Hosts Joe Muratore and Ryan Swehla discuss the "Three Legs of the Stool" concept and how it applies to Commercial Real Estate.
Learn more about Graceada Partners at graceadapartners.com
Hosts Joe Muratore and Ryan Swehla discuss the "Three Legs of the Stool" concept and how it applies to Commercial Real Estate.
Learn more about Graceada Partners at graceadapartners.com
Start Transcript
Joe Muratore:
I fundamentally believe the world is dying for leadership. The world is dying for people who will take a stand and have the courage to execute on that. And employees are looking for leaders they respect. Leaders who will own outcomes, that aren't wishy washy, that don't need to take it to committee. But employees want to work in a spot where the owners are owners, where they provide buck stops here, halo of protection, where they don't have to worry, "Am I going to get in trouble for that later?" Or like, "Is that the right thing?" Where there's the right amount of accountability and freedom, but ultimately where there's core values like we have, and there's a buck stops here mentality. A-players thrive in that environment
Narrator:
From Graceada Partners, this is Durable Value, an investor's podcast, where hosts Joe Muratore and Ryan Swehla demystify commercial real estate with safe sound investment strategies to help you balance your portfolio.
Ryan Swehla:
On this episode, Joe and I talk about the three essential disciplines you need to succeed in real estate investing.
Joe Muratore:
Today, we're talking about the three legs of the stool in the investing business. And there really are three disciplines that are distinct and distinctly important that lead to success or failure in this business. You have to have all three, and normally as an individual, you tend to be good at one or two of these, but rarely at three. The first is opportunity. The second is capital and the third is team. And I'll just intro a little bit to say this business starts with opportunity. If you don't have a deal worth talking about, you don't have anything. A lot of people I see in this business start from a perspective of capital. I've got money, or I need to go get money and then figure out what to do with it. True, you can't do anything without money, but finding deals is often harder than finding capital and finding great deals, exceptional deals leads to being able to raise capital.
Joe Muratore:
And then as you have opportunity, and as you have capital to invest, then comes the third. And this is the part that allows you to scale, and that's building out a team. Great decisions, as we've talked about in earlier podcasts come from our partnership. They come from our team members. Investors do best when they're at the front lines, finding great things, working with capital, and they built a team around them that they can execute on with, for management, for leasing, for accounting certainly, for reporting, all these other parts. But you need all three of those things to make investing work.
Ryan Swehla:
I'd maybe twist team into expertise, because I think an important thing to recognize is that you need to know the expertise that you need to be successful. And so when you're starting off as an investor, that can mean your own personal experience or expertise. But as we've recognized, as we've grown is identifying the expertise that we need to have, that we don't currently possess to be able to bring that in, into the fold. On the capital side, I couldn't agree more about the opportunity must lead the charge, because I remember when we first step... Frankly, when we first bought our first property, it was literally this deal's too good to be true. We just have to figure out how to find money for it.
Joe Muratore:
Yeah, you did that for several [crosstalk 00:03:45].
Ryan Swehla:
And I was talking to my aunt, I was talking to friends, I was talking to family and that organically developed into what it was. But then I also think of the time that we first started operating in the 10 to $25 million property space.
Ryan Swehla:
We had already been managing properties of that size for others for years and years. And so we had a lot of expertise in creating value and managing these types of properties, but we had never developed the capital for these kinds of properties. And I remember the first property that we said, "We're going to do this." And you know, we both looked at each other and said, "All right, here it goes." And sure enough, what ends up happening when you have the right opportunity, is the capital comes. It wasn't easy.
Joe Muratore:
No.
Ryan Swehla:
It was a lot of work, but at the same time, having the thing that we knew would create interest, that's what brought the capital. You can divide the investing world into, I believe, two different types. One is the transactional and the other is the true investor, I would say. The transactional are the people that are really more focused on churn of capital and on garnering a fee for the work that they do. And the investor is the one that says, "I am solely focused on making great investments. And by the way, I have to assemble the capital to do that and the expertise to do that." And you can tell in operating style the difference between those two, because the transactional is very much more focused on pushing money out, on finding any deal that can work. And the investor is focused on what am I investing in and how do I align the capital to satisfy that need?
Joe Muratore:
Yeah. When going back to the skill building, think of where we started. We started as leasing agents doing little 1000 square foot deals, and 1500 square foot deals. We were called in to solve those little problems. And when we started, getting a 1000 square foot lease signed was hard. My first leasing deal was for the Neptune Society. It was a crematorium, a tiny little one in South Modesto. And it must've been 2005, 2006. And I remember at the time that was scary. And I did lots of meetings, I explained the lease and I was very serious, but over time you develop a skill and that becomes easier. And solely we worked our way up through leasing and then selling buildings and then selling shopping centers, selling larger buildings. And then we added property management. We added property services there for a while. So we were working in all these phases. And over time, what we realized was, "Wow, people who own these big buildings are hiring us because we actually know how to solve their problems better than they do, or they wouldn't hire us. We should add capital to this and do this ourselves."
Joe Muratore:
And that's where we began to pivot on the team side. And on the opportunity side, you were talking about capital, when you take on a large building, you have to have the courage, but also the understanding of these are the four or five things that we're really good at fixing. Like we're really good at managing construction costs and solving deferred maintenance. We're really good at fixing the right things. We know that paint is a mile wide and three millimeters deep and totally changes the look of a center. It's one of the most cost effective things you can do. So is landscaping, so is resealing a parking lot. We also know that you can't neglect roofs. We also know that HVAC is expensive and you can't neglect that. But having the courage to walk into a 10 or a $20 million investment that's got problems, and having the confidence and the team to be able to solve those and accurately assess those problems in due diligence and curing those, and also having reserves.
Joe Muratore:
That's a skillset that's built over time. And that allows you to take on more challenging investments, expert zone investments that can yield the kind of returns that we bring to our investors. Sourcing opportunity is an art and a science. It's science, it's data and it's people. The most important analogy I can give is that of a Ferris wheel. Sourcing opportunity takes a long time. It can take years, it can take a decade, it can take... Generally it takes more than six months. A lot of times, often the people we're competing with are 1031 exchange buyers. And they're like, "I just sold. I've got 180 days to buy. I've got these many days to identify. I've got to execute." We have the luxury of saying, "We're not driven by that, and even if we are exchanging, it's part of our normal cycle, so it doesn't influence our timelines." But routinely we sort of kicked tires.
Joe Muratore:
We talk, we understand where things are and the way I see this, and we've talked about it a lot is we're placing that on the Ferris wheel, "Ah, that building on Douglas Boulevard in Roseville. Got it. I understand that building. I understand that railroad. I understand that tenancy. You know, I could see us making an offer. We'll talk to the broker. Maybe we put in an offer, maybe it's a little on the low side", but that's okay. It gets there on the Ferris wheel. And it begins to sort of circle around in that process; the seller, the brokers, they get to know who we are. They get to know what our investing platform is. They get to know that we're high quality people, who do what we say we're going to do, that pay on time, that pay commissions, that do great work, they learn about us.
Joe Muratore:
We become a part of their psyche, a part of their mind share. Everything leads to something. So almost always, when we put an offer in, or we talk to an agent, or we talked to a seller, I know, "Hey, six, nine, 12, 18 months from now, we're going to be talking again." And I want to make sure that our first impression is solid and puts us on the right footing for that. So sourcing opportunity for me, it's about the funnel and about the Ferris wheel. And then when there's opportunity, you're there, you get that first call. You're the obvious person to call. The offer comes in, the seller, maybe they've gone through their stages of grief already, maybe they're part way through, but they like you, they believe in you and if they were going to sell to somebody at this low price, it might as well be those nice guys in Modesto.
Ryan Swehla:
You know, that segues into how we find the capital. So there's, there's two aspects of capital in a property, which is debt and equity. And on the debt side, that is working with lenders, working with strategic relationships, with banks, with other types of lenders. You mentioned earlier about, with the brokerage community, them knowing that we will do what we say, that we will follow through, that we will execute. I can't tell you how many times we've had lenders tell us we've never had a borrower perform to the discipline that you guys have performed.
Joe Muratore:
Yeah.
Ryan Swehla:
When a lender knows that they can proceed down a path and know that we're actually going to execute that path, that's powerful.
Joe Muratore:
Yeah.
Ryan Swehla:
The lenders work with a lot of people that don't operate with the same precision that we do. And it's refreshing for them to know that we're going to operate with the same integrity and the same precision that they do. The counter to that is that we hold our lenders to a high standard too. We need to be sure that our relationships can execute well. Execution is the number one thing. We will trade on interest rate or whatever deal structure that we need to, if we can be sure that the lender will execute the business plan that we need to execute on the property. On the equity side, that is our investor pool, our group of investors that we work with. And I love developing those relationships and talking with our investors about what we do, but ultimately at the end of the day, we are focused on continuing to make good investments. And so our investors, we hold ourselves to a high standard of how we communicate with them and how we report to them, the transparency of what we do.
Ryan Swehla:
But at the end of the day, we attract investors that know that they are along for the ride for the investing activity that we do. So if an investor fundamentally buys into the strategy that we are employing, that's the kind of investor that we work with. We don't lead where, "This is the kind of return you're going to get, this is the reporting that you're going to get." We lead with our investment strategy, and if they believe our investment strategy, then we're given the freedom to continue to do the great investing that we do.
Joe Muratore:
I'm often reminded of how important vision is in what we do. There's that phrase that success favors the bold. Of course, you can get in trouble with boldness, and we're careful about that. We've spoken about that, but you can't get anywhere without boldness. I remember earlier in our career, we had done a bunch of small deals and we were at our Think Week, which is a retreat where we put some time into thinking about what the next year is going to look like. And we challenged ourselves to do a larger deal. To that point, the largest deal we'd done was 1.6 million. And we found a shopping center that was trading at a 9.2 cap. There was $12.4 million, almost 10 times as large as what we'd done before. I guess, larger than that. And we looked at each other and we just thought, "Can we pull...?"
Joe Muratore:
We believe in the fundamentals of this investment. It was in Modesto, it was in our hometown. We understood the tenancy. We understood the geography. We understood what we were fundamentally the right group to execute this investment. But Jesus, it was 10 times bigger than we'd done before. And one great thing about our partnership is we looked at each other and we just said, "Let's do it." It might've been a 15 minute discussion. We just knew it was right. I remember being afraid, feeling fear as I called this Sacramento broker and started negotiating on this huge deal, the largest I'd done in my career. And we put it in escrow and we went out and we raised a bunch of money, four and a half million dollars. We still own it. It's done very well. And it's half government occupied and partially healthcare occupied. And it's done well during this recession. But I think that's what I enjoy about our partnership, is we have vision together and we can execute together and we can get out of our own heads, and go do stuff.
Joe Muratore:
When things are hard, I feel propped by you. And I think it's probably-
Ryan Swehla:
Yep.
Joe Muratore:
The same way in reverse.
Ryan Swehla:
So.
Joe Muratore:
In our escrows, we literally have 127 point escrow checklist. We start it, not when we go into escrow, we start it when we have a signed LOI.
Ryan Swehla:
Well, I think the 127 point escrow checklist touches on a broader theme of the expertise that we bring. We hold ourselves and our team to a very high standard with everything that we do. The type of reporting that we do, the technology, the software that we employ is very focused on being best in class. Back to the three legged stool of the team, ensuring that we have the right expertise as we grow has just been absolutely critical.
Joe Muratore:
Totally agree.
Ryan Swehla:
And the investment that we've made in our team has been multiples of return on the investment that we've made in properties.
Joe Muratore:
I love the efficiency and the speed and the joy that comes with having an awesome team. I often think of us as like a Navy SEAL platoon. There's that level of trust where someone's got the flank, and someone's got the rear and someone's laying down to suppress a fire, and we're charging ahead. And it's our job as owners to command that platoon, to have the vision, to stand in front, to say the buck stops with us. But it's our job to give the team the freedom to do their highest caliber work and to share that joy and to share that journey. And I think most days in our office, not every day, but I think most days there is a joy that we're on an exciting journey together. And as I look at our dollars, we've often said, "Should we invest in more properties or invest in people?" And the return on people's been just exceptional.
Ryan Swehla:
I will tell a little secret that every entrepreneur should know about, which is EOS and Traction. Traction is a book by Gino Wickman. You know, you and I have implemented the EOS, Entrepreneurs Operating System, into all levels of our company. And that has helped tremendously. We have core values that we live by in our company. Extreme ownership, humility, and-
Joe Muratore:
Honesty and integrity.
Ryan Swehla:
Yep. Excellence and execution.
Joe Muratore:
Yep.
Ryan Swehla:
These are things that we have really lived by and we have almost kind of fought over to distill down to what really is most valuable to our company. And having that, has helped us be able to have a filter by which we evaluate people.
Joe Muratore:
Yeah.
Ryan Swehla:
So there's kind of two levels to it. One is their match with our core values, and then the second is something called GWC, which is, 'gets it, wants it and has the capacity'. So those look at a kind of a competence expertise level, and a core values, who you are as a person and on a regular basis, we evaluate ourselves, we evaluate our leadership team. We evaluate the rest of our team through these eyes. And that has been so helpful as we go through and are able to really look at what's working and what's not.
Joe Muratore:
Yeah. Well, over the years we have, have had some people come and go. For whatever reasons, people's focus comes in and sometimes it wanes, but what we evaluate every quarter is, "Does this person get it?" Like, do they fundamentally get what it takes to do their job? Like, do they know what it takes to do their job? Do they want it? Do they still come in with a hunger every day for wanting to do their job to the best of their ability? That also translates to, is this a good opportunity for them? Are they motivated around this? And finally, do they have the capacity? We all have core competencies, we all have things we're great at. Is this the right person in the right seat? Do they have the capacity to do their job? And we rank every person including ourselves on that every quarter.
Joe Muratore:
And we have candid conversations with our team. One thing I've learned over the years is hire 10s, pay extra, pay more but hire 10s. You can pay now, or you can pay later. But when you hire a 10, when you hire someone who's world class at what they do, the very best within your region, the very best person you can possibly find to hire to do that job, they pay for themselves over and over and over again. People who are tens it's in their DNA. They don't do slouch work. It's just not who they are as people. They come to work, because they're a 10 with something to prove. They internalize their job. They see it as their mission and they attack it every day to the best of their ability. And there's been times when I hired someone who's sort of in the middle and maybe paid in the middle, but I've always found, and maybe you agree or maybe you don't.
Ryan Swehla:
Yeah.
Joe Muratore:
When we pay that third more or whatever it is more and get that top person, usually it's the same as having two middle people. Sometimes it's the same as having three middle people. Not only that, but we work 50, 60, 40 whatever hours a week. And these are people you spend your life with. I want to spend my life with people I respect and enjoy and feel like a shared sense of mission with so hire 10s.
Ryan Swehla:
And the other thing I'd say, kind of along the same lines is if you have a need or, or a position opens up, or you realize you need to be hiring a new position, envision what you need for that position. And then envision the person with 20% higher skill sets.
Joe Muratore:
Yeah.
Ryan Swehla:
So it's kind of along the same lines, is every time that we have essentially overhired skillset-wise for the role that we need, we've earned dividends on that because what ends up happening is that person brings in a lens and expertise, a value that we didn't even know existed.
Joe Muratore:
Yeah.
Ryan Swehla:
So whenever a company is investing, especially when you're starting out or you're early in your business. I can remember so many times we thought, "Oh my gosh, I'm going to have to pay that salary. I don't even know how I'm going to do that. Maybe I'll start them a little lower and work them up. Or maybe I'll do..." And, and those cutting corners, looking back inhibited our growth rather than multiplied it.
Narrator:
You're listening to Durable Value, an investor's podcast. We understand the world of commercial real estate can be daunting, but we want to make it as simple as possible for you. Get the free 56 Point Checklist for Evaluating Investment Properties that Graceada Partners uses every day at graceadapartners.com/guides.
Joe Muratore:
I fundamentally believe the world is dying for leadership. The world is dying for people who will take a stand and have the courage to execute on that. And employees are looking for leaders they respect. Leaders who will own outcomes that aren't wishy washy, that don't need to take it to committee. Employees want to work in a spot where the owners are owners, where they provide buck stops here, halo of protection, where they don't have to worry, "Am I going to get in trouble for that later? Or like, "Is that the right thing?" Where there's the right amount of accountability and freedom, but ultimately where there's core values like we have, and there's a buck stops here mentality. A-players thrive in that environment.
Ryan Swehla:
Well, I think if we step back to a common theme here is, we're based in Modesto, California. And we're this area called the Central Valley region, which is kind of an under appreciated, overlooked region.
Ryan Swehla:
And here we are on the forefront of being able to apply capital to improve the physical environment of our Central Valley region. It feels like something that I can rally around, that we can rally around and to be able to drive up and down the Valley and know that we don't just buy properties and receive checks.
Joe Muratore:
Yeah.
Ryan Swehla:
We buy properties and we incrementally make those properties better. That is rewarding. And then for our team, one of the things, you know, we started this business and we are in this business to be investing in commercial real estate. But we love being able to build this amazing team of individuals and to be able to see people become their best self or be their best self. And that's where the two lines really cross, because we really are talking about creating an environment in our company that transforms people's lives in our company. But then also, we happen to work in the physical environment. And so we're also able to change the physical environment in ways that impacts people.
Joe Muratore:
Yeah. We started with strip centers. These little forum, 5,000 square foot buildings with three to five tenants, nail salon, sometimes a tattoo parlor, Chinese food, stuff like that. These are generally weak ownership, mom and pop tenants, but they're not going anywhere. And most of them have a following. Sometimes these centers have a lot of deferred maintenance, but this is a pretty good way to get started. It's a bite size investment. It's something where you can add value by fixing up the exterior. You can raise rents, work with the tenants. That's a pretty good way to get started if you're a small investor. It's most important to remember that we work in a world of ideas. We create something out of nothing, especially when you're getting started. And you don't have a great opportunity and you don't have great capital and you might not have a team.
Joe Muratore:
The first thing to do is find an opportunity. The second thing is to go try to find some small amount of capital to pair to it. And third, you begin to build up your team. But ultimately, a lot of this is just hard work. I often say, "Just dial." That's one thing in this business that I've learned over the years, is pick up the phone and dial. So many times, I don't quite know what to say, I'm a little bit nervous, I feel inexperienced. Even today, I was calling a couple of people on buildings. I was like, "I'm going to have to explain to these guys who I am, what we do", but just dial. Just pick up the phone and dial. And that's how things happen. You do that day after day, year after year. And before you know it, you've built something and that's how the world works.
Narrator:
Thank you for listening to Durable Value, an investor's podcast, where we demystify commercial real estate with safe sound investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit graceadapartners.com, where you'll find more information, investors tools, case studies, and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodic with intro music by Ian Post. Thanks again for listening, and we'll see you next time.