JF2370: The Challenges Of Starting And Scaling A Syndication With Chris Larsen #SituationSaturday

Chris Larsen started investing at 21. He was racing bicycles for 7 years on a professional level at the time, but he knew that he could do more with his life.

Investing gave him the feeling of freedom that riding a bicycle once did. He went on to build a portfolio of single-family rentals. Over time, he moved on to multi-family units and commercial real estate and did his first syndication in 2016. Four years and nine syndications later, Chris is here to share his perspective and experience.

Chris Larsen  Real Estate Background: #SituationSaturday

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“You don’t identify the deal first. You identify the market first.” – Chris Larsen.

TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’ll be speaking with Chris Larsen. Chris, how are you doing today?

Chris Larsen: I’m doing fantastic, Theo. Excited to be on with you today.

Theo Hicks: Yeah, absolutely. Thanks for taking the time to speak with us today. A little bit about Chris. He’s a full-time real estate investor, author, and sales executive. The founder of Next-Level Income, through which he helps investors become financially independent. He has over 20 years of real estate investing experience in development, private lending, buying distressed debt, commercial offices, and syndication. Based in Asheville, North Carolina. His website is nextlevelincome.com. Chris, do you mind telling us something more about your background and what you’re focused on today?

Chris Larsen: Yeah. Thanks, Theo. So as you said, over 20 years of real estate investing. I started in college, aged 21. I was racing my bicycle at the time. I started racing bicycles at age 14. It’s funny, I think back and I always really enjoyed the thought of having freedom. One of the best things about riding a bicycle – I’ll never forget it, when I could like leave my neighborhood on a bike, I had this sense of freedom.

Then I started riding with a family friend, and I rode from our house, which was 10 miles from Annapolis, all the way to Annapolis, Maryland. Then met, who became my best friend and training partner, Chris Strater. We’d meet after school every day and we’ve ridden all over the place, Theo. We traveled up and down the East Coast, and eventually across the country, racing as juniors, and Chris became like a brother to me.

So I got into college. I was studying engineering at Virginia Tech. My freshman year, the family friend who got me into cycling also introduced me to investing and the idea of compound interest. I started a Roth IRA, started investing, started day trading, and was making and sometimes losing thousands of dollars a month as a junior in college. At that point, I had quit cycling, and the reason is my best friend Chris had passed away. He died between my freshman and sophomore years. I raced my sophomore year, and I kind of got burned out… But I also crossed the line after winning a race and I felt hollow. I realized that I was meant to do more than just race my bicycle. So I quit racing. I wanted to be free to pursue the best life that I could and I thought that investing would be the best option to achieve that freedom.

But after trading in the stock market for a little over a year in the late 90s, I realized that personality-wise, I wanted something a little more concrete and a little bit more controllable. I bought my first property aged 21, after a bunch of reading. I went on to build a portfolio of single-family rentals, but after some more introspection later on in my life, about 15 years later, I realized there were better ways to invest in real estate. At that time I came upon multifamily, and I realized that the passive nature of it, the income, the controlled appreciation, the tax benefits were a good fit for me. I ultimately unwound my entire single-family portfolio and moved into commercial real estate and then formed a partnership. We did our first syndication in 2016, and we are now on our ninth syndication here since then. We’ve been focused on the South-East, and that’s been our main focus when it comes to real estate here, Theo.

Theo Hicks: You say you’ve done nine syndications so far. The first one in 2016, correct?

Chris Larsen: That’s right.

Theo Hicks: How long had you been doing this investing in multifamily? Or is it just multifamily? Or was it you’re buying by yourself? Or were you buying other commercial properties too?

Chris Larsen: We started off with our first multifamily investment in 2013. We did some other smaller deals, like smaller commercial office deals as well along the way. But 80% of what we’ve done since 2013 has been multifamily.

Theo Hicks: Perfect, so you did multifamily for three years before moving into your syndication. Why did you go from – I’m assuming using your own money, or maybe doing JVs to doing syndications.

Chris Larsen: It was about two years before we made the decision, and it took us, as you know — it wasn’t like, “Hey, we’re going to do a syndication”  and we’ve made some calls in the next month, and we got our first deal. It took us about nine months to do that. So my partner and I – had been investing with the same group. I introduced him to the group that we invested with; it was in Richmond, Virginia.

We went through their mentorship program and between the two of us we had more real estate experience than the group we were investing with. Not more knowledge in the space, but we’d been doing it, we had a lot of connections, and we decided that doing a partnership with them, an initial JV, would be a good way to start. It would lower our risk, and that would give us (one) more control, but also it would also give us the ability to have a bigger piece of the action.

Theo Hicks: So the first one was a syndication? Or was it the JV?

Chris Larsen: The first one we did in 2016 was a JV. We did syndicate it, though; we brought 100% of the capital to that deal, but we had them on basically an operating partner.

Theo Hicks: Sure. So two questions. Number one, was that a part of the mentorship program where they would agree to be a JV with you? Or was it something that was separate and you had to have that conversation with them?

Chris Larsen: That’s a good question. It wasn’t set for any one person. So there were different members of that mentorship program, and they would just be investors, and they wanted to learn more about investing. There were groups that would come and they would do JVs where they would bring some of the capital. There are groups like us, where we put 100% of the capital and brought them on in a more of a consulting capacity, which is probably more accurate. So it varied, but that was one of the options that they had.

Theo Hicks: How much of the equity in the deal did they get for having that consulting role? Maybe explain what else they. Did they sign the loan? Did they have any other active involvement? How much do they get for that?

Chris Larsen: Actually, the way we work that out… That’s why I said maybe it’d be more accurate to talk about him as a consultant versus a JV. Since we were able to bring 100% of the capital and we were able to sign on the loan, we brought them in and they got a piece of the asset management fee.

Theo Hicks: Perfect. So they get a piece of the asset management fee. What about the structure with the investors? What was that structure between the GP and the LP for that first deal?

Chris Larsen: First of all, it was a 20/80 split. So 20% to the GPs, 80% to investors. The investors got almost a 95% of the cash flow from the operations of that.

Theo Hicks: And then how did you find these investors?

Chris Larsen: As I said, we decided to form our partnership in late 2015. I remember for the next few months just making phone calls. I’ve always done a good job of networking, Theo, so I just started calling people that I worked with over the years. I knew I kind of had an entrepreneurial streak. Being in the medical device field where I spent 15 years, I knew a lot of high-income individuals; they were either selling, I knew doctors, and I started making phone calls. I said, “Hey, this is what we’re doing. This is the concept that we have. We’ve been investing in this space for a couple of years. We’re going out and we’re going to be putting together a group of investors. There’s going to be a multifamily property in this range.” That first year we bought something that was $9 million, so I kind of gave them range. And we just said, for instance, “Theo, is this something you’d be interested to learn more about?” We put together a list… And it’s interesting – you know, you get a list of 50 people and you’re like, “Yeah, I got a lot of money ready to go.” You might get about 10 of those people.

Theo Hicks: That was what I was going to ask you next.

Chris Larsen: Yeah, I always tell people. I said, “If somebody looks you in the eye, shakes your hand, and swears on their firstborn that they’re going to invest $100,000, they’re good for about a 50/50 shot on that.”

Theo Hicks: That’s funny. So you said you had a list, and you say it’s about 20% of the people on that list ended up investing in your deal?

Chris Larsen: I have to look back and look at the exact number. But yeah, that’s about right.

Theo Hicks: Okay. How did the process work? The investor calls, getting their commitments, partnering up with the consulting firm, and then finding that deal – so what order did those happen in?

Chris Larsen: First, was working with the mentorship group that we worked with, and going through the process with them. Two was forming the partnership and agreeing to that. Three was reaching out to investors, and basically getting an expression of interest from those investors.

I’m trying to remember if at that time we actually got a dollar figure in mind, but it may have just been an expression of interest. Then we circled back and said, “Hey, we have some deals in the pipeline. Are you still interested in investing? At what level would that be?” So then we got basically a soft reserve, if you will, on that.

Then I want to say it was about three months from the time that we identified the property to closing. I do remember it was August 2nd of 2016. So I want to say was about three months from the time we identified the property, and were able to get all the capital. I will say we were still raising capital after closing on that deal. So we scrapped by, but we raised about four and a half million dollars for that first deal, Theo.

Theo Hicks: How did you know what size deals to look at, dollar amount-wise?

Chris Larsen: We had an idea of how much capital that we would raise, and we were looking for something that was 100 units or more. That deal was actually right at 100 units. It was a 100-unit deal in Georgia, and came in right at 90,000 a door.

Theo Hicks: Okay, so what things were you doing to generate leads? And then how do you end up finding this deal?

Chris Larsen: I’ve read your book, so you know how the process works… But we went into the market, we identified a few markets that we were interested in. As I talked about in my book, which – if anybody’s interested, you mentioned our website, nextlevelincome.com, but you get a free copy of our book by clicking on the book link, and you put your address in, and I’ll even send you a free copy.

So I talked about in there how you don’t identify the deal first, you identify the market first. We moved to Asheville, North Carolina for the demographics of the Southeast. The Southeast was where we were focused, Theo. Atlanta, Georgia was one of those MSAs that we were focused on. So we used our contacts with the group that we first started investing with to develop some broker relationships down there, let them know what size deal we were looking for the capital that we had. Fortunately, we had the partnership with that group to give us some backing, some credibility, so that those brokers knew that we could actually get that deal done. That’s ultimately what allowed us to identify that deal, ultimately get it under contract, and then move forward.

Theo Hicks: On market or off-market?

Chris Larsen: A good question. I believe that was an off-market deal, but I can’t remember exactly on that one.

Theo Hicks: Who did the screening on that particular deal. So who did it? And then what did you actually do to screen it and to come up with that offer price?

Chris Larsen: We worked hand in hand with one of the partners in the initial group that we invested with to do the underwriting, and then also the property management company, we worked with them, [unintelligible [00:13:24].18] is his name. We worked with him closely to verify those numbers and make sure that they were solid numbers, knowing that going in on that our budget was very tight. Back in 2016, the margins were a little bit bigger than they are today, but we were conservative, and we had some additional cash that we set aside. We pulled some money out of that deal last year, and it’s performed about two times better than pro forma.

Theo Hicks: Wow. Thanks for going into a lot of detail on that first deal. Whenever people are doing syndications or whatever, I like to focus on the first deals so people know what it’s like to get started… Whereas if you talked about doing a thousand unit deals and raising millions of million dollars, people are like, “That’s crazy.”

But let’s talk about that now. Let’s talk about the nine deals so far. Let’s talk about what are some of the challenges – if there an any – of doing more than just one deal? Kind of scaling up from doing that one first deal, to now having to manage that deal while also continuously trying to get more deals, and then get investor capital, and close on the deals, but you’re also asset managing. What are some challenges you faced there?

Chris Larsen: So I think when you start off, as any entrepreneur, Theo, you’re kind of doing everything yourself. You have an idea in mind, you’re like, “I’m going to do this, I’m going to do this, I’m going to do this.” You’re raising capital, you’re trying to cultivate your investor network, you’re underwriting deals, you’re working with a property management team… And that’s okay if you have one deal, or if you have a partner you’re both kind of overlapping a bunch on that. When your portfolio grows, at some point you can’t handle everything effectively and continue to grow the business. So whether you’re working in the medical device industry, or whether you’re in real estate, whatever it is, I think ultimately, the ability to grow comes down to your team. Identifying people and skillsets that fit the right places on the team.

So as the process went on, the challenge is “Okay, I enjoy this, I’m good at this, but that’s not the highest and best use.” There have been some challenges – I lost that original partner I worked with; I no longer work with that individual. It’s a bit of a long story, but there was a fatal flaw in that partnership. We did our last deal over a year ago together, with respect to that. And I think the different vision of where you want to take a business – if that’s not aligned, then ultimately that partnership is not going to work; it is going to come to be a breaking point.

So I think if I had to go back and say, “Alright, what was the biggest challenge?” it was realizing that not being on the same page and [unintelligible [00:15:44].23] for where you wanted that five-year vision can really damage things. So first off, making sure that you’re well-aligned, and then making sure that you have the right people on the team, and then learning how to evaluate those people so you can put them in the team.

I am part Strategic Coach, which is a coaching program, and Dan Sullivan calls it your unique ability. So I’d say identifying that unique ability is challenging, but once you do it, it’s going to give you the most energy. What you would do if you could work every day for free. And ultimately, if you can find people that can have their unique abilities and fit into those roles on your team… It’s very challenging, but once you get it, it’s like magic.

Theo Hicks: Who was the first role you hired someone for and why?

Chris Larsen: In my company, the first person I hired was somebody to head up my marketing and social media. So for me – it’s interesting, I read your guy’s book, talk about building a social media presence, building a presence, and a funnel. There’s a lot of pieces that I put into place for that. But I think if you’re trying to scale in this business, there are two things you need. One, you need deal flow, and two, you need capital.

So to build a platform and build a presence, I didn’t really have a lot of expertise in social media,  and building a website, starting a blog, doing a podcast, and that was the first person I brought on board, to really help me scale that aspect. I read your guy’s book, and it’s like, “Oh, I kind of figured out how to do this slowly.” I wish I had that as a resource to start off because you guys definitely have it boiled down in how to do that.

The second person I hired personally was an executive assistant. So somebody that could handle the day-to-day stuff. I brought up my book earlier – so if you go on our website and you put your information in, my executive assistant she’s going to pull all that information, she’s going to put it in, and she’s going to send that book out to you. Unless you want a signed copy; then she’ll let me know and I’ll do that myself personally. But somebody that can keep the wheels turning on the ground, so you can focus on those high-value activities. And then again, somebody that can help me fill the top of the funnel, so to speak, to get out there and spread the message.

In the Next-Level Income forum, Theo, not only do we provide opportunities to invest, but the big thing we do, which is education. I really built that education platform to help individuals to achieve financial independence, and to focus on content, and shows like this, going out there and spreading the message and the ability to do that.

Theo Hicks: In addition to all the great advice you’ve given us thus far, what is your best real estate investing advice ever?

Chris Larsen: Look, I’ll put my money where my mouth is. I think the best advice I could have is to find a partner that has actually executed success that you want to emulate, and then reach out to that person or that group and say, “Hey, listen, Theo. I’m interested in doing what you’re doing. You’ve been very successful in this space.” If they can’t or don’t have the ability to work with you, ask them for advice on what would they do. Because, again, going back, if I had to do it all over again, I probably could have cut the time in half or even three quarters to achieve the same level that I’m at today.

Theo Hicks: Alright, Chris, are you ready for the Best Ever lightning round?

Chris Larsen: Let’s do it.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:18:45] – [00:19:29]

Theo Hicks: Okay, Chris. What is the Best Ever book you’ve recently read?

Chris Larsen: So I brought up Strategic Coach, and Dan Sullivan – he’s always coming out with new books. It talks about – as entrepreneurs, we’re trying to find how we can do something; he talks about finding the right Who to do those things that are going to help scale your business.

Theo Hicks: What was the book title again?

Chris Larsen: Who, Not How.

Theo Hicks: Who Not How. That’s what I thought you said. Okay. If your business were to collapse today, what would you do next?

Chris Larsen: I’d probably do what I did when I started with our syndication model – I would reach out to all my contacts, the people that I either worked with, or worked for, or people that work for me or I trained. This is assuming I already had a vision in mind of what I wanted to do. If I want to rebuild my business,  I would reach out to those contacts, I’d tell them what was going on. I’d either ask for help, or I would give them a vision of where I was going, and if they want to get on board.

Theo Hicks: What is the Best Ever way you like to give back?

Chris Larsen: There is a group here in Asheville, North Carolina, Open Doors. Open Doors works to close the education gap between those in poverty and those that are not. So one of the initiatives I’m working on with them is a financial education initiative. We love to not only donate to Open Doors, but I’m working on content and some ability to help grow their program.

Theo Hicks: And then lastly, what is the Best Ever place to reach you?

Chris Larsen: I think you already mentioned it, nextlevelincome.com. You can access our podcast, you can get a copy of our free book there, and you can also check out our blog, and you can reach me at chris@nextlevelincome.com.

Theo Hicks: Perfect, Chris. Well, thanks for joining us today and giving us your Best Ever advice. Some of the major takeaways for me was how you started in syndications – first, you worked your way up; so you started doing single-family homes, and then from single-family to doing multi-family homes by yourself…  And then you went up to doing syndication by raising money, but you did that with a partner, as well as was a mentorship group. Then you went off to do it with a business partner, and then you ended up doing it by yourself over time.

Then we went to a lot of detail on that first deal, of what order the pieces fell into place, how you raised that money, and the fact that not every person you talk to is going to actually invest, the structure you did, how you found the deal and that strategy…

And then I really liked what you said about scaling and how originally everyone tries to do everything themselves, but eventually, that’s just not possible to do everything effectively. There are just not enough hours in the day. So you need to identify first what do you like doing, what you’re good at, but also making sure that that’s the highest and best use of your time. Because maybe you really like doing something or you’re really good at something that’s not the most important thing that needs to be done, that $1,000 or $10,000 an hour activity.

So from there, you can start to hire things out. You started off by hiring a marketing social media person, and then the next hire was the executive assistant. Then making sure that each of those people has the unique ability that is required to effectively fulfill the responsibilities of that role.

And then your Best Ever advice, which is what you [unintelligible [00:22:38].19] as you mentioned, which is to find a mentor and/or a partner, someone or a group of people who have done what you want to do, or at a point in their business that you want to be at, and then reach out to them. By doing so, you can cut the time it takes to get to a certain level, or get to that level in half or in a third.

Chris, I really appreciate it. Make sure you check out his website, nextlevelincome.com, take advantage of him offering his book to you. Thanks again for tuning in, Best Ever listeners. Have a Best Ever day and we’ll talk to you tomorrow.

Chris Larsen: Thanks, Theo.

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