Doug Harman is the owner and CEO of Liberta Homes, a diverse company focusing on the construction of modern high-end homes and quality multifamily housing around the country. In this episode, he shares the lessons he’s learned from hiring the wrong property managers, how he ended up finding the right fit, and his tips for developing a strong team.
Doug Harman | Real Estate Background
- Owner and CEO of Liberta Homes, a diverse company focusing on the construction of modern high-end homes and quality multifamily housing around the country. He has been a real estate investor for 22 years, and also works full-time as an Avian Maintenance Manager.
- Portfolio:
- GP of 152 units
- Based in: Oakland, CA
- Say hi to him at:
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Doug Harman. Doug is joining us from Oakland, California. He's the founder of Liberta Homes, which is a value-add multifamily syndication company, currently operating 152 units. Doug, can you tell us a little bit more about your background and what you're currently focused on?
Dough Harman: Yeah, and let me know if I run on here. I have a lot going on in the background. Basically, I started off in aviation as a mechanic, and worked my way up to management, and got into project management, and found out that translated pretty well into real estate. And I always had hobbies as rebuilding houses, I was very mechanical as a kid and growing up... So I got into it around 2000, and then moved on from there to bigger and bigger projects. Around 2013 we were introduced to David Lindahl at a real estate meetup here in California in the East Bay, San Francisco, Oakland, that area there, and David Lindahl had someone come over and talk about multifamily.
We didn't really see much future in it in California. That market was pretty well picked over. But we did travel very easily. We worked for the airlines, and really thought that it would be a good idea to at least try it. So we went from there, and bought some smaller duplexes, triplexes up near my hometown, where I grew up in upstate New York near my family, and struggled mightily the first year or so with several different management companies, and then finally got it right and made money with it... And we're actually selling them right now. It was a great investment.
We decided along the way that it would be a good idea to start building houses to build up a little bit of capital to help with the multifamily. That was our plan... So I got my contractor's license here in California, and we started building houses, high-end houses. We made every and most investors' mistake, we fell in love with the first one, and moved into it. We still live in it today. But we did have a plan there; we've built a lot of equity into this house, and that is still working for our real estate future now. And then also, we built two others at the same time, which just was continuous, seven days a week, 12 hours a day of work to get these places done. They're very nice, high-end, four stories, elevators, big views, all that kind of stuff... But in hindsight, we really should have went for the multifamily first, and then worked on single-family residential after that. But here we are, that takes us to today. We sold the last big house in 2019, we did use capital from that and our equity here to move into more multifamily... And that's where we're at now. I haven't covered our current deals; if you'd like to do that now...
Slocomb Reed: You know, I'd like to jump into some questions that came up for me while you were talking about your background. A couple of things here... The first is, where were you living when you started investing in residential multifamily in upstate New York?
Dough Harman: We were actually living there. I grew up there, and my family's from there; we just found some really good deals at the time, in a pretty iffy market in Rochester, New York. There are definitely some deals there, but there's also some very rough neighborhoods and other issues there... So you've got to know the market, I feel. But that's kind of how we jumped in.
Slocomb Reed: Tell us more about your property management issues. You said you bounced through a few of the wrong PMs before finding the right one. Before you get into what made the right one the right one, can you tell us what it was about the "wrong" property managers that led you to work with them in the first place, and then where things went wrong?
Dough Harman: Yeah, I think we did some of our due diligence correctly in finding them. We did ask people that we knew, and people that were meeting in some of these groups, Dave Lindell, what were good property management companies there who they used. I think we did everything right there, we did ask all the questions. I just think that we weren't really paying attention to how many properties these people were trying to manage... And that there are different types of owners everywhere; we are playing it by the book, we're using the checklist, and some of those items weren't being check-marked... And those were big items. Was the maintenance getting done correctly? What were our collections? Were you hiring the right tenants? And literally, like I said, we were playing it by the book. I was flying down there every couple of weeks at first, and seeing it first-hand... And I don't think some of the bigger operators that were there in town necessarily were doing that. And as they grew -- I think that's one of the big things I saw with management companies as, they grow, they really seem to struggle. And everybody does, right? ...struggle to increase their presence in the market. And they were not paying attention to details, and putting it off on staff and stuff that they thought could handle it. But again, it was all the fundamentals; the maintenance wasn't done right, we were being charged too much. The collections were great at first, but then they weren't. Tenants tried to pay the rent [unintelligible 00:05:49.28]
Slocomb Reed: Doug, please correct me where I'm wrong... I do as a podcast host like to make assumptions on behalf of our audience, and I'm more than happy to be corrected, so please do let me know if I'm off-base here... But it sounds like the issues with the property managers that you hired, that didn't work out for you - they were issues of property managers, thinking of them like business owners, who were scaling faster than their infrastructure and their systems would allow, and that it's quite possible when you hired them, that they had the infrastructure to handle their current management portfolio, but they continued to add properties without adding the systems and the infrastructure they needed to continue to maintain and manage those properties. Is that what you're saying?
Dough Harman: That's absolutely correct. And I think they were probably already scaling up when we got into that. The people that we asked for referrals from had worked with them a long time and hadn't really seen the scale-up problems that we saw as new owners.
Slocomb Reed: Gotcha. So what made the right fit the right fit?
Dough Harman: Trial and error, and finally, we got another referral, and they're like, "Oh, this is the guy that turned around my properties. This is the guy that comes in and saves the day." And that is through making local contacts and local contacts and local contacts until you find something that works. We were paying very close attention to the maintenance, the budget and the collections and how happy the tenants were, and all of that stuff just disappeared as a problem overnight.
Slocomb Reed: That's awesome. And how long have you been with this manager?
Dough Harman: We're still using them today, so that was almost eight years.
Slocomb Reed: Gotcha. So hopefully, if this is a person who's an excellent operator in their space, they've continued to scale their company through opportunities to work with more people like you, Doug, and it sounds like when that has happened, they've been able to scale their business along with it.
Dough Harman: I think so. I think that's key for all of us, every single one of us, to be able to scale.
Slocomb Reed: Absolutely. Doug, transitioning to your development of - it sounds like luxury single-family homes, I think you said four floor elevators. Where are they?
Dough Harman: They're in the Berkeley, Oakland Hills area; the nicer areas in the East Bay. They're not San Francisco markets, but they're as good as you can get on the other side of the bridge.
Slocomb Reed: Okay, gotcha. And that seems like a pretty hefty transition from residential multifamily in upstate New York, to building four-story homes in the Bay Area of California. Were there any investments in between? Or was it straight coast to coast?
Dough Harman: No, this was pretty much a coast to coast. And we did do some renovations and some other things, but not nearly enough to be what I would call an experienced builder. But I think my advantage was that -- yes, we were in over our heads, but I think our advantage was that I did work on large projects as a W-2 job for a long time. I was used to dealing with complex tasks, and I did learn lessons, luckily early on, that if I bring the right people along, I'll have much more success. So I hired the expensive engineer that the city liked to deal with... I spent a lot of time at the city, making sure they knew I was serious... And again, I think all of our success, even to this day, was about having the right people around you, and then just being there; flying there, going there, being in their office... Don't try and do things over emails, at least for the initial projects and everything else. The face to face time was invaluable, and hiring the right people to work with us to succeed. It was still very, very, very hard, and not something I'm probably going to do again on any major level.
Slocomb Reed: You did say it was seven 12-hour days a week... What was the main contributor to how much of your time was taken up building these homes?
Dough Harman: I think we said it before, scalability, and my just trying to do everything myself. You have to scale up and you have to bring people in, even if they're subcontractors, whatever else... And set them loose on the project, and then correct, instead of trying to take on so many things yourself. I was literally building some furniture pieces myself, and other things, doing some extra lighting and stuff; you can't do that on this kind of scale.
Slocomb Reed: You know, it's so funny... One of the reasons -- I'm an apartment owner-operator in Cincinnati, Ohio, and I've done several BRRRR deals; the largest proper BRRRR with a cash-out refi was a 24-unit. And one of the reasons I've been able to scale as I have as an owner-operator is because there's a lot that I suck at, that I just can't even attempt to do myself. I was chatting with one of my contractors, I showed up on-site to see progress on a kitchen, in an apartment that were gut remodeling, and I was on the phone, and there was a pile of boxes and old tile walls from the former shower surround... So while I was on the phone, I started picking it up and just carrying it to the dumpster, because I was on the phone, I might as well make myself useful. My guy came out and he said, "No, don't worry." I said "This is the only useful thing I can do on-site today. I don't have any skill other than putting this stuff in the trash." But that means that I had to get good quickly at hiring other people to do that stuff.
Right before this interview, I had a phone call with a bookkeeping, a CPA consultant for my property management company, and I was trying to brief him on an issue that my in-house bookkeeper is having... And he immediately wanted to explain the solution to the problem with me on the phone, and I had to say, "Nick, whatever you're about to say isn't gonna mean anything to me anyways. Please just connect with the people who know how to do this stuff." So I totally get where you're coming from. I've benefited greatly from finding ways to get organized enough and systematized enough to offload a lot of those day to day responsibilities and things like renovation; it sounds like that's something that you're working on as you move into multifamily as well, isn't it?
Dough Harman: It absolutely is. Our last two deals were me flying out to all these markets, meeting people face to face and all that, but it was just me. And then all of a sudden we had a deal, and we didn't really have any friends that we knew who we really trusted to move into a deal with us; and all these relationships, all this delegation would have been so much easier if we'd done that in advance. We've been super-lucky in developing a decent team now, but it was so last-minute that it could have really blown up in our face.
Slocomb Reed: Tells me more about that.
Dough Harman: So I got into know our first deal - again, it was all me going to Texas and all these other markets. I'll go all over the country; North Carolina, everywhere, flying to them and making offers and doing what we needed to do. It was a lot of fun and very scary, but we were not developing the team. So here we got this deal all of a sudden, a nice 56-unit in Texas, great little property, and we had no partner to move forward with that we developed a relationship with to help us sign this loan. It did require a cosigner. So here we go, we started calling friends and everybody else, and got hooked up, and [unintelligible 00:13:01.25] trouble, and the whole thing just fell apart. Literally. We had hard money and everything else, and it just blew up in our face.
So we were just joining the MIH Mastermind at the time, and made a lot of connections there, and saved the deal. Had to extend it to save the deal. Literally, at the last minute. We closed on the last available day before money [unintelligible 00:13:25.00] And I don't know if you want me to mention names and stuff of some of the people who have helped us out, but it was a really great experience at the end of a very bad experience.
Slocomb Reed: Doug, we have a very sophisticated audience for the Best Ever podcast. The vast majority of our listeners are actively involved in apartment investing, actually... So give us an idea of when you were putting this deal together, that'll mean something to our audience.
Dough Harman: Do you mean more about the timeframe, or the details around putting it together?
Dough Harman: I mean, when is it that you were making these flights? Are we talking 2020, or 2022?
Dough Harman: Oh, great question. Yeah, so 2019 to 2020.
Slocomb Reed: Gotcha.
Dough Harman: The pandemic started, we sold our last house and decided it's time to shut down construction and really get serious with multifamily. So I was flying around all over the country from basically January 2020 all the way through 2022.
Break: [00:14:21.18] to [00:15:30.04]
Slocomb Reed: When did you close on your first apartment deal?
Dough Harman: December 2021. So less than a year ago.
Slocomb Reed: Yeah, that was a good time to get financing though... We're recording in September of 2022 and there's a lot I wish I could go back and do in December of '21, for sure. Tell us more about that deal. I introduced you as a value-add multifamily syndicator, and that is one thing we haven't gotten into yet in this conversation.
Dough Harman: Right. And do you want specifics for property names and that kind of things, or do you want more generalities?
Slocomb Reed: The specifics are at your comfort level, Doug. I will say, you can't make any offerings of investment opportunities through the podcast... So it all needs to be about things that have already funded and closed. That said, detail away, at your discretion.
Dough Harman: Okay. So we flew down to the I-35 corridor, which I liked very much, in between Dallas and Austin, and spent a lot of time driving up and down there, and Waco was always very strong... So we looked at a property there, it was not for us. From the contractor side, it had lots of issues. So just as we were leaving, there was a little 56-unit that kind of popped up as a student deal. We didn't know anything about student properties at the time... I went to look at it and thought the place was just really cool. 12-foot ceilings, cement floors, very industrial loft style, big windows... And I couldn't understand why it was empty, basically. Not empty. 70% occupied, and a lot of delinquency and everything else... But it was in a great location; very close to Baylor, right close to downtown in Waco... And Waco was booming; still is. So I'm like, "Well, this is that deal. You know, it's kind of off everybody's radar, it's listed as students, so that takes us off the radar, but it's great for market and student renters. I think we have a great number of options here."
So we dug into it... And all the properties around it were 98% full, so we're like "Okay, this is it. This is the one. I'd love it to be bigger, but we're jumping in with both feet." And from there, we just started, again, hitting the checklist, hitting the lenders, and making all those relationships that we didn't already have in place. So we finally got it closed after a lot of difficulty with the bank. A great local lender though, Amplify Credit Union finally just appeared on the scene, and great rates, great terms, and they understood the market. I hear so often that the local banks often are so great at stepping in there because they understood the market.
Slocomb Reed: It makes sense.
Dough Harman: And we've had a great relationship since.
Slocomb Reed: So you buy student housing in December of '21 near Baylor... First of all, I personally want to salivate over the debt that you got in December of '21, because at the cost of debt is crushing my deals right now. I just told an off market seller for a 10-unit in an amazing neighborhood that I couldn't do it, because the debt would be too expensive. What did you get?
Dough Harman: We got four and a quarter percent, with really great terms. It is a bridge, but it's a long bridge, five years, and then 10 years we can extend it to... And it's fixed. So it was everything we were looking for. And like I said, we were going back and forth our experience level and our cosigners and all these issues with other lenders, and everything just came together with this one lender. And local lenders, they get it done every time.
And then we filled it up. We got those set up, they closed... They were very conservative, and they were also at the same time performers. In other words, they did everything they said they were going to do.
Slocomb Reed: Who is this?
Dough Harman: This is Amplified Credit Union out of Austin.
Slocomb Reed: Gotcha, the lender? Yes.
Dough Harman: The lender, right. And that is actually the old IBM credit union out of Austin. So they were looking to get into the market, they were more aggressive than everybody else, and they were just total dudes; they'd pick up the phone when I had a question. "Hey, what do we do?"
Slocomb Reed: That helps, for sure.
Dough Harman: Yeah. That really [unintelligible 00:19:29.03]
Slocomb Reed: Doug, tell us more about your business plan. You said it could remain student, it could go market... I know student housing needs a different kind of insurance and lenders are gonna look at it a little differently. Tell us what your business plan was after you acquired it.
Dough Harman: So before we even acquired it, we developed a business plan that said "Hey, we can't limit ourselves to a student market here. We don't know enough about it. We don't feel like dealing with these headaches." So we said "We are going to market this to the market. We are going to bring in the higher income, middle income renters here. Due to our location, and the asset itself, we think we can do that. If we have students, that's great, but we're not going to allow sponsored students, in other words sponsored by their parents and everything. That way, we have the option of bringing in students who are more professional, who qualify on their own, bringing in construction workers and nurses, medical workers and all that, and being able to qualify for a loan to refinance this thing with as little trouble as possible." And the insurance, as you said, was easier that way, too. And it worked. We filled it up in three months, and have been at basically 100% occupied ever since.
Slocomb Reed: That's awesome. A couple of quick questions there before we transition to the last segment of the podcast. A couple of things come to mind. First, you say you got it filled up in three months. How many vacancies was that?
Dough Harman: Let's see... That was probably about 20 vacancies when we started. And we have the transitions due to the student cycle that was coming up in the summertime; we were very concerned about that. There were students there before, so we made it through the student lease-up this summer, and kept it 100% full the whole time.
Slocomb Reed: Doug, you may have anticipated my next question... I don't personally have a lot of experience in student housing, but a lot of my friends do. And I know that leasing cycle is fairly rigid here in Cincinnati. For UC and Xavier, those students are looking in the fall for the leases that will begin the following August. So in October, November, signing leases that begin in August of the next year. Also, I would imagine if this is primarily student housing, that's a lot of leases coming up at the same time. This is a very operational question, but you guys have gone through a summer now since you've bought it... What things are you and your management company doing to smooth out that transition of so many tenants who are on leases that terminate at the same time?
Dough Harman: That's a great question. We saw it coming. There's lots of peers, and everybody else has told us "Hey, this is coming, you'd better be ready." So we did a lot of pre-leasing. Part of our team, luckily, was very good at the virtual marketplace - the Google Market, the Facebook Market, and everything else. We were on all the websites too, and apartments.com generated a lot of traffic, don't get me wrong, but we really pushed the Facebook... And we had some strange units, too; 1,600 square foot four-bedroom units that were kind of scary. We're like, "No one's gonna want that. They'll just get a house." But time after time, after time, we get our experts on the Facebook side of this and getting it out there, and it will come off the market, it would get pre-leased. And after four or five times, I'm like "This is no coincidence. This really, really works."
So we are able to really intensely pre-market and get all those leases pre-signed before we even hit that summertime bubble. And then we really started working on staggering our leases. "Hey, I will do this one for six months, this one for top ones, this one for nine months", to get us off that bubble moving forward. But kind of jumping ahead, that really was key, because we just stumbled across -- a broker called us out of nowhere for a deal 96 doors next door to our current property, and we jumped all over it. That we closed on here in August, and we just went through a turn; 30 of those units turned, and we were ready for it, we budgeted for it, our management company knew about it, and we turned it successfully within that two-week, two to three-week timeframe to get those students. Because that's heavier students than our previous property.
Slocomb Reed: That's good information. Doug, are you ready for our Best Ever lightning round?
Dough Harman: Yeah, I'm ready.
Slocomb Reed: Awesome. What is the best ever book you've recently read?
Dough Harman: I recently read Think and Grow Rich, which I'm sure many of your interviewees have talked about before, by Napoleon Hill. It's a really old book, and the thing I liked about it so much is we read a lot of this kind of material, right? Most of us do... And to see some of that same stuff in 1937, those key fundamentals about vision, and forward-thinking, and team development, and all of that in 1937, and keep bringing some of these key things year after year after year, right up to 2022, is really important to me. I think that if you can tie in history and see these things over and over again, it must be true, and we practice that every day. I'm big into visualization, whether or not I'm just driving down the road, or I have it stuck to my wall somewhere. I think that's so key to see yourself already there.
Slocomb Reed: What is your best ever way to give back?
Dough Harman: My best way to get back is I was big into aviation, so I definitely - as I reached into retirement here, I want to start teaching and educating along those lines... And then also, I definitely really enjoy the big capital of work, helping with the city and stuff like that for charity projects such as construction and renovation of local parks, and that kind of stuff. I haven't done as much of the latter yet, but those are my big exciting ideas to give back.
Slocomb Reed: Doug, this being a commercial real estate investing podcast, I want to focus this next question on your most recent apartment investing deal. What is the biggest mistake that you've made thus far, and the best ever lesson you've learned as a result?
Dough Harman: Just in this last deal, or throughout my real estate, multifamily career?
Slocomb Reed: Let's focus on commercial apartments, so 5+ units.
Dough Harman: Okay. The biggest mistake I ever made, I think, was a condo conversion back in Houston... And I think my biggest mistake was there that when we were going to title and saw 130 individual title closings that needed to happen there, we should have reached out had a few more experts around us. And number two, knowing when to quit. When the title company calls you up and says, "I don't see how this works, and we're spending a lot of money ourselves on this", it's time to at least put the deal on pause until you have those answers, versus my mentality, that "We are closing no matter what." And that is my mentality. When we get into contract, we are closing, period. But you need to be realistic, and when a deal reaches some point where everybody is telling you "This isn't going to work", or at least "We have problems here", you need to listen. We were lucky, we knew this was coming, so we didn't lose a lot of money other than all of our due diligence and legal fees and that kind of thing. But we didn't lose any hard deposits or anything. So we lost money on that, and that was about really not being so desperate to do a deal that you will just do anything.
Slocomb Reed: Dough, that being said, what is your best ever advice?
Dough Harman: My best ever advice - there's a lot of things I'm still not successful at, but the most important thing is developing a team. You have to do that in advance. You have to go with known operators, you have to go with referrals. Referrals are everything. Throughout my career, that's been everything. You can't go to Craigslist or anything and hope to find something you're going to deal with. You have to deal with people that you trust, and then you have to deal with the people that they trust. Teamwork... This is a team sport, and I'm a loner. So if I am telling you this, you've got to listen. Teamwork and developing the team is number one, and a close number two is getting on a plane and going out and meeting that team... Or brokers, or lenders, or partners for boots on the ground. I know it's all fundamentals, everybody says that, but it's true.
Slocomb Reed: Awesome. Last question, where can people get in touch with you?
Dough Harman: My best option is email, and I can attach that here, of course, but I am a phone call kind of guy; if we've got stuff going on, ring the phone and I pick it up. That's the way I work. Send an email first, and like I said, I could post the email with you for people.
Slocomb Reed: Your email will be in the show notes. Doug, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five-star review and share this episode with a friend who you know we can add value to through this conversation about surrounding yourself with the right people in real estate investing. Thank you, and have a best ever day.
Dough Harman: Thank you so much.
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