This is a story about Stephanie McConnon’s experience in real estate investing: How she got started, what she worked on, setbacks, marketing methods, and strategy changes. Stephanie writes:
It was the design and construction aspect of buildings that attracted me the most to residential real estate at an early age. I had watched my father build additions to our home and was fascinated by the process of creating new living spaces, and the way that each change lifted the value of the home. In my free time in high school, I read every real estate investing-related book I could get my hands on. I was particularly attracted to residential renovations and multi-family value-add opportunities. Short term profits or “get rich quick” schemes never had allure for me. However, I was definitely attracted to the thought of setting aside money slowly over time to invest. I was interested in renovating assets that I planned to hold long-term for passive income and financial security.
Developing a Set of Investment Principles
Through my reading, I chose investment principles or ideologies that made sense to me, and when I was older, I was able to invest using those same principles. Today, the list has grown, but more or less includes the following:
- Purchase assets at “below-market” prices. In a stable market, it is my job to find opportunities for arbitrage and purchase below market. Perhaps there is a certain asset class at a specific price point, sitting on bank books, that nobody else is interested in buying. Perhaps larger investors are staying out of tertiary markets. Perhaps one market is going through a total meltdown (this year, I’m thinking of Flint, MI).Whatever the opportunity for arbitrage may be, it is my job to identify it and act upon it. This concept applies to commercial assets as well, and obviously my preference is to purchase assets when real estate values are down in the dumps. (Of course, this is also when capital/funding sources dry up).
- Invest in a good deal or do not invest at all. If I cannot find the arbitrage opportunity that I am looking for, I won’t invest. Period. I do not need to create an artificial timeline that pushes me to spend investor money or personal money when I am struggling to find deals. I would rather not invest than get involved in a bad deal.
- There is an investment strategy that works in every market during every phase of a real estate cycle. The fun and interesting part of real estate investing is figuring out what works, when, where, and being ready for it. Sometimes the strategy I really WANT to follow doesn’t turn out the be the strategy that works in a particular market, and I am forced to choose an alternative strategy (it happened to me in 2015).
Applying the Principles to Single Family Home Deals
With those principles in mind, I began working on residential real estate projects after high school, mostly with a relative. We purchased single family homes in Florida well below market, and many of them were sold at peak prices leading up the financial crisis in 2008. Almost all of these opportunities were identified by sending out direct mail to absentee property owners. During peak months, 30,000+ letters went out to property owners. We also tried sign advertisements, direct phone calls, door knocking, and expired listings from the MLS. Most of our transactions were borne out of direct mail, and our letters simply stated we were looking for properties to buy in their neighborhood. (Note: I am most happy to share the templates/mailers/methods for marketing with anyone who requests it via email).
Most people who responded to our advertising wanted to sell at retail (full) price, so we weren’t interested. Sometimes, however, we received callbacks from sellers who were selling at a discount. Most of those types of sellers were those who needed to sell their property “yesterday.” On average, properties were purchased for less than $20-50k, renovated for $10-25k, and sold for upwards of $100-300k.
After working on about 30 transactions, we wrapped up the Florida property portfolio and went on with our lives. At that time, our arbitrage opportunities for our strategy were dried up.
I spent a few years on other pursuits, including opening a business and finishing my undergraduate degree. Then, in 2012, I came to NYC, like many, seeking opportunity. I wanted to become a more sophisticated real estate investor by working on larger transactions and expanding to additional markets. I was very open minded to opportunities, and I knew two things:
- Success on a larger scale would require raising money from others.
- Thoroughly understanding due diligence, legal, and title in transactions would become a necessity.
Trial, Error, and An Overheated Multifamily Market
As a result, I took on a job role that would help with the fundraising and investor relations aspect of using OPM. This lasted for two years. I worked for a company that handled major real estate transactions nationwide to help me understand the due diligence, title, and legal aspects of real estate. This also lasted for two years. I also used this time to earn an MS in Real Estate Finance from NYU.
During my time at NYU, I received my first exposure to the sophisticated investment techniques used by larger players in the industry. I got together with a long-term trusted friend, and we started a company. We began putting out bids for multi-family assets and apartment complexes. From a marketing perspective, we tried lots of things, including:
- targeted USPS letters to apartment complex owners
- direct phone calls to owners
- door knocking
- networking and reaching out to brokers
- landlord/property owner associations
- targeted internet advertising
Again, I received the best response through direct mail, with handwritten envelopes and physical stamps on each envelope. Getting potential apartment complex deals in the pipeline was the easy part, and soon we were bombarded. We had properties to underwrite, investment committee meetings to attend, lender pitches to present, and vendor meetings.
I put my absolute best bids out on several large assets over the course of a year-and-a-half leading into 2016. They were not junk bids; each was carefully planned, conservatively financed, and had excellent long-term potential for myself and my investors. However, in every case, I was outbid by at least three other purchasers.
Given the prices I saw other investors paying, I knew they were underwriting based on highly optimistic, best-case scenario numbers that were not impossible to achieve, but could potentially put the property at risk if anything went wrong, such as:
- a change in the real estate markets
- an operational mistake
- a slight decrease in demand
- a lag getting new tenants moved in
- any host of other potential problems
While I respect the fact that every investor has their own personal risk tolerance, slicing thin margins and teetering on default in tough times are not the types of risks I like to take. This applies especially to someone who does not yet own an apartment complex, like me, and who is using equity funding from professionals who have worked long, hard hours for years to earn their investment dollars.
Though I wished to invest in those apartment complexes, I knew the right thing to do was wait for the market to cool off. In the meantime, where have I found opportunity? I am working on a portfolio of pre-fabricated homes that were bank-foreclosed. I can purchase them below-market in bulk, renovate, and sell them above market by financing my residents. This is a high-margin, low asset value strategy that gives a second chance to both the homes and the people who live inside them.
Still, I plan to work in the commercial value-add and opportunistic space in the coming years. As for the right strategy, in the right market, at the right time? You’ll have to get out your crystal ball for that.
View my real estate portfolio: www.stephaniemcconnon.com.