On the show today we have… Bob Thomas of Merchants Mortgage!
Show notes for Bob Thomas of Merchants Mortgage!
The Vantastic Life is…
– is in Frisco CO!
Let’s welcome Bob Thomas to the show! Joe is still in snowy Frisco Colorado snowboarding at Copper Mountain, Julie is in Ballard Washington, and Bob Thomas is in… Portland Oregon.
Bob is one of the smartest guys in the real estate investing world, and we’ve wanted to have him on for about 1.5 years. He’s a lender, developer, VP at Merchants Mortgage and Sierra Financial. He’s also an avid backpacker and has a sweet camper on his Toyota Truck!
He also had a new baby boy on Christmas Day!
What do they do when you have a baby on Christmas?
We really just wanted to get out the door and back home.
We’d love to hear your life story! Everything!
I grew up in Chicago but it was super cold there, so I decided to go to San Diego State University and got in-state in CA. I have 2 degrees in accounting.
Crazy, I wanted to go to San Diego State but ended up at WSU. What are the 2 degrees?
Nothing exciting. A bachelors and a masters. I wanted to get into real estate, but my dad told me I could get into that later on.
I wanted to get into real estate since I was 11 or 12. I saw people that had the lifestyle that I wanted was into real estate.
I even did a couple real estate internships in college.
Went to work for one of the big accounting firms out of school. And they push you to go down this track in college.
I was about 3 years in and saw these partners that were making half a million bucks but they didn’t have time to spend it. That wasn’t where I wanted to end up with my life.
At that time I was in SF and started looking for work in the real estate industry. So I got a job with a company that was doing a couple billion dollars per year. Where I stayed for 3’ish years. Starting as an analyst and moving towards brokerage. But I wanted to be on the principal part of the business.
There was one deal we worked on that was two class B office towers. 60% lease, the seller wanted to get out of the deal. We sold to a value add investor. They bought them for 60 million, put in 10-12 million. All in for 70mil. Leased most of it to WeWork, and sold it to another investors for 120mil. We told them how to do it, and they just executed it.
This switched my thought process.
What steps did you take?
My girlfriend got a cool job opportunity up in Portland. And I had done some deals up there.
So I said, let’s go for it! And I’ll try to do my own thing up there. I’d only been to Portland 3 times before.
She was doing corporate strategy for a beer company.
I went out to meet everyone in Portland in the real estate area.
You were doing your own thing. What were you capital resources at the time?
Coming from the larger institutional background you see how people structure deals.
In my world we would find joint venture partners. We would source senor debt and mezz debt.
I would look for deals to buy and go and conquer!
Did you have a hard time having never been an operating partner?
It started out where you kinda… if you have to put all of the pieces together before writing an offer the deal goes to someone else.
I knew that I had capital partners that I could draw on if I found a good deal.
Sierra Financial is the main holding company.
We have a full services investment brokerage, lending, and value add investment projects.
I love that where you started out gave you on the job training of what it looks like.
There are so many people that are looking to get into commercial. Go learn for a few years and watch it all go down and happen!
You don’t just switch a dial and go do it.
That is my background as well. Yes.
Listen to the podcast to hear Julie’s whole background story!
I total agree with you that it is not an issue to get a W2 job. If you hate it, get out of it. If it will help you do your own thing later on… do it! It’s so invaluable! I probably got 20 years of experience in just a few years.
Get jobs as Collars, Eastdil Secured (Goldman Sach’s of real estate).
You want to understand placing senior debt, but finding mezzanine financing… you’re only issue is finding a deal.
What is a full capital stack?
Let’s say a million dollar house. I do hard money lending. We will lend 90%, so I’ll lend 900k. Your capital stack is the full 100%.
What if you don’t have the extra 100k? Then you would find a mezzanine lender for the last 100k.
That’s a small scale.
If you’re just one person, it’s easier to squeeze your way in. Going into a big deal is just bigger numbers.
What does that mean when you’re the operating partner?
You’re not going to put in any money because you’re going to run the deal. Then you sell it for 1.5 million. You get 250k and your mezzanine lender is going to make 250k. That is the definition of an unlimited return.
You can get returns that are like a 3 million IRR.
That’s exactly how I’ve made my wealth as well. I was the asset manager on the ownership side. Just for being an expert operator. That could be value add of many different things.
That’s another option right. Learning the execution side.
Do you find that… so you’re able to make those work because you’re find the deal.
I worked for a salary for 8 years, and then was an expert operator for 8 years.
Bob’s way is more lucrative.
I think having the finance and executional background is essential. I don’t have true asset management skills, but seeing operations helped me bolster that.
Tell us about your first deal?
I had been networking with a buddy of mine. He had purchased a multi family development site. He was bout to raise equity. I said I could bring in the equity. We needed to raise about 10-12% of the stack. I put a PPM together and went on a fund raising effort and raised a couple million bucks. We recently bought out the equity that we raised and sold the project into an opportunity zone fund that we are managing. We couldn’t stay on as the owner.
It went 6-8 months over and there were headaches with the city. They wouldn’t give us a permit for 9 months. It was crazy what the city of Portland wanted.
Why did you decide to sell that one?
It’s more valuable as an opportunity zone asset. My partner is being a lessor of the land. We are going for the full 27 years. The sponsor gets their interest…
It’s better to be lucky than smart!
We are learning opportunity zones as we are going.
The depression benefits help to make it a killer deal!
Wow! That’s a whole another podcast! We need to have you back on.
Are you riding the wave of the opportunity zone thing?
It’s good until 2026. Then you can hold through 2047, then it resets based on the market.
We should do another podcast on this.
I’m looking for opportunity zone development projects. I’m actually closing on one today.
Trying to switch my portfolio to value add multi family.
Are you looking for upside to operations and value add remodeling or more?
As long as it has a value add I’ll take a look at it. It goes back to cost of capital. When I started out my capital was expensive. But now I’ve found better deals. So I can not get larger profit with less risk.
So I’m actively trying to seek out 5-30 million value add deals.
Short answer, yes!
If people are looking to follow in your footsteps. What’s the lesson when you’re getting started? To keep it simple. And achieve on their first few deals.
That is a huge thing. People look at deals as one and done. But I think that will miss a lot of opportunities to build your resume. My buddy likes to go for singles.
That first deal, I made money, that was great. I did a couple of house flips because I wanted to get some experience there. And I got my investors comfortable with me.
There have been some partnerships that I’ve made that have turned into much larger deals, and more opportunities.
I’m looking at a value add office deal in Portland right now. I also like self storage and RV parks. I don’t have an eye for retail. I wish I did.
In what circumstances are you able to close right away vs. developer terms? I mean close on permits.
Umm. Let’s go back to multi family. Sometimes I know there’s capital out there but I don’t have it yet.
There can be a scramble to get thing like the appraisal done.
It’s nice to give yourself some leeway to raise the capital.
How long do you think it takes?
I know you’ve done some classes with WAREI and Jan.
What’s the smallest size deal and what states?
I’m a deal junkie, and I love it. I can talk to my clients and help them structure their capital stack. If I were to JV I’m looking more to hold properties right now. I’d be looking at a 20 unit apartment right now.
Why did you decided to work with Merchants Mortgage and what are your companies?
I saw a job opportunity for Merchants Mortgage to place debt. I was going out and networking anyway, so this would go hand and hand, while adding to capital markets expertise.
Sierra is my holding company
Ridge is my property management and real estate brokerage
That plus Merchants give me a full service shot when I go out to raise money.
Right now I’m very Oregon heavy, but I’m trying to branch out.
Activity looking in Portland, Dallas, Ralghie Durham, and Fort Worth.
When I was younger I thought that I would go into syndication and that stuff, but then my kids were born.
Are there opportunities for anyone to invest in your deals?
So I’ve typically done 506d, which means they are not publicly available. But yes, I would like to develop some relationships up front.
Let’s get on a phone call or have a cup of coffee to develop that relationship.
The worst thing you can do is put a great investor into the wrong deal!
You want to have a great relationship with your investor base.
Julie, I’d like to talk with you more.
What would be the top one or two lessons that you’ve learned? And who are your top mentors?
1 – deal size doesn’t matter and bigger is better. I’m looking at a deal that’s a full block in Portland right now.
What part of your background that gives you that confidence?
When I was at CBRD we sold office buildings in downtown SF. If they did it, then I can do it.
I don’t think deal size matters.
2 – there isn’t a lot of creative deal structuring. It’s more on how equity is structured. Learned from Greg Pinnio and Power Players.
Are you saying that mom and pop type stuff allows you to use more creative financing rather than playing in the big big pond, like in my previous life, I did not know anything about creative financing. I only learned this later in the investor world that I’m in today. I agree that not a lot of people can put the two together. I like to talk with Brian Blessing about this stuff.
Yeah, he’s a great guy.
Are you doing any classes?
I haven’t done anything in 6-8 months, but I love talking about deals and talking about the framework. I’m open to talking with people.
I’d love to do a joint thing with Jan and WAREI. I love bring in people from the outside.
On the opportunity zone thing, I think we were one of the first people to do it. We were already mid construction when it came into effect. So we are kind of at the cutting edge of it.
We need to have you back on to talk about (maybe) that building.
How do you think that subject matter touches people not like yourself?
That’s an interesting and loaded question. Opportunity zones are like Roth IRA’s for high end investors. That’s kind of limiting right there.
I would say sourcing the deals unless you have access to capital gains.
Maybe we can talk and try to get the right audience together for this topic! I’ve very interest!
What is a climb or mountaineering trip that you want to do?
I’m midway through the California 14,000 foot mountains! My last trip I was supposed to tag 5 of them. I want to do Thunderbolt traverse and the other California 14’ers.
I’m going to be in the Sierra’s in August. I might do that solo, but if I’m doing technical routes I will have a partner.
How did you get into climbing?
I started in early teens, and my brother got into it bigger than I did. We get together to do a skiing or mountaineering adventure.
I would love to sit with you personally! There’s so much to tackle with Bob. We just got to know him today. We will have him on again.
Will you be at the Big Badass Real Estate Expo?
Yes, I will be there with Merchants Mortgage at a table.
You all need to be there! It is the event of the year for the PNW real estate.
The ticket prices are going up March 19th. There will be over 750 people there. 40 presentations. Look it up and get registered at https://www.pnwrealestateexpo.com/