I Would Have Lost Our Investors $5.5 Million—What Would You Have Done In This Situation?

What were you doing on the morning of Jan. 17, 2020? While the world was learning about a strange new virus approaching our shores, my business partner, Ben, and I were visiting Louisville, Kentucky. We were meeting our largest operating partner, Mike (not his real name), to walk through a mobile home park his firm was acquiring. Our fund would be the largest investor. 

This park looked like many we had invested in, but larger. There were 315 lots, but about 50 were vacant. We saw a typical range of cars—from junkers to Jaguars. People walked their dogs, kids boarded buses, and a maintenance man shuffled around with his coffee.

But this park was different from most parks this size. You see, the owner lived three states away—and she hadn’t visited (or raised rents) for at least five years. 

This institutional-sized park was owned and operated by a classic mom-and-pop operator. She had no knowledge of how to maximize income and value. She was distracted by other pursuits. 

And she was ready to exit. 

Our operating partner pointed out a variety of deficiencies as we toured the park. He told us how the owner funded all tenant utility bills. He explained how she overpaid staff to avoid getting involved. And he described the profitability of setting new manufactured homes on vacant lots—something the seller wouldn’t dream of.

We flew home to Virginia after lunch and started raising capital for this new fund that would invest in this park and over 200 other commercial real estate assets. 

Mike closed on the acquisition on Feb. 25 while headlines screamed about the coronavirus that threatened every human on the planet. He paid $7.1 million—about half debt and half equity (including ours).

We raised several million dollars in February and March while U.S. investors watched trillions of dollars of value evaporate in Wall Street’s casinos. 

A Surprising Call Amid Pandemic Chaos

In the midst of escalating national turmoil, Mike got a surprising call: Within a week of the acquisition, a competitor called with an offer to buy the facility for $9 million. 

That’s where I might have messed up if I was at the helm—especially in light of the uncertainty of COVID and Wall Street’s precipitous drop.

Mike told me about the offer. I did a quick calculation on turning $3.5 million equity into $5.5 million in about a month and scoring a decisive win for investors in our third fund. With the knowledge I had, I may have accepted the offer and redeployed that capital into other assets. 

Thankfully, I wasn’t in charge. 

You see, our funds don’t acquire and operate commercial real estate assets. We do stringent due diligence to find the most proficient operators we can. We invest alongside over 800 accredited investors in these operators’ assets within our diversified fund.**

We are not in the asset management driver’s seat. And we don’t want to be. (I’m not that capable!) Our firm hand-picks operators with deep expertise and experience in their CRE asset classes and strategies:

• Operators you’d probably never hear of or have access to on your own.
• Operators who acquire underperforming assets like this one.
• Operators with a track record of driving increased net operating income and optimizing investor returns.

Mike flatly refused the offer, even when they raised it to $9.5 million. He had a strategy to transform the park and raise the value efficiently. He hoped to sell it for $13 million or more in just three or so years. 

While his strategy was similar to others he’d successfully executed dozens of times, he reminded me that this was an unusually large asset to have this many operational and income shortcomings. He was excited for his team to get to work. 

And get to work they did. They executed several of their major objectives in the first six months, even with COVID-19 dogging the team. They created a significantly nicer place to live, they cut costs, and they raised income. 

A Second Surprising Call—from a Different Competitor

As they made final plans to start the most challenging phase of their strategy (setting up new homes on 50 vacant lots), Mike received a call from another large manufactured housing operator. He queried Mike about the park and the improvements they had made. He asked about their plans and their current income.  And he offered to buy the park for $15 million. 

Keep in mind that this was late in the same year that Mike acquired the park for $7.1 million. Mike accepted the offer this time and closed a few months later. 

Here are the final stats: 

• Acquired for $7.1 million in February 2020
• Sold for $15 million in December 2020
• Property-level IRR: 347%*
• Property-level MOIC (multiple on invested capital): 3.4x*

Some of the equity was reinvested into other assets to leverage potential profits even further. Some were distributed to investors, who didn’t expect bonus distributions this early in a long-term fund. 

What Would You Have Done? 

Like I said, I’m glad I wasn’t in charge. I’m glad Mike had more experience than I did. And I’m glad hundreds of our investors (this fund is no longer available) benefitted from this deal and many other similar ones. 

Hindsight is 20/20, but I’m still not sure what I would have done in Mike’s shoes with the uncertainty of COVID-19 and without the benefit of a crystal ball. While no one goes broke making a profit, Mike’s wisdom and experience resulted in a much better outcome than selling right after acquiring the asset. 

What would you have done? 

Thankfully, our investors don’t have to answer this question. (I can confidently say none of them would get access to deals like this in the first place. Neither would I!) 

Our investors trust us to trust our operating partners to acquire, improve, and eventually divest underperforming and undervalued assets like this one. While this is a dramatic example, many others follow a similar pattern. 

Furthermore, diversifying across recession-resistant asset types, operators, geographies, strategies, and capital stack positions could provide a safer investment experience for accredited investors—those who want the benefits of real estate but are busy with their careers, families, and interests.

Final Thoughts

I just read this over and felt a little funny—like I’m just bragging on our operators and fund. Though I’m proud of the team, that’s not my intent. My intent is to remind busy professionals that it’s OK to outsource your active real estate investments. It’s alright, and I even believe it’s preferable to trust others to do the heavy lifting. 

It’s reasonable and often profitable to locate expert operators, perform deep-dive due diligence on them, and entrust them with your hard-earned capital. I’m my own case study here. 

I’ve been investing in real estate since 1999. I’ve written three books on real estate investing, spoken at every BiggerPockets conference, and been a guest on hundreds of podcasts. And I’ve raised and placed over $140 million in real estate investments over a few decades. Even so, I feel entirely underqualified to do deals like this one. 

There is no way I would consider taking on the deal I described. And I couldn’t have located this opportunity anyway. 

I believe I can make more profit and build more wealth by locating the best operators possible, with deals I could never find, and passively investing with them. 

But this is not necessarily the best path for you. You may have joined the BiggerPockets community to learn to do deals on your own. You may be happier and become wealthier by buying and operating your own residential or commercial real estate assets. Or you may become like Mike, and hundreds of investors may eventually give you their cash to invest on their behalf. 

If that’s your situation, I encourage you to go for it with all your heart! But if you’re a busy professional hoping to do deals on the side, I want to warn you: You may have a role in the story I just told.

Your career and family, lack of focus, lack of a team, and lack of experience could land you in the role of the original seller of this wonderful asset. You could become a mom-and-pop operator. While the lady who sold this park made millions of dollars, she also left millions of potential upside on the table. 

I wrote this article to inform some of you that there may be a better, healthier, less time-consuming, and less frustrating path to growing wealth in real estate. I invite your feedback, comments, and complaints!

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*All investments are subject to risks, including the loss of all principal invested. Past performance is no guarantee of future returns, and the investment objectives of the currently open Wellings Real Estate Income Fund may not be achieved. Please read the offering memorandum before investing so that you fully understand the risks and consult your tax or advisor before investing. Wellings Capital and BiggerPockets are not affiliated. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.