From single-family investing to multifamily development

Today’s Guest is Paul Thompson.

 

Paul has been featured in numerous real estate podcasts and hosts his own podcast called Ready Investor One where he teaches the mindset and mechanics of real estate investing. Join Sam and Paul in today’s show.

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[00:00:00] Intro

[00:01:34] The challenges of ground-up development

[00:05:18] Dealing with entitlements and negotiating with the city

[00:10:02] The entitlement process and financing

[00:11:48] The decision to pursue larger projects

[00:13:38] Underwriting multifamily properties

[00:20:45] Paul's journey from single-family investing to multifamily development

[00:20:29] Challenges faced in ground-up development

[00:21:14] Closing

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Connect with Paul:

Facebook: https://www.facebook.com/pauldavidthompson180 

Instagram: https://www.instagram.com/pauldavidthompson/ 

Twitter:https://twitter.com/WinCoreInvest 

Linkedin: https://www.linkedin.com/in/paulthompson-wincoreinvest/

Web: https://pauldavidthompson.com/free-resources/

 

Connect with Sam:

I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

Facebook: https://www.facebook.com/HowtoscaleCRE/

LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/

Email me → [email protected]

 

SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson

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Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f

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Want to read the full show notes of the episode? Check it out below:

Paul Thompson (00:00:00) - The way it works in the development business is the longer you hold the land, the more money you make. So the sooner you sell, you can still make money, but you make less money. So like, well, we don't need to sell this this property right now. Let's go to the next level and do the horizontal development. Well, once you do that, you're like, Well, can't we keep some of it and do the multifamily side of it as well? And that's where we stand. Welcome to the How.

 

Sam Wilson (00:00:23) - To scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Paul Thompson has been featured in numerous real estate podcasts and hosts his own podcast called Ready Investor One, where he teaches the mindset of real estate investing. Paul, welcome to the show.

 

Paul Thompson (00:00:45) - Thanks for having me, Sam.

 

Sam Wilson (00:00:46) - Absolutely. The pleasure is mine. Paul There are three questions I ask every guest who comes on the show in 90s or less.

 

Sam Wilson (00:00:51) - Can you tell me where did you start? Where are you now and how did you get there?

 

Paul Thompson (00:00:55) - Where did I start? Cut my teeth in multifamily. I'm sorry. Come on. Teeth with single family and have since gone to multifamily. I did that as a way to escape my day job. I was a corporate guy. Recovered. I'm still recovering, I think, from being a corporate drone. And so now I have a portfolio of single family in Little Rock, Arkansas, where I live, but now I'm doing multifamily development in syndications in the Dallas-Fort Worth market.

 

Sam Wilson (00:01:24) - Wow. Wow. That's a big jump. What what was the thing that really compelled you to say? All right, we're going to go do something bigger.

 

Paul Thompson (00:01:34) - Well, I bought I bought and sold a lot of single family. Like I've gotten really good at doing that. If it can be done in single family, I've probably done nearly all of it and it became kind of pedestrian to me and I was playing it a bit safe.

 

Paul Thompson (00:01:49) - And if you really want to scale, which I did, then I wasn't sure that buying 100 single family properties was the best play and I wanted to jump off in the deep end. So instead of just buying an apartment complex, I decided to do a ground up development. So I just I really went for it.

 

Sam Wilson (00:02:07) - Wow. Okay. So you took on the ground up development project on your own. You said, All right, we're going to do a ground up development. It's a multifamily property. Uh huh. Whoa, whoa. Walk us through walk us through that. I mean, that's ambitious. Like that's I mean, just to get lending, to get investors, to get all those things lined up, you had to do a lot of things, right? What were they?

 

Paul Thompson (00:02:27) - Yeah, I'm still in the middle of it. So we'll we'll give you a full report in a couple of years when it's all said and done. But the learning and the process so far was that I was a member of a mastermind where we were working on mindset and trying to figure out kind of what our bottlenecks are and kind of designing our life.

 

Paul Thompson (00:02:49) - And I have a good life. I've nothing to complain about, but I felt like I had the potential to do a lot more. And I met a really good friend and he and I are still business partners at this mastermind. And he said, You know, I live in Dallas and I feel like we're in a good market. I really want to get into this land business. Interested in since you've done a lot of wholesaling and flipping and stuff, you kind of know the marketing side better than I do and our values aligned and we're still, you know, considered one of my best friends in the world and talked to him on a daily basis. And I really enjoy that business. So that's how it started. And then it evolved from there to, well, we've got the land entitled now. I mean, like let's we could just sell it. But the way it works and the development business is the longer you hold the land, the more money you make. So the sooner you sell, you can still make money, but you make less money.

 

Paul Thompson (00:03:41) - So like, well, we don't need to sell this this property right now. Let's go to the next level and do the horizontal development. Well, once you do that, you're like, Well, can't we keep some of it and do the multifamily side of it as well? And that's where we stand.

 

Sam Wilson (00:03:55) - Wow. What was the timeline from? Hey, here's an idea to when you identified a parcel that you said, Hey, this is a place where it will work.

 

Paul Thompson (00:04:04) - You probably took 3 or 4 months and made lots of offers not knowing we were doing. We did the I come from a kind of a wholesaling marketing background so I can do that. I don't necessarily say I enjoy it, but I know how to do it. And we sent lots of letters to landowners and we ended up finding a friend of ours that had a property and he's in the business and he had a property and said, This is a small one for me, probably smaller than I care to fool with. Would you guys be interested? I'll you'll pay me an assignment fee, but I'll show you the ropes and here's a good project for it.

 

Paul Thompson (00:04:36) - And that's that's been all we needed because that has then kind of dovetailed into a couple of deals.

 

Sam Wilson (00:04:43) - Right? So were you guys were you guys marketing for off market land then?

 

Paul Thompson (00:04:47) - We were.

 

Sam Wilson (00:04:48) - Gotcha. Okay. So yeah, I was wondering, I'm like, if you're going to, you know, again, if you're the DFW market, there's a property on the market. I mean, getting just the credibility with the brokers and with the sellers that says, Hey, we're going to take it's hard.

 

Paul Thompson (00:05:00) - Yeah, yeah.

 

Sam Wilson (00:05:01) - It would be hard. So finding it off markets probably a little bit. A smarter way to go about that. So you had the idea. Four months later, you acquire the land and then you're like, okay, we're going to go through entitlements. What are some things that you learned that maybe you wish you had known early on about entitlements?

 

Paul Thompson (00:05:18) - Lesson number one you don't buy land unless it's entitled. You can get it under contract subject to getting it entitled. And that's the way we do it now.

 

Paul Thompson (00:05:27) - But the first property we bought a little too quickly and it ends up we're going to be okay with it. But we had a surprise development in the middle of our process that the city didn't really want to do what we want to do with it. So we had to I mean, it's it's what they call it's in the county or in the Texas. They call it the edge. And it was kind of out in the county there. And that gives you options. You can annex into the city or you can stay in the county and it gives you some options. And basically we're running into some hassles with the city. And they're not. They say they want to do all the things you want to do, but then when it comes time to negotiate what they call the developer's agreement, they're like, well, we don't want to commit to anything. It's like, well, I'm not going to annex into the city unless you commit to something. And, you know, just that's that's the process of entitlement is dealing with the cities and going through the legalities and negotiating with lawyers who everybody typically means pretty well, but no one person has the say.

 

Paul Thompson (00:06:26) - So you're having to kind of like piece all this things together and even the people you're interfacing with, with the city, they're the city planner or the city attorney. They're not the city. They're just like employees of the city. And so this is really weird dynamic where you're trying to get the council to agree to something, but the council has no idea what you're doing. Because they're not involved in the conversations.

 

Sam Wilson (00:06:50) - So how do you how do you work around that?

 

Paul Thompson (00:06:53) - Well, you fight with the city planner. I say fight, but you have very pointed conversations with the city planner and especially the city attorneys. And you're like, no, the city does want to do this because they're going to get tax revenue. Does the city want tax revenue? Well, of course they do. Okay. Well, then this is how they get it. And you just have to play that game a lot and negotiate back and forth, have lots of meetings. Like, sometimes it feels like I'm back in corporate because I'm like, trying to, like, herd the cats a lot.

 

Paul Thompson (00:07:18) - And. And when it goes well, it's awesome. And when it doesn't, it's really frustrating.

 

Sam Wilson (00:07:23) - Yeah, man, I can only. I can only imagine what? How would you, other than waiting, you know, to close on the land, subject to whatever your plans are, getting entitlements done. What what else would you do to maybe expedite that process and or just kind of grease the wheels?

 

Paul Thompson (00:07:41) - I have learned that you don't expedite the process. No matter what you think you can do to make it go faster. The process is the process. And it's it's just government, right? So, like, you just can't make it go faster. So you basically have to negotiate with the seller to allow the and educate them that this is what it takes in any developer who's going who's worth their salt is going to do this, this, this same thing. They're not going to just buy it hoping and wishing that that that we're going to get the the terms we need from the city.

 

Sam Wilson (00:08:13) - Um, could you have gone to the city in advance and said, Hey, what do you guys want?

 

Paul Thompson (00:08:20) - Yes, we did.

 

Paul Thompson (00:08:21) - We can. And we did. And they said, we want this. This would be great. Let's annex. And then, you know, 18 months into the process, like, okay, well, we want you to help us get the financing. That'd be the only reason we actually annexed into the city is to help get a what they call a district created to do the financing. And they said, Yeah, yeah, we'll do that, but we're not going to promise we will. It's like, Well, then we're not going to annex to the city. Right, right.

 

Sam Wilson (00:08:44) - And you guys wanted to be annexed into the city for valuation purposes. Being attached to for.

 

Paul Thompson (00:08:52) - The financing, the city can help you qualify for financing. Public improvement. Financing.

 

Sam Wilson (00:08:57) - Right. Right. Which I'm sure is much more favorable terms than maybe what the street rates are.

 

Paul Thompson (00:09:02) - Yeah, right. Very much. It's a bond, right? So you raise a bond and the people who go and get the benefit of it, pay it back over time.

 

Sam Wilson (00:09:09) - Right. Very interesting. Okay, man, that's a lot. So you got through entitlement, you said. And so now you're, what, two years in at least? Yep, yep. Two years in, you get the land entitled. And then you came to a fork in the road. You said, Hey, look, I can sell this or we can go vertical with it. And it sounds like it sounds like you love hard things just from.

 

Paul Thompson (00:09:31) - No, like, actually I'm lazy. Like, why did I sign up for this? But then you look at the the potential profits know like, oh yeah that that adds like a whole nother zero to your profit. And I was like, okay, maybe it's worth it.

 

Sam Wilson (00:09:44) - Right? Right. Zero zeros are important. So you decided to go vertical. Like what? What was the next I mean, because at this point you're a lot of money in you're a lot of money and you're a lot of time. Yeah. Any any idea how many acres is this project?

 

Paul Thompson (00:10:00) - The whole thing is 36.

 

Paul Thompson (00:10:02) - 13 of it will be developed into multifamily and the other 23 will sell as townhomes. And basically we'll sell it, put what they call paper lots, we'll sell it 20, we'll sell the 23 acres to a builder to do the townhomes and the duplexes and whatnot. A build to rent model.

 

Sam Wilson (00:10:19) - Got it. Got it. Okay, cool. But still, so you got see and even so, you've already gotten all your, like you said, paper lots. I mean, the place is basically drawn up at that point. Right, right, right, right. Forget what I was going to ask you. It was about a oh amount of money that you're in on a project like this. Like what? What would you budget if you were to turn around, do this again? Maybe you already are doing this again. But we.

 

Paul Thompson (00:10:40) - Are. Um, I mean, you need access to, you know, probably tens of thousands if not hundreds of thousands of dollars to pay for and pay for entitlements.

 

Paul Thompson (00:10:54) - And the studies and like, it's not uncommon for our earnest money deposit to be like 70 grand. Yeah. So it's not trivial amount of money. This is probably not something that you stumble into as a newbie having no experience, right? Um, yeah. And which is what we were, we were newbies and had no experience, so we made some mistakes along the way. But we were, you know, I'm in my 40s, my business partner is in his late 30s and we have established businesses otherwise. So this is not like the only thing that we're relying on. This is I think of business development and kind of like when you come in investing, single family and existing multifamily are more stable and defined, but then you can have these bigger projects that you kind of go go for gold. And this is what this is. This is a much bigger play, a longer term, and I'm not looking for immediate near-term cash flow. This is like like life changing wealth potential.

 

Sam Wilson (00:11:47) - Right, Right.

 

Sam Wilson (00:11:48) - No, absolutely. Clearly, you have the long game, the long game in mind. And I kind of suspected the answer to your, you know, or yeah, I suspected your answer to the question, which was, hey, you know, you could be hundreds of thousands of dollars in on this project by the time you get to entitlements. So we kind of learned plan B of it where you're going to sell that, you know, the other 23 acres off to developer, you guys are going to build the multifamily property on the 13 acres. But you liked it so much that now you're going back and you're doing it all over again.

 

Paul Thompson (00:12:18) - Yes, we are under contract on other projects and we're negotiating on with the cities to see if they're willing to play ball. And we make a decision right before our earnest money goes hard if the city is willing to to play or not. And we've gone on our contract on multiple occasions where we've had the property under contract, earnest money approaching, going hard, but we can't get up, can't get it back and we have to back out and tell the seller that this is like we explain this on the front end, that this is a risk of this.

 

Paul Thompson (00:12:52) - And most sellers that own that kind of land are sophisticated enough to kind of get the game enough that they understand. And they and I was still out money because I paid for all kinds of studies. And, you know, sometimes you can be out 30, 50 grand and realize this is not a viable deal.

 

Sam Wilson (00:13:09) - Wow. Wow. Man, that's tough. That's tough. What is what you talked about the financing side of things. But what is it like underwriting multifamily mean in today's environment? It's an ever changing environment, especially buying land developing. I mean, that's a long a long time time frame. There it is. What's a what's a strategy or how are you kind of offsetting or compensating for some of that unknown that we seem to have right now.

 

Paul Thompson (00:13:38) - So we take the we pay for market studies, which again, it can be 5 or $6000 and they and they provide like like a 60 page report on what's happening in the marketplace given where you are. And you take they give you a range of what things will rent for, you know, say a three, two or rent for, you know, 1600 to 1800.

 

Paul Thompson (00:13:57) - So we will run the numbers at 1500. So we kind of round down and we do our valuations based on that. And you determine what your NOI is based on, the number of units you think you're going to get, which again is, you know, this in a given like you think you're going to get 200 units, but you only get 188. So you you do like the 80% number of that and then you do these engineering estimates, which they call an opinion of probable cost. And you and you really got to understand the assumptions that they're making because most of the engineers are trying to do right by you and they make really, really, really conservative numbers and they make it super expensive. So they're so you have to kind of dial that into reality. Which is a whole process to learn. But once you kind of get your costs of what you think it takes. I went to an actual builder and said, What does it cost to build something? And they said, In today's market, it's $135,075 per square foot, so budget for 185.

 

Paul Thompson (00:14:54) - Okay. So we budget for 185 and then we determine, okay, like what's the going rate, determine the value? Well, we we run the conservative side of the cap rate. So in Dallas, it can be as low as four and a half. Five. We run it a five and a half, five, 5.8.

 

Sam Wilson (00:15:11) - That's a lot. That's a lot. A lot, A lot of things to consider there. Love. I love the the ambition and the just hey, we're going to go for it and figure it out. But it sounds like it sounds like you've done this, though, strategically. I think that's that's it. Maybe I'm wrong. Does that sound right? I'm going to say.

 

Paul Thompson (00:15:29) - I did because I can't defend myself in the event that I didn't.

 

Sam Wilson (00:15:35) - Love it. I love it, man. That's that's really, really cool. One of the other things, though, that it looks like you've done just from going through our show notes and then talking here before we kick this off, was that you've also just focused the side of your business on the capital raising side into other opportunities.

 

Sam Wilson (00:15:51) - Is that still something you do and if so, why? When you are apparently so busy already on your own deals?

 

Paul Thompson (00:15:57) - Well, my role in my own deals is that I'm the capital raise and the capital stack guy. So that's that's my angle. So my business partner is more of the finding the deals and analyzing and dealing with it with the the engineers and whatnot. I'm more of the the CFO role, right? So that's, that's where I sit. And whether it's for my own deal that I'm developing or for somebody else's RV park or somebody else's multifamily, I like getting to know investors. I like the marketing side of that because you're dealing with typically very consummate professionals and they're super curious about the business and they're not experiencing it yet. And they asked typically very shrewd questions based on their level of sophistication. They just don't know this business yet. And I enjoy that process of hosting webinars and meeting. I do a lot of Zoom calls with with investors to understand, you know, what they're after and what their goals are.

 

Paul Thompson (00:16:52) - And like, you know, this may not be a good fit for you, but, you know, down the road there might be something else that is.

 

Sam Wilson (00:16:56) - Sure. No, that's really, really cool. Anything that you have previously been investing in that you're now just like. Not interested in anymore.

 

Paul Thompson (00:17:06) - Yeah. So I ran an experiment for a while, though, where I was running with what I call mid term rentals, where I take basically you're focusing on traveling nurses, traveling professionals, and you're using Airbnb to market it. And I still have three units that do this with because I've already put the investment in the process in place, but I don't enjoy that business. That to me is personally exhausting. Like I have just three of those and I spend more time thinking about those than I do the other 40 long term rental units I have in Little Rock.

 

Sam Wilson (00:17:36) - Wow.

 

Paul Thompson (00:17:37) - Right. So even though they're only turning over once every 6 to 12 weeks, we have to turn it over every time because someone has lived there oftentimes for months at a time and it needs a major cleaning.

 

Paul Thompson (00:17:49) - And so after the cleaning, we have to go there and look at it and say, is this good enough? And nine times out of ten, it's not like it needs a little bit more. And so we have to get the cleaner back over there or me and my wife will do the last few minute items. I don't enjoy that part of it. That's not the kind of business I want to be in long term. But it's good to know I ran an experiment and it's a great model if you're that kind of operator. I am not that kind of operator. And so you need to know your pros and cons like, like what are you good at? And that is not what I'm good.

 

Sam Wilson (00:18:14) - At, right? No, that's really cool. I love I love that. And it's funny how different, different investing styles fit different personalities where it's like, you know what? There's people got a I got a buddy of mine that he loves the mid term rental thing. I mean that's all Yeah.

 

Sam Wilson (00:18:29) - Is mid term. It's a good business. A good business. Great makes great money. It it at scale and that's his thing. Yeah. You know doing capital raising like what you and I do and then you know getting involved in ground up development would not be his thing. So I think that's what's fun about this business. We all all get to choose. What has it been like for you? What are some systems that you either have implemented that you really liked and or systems you're still working on inside of your business that you're refining?

 

Paul Thompson (00:18:57) - I have found that I am a high startup, low follow through personality. This is like a real thing. This is like somebody came up with those words before I did, right? Like, this is a thing that people have and I am that person. I love dealmaking. I love deal structuring. I love putting things together, but I don't want to operate the deal. That's not my strength. I'm a visionary, not an operator. Right? So I need an operator.

 

Paul Thompson (00:19:20) - And for an example of the mid term rentals, I have completely outsourced the management of that to a good friend of mine and she does an amazing job. She gets 15% of all revenues, so she gets paid very well to do that and she does a great job and we still get pulled in occasionally to take care of things. So we're having to train our our cleaner, our local cleaner to look at things the way we would look at things. And so we have created her a checklist. And she's so good that we're afraid to run that by her too much and be too critical because we don't want to run away. Right? So that's something that me and my wife are working on. My wife likes to like fiddle with these things. And to me it is a money in money out box. But she likes to make a nice place to live. I care nothing about that. My wife does. So we have to like marry those two approaches and my wife can think about what the what kind of flowers that we're planting and I can think about, you know, what what the process is, the checklist for the cleaner to make sure that they're cleaning underneath the furniture because people have been there for a long time.

 

Sam Wilson (00:20:23) - Right, right, right. Yeah. If you have hardwood floors or whatever, you don't you don't want to get on your hands and knees and see nothing but dust.

 

Paul Thompson (00:20:29) - Right. Which is what happens if we let just the cleaner do what she would normally do because she turns over Airbnbs that are like 2 or 3 day stays. They don't get that dirty. When someone lives there for six months, it gets dirty. It needs a full overhaul. So what her checklist for a midterm is completely different than for a short term?

 

Sam Wilson (00:20:45) - Yeah, absolutely. Absolutely. Very, very interesting. Paul, I love what you're doing. This is I mean, you got your hands in a lot of different things, everything from long term rentals, mid term rentals, land acquisitions, entitlements, now doing massive development projects, it sounds like. Yeah, it sounds like you stay a fairly busy. This is this has been certainly enlightening to have you here come on the show and just share with us today. I appreciate your time.

 

Sam Wilson (00:21:10) - If our listeners want to get in touch with you and learn more about you, what is the best way to do that?

 

Paul Thompson (00:21:14) - The best way to get a hold of me is that my website. Paul David Thompson. Com. I think you'll drop that in the show notes. But it is spelled the way you might expect. I say this a lot, but I have a curse of a common name, so I had to use all three of them to make sure I got my own domain. All David thompson.com.

 

Sam Wilson (00:21:32) - That's awesome. Paul We share the same middle name. I like it. This is great. Thank you again for coming on the show today. I do appreciate it. Appreciate it. Sam Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show.

 

Sam Wilson (00:21:56) - It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.