Me and my main partner have a slightly larger share, so that we can take the guarantee, and then the other partners didn’t have to take the guarantee, and they took a small share for it. I spread it out equally so that I could– how do I say it? People are taking a chance on me because it’s my first one, so I just said, “Hey, look, just believe in me. I’ll give a return and I don’t care what the work costs me, I just want to make sure that I can show that I can get this done, I can show a profit, and then I’ll take a bit of cut in the next one.”

Theo Hicks: Yeah, exactly. So since everyone’s in the deal for equal amounts, are the profit split done equally as well?

Alexander Felice: Yep. You’re split with the amount that you put in, both equity and cash flow.

Theo Hicks: Okay, perfect. Any challenges with doing a JV as opposed to doing the syndication route? Any challenges with control, or everyone having a say, anything like that?

Alexander Felice: No, but people is my specialty. So I didn’t expect any of those challenges from the start. Everybody knew that I was gonna lead the deal for the most part, and that’s worked out well. I didn’t take in anybody that I thought it was going to be more of a hassle than I was willing to take on. So I haven’t had any problems with that. The syndication route, I’m up for it in the future. I underestimated the challenge of the cost to price balance of doing syndication. With the syndication, thhe attorney costs you 15 grand, it’s like, “Dude, don’t do it on a million-dollar deal. It doesn’t make sense.” But the problem is not that we should have syndicated, the problem is that do a bigger deal. That’s the correct solution, in my experience.

Theo Hicks: So with all the lessons you learned, what would be your ideal next deal?

Alexander Felice: I would like an A or B Class property in a bigger area, in a growing area with higher rents and more investors. I would go bigger even if it means less returns. I think the stability is worth the premium by a longshot. The C Class properties, the numbers look good, but it’s just not what I would do again. I’d go with an A Class property in Raleigh or Charlotte, that’s what I’d prefer.

Theo Hicks: And then do you have a network of people that if that ideal deal were to fall into your lap tomorrow, you could raise the capital?

Alexander Felice: I think so. Funny, in this business everybody who’s done no deals – that uphill battle is really hard, but once you do one, it’s like the doors really open up. So obviously that gets bigger as you do more. I think I have– a lot of people didn’t want to do the first one with me, even though I’ve been doing single-families for a long time, and I have a big social media presence, a lot of people were interested… But I’ve had literally people tell me, “Yeah, I’ll do the second one with you. I don’t want to do the first one with you.”

And also, the first one, you don’t have a problem with — it’s hard for me to explain. I have a problem selling the first deal to people, because you don’t really know if it’s going to close when you get a hold of it, because I was new… And so you go to somebody, it’s like, I really can’t sell them as confidently as I’d like, because I’m not sure how to do this. So they can feel that, and that hinders me. So it’s like a cyclical thing; I’m not as confident so they aren’t as confident, so then I’m not as confident. When we go to do this next one, I think that will be mostly entirely removed, and so I’ll be able to much more confidently go out and get funding, and I’ll have learned a lesson from this first one, and I perceive that to be a much lesser problem.

Theo Hicks: Alright, Alex, is there anything else that you want to mention before we close out the interview?

Alexander Felice: Buy something that makes money. You can grow, you don’t have to do everything on your first one. Ego, I’m prone to ego, and it got me in a little bit of trouble on this one, and I know that problem for other people, but I play the long game. This multifamily thing, it works, but you don’t have to do it on the first deal.

Theo Hicks: Alright, thanks for sharing that. Alright, Alex, well, I enjoyed this conversation. I look forward to checking out your Broke is a Choice website and some of your comments on social media, but in the meantime, some of the biggest takeaways that I got from the episode was – number one, how you were able to put together a joint venture deal with four people you’d met on the internet.

I really liked your strategy of having a “Do you want to video chat with me?” on your contact page, and that’s how you were able to meet the individuals you did this deal with. You also mentioned how the roles and responsibilities were allocated, but your biggest lessons on this deal was number one, not anticipating the reserves that need to go to the bank every month, as well as having to pay a monthly insurance rate that was covering year one and year two during, year one. So another is understanding what the lenders’ criteria is for reserves and insurance and taxes. I know taxes is another thing that people talk about as well, that might be a little bit different in year one.

The second thing you said is that 24 units is too small, because most of the issues that you’ve come across have been economies of scale issues, and so you prefer to focus on 100 units or more, because that’s where economies of scale come into play. You also mentioned that you wouldn’t do $600 to $625 rent ranges anymore, and that you want to go a little higher than that. You also mentioned that you probably should have paid a lot less for the deal, but were really excited.

Alexander Felice: A little less, Theo. Not that much, a little less.

Theo Hicks: And then the last thing we talked about having a little bit of trouble selling the deal confidently – because you hadn’t done it before, so you weren’t exactly sure how things were gonna play out, so you didn’t feel comfortable saying something you didn’t really feel confident and comfortable with, and then in turn, they could feel that, so they were less confident and it’s a negative feedback loop.

So again, Alex, I appreciate you coming on the show. Make sure you guys check out his previous episode; again, that’s 1614. Go to the website Broke is a Choice, take advantage of the free video chat. It’s not every day that guests offer that to listeners. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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