Interview with Jason Hartman: Five Things You Need to Know to Succeed in the Real Estate Industry
Ask The Expert: Overcoming the obstacles to starting out in multifamily with Patrick Grimes and Sarah Hanna.
Read the Full Interview:
It takes a little more energy for you to find those less established brokers and also investors that value relationships, but those are the ones who are going to be the most loyal. You took a chance on them and they appreciate it. These are the partners who will be rooting for you and not comparing you to the next guy.
Thank you so much for doing this with us! What is your “backstory”?I can trace my “start” back to playing with Legos as a kid. I loved designing and building things and it naturally flowered from there into mechanical engineering and, then, robotics.
As far as my education goes, I have a Bachelor of Science in Mechanical Engineering from University of the Pacific, and a Master of Business Administration and a Master of Science in Engineering from San Jose State University. After college I began a professional career as a mechanical engineer and spent 14 years in corporate America focusing on machine design automation and robotics.
My first automation job doing custom machine design was working for a company called Kinematic Automation. I worked at several companies though — Toyota, for instance — and even the largest winery in the world. I learned a lot about the importance of following a process along the way. The jobs were very rewarding because I was doing what I loved, but I couldn’t overlook the fact that they were very demanding, as well.
I mentioned that Kinematic Automation was my first job doing custom machine design. Dave Carlberg, the cofounder of the company, became a great friend of mine. He strongly advised me to invest in real estate — specifically, acquiring as much as possible and getting started as soon as I could. If I did, he assured me that I would never regret it. I was intrigued, of course, and began to learn everything that I could about real estate. I started saving too.
Next, I did a bunch of research taking an analytical data approach to try to figure out which strategies had the highest return, which markets appreciated the most, and had the biggest growth. Once I determined those answers, I was ready to get involved, but wanted to invest in a property that would double my money as quickly as possible. So, I settled on a pre-development land project with the plan to build on it.
I took out some loans that were very typical of the time — it was 2007 and hard money loans may have been the norm but they equated too high leverage. Unfortunately, it wasn’t until after I’d dumped all my money into the project that the market took a severe downturn. And I learned what speculation was versus investing. And that drew — perhaps forced would be a better word choice — me into learning about foreclosures.
I paid into it for a year jumping through whatever hoop was put before me. And, after negotiating with the third lender that had bought and sold my note with an attorney, I was able to do debt forgiveness. Ultimately, I was able to avoid bankruptcy, but that just meant Uncle Sam came after me for the income for that forgiveness in the following year.
So, I learned a lot of tough lessons. It did take me some time to get back on the horse but I refused to give up. Instead, I learned about resilient markets with employment makeups that stay strong in recessions. For example, Houston was rising steadily, during the bust it leveled off, and then started growing again. That was when I realized, there is downside protection from investing in the right place. However, judging from past experience and the current market, that may not be in my own backyard — or, anywhere here in California for that matter.
I also learned about lower risk properties and investment strategies. I began to see new development or raw land as a high risk money pit. I was drawn topurchasing for cash flow so I could buy the property and receive cash flow on day one.
I started looking for properties to acquire in Houston and deals that I could purchase below market and with lower leverage. That way, if there was a market swing, I could still pay the bills and wouldn’t be stuck paying out of pocket again. So, I started buying distressed properties, renovating them, cashing out my investment, and holiding them. This was working great but I realized after a while that working between 48 and 60 hours a week at a very demanding job didn’t really allow much time for dating.
That thought really stuck with me after I met Shuo. I decided I needed to shift gears because with each new property I acquired, my workload increased. I decided I was going to focus on multifamily dwellings and Shuo was with me when I closed on my last single family property. We got married after that — twice actually. Here in California and, since Shou is Chinese, we had a ceremony in Beijing as well.
We spent the next two years learning the industry. We attended all the seminars we could find, purchased courses, and had audio books playing almost constantly, it seemed. We immersed ourselves into what is known as a multifamily value-add syndication model which is similar to what I was doing in residential but at scale in larger 100+ unit apartment complexes.
Partnering-up with investors who had successful track records and more experience became my next goal. I was able to learn a lot from those people and considered their mentorship invaluable. We spent almost a year traveled across the states, meeting brokers, collaborating with different parnters, walking properties, analyzing deals and placing offers. My extreme risk aversion translated to very consivative underwriting and analysis. This didn’t make pulling the trigger on partners or a deal an easy task.
It wasn’t until COVID hit that we were able to find a deal on a multifamily that checked the boxes and we closed on it near the end of 2020. A partner discovered a property with 86 units, a motivated seller, and it was located in a great market. It was really a great location — on the border of South Carolina and Georgia — just across the river from where the Master’s Tournament is played. We formed our renovation and reposition plans, raised the capital, and closed the deal. It’s doing great and we’re beyond our five year projections.
With a rockstar team and solid process, we just put things on a rinse and repeat cycle for the most part. Each project needs a little customization, but, overall, we follow the same disciplined procedures. Don’t get me wrong, it was a ton of work. I partnered with people who had even more experience and I continued to learn more about the real estate business.
We’ve been very fortunate. Invest on Main Street has continued to grow. That 86 unit property turned into a 159 unit in Dallas, then another 270 unit in Dallas. Then, it was 94 units in Atlanta Followed by a 300 unit and then a 320 unit in Houston, TX. Meanwhile, we turned over a 288 unit in Jacksonville, Florida in a ten month period. That really pleased our investors because we sold at 10.25 million in profit!
That was out of the norm though. Usually we stick to a five year or five to seven year business plan. It’s working out very well for us. I’ve done a 440 unit portfolio in North Carolina, and currently, another 340 units in Houston and our newest Midwest Portfolio investment.
Can you share the funniest or most interesting story that happened to you since you began leading your company?
Maybe it’s the engineer in me, I’m not sure, but I want to be the one that maps everything out. I handle the analysis, the projections, and proformas so, I always make it my responsibility to put together the investor slide decks.
It’s an important part of our process and I take pride in creating them from start to finish. It can take weeks to put everything together. It’s well worth the time spent though because we use the presentations everywhere showing them to hundreds of investors through webinars and the like.
During one specific presentation, my partner came upon the target market demographic slide — it speaks to the type of residents we hope to attract. It illustrates the demographic and the income of the current residents and illustrates how we plan to reposition the asset to attract a different group of people.
The property level was classified as C Class which often is associated with workforce housing of blue collar workers — when we acquired it. We planned to market to B Class residents — which is between white and blue collar — after the renovations were complete. B Class residents are sometimes referred to as gray or dirty white collar in the industry.
My partner caught a blatant “typo” as he read the information presented on the slide — during a live webinar in front of hundreds of people. It should have read “repositioning from blue collar to gray collar or dirty white collar.” To my immediate embarrassment, the slide stated that we were repositioning to a “white color resident.” I’m not sure he was even aware that I made the mistake at the time, but I certainly was — and was hard pressed not to slide out of my chair and under the table in hopes of not being seen — even though it was a webinar event, I was in a room with wealthy investors as it happened.
Thankfully, no one was offended by the error. And, of course, the mistake was acknowledged. I still get jokes to this day about my “white color business plan” though.
What do you think makes your company stand out? Can you share a story?
Invest on Main Street stands out from other private equity firms because we fit in between the two extremes found within our niche. At one end of the spectrum, we have the newer mom and pop type shops that are out there trying to do deals without a lot of experience. They manage to get the capital they need through family and friends. On the other end of the spectrum, you find the large hedge funds and financial institutions that are purely transactional. They don’t have a relationship with their investors at all.
We fall in the middle area because we relate with the investor at a personal level the same as the mom and pop shops do. We also have access to a much larger investor base that likens more to the large hedge funds and financial institutions. It’s a “best of both worlds” scenario for us.
Larger institutions mainly focus on low risk assets — new or already renovated properties that don’t require a lot of work to maintain the cash flow — but it affects their returns. Also, they are often structured as funds which mean the funds are there before a deal is found. This pressure to find and acquire assets rapidly tends to result in acceptance of lower performing deals. Lower returns equals lower cash flow, appreciation, and slower growth of your investors portfolio. On the other hand, the individuals who are new to investing often acquire much higher risk assets hoping to have a very high return. But, if they’ve never been through a downturn, they may not realize how much they’re actually risking.
Invest on Main Street finds the best options for our investors to consider. It could be properties that might not or may only be partially renovated but are in the path of progress of an emerging market, or just a really good discounted buy from a motivated seller. But, we always take on the properties that need some work and attention poured into them to raise rents to market rates because those diamonds in the rough can certainly provide you the best return on your investment in the long run. We’re not scared to get in there and work for the investor to force appreciation.
We have a partnership with 20 years of experience in real estate so we’re not lacking there in the least. And, we’re very hands on with our investors — for instance, I’m often the one answering the phone or if I’m unable to take a call, I make it a point to get back to people right away with the answer they need. It’s the key to our growth because we’re strengthening a relationship built on trust. Our investors know we will steer them in the right direction — they’re our main concern rather than primarily focusing on our bottom line as a company. Also, with 80 episodes of investing education and many investing guides available on our website, we spend significant resources to invest in the education of our investor base. We want them to be successful and make the right informed decisions based on their risk profile and goals.
We come to the table with the experience to underwrite, analyze, and structure deals in a very low risk way utilizing low leverage and long term debt. We’re prepared to ride out any reset, but we’ve also got experience with renovating and stabilizing assets. Invest on Main Street brings you the best of both the larger institutions as well as that relational side.
And we bring it together into what I believe to be a more balanced firm. Our investors are appreciative of that and often leave us video testimonials which we put on our site.
Are you working on any new or exciting projects now?
It’s very difficult to find higher cash flowing assets in the markets right now that fit our criteria. However, we’ve built a great diversified portfolio and overall, it’s an extraordinary market. Our team is doing great.
What’s really exciting for us at the moment is that we have locked in a portfolio of seven assets — seven multifamily apartments communities totalling 772 units — that are located in Columbus and Cincinnati, Ohio and bridging over into Southeastern Indiana. They are all within a few hours drive of each other. That’s going to help us bridge and further diversify the holdings that we have in Texas, Georgia, North and South Carolina, and Florida.
It’s going to help our investors balance consistent cash flow and the highest appreciating markets with some of the more stable healthcare and educationally based markets in Ohio. The properties were also purchased at a very high 7% cap rate, which equates to significant discount and high income producing potential. We’re averaging a 12% cash on cash return on that, which is an extraordinary feat for properties bought today. That type of cash flow allows us to diversify into some other markets and balance our investors portfolio.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?
I could probably list about a hundred individuals who have helped me immensely. A lot of people have invested in me and vice versa — helping each other along is what it’s all about, right? Then, there are the masterminds that I’ve joined. The wealth of knowledge shared in those groups is truly invaluable.
However, I mentioned Dave Carlberg earlier. He encouraged me along the path of real estate, even knowing that I am very much an engineering geek who sincerely loves the design aspect and the cognitively rewarding technical challenges of engineering. Still, he encouraged me to invest in real estate because he knew that a career in the volatile high tech market would never afford the financial security real estate can offer. He also made sure I understood that we can lose a lot of money too.
Sadly, that’s what happened when the market tanked not long after I made my first investment. Getting through the bust was a huge struggle, but Dave didn’t leave me hanging. And through that process, he helped me learn what failure was both in real estate and in machine design — that it’s just another step toward success. And, he taught me that it’s easy to recover from failure — you don’t give up.
So, I didn’t. Instead, I took what I loved about engineering — the design and technical aspects — and incorporated them into my process. I told you that I take complete responsibility for creating the investor slides. By the time I’m to that point, we’ve already made sure all the pieces fit together. The design is complete and the technicalities addressed.
We’re certain that in moving forward we are going to make the community a better place while providing our clients with a solid return in the end.
Dave’s still investing with me today and I very much enjoy each of our calls. The strategies of investment have dramatically changed to much more high risk adjusted returns and buying for cash flow and stability and recession-resilient markets.
I love the life I’m living and the fact that Dave has been a part of both the high tech engineering side and the real estate side, all these years. I appreciate his help along the way back then and his continued friendship for all these years since.
How have you used your success to bring goodness to the world?
I’m a people person so helping others is naturally part of who I am. I don’t have a foundation or anything formal like that yet — I’m still trying to figure all that stuff out. Stay tuned though. For now, I just do what I can.
I’ve worked with the Salvation Army at their distribution centers and helped build orphanages in Mexico. I’m not above getting everyone connected with me involved in giving back either. Partly because I know they’re going to jump in wholeheartedly. My partners and I just recently volunteered here in Sarasota to help the Boys and Girls Clubs feed a thousand families over the holidays.
Helping the community whenever possible is a yes in our book no matter how you look at it. In fact, I believe Invest on Main Street gives back to the community with every investment property acquired. That’s because we’ve made it our mission to provide a safer, cleaner, and improved living experience for our residents.
So, even when I’m considering things from an investor’s viewpoint, I’m thinking about the community. We’re not buying buildings and taking money out of the communities. We’re buying buildings and investing into the communities and improving our residents’ lifestyles.
That point is made clear on all of our slide decks. In fact, I put on the bio section that Invest on Main Street is not only here to bring high risk adjusted return, tax shielding, and inflation hedging to busy professionals so that they can live their lives and be passive, but it’s also to provide our residents with a cleaner, safer, and improved living experience. And, to be frank, that’s not every company’s business model.
We want to have a positive effect in this industry. In all of our business plans and all of our decks, it’s very clear that we’re not buying D class properties and putting them on section eight. Then, basically, ignoring them and letting residents suffer as the property deteriorates and maintenance requests stack up.
In fact, we just bought a 320 unit property in Houston from a distressed seller and, during due diligence, we printed out a stack of ignored maintenance requests the height of a ream of paper. So, it definitely happens. Some people acquire properties, drain them of all cash flow and run them further into the ground.
We’re looking at investing into our communities. Through COVID, for instance, we have had conversations with them to assist residents in paying their rent. When residents came to our property managers for help, we worked with them to help fill out the necessary applications to receive assistance. If they were honest and stayed in communication, we helped them and believe those are the tenants that are going to stick with us.
We’re building a good reputation in these communities. Also, when we buy a property, we look very closely at the health of the property itself. We look for mold issues and things like asbestos and lead. We make sure that we’re covered on those kinds of problems, for sure. We build out more amenities, too. We’re putting in playgrounds and dog parks and fixing up the pools and barbecue stations.
We invest in it heavily. For instance, oftentimes when we’re doing a reposition and need to get out the riff raff, we’ll add a full time security guard. Doing our best to really make the community a better place to live.
When I go around properties that people have been living in and the rents are way below market rates, it is often because they have been neglected to varying degrees because somebody has been using them as a battery in their personal matrix, right? They’ve just been producing a charge of cash and they’re living off every penny of it.
Meanwhile, we find holes in the fencing around the property, the gates often don’t work and things tick on from there. We take on the little things that are easy to overlook — landscaping, painting, fixing a damaged ceiling or wall, and striping the parking lot…
And when security cameras go up and there’s a security guard walking the area, we see less crime immediately. Vandalism drops off too. The residents are notably happier because they feel safer in their community. That’s an important aspect of our business.
Can you please give us your favorite “Life Lesson Quote”?
“No battle was ever won according to plan, but no battle was ever won without one.” Napoleon Bonaparte
I tend to sum that quote up as a mantra because I’m an analyst. I tend to be a calculated individual who looks at a ton of data and makes very deliberate moves. There’s a lot of individuals out there that are more instinctual and go with their gut. There’s nothing wrong with that, but I tend to be on the side of planning the attack. I think the process through before any decisions are made. From forming the business plan, underwriting and stress testing my deals to see if they would hold up if a recession is imminent and happens during my hold — I go through as many “what ifs” as necessary. Then, I consider how it would play out.
Thinking in that vein helps me structure my plan of action for each opportunity we consider. Things aren’t ever going to play out completely as planned, but it doesn’t hurt to go into things with your eyes wide open for the worst case scenarios. I think that allows you to sleep easy at night, right?
If I wake up in the morning and I’m looking at the news and see a looming recession, talks of inflation, and market shifts, I’m still comfortable. I know things are set up at a 67% break even occupancy. We’re going to be cash flowing — even in the worst recessions, we only hit the mid 80s.
That kind of planning ahead allows you to take things in stride. You’re still able to enjoy your days instead of constantly fearing a turn for the worse that can lead to a catastrophic end. So, plan to win, but consider your opponent’s countermoves too.
Some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might just see this.
Well, there’s really two sides to me, so do I get two choices?
There’s the engineering guy that spent a lot of my life doing satellites and rockets for companies like Lockheed and SpaceX. But I also did electric cars at Tesla and I did the rotor assembly. There’s one guy that kind of melds all those together. That’s Elon Musk. Obviously, I’d love to have breakfast with him.
Then, I’d head for my lunch with David Lindahl. I heard him speak years ago about what he calls the Holy Trinity of Real Estate. I didn’t realize it at the moment, but it triggered something in the back of my mind. The thought that there’s a better way… it affected my foundational approach to things going forward.
I’ve never met him personally, but I’d like to so I can share how much I resonate with his approach to real estate and thank him for his life changing book. Actually, I believe we resonate on a lot of things — so if you’re reading this, Dave, choose the spot. I’m buying.
Ok. Thank you for all that. Let’s now jump to the main core of our interview. Can you share 3 things that most excite you about the Real Estate industry? If you can please share a story or example.
The most exciting thing to me about the Real Estate industry is that it’s a win-win for us. We can provide great returns to investors while providing a cleaner, safer environment for the residents. Improving everyone’s quality of life is an exciting aspect of what we do.
The fact that real estate is better than other asset classes excites me too. I love introducing my deals to non real estate guys because we have what is essentially an unfair advantage over them. It’s evidenced in the inflation hedging, asset protection, tax shielding, passive cash flow, as well as appreciation and downside protection. The list goes on… There’s just simply no other asset class that gets even close!
Lastly, I love the real estate industry because of the people that you meet — investors, brokers, property managers, and residents. I’ve always been a community builder. It fascinates me because everyone has a story to tell.
Can you share 3 things that most concern you about the industry? If you had the ability to implement 3 ways to reform or improve the industry, what would you suggest? Please share stories or examples if possible.
Most concerning right now is the fact that inflation is looming before us and there are some irrational things going on out there. For instance, with the ongoing pandemic, we’ve seen some states veer toward rent control. And, while rent control may seem like a short-term win, if you look over the test of time, rent control has actually been devastating because it ramps the influx of investment funds. That prevents communities from being kept up. Ultimately, the residents wind up with their infrastructure degrading over time. Not good.
Interest rate risks are another concern. We always underwrite with long term, fixed interest rates. A lot of the industry doesn’t do that. Instead, they use bridge debt, which is short term, often three to five years. With the interest rates rising, it could create opportunities for me, but it could also be devastating for others. I see some concerns there.
There’s also the supply chain issue to contend with right now. We have to look further and work harder to make sure we can secure our pipeline for our renovations. For instance, we are getting in containers of hard counter tops from Vietnam. We’ve never had to do that in the past. We’re having to search harder to stay in control of our fate now due to the supply chain constraints.
What advice would you give to other real estate leaders to help their teams to thrive and to create a really fantastic work culture?
The best advice that I can give regarding creating a fantastic work culture is to be physically present — hands on all the way. When you’re totally involved, aware of what’s going on in all facets of your business, it puts a flow of positive energy into the work environment. And, when the going gets rough, it’s important to get physically in front of each other.
I know that’s been a little harder to do since COVID because we have as many people as possible working remotely. Rather than forgo team building, I’d recommend zoom social gatherings for the employees and their families. Buy your team (and sometimes their whole family too) dinner and drinks by sending a gift card to doordash and drizly ahead of time. Then, plan a happy hour or pizza party of virtual zoom games with prizes. There are many options out now. Email me if you need ideas.
Ok, here is the main question of our interview. You are a “Real Estate Insider”. If you had to advise someone about 5 non intuitive things one should know to succeed in the Real Estate industry, what would you say? Can you please give a story or an example for each?
Okay, first, I’d say make calculated moves. It took me two and a half years before I got into my first deal in commercial real estate. It took a lot less time for me to do that in residential single family.
Second, stick to your internal compass when evaluating deals or deciding to use a certain investor’s funds that you might not fully trust. If you’re not feeling comfortable, go with your gut and walk away. There are plenty of deals out there and, in hindsight, some of my best hands I ever played were the times that I folded and chose to walk away from the table.
Third, take less on your first deal and partner-up. What I mean by that is don’t focus on what you’re getting out of it. For a while, I chose to try and partner with people at my level because I felt like I couldn’t contribute to people who had been in the space for decades. But through the course of working with various partners and trying to get deals going, I realized I would be doing my investors a disservice if I didn’t choose to partner up.
That meant finding ways to add value to those who are vastly more experienced, working harder, working faster, and taking less of the deal. Quite honestly, I didn’t even ask how much I, personally, was getting until I did my second deal.
Fourth, there are plenty of red oceans out there. Be in the blue ocean. A lot of individuals think they need to go to every real estate conference, every broker conference, every passive investor conference, all while collecting everyone’s business cards along the way. They also feel obligated to stab — in other words, hit — everyone with their card as well. This numbers game doesn’t work. I call that the red ocean. That’s where everybody is.
I’ve learned that if I cut down on the number of conferences — I only attended two last year and we’re currently closing on thousands of units — we dove into what I call the blue ocean. Instead of going to all the obvious contact sources, we search for opportunities to work with brokers that are a little less established or on getting investors who are not evaluating you as a commodity against a list of hundreds of other sponsors.
Fifth, it takes a little more energy for you to find those less established brokers and also investors that value relationships, but those are the ones who are going to be the most loyal. You took a chance on them and they appreciate it. These are the partners who will be rooting for you and not comparing you to the next guy.
Because of your position, you are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. 🙂
Employee sponsored 401k’s have disillusioned Americans. They’ve been told that’s all they need to set themselves up for retirement. Meanwhile, consumer debt is soaring and savings accounts depleting. Most Americans don’t have the funds to survive even a year of retirement. The system that educated them and prepared them for this phase of life is broken.
Financial education awareness should happen early in school and continue through adulthood. We should be focusing more on the empowerment of people to take responsibility for their own financial future. We should be educating them on the various asset classes that are available aside from just the stock market and the plans that their financial planner would box them into.