From the challenges of project budgeting and dealing with the unexpected twists of 2021, to the importance of conservative underwriting and the role of refinance, Sean Tagge offers a goldmine of insights into multifamily investing. Slocomb Reed facilitates a compelling discussion that also explores the mental and leadership aspects crucial for any investor's success.
Key Takeaways:
- Budgeting Realities: Recognize that going over budget can sometimes be part of the game. Use data and experience to predict and manage these situations, especially when external factors like rising material and labor costs come into play.
- Conservative Underwriting & Refinancing: Approach underwriting conservatively. Sean shares how refinancing can significantly affect your IRR and why it's vital to ensure your deals work out even without relying on refinance.
- Leadership in Real Estate: Embrace your role as a leader in commercial real estate. Understanding and respecting the influence you have on others, from your team to your clients, can make or break your success in the industry.
Seth Tagge | Real Estate Background
- Founder of Acorn Equity and Acquisitions
- Portfolio:
- 650 multifamily units
- Based in: Salt Lake City, UT
- Say hi to him at:
- Best Ever Book: The Big Leap by Gay Hendricks
- Greatest Lesson: Treat others as you would want to be treated when acting as their boss. You have so much influence over others as a leader. Don’t waste it.
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Podcast Transcript
Slocomb Reed:
Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed. And today we are joined by Sean Tagge. Sean is joining us from Salt Lake city, Utah, where we host the best ever conference. The next one is coming up here in April of 2024. His company is. Acorn equity and acquisitions. They are a real estate syndicator. They're also getting into private equity, looking to buy small businesses. Their primary focus though is multifamily syndication in Tennessee and Georgia. Sean primarily operates as a co-general partner, focus on acquisitions and investor relations. Current portfolio consists of over 650 multifamily units with another over 200 under contract and an HVAC business. under contract. Sean, can you tell us a little more about your background and what you're currently focused on?
Sean Tagge:
Yeah, sure. Thanks again, Slocomb and the best ever listeners for having me on. Super happy to be on here and lucky. I did biomedical engineering as my background and just realized the numbers of real estate and the returns I can get versus the stock market. So quit my job after three years after owning a few rentals in Memphis and move my family and my one-year-old daughter all the way to Memphis, Tennessee from Salt Lake. And I was there the past six years and really just rode that huge wave of appreciation through the past six years. Everyone's seen and flipped 1500 single family houses, learned a ton about systems, processes, marketing, team creation. And I was the chief operating officer with some other partners over there. And past four years is when I really dove into instead of doing a hundred deals, a hundred times, why not do a hundred doors one time? So we got into multifamily and basically just. did the burr or flipping these multifamilies. So we've done about five different complexes, 750 doors. We sold a hundred of the doors about a year and a half ago for a great IRR in return. And the others are just under refinance or stabilization right now. So yeah, it's been a great wild ride. And now I'm also dipping into private equity. I'm buying a business. I'm under LOI to purchase a HVAC business here in Utah. And that's what I'm really good at is the operations, talking with people. I'm kind of the middleman. I love tough conversation. I kind of like it when a couple of people are disagreeing on some things. I love hearing both sides. It's kind of a fun little interesting quest. So I think that helps out a lot with any business, real estate or anything, the tenant versus the landlord, the manager versus the employee. I love hearing about all that and getting in there being a mediator. So I feel like that's a good use of my skills.
Slocomb Reed:
Cool. So Sean, diving into your. apartment investing, it sounds like you've gone full cycle on one property over a hundred doors. You're in the stabilization or value add business plan on some of those properties and some of them you've executed a cash out refinance. Is your team primarily focused on the roughly five year hold business plan to deliver an IRR to your investors or are you looking to. build a long-term hold portfolio?
Sean Tagge:
Yeah, great question. Ours are focused on the five-year plan. So one of them just ended up being about a two and a half year plan because we hit rents right in 2018, 2019, and they went crazy through 2020 and 2021. So we were able to exit out a great IRR with that with some nice value add. Cap rates also suppressed during that time. So I had a great exit on that. The other two, pretty much the same thing, it's just we were later on when we started the project, so we were able to refinance out about 80% of the investors initial hours and the investors initial capital on those. So that was a sweet deal. So now they're cash flowing really high on that because you have so little equity in them. And yeah, we always analyze with the five year play, we don't put the refinance in there because it's unpredictable and just holding for five years, but. It's just a cherry on top when you get the refinance, some equity out at years two or three, and then sell earlier or later. Yeah, typically a five year hold. And we go for value add. We're looking for 200, $300 a door rent bumps with some minor to mid-level renovations on these properties. Typically what we've found experience in is in the B and C class areas. I know everyone has their niche and their preference on the type of vintage and class. We just find those have the better opportunities. A lot of other private equity and larger shops kind of turn their noses up at those types of projects. So we come in and we're happy to be taking those over and helping the blue collar class have some nice, clean, safe and well-ran apartments to live in.
Slocomb Reed:
That makes sense. You flipped over 1,500 single family houses in Memphis in a span of how many years?
Sean Tagge:
Six years.
Slocomb Reed:
1500 doors. That's a significant number of how's I have to believe you have some pretty solids 250 a year. Yeah. You had to have some pretty solid systems there. Are you still flipping houses or did you back out of that business?
Sean Tagge:
There are two other partners, a father son that were in Memphis for 30 years, great relationships, great team, great partners to be on with. I came on as the operations, they were growing so quickly. and didn't have that systems processes, the engineering skills that I have and bringing in some softwares, you know, I'm a millennial, so bringing in some of the more software things to make employees' time more valuable and levered with using softwares and automated reports and things like that. So that was kind of the value add I brought into that partnership where they had a pretty decent renovation crews, good team, lots of networking connections with other realtors and investors and everything like that and a great foundation in a property management company. So yeah, it came in, it was a wild ride for the first two years, getting a solid team down, just talking with people, working out the rough edges, hiring some good people on the acquisitions team. We got up to three acquisition managers. We had seven virtual assistants taking phone calls of all the marketing we're sending out and doing cold calls, trying to buy houses, talking with realtors and wholesalers as well, and then two contract administrators helping out on the team. And then three renovation managers and they all had probably four or five subcontractor crews under them. And then a bunch of plumbing, electric HVAC specialty trades under them as well. And accounting team, two or three bookkeepers and a CFO and all that. So yeah, it was up to the four when we did 320 in one year. It was a wild ride, but it was a pretty well-hungry machine at that point. And I alluded all to traction, that book traction, Gina Wickman, he's a genius. And I just live by that. That was my. business Bible and I just tried to do everything on there up to 80% right. Got really lucky with great team and great people to help and awesome partners and it was, it was really fun and enjoyable.
Slocomb Reed:
Why did you exit that business?
Sean Tagge:
A couple of reasons. I moved to Memphis six years ago saying I'll only be there two to five years to my wife and two, three, four, year five. We're now into year six and every year we have the talk with my wife and we want to get back to family. So. Salt Lake is where we're both from, the grandparents. Hint or whine every time they see us, oh, wish we could see you more. So move back to Utah to be by family. I love it over there. No disrespect on the South. I love the South. I love the business prospects, but man, there's nothing better than Salt Lake City, Utah. You guys know too, Al, so you have your best ever conference over here. So it's a great place to live. So I came back here and really also, I wanted to be a majority owner. So I was a minority owner. 20, 25% partner in the flipping company. I'm just that one in a hundred, whatever percent of the population is. I want to own something vast majority myself. So this business I'm buying, I'm going to be an 80% owner of. And that is such a thrill for me to call in all the shots. A little scary. I'm finally the only one that can blame for the dumb decisions that I make. I'm not the other partners or anyone else, but also it brings just the great responsibility and excitement. So those are the two major reasons there.
Slocomb Reed:
Sean, that makes more sense now. So you have 650 residential units in your portfolio now with another 200 under contract also acquiring an HVAC business. Why is it that you're looking to add operating businesses to the real estate acquisition and syndication you're already doing?
Sean Tagge:
Well, flipping 1500 houses and dealing with different subcontractors. I just saw that they're good, but then also there's a lot of ton of bad sub. contractors out there. It's just a miracle to get any type of specialty trade to number one, answer their phone, show up, give you a quote and then actually go do it in a timely manner. So I just figured if I can just execute on those basics, you'll pretty much stand apart in the HVAC space that I'm looking into. And then secondly, of course, is the economy is a scale. So now if I have any multifamilies here or in other markets, I understand the trade and can actually use my own company. And then secondly on it is I'm love operations. That's what I was born and raised to do. My dad grew up entrepreneurial at 12. I grew up in a fruit orchard. My dad would send me out there and he'd have me over the crews that were picking at 12. And then by 16, I was. I was a managing all of our distribution to our wholesale accounts of all this produce throughout the summer. So just learned a lot from that. I just love being in the middle of things, the higher level, low level and top level operations of the company. Excited to be diving into that.
Slocomb Reed:
Sean, it sounds like your multifamily portfolio is primarily still in the South Southeast, Tennessee and Georgia, that your HVAC business will be in Utah. Are you looking to bring in how some of the real estate related businesses that will be affecting your portfolio?
Sean Tagge:
Yes. I was searching quite heavily for an HVAC business in Tennessee and Florida. It just so happened one popped up here in Utah that worked and fit all my parameters and obviously want to kind of start out one first where I'm here close by and can check up on the business daily. But yeah, I eventually want to add on some other HVAC companies. I get a regional, maybe even a national presence on places I'm very familiar with. So those would be my targets that I'm already targeting. And then also, yeah, I obviously already owned a few rentals here in Utah. I'll probably keep building up that portfolio over time. Once when the right opportunity hits and can use the synergies between those.
Slocomb Reed:
Did you raise capital from passive investors for the sake of acquiring this HVAC business?
Sean Tagge:
Yes, I've sent it out to my same accredited investor list that have invested in the multifamily and I have not quite as much interest as multifamily equity, but quite a bit of people are interested in the deal and backing me on it and having some type of split on the deal somewhat similar to real estate, but of course completely different since I'm personally guaranteeing this loan. It's an SBA loan I'll be getting, but it's kind of similar in the similarities and differences in private equity and private equity real estate. But I think it's a pretty easy transition from one to the other. So some interest there as well.
Slocomb Reed:
I want to ask a question recognizing that you haven't gone, quote unquote, full cycle on an operating business. And you're looking at getting into your first one now, even considering your vast operating experience, this is at least the first time it sounds that you're raising capital for it. Putting your investor relations hat on Sean, the conversations you're having about. the apartment deals you're currently putting under contract and this operating business that you currently have under contract. What are the similarities and differences between those conversations with your accredited investors and how do the returns compare?
Sean Tagge:
Great question. So first time, of course, raising money on the private equity side. It's a bit of an education. What I'm looking for though is really kind of the investors. I'm getting to know them and ones that are already. running a business, entrepreneurial, kind of understand the industry somewhat. I'm putting them on my top list because I also want a synonymous investor slash advisor for the private equity side. So that's what I'm really looking for is not just someone who's gonna slap in some money, but maybe someone I could call once a month or quarterly, bat some ideas off each other if they have a certain expertise. So that's where it goes a little differently than real estate where a lot of these investors don't know a lot about real estate, they're in their other fields. When the private equity, it's kind of nice to have an investor slash board of advisor or just a mentor on there to help out in special cases. Because as you know, businesses are way more dynamic than real estate, where it's the same clientele. They're on one year leases where this business is dynamic and moving and changing a lot more due to that. There's a lot more risk return on the business side. I'd say the returns are way higher on the projections. 30% plus IRRs. Obviously, these are just projections and also what I've seen, there's a Stanford study that they take out yearly and those have been the returns 30, 40% plus. Now obviously, I don't know what percentage it is, but some of them do go belly up.
Slocomb Reed:
Just a follow up question there on that 30% internal rate of return. Hitting those numbers with multifamily typically necessitates... the sale of the asset with the proceeds being dispersed according to the agreement, but with the owners getting their proceeds and profits returned to them. Are you looking at the same kind of thing? Are you looking at this HVAC business like it has a five-year hold with a targeted IRR upon the sale of the business at the end?
Sean Tagge:
Yes, kind of similar type of thing. They get a slightly higher pref equity, things like that. And typically they'll actually return the equity back first before. cashflow distributions are given, and then they still keep on getting the same return on what their equity's in. So yeah, they're projecting at that, where as real estate, I'm kind of projecting 15 to 18% IRRs on the multifamilies. Obviously some do better than that, or all that on mine that are going on. Obviously with the past two years, real estate markets a lot easier with that. So yeah, that's kind of the different dynamics, but pretty much you write up a private placement memorandum. You can do a five or six B or C just like you do in real estate. And there's several others as well that I didn't get too much into with my lawyer, but I'm just kind of going to go with the five or six C. So pretty similar on that end, the legal side.
Slocomb Reed:
That's interesting. So effectively greater risk, greater reward when compared to value add multifamily.
Sean Tagge:
Yeah, correct.
Slocomb Reed:
Sean, I have a question. I'm personally curious to hear a couple of different answers. I want to hear with the house flipping business in Memphis where you partnered with the father-son duo and then also with your multifamily investing since then. What are the biggest things that have gone wrong?
Sean Tagge:
Oh, okay. It's the deadly sin. I think number one is on the flipping. It's really based on that renovation. Can this renovation budget that we assume be hit? So when we lose money on deals, which we do on a few, obviously doing 1500 impossible to not. It's the rental budget, right? And it's the things that you can't see. Electrical plumbing, foundation things, open up a wall and you can't see that. All of a sudden your rental budget goes up 10, 20 grand. Another deadly one is it's plain and simple is comps, right? So in the flipping, it's even harder in single family cause there's not cap rates. There's not NOI really to assume here. It's just simply three houses, five houses will sell for X average. Well, then this one should, but there's just those nuances like a busy street or a crazy neighbor. that you don't see or just a weird floor plan. And you just got to really get intimate and walk inside each one of them, which sometimes doing 1500, we overlooked that. And then all of a sudden, we thought after repair value would be X, but it's 20, 30 grand less. And obviously that could kill the deal where you lose money. So those two big things are the main things. Then the third one on losing money, deals going south and flipping single families is time. If all of a sudden the rentals plan for. Four to five months, it all of a sudden takes a year or a year and a half, the interest can kill you on the holding period as well. So those are typically the three deadly sins, I would say, of flipping the mistakes that are the most common to losing money on a flip. It hits you harder than multifamily, because multifamily, you can hold it for five years, and the things, they buffer out over time, where these are high quick turn things that you're trying to go fast on, so time is up, yes, it's off.
Slocomb Reed:
To that end though, Sean, you kind of pointed this out. You alleviated those issues with some of your deals with scale. So if I can ask 1500 flips understanding and our listeners understanding that you're shooting from the hip because you didn't prepare anything for this, these kinds of statistics on what percentage of your deals would you say that one of those issues arose and then on what percentage of the deals would you say y'all lost money?
Sean Tagge:
Great question, Slocomb. Don't have the data. I obviously did start tracking that after years two and three. You start zoning in, getting some lots of data, lots of N numbers. I'm a scientist, people will be familiar with the N number. So once I got like a couple hundred data sample budget, 50% of the time, we're going over budget by at least a little bit. It's just part of the game. I think a lot of people can know about that. Luckily on a lot of them, it wasn't over too drastically. or we could make up for it on the sell side with appreciation rolling in. Obviously we'd start doing more conservative ARVs, getting second and third opinions. After years two or three, we actually brought in an ex appraiser on our team that would just do a CMA on every single property we were about to buy. So she was doing hundreds, cause we bought 1500, but we probably had to look at 20 or 30 to get one. So she was doing CMAs for acquisitions team, cause they weren't quite as experienced and familiar with it. So that helped with it, but five, 7% or so was probably around the loss ratio. It got down to three or 4% in one year. And then yet again, with the market cycle and 2021, that got thrown off to where it was more on the higher end. Through 2021, yeah, we set the budget and sometimes we would make an offer on a house three months ago. And we're like, yeah, our offer still stands. So we set the budget three, six months ago and it was at 30 grand. Well, As you know, 2021 material and labor costs went 30, 50% in some areas. So then that threw off the budget on the backend. Sometimes it buffered a bit though with appreciation. So it's like, there's another fourth factor of the variables of the already, the three things I talked about going in there. So it gets a little complex, but you just kind of monthly, you need to wrassle it all in and communicate with each team member. the appraiser, the contractor, the acquisition team who updates the material costs, they need to get that info from the contractor. So I'm kind of the middle guy helping each one know because the contractors, they have their blinders on and the acquisition team has their blinders on and our CMA team. So it's all of them need to get together and communicate which gets harder when you start getting larger. Degree of complexity and factorial of the people that need to communicate and talk to each other gets more complex.
Slocomb Reed:
Going back to the multifamily portfolio, Sean. What are the biggest mistakes that you guys have made this far and what lessons can our listeners learn from those?
Sean Tagge:
Great question, Slocomb. So one, the first two, we did write in a refinance in there. Luckily we put a 15% cash out refi. After that though, I started hearing about these interest rates. So we stopped doing it because it's so hard two years from now you refi. What would the value be? How much cash will you pull out? What will the interest rate be in all those terms? So I've learned to be even more and more conservative. So the other deals we didn't have a refi in and if the deal worked out without a refinance and a five year hold, it's a buy, cherry on top if you refi. Because you know a refi can really skew your IRR. If you're getting tons of capital after year one or two back, the IRR can just go really high, which is great if it works out. But if it doesn't and you're planning on that, then that can really hurt you. So I'd say that's a big one, is just conservative underwriting. budget, budget conservating. Then on the budget side, obviously, if you're doing a kind of a medium reno, getting that down and also factoring in a bit of a buffer for material costs and everything like that, which caught us as well as it did with anyone in 2021. So lots of variables and factors, but those are the two main ones that I can think of off the top of my head.
Slocomb Reed:
That makes a lot of sense. Are you ready for the best ever lightning round?
Sean Tagge:
Absolutely, let's bring it on.
Slocomb Reed:
It'll be a quick one. We're running a little over time. What is the best ever book you recently read?
Sean Tagge:
All right, so the big leap by Gay Hendricks. It's all about how our self doubts and fears hold us back and how we can overcome those. A lot of people just inherently, whatever the world tells them or our culture that, you don't deserve to be happy. You don't deserve to achieve this big thing and taking that big leap and going for that big thing. Like right now, I'm trying to buy a business where I'm a majority owner. I'm getting a lot of that self doubt. So this kind of helps you overcome it. Highly recommend it.
Slocomb Reed:
What is your best ever way to give back?
Sean Tagge:
All right, a wise man said, the most important work you will do ever in your life is within the walls of your own home. So my kids, I'm not a great father, I'm not perfect. I will say I'm probably the world's funniest dad, but basically in your house, treating your wife well, being a good spouse and being a great father. So I like to give back and then my church, I do some youth mentorship on Wednesdays and Sundays, kind of teach them Christ, gospel principle, how they can apply that to life. Obviously give them something fun to do on Wednesday so they're not out doing bad things and things like that. Some wholesome activities with the youth.
Slocomb Reed:
What is your best ever advice?
Sean Tagge:
My best ever advice is I think at us, a lot of people listening, we're in a leadership position and just really holding that mantle and that stewardship the best you can. You have as much influence, a study said, as much as someone's spouse on someone's happiness as a manager and a leader. So you can make someone's life. Great or terrible. So it's just like, yes, you need to hold people accountable. Obviously we're not gonna brush things on the rug. Mal-performance or illegal activities, but approaching it in the right way and the right mindset and just treating others how you would wanna be treated as a boss. I've had a bad bosses before, so I try to do the opposite. So I think that's the best advice is just know that mantle you have and really try to work on yourself because that will pass down to the mothers and fathers working, which will pass down to the kids and they'll be happy in their home lives as well.
Slocomb Reed:
Last question, where can people get in touch with you?
Sean Tagge:
LinkedIn, of course, Sean Tagge, my website is Acorn EA. So Acorn Equity and Acquisitions. And then it's just Acorn, A C O R N E A.com and my YouTube channel, Sean Tagge, I'm trying to post weekly videos on business leadership and multifamily real estate. So yeah, reach out to me. They're happy to connect in any way. Those links are in the show notes. Sean, thank you. Best Ever listeners, thank you as well for tuning in. If you gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend. Thank you. And have a best ever day.
