From Corporate W2 to Full Time Real Estate Investing with Karl Krauskopf

Karl made the jump from his corporate job and became a full time real estate investor so he could afford the life he wanted for his growing family. Today we discuss how he was able to make the leap from W2 to single family investing, and then ultimately into multifamily.

Today we discuss:

• What happened when he was sold a property fraudulently
• Why he prefers to hire employees, rather than create multiple business partners
• Why he's expanding his investments outside of his hometown in Seattle

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Transcript

Ciaara: 0:00

Hi, everyone. Welcome to commercial real estate bosses, where we interview badass investors who are crushing it in the commercial real estate space. I'm your host, Ciaara Hoffmann. And on today's call, we have Karl Krauskopf of Aurora's Investment Group. So thank you so much for being on the show today.

Karl: 0:16

Oh, I am super stoked to be here and I appreciate it

Ciaara: 0:19

Karl, tell us your story. How did you get into commercial real estate and what were you doing before?

Karl: 0:24

Sure. So I took one of the more typical routes into commercial real estate. So started off in the single family space, flipping homes moved into development when I had organically grew an investor base and they wanted to be part of the real estate space and transitioned from development into a multifamily on the front end of the inflation cycle coming up a couple of years ago, but before that I spent 10 years in corporate strategy in business development for a healthcare business services company where I helped grow a 50 million revenue, annual revenue company to about 120 before exiting and the transitioning into real estate full time.

Ciaara: 1:08

Awesome. And what kind of prompted you to make that transition from corporate and going into real estate?

Karl: 1:15

So there was absolutely a very finite catalyst point that I remember so clearly on a rainy day in Seattle, when my wife and I were having this conversation about starting a family and we were super excited about it. And we were thinking about, okay, from an income and expense standpoint, we're about to. Bring in this new life and really have in, we've got to talk about weddings and college and all different types of expenses that are coming in. And at the time my wife was a school counselor and, from a public education standpoint, you can look at a salary schedule and look out 10 years from now. And, assuming there's no radical increases or decreases, we could tell what she was going to make in 10 years. And then from my perspective, working in corporate. Typically your performance, unless you're commission based, which I wasn't your performance is usually based on your compensation, I should say, is usually based on the performance of the company and performance of yourself. And so you're typically not going to get any kind of raises or promotions for a 12 to 18 month period. So again, you knew what your salary was going to be. And then moreover, if you're doing, if you're following the loyalty program to your single employer, you're typically not going to be getting compensated. As you should be. Whereas if you were to be employer hopping, so decided that we needed to figure out another way to make money. And we scrambled, we looked at day trading, we looked at all these different, this was before Bitcoin was, a dollar. Dollar a coin and that really wasn't on the radar. So I had some conversations with other local real estate agents. I knew that I was opportunistic and buying single families single family homes wanted to get into the rental space, had some conversations and what was one of the more enlightening conversations was. That as an individual, we can own duplexes and four plexes. And to me, I had no idea. I thought entities own those. And then we expanded the concept to apartments and 12 plexes and 20 unit apartment complexes. And again, to me I thought those were organizations or hedge funds and things of that nature that owned it, not small private private groups like what we're running now. And I started exploring that and that took me into the small multifamily, small rental business and got into a flipping shortly thereafter.

Ciaara: 3:44

So how long did that take you from the time when you decided, okay, we need to get into real estate to then being a full time investor?

Karl: 3:52

That was two years. I took six months before making my first transaction to. Read every book I could find at the time BiggerPockets was the kind of the go to beginner's guide of things real estate related. Read I want to say half a dozen books, listened to every single podcast at that point, that was probably like podcast one to 150.

Ciaara: 4:15

Yeah.

Karl: 4:16

And really just absorbed as much information as I could about the topic and I truly fell in love. It felt like I found a passion that, really, I love to eat, breathe, talk about. There were times where I was told to stop talking about it. It was so obsessive.

Ciaara: 4:33

Yeah, that's how I feel about real estate and this market and this business as well. It's just, it becomes like an obsession, I really enjoy it and I think it has to be an obsession if you want to be successful at it in a way, right? Because you kind of sleep, eat and breathe your multifamily or your real estate business and that's really what gets you to the success.

Karl: 4:55

Yep. Yeah. I think the underlying Kind of characteristic of that is the entrepreneurial spirit, right? Real estate is what sits on top of the entrepreneurial spirit. It's real estate is the engine that we're using to exercise that muscle of entrepreneurship.

Ciaara: 5:11

Absolutely. Now you mentioned briefly that you got into construction initially when you were doing single family. So tell us about that. Was that like just new construction, single families? What were you doing in that space?

Karl: 5:24

Sure, originally on the flipping home. So I flipped one home. My first home I flipped, it was successful, made about 60, 000. Parlayed that into three new flips, all at the same time. By the way, I don't recommend that for somebody who's working a W2 job. That's 50 hours, has a brand new kid. She was four months at that point. And still trying to figure out the ropes. And so those three flips. One was sold to me fraudulently. So I bought it from a wholesaler digitally and the, somebody purported to be the seller and went through the whole title and escrow process, notarized it, started rehab, 26, 000 into rehab. And all of a sudden I get a lawsuit claiming that the sale was fraudulent. Long story short, it was fraudulent title insurance stepped in, paid the title premium or title insurance. And then in the long run, I ended up losing about 50, 000 on one of my first deals, which was just heartbreaking. The other two went mild, right? Probably turned 25, 000 dollars profit each. Nothing great. Spent a lot of time on them, but again, going back to that entrepreneurial spirit, the passion of it, I still was super excited and super gung ho about it. Picked up the pieces and continued on doing three more flips each year and taking on a little bit more advanced and more difficult flips. So instead of just the lips, the carpet and paint, so to speak, We'd go down to the studs replacing roofs, replacing, adding new windows, changing the envelope of the home. And then soon I was getting into foundation jobs where I was going in and I was repairing massive foundation gaps. One that was so big, I was actually able to stick my hand through the stem wall from where the foundation was cracking. Crazy projects. And so I realized at that point Hey, let's try I'd love to try a new construction because fixing these, I knew all of my subs were really upset about waving walls because these were just really old homes. And again, I think I mentioned on the front end is I live in Seattle. Most of the homes that we're flipping here in Seattle, generally speaking, are anywhere from 1920s to 1970s. So a lot of those, a lot of that product really is old and sees a lot of deterioration. So

Ciaara: 7:49

yeah,

Karl: 7:49

went into a new construction on partnered up with a builder where I brought in the investors, I brought in the equity essentially I built the capital stack for us and bought an entitled project. And had a great great experience with that. We made a ton of money on it. I was really able to learn and be hand in hand with the builder. And learn the process of managing a new construction project, which by the way, for the flip for the folks that have flipped or do any kind of flipping out here is that it's much, much easier on a new construction project than flipping flipping a home. Everything does not go to plan, but things are straight. Things are even, and the only cat, the big caveat is working with the city. Municipalities and things of that nature.

Ciaara: 8:38

Absolutely. And then what caused you to want to transition into, the small multifamily from there?

Karl: 8:45

So going from the new construction into the midsize, the small midsize multifamily. So we bought a 30 unit apartment complex last year. That was the first multifamily value add that, that we bought. And again the big reason of going into that, an asset like that was because of seeing the inflation rise and realizing, Hey, I want to be on the rising tide. side of things specifically related to rent. So I saw that coming up and wanted to, again, I spent about three months self educating myself and how to asset manage how to work with property management, how to work with tenants, how to build out business plans related to multifamily. Before making my first multifamily purchase.

Ciaara: 9:30

Got it. Now, when you went into these deals, you mentioned you had investors. Were you doing syndication at this time? Were you doing like more of a JV structure?

Karl: 9:39

More of the syndicated equity side. So single assets syndications.

Ciaara: 9:44

Got it. All right.

Karl: 9:46

And for the most part, those were, they started off as 506B, so raising from family and friends. And for the most part, those were investors that I did JV with on a lot of the flips. So I did JV with capital partners who also brought in some additional work in terms of communication with the subs, et cetera. But ended up parlaying a lot of them who were like, yeah, Karl this is all well and good, but this is just too much work for me to. To really pitch in during while also managing a day job. And it was positioning them differently into a passive investor role. And again, going from a single assets single family homes to single assets multifamily homes was much easier as the operator, because we're having to manage one asset with multiple investors as opposed to. One asset, one investor.

Ciaara: 10:42

Makes sense. All right. And so tell us about what's your investment strategy right now in the current market? Obviously a lot has changed. So what is your investment strategy now in 2023?

Karl: 10:54

Sure. So investment strategy is just having a very clear and multiple exit strategies. Really looking at ways that we can either spin off part of the assets, non performing portions of the assets. So the one that we closed on last year, the 30 unit is comprised of three separate tax parcels. A 24 unit garden style Bavarian apartments, a six unit cottage and a vacant parking lot. All three are separately deeded, separately parceled. And so that gives me flexibility in terms of how and when I sell the assets itself instead of, business plan A is to sell all 30 units with the parking lot at the end of 10 years. As an asset manager, my job is always to evaluate how do I de risk my, our balance sheet and increase our velocity of money. So pursuing a separate sale of the six unit cottage portfolio to another investor is the lowest, barrier to entry. Alternatively, it's going in short platting the six unit cottages. And then installing HOAs on each of those short plats, so that way it can sell to individual homeowners, six individual homes to six individual homeowners, getting a premium on a per unit basis, while also considering either selling off the parking lot as is, entitling it and selling it off. Or entitling and building it. So again, one asset, multiple exit strategies is absolutely critical. And then obviously the kind of, yeah. One trick pony so to speak, where go in, increase rents, decrease operating expenses that's obviously, has to be part of the play itself. So class B class C apartments in a way that we can increase again, the income and decrease the expenses.

Ciaara: 12:42

Perfect. Now, as an operator, going into these bigger multifamily deals, obviously I think before when you're in the single family, it was probably a one man show. You were running the whole thing and operations, raising the capital. Now that you're transitioning into multifamily what is your role or do you have a team to help you with all the different aspects of it? Or are you still managing, the asset management itself, plus finding the deals, plus getting the investors? How does that structure?

Karl: 13:08

Sure. So building out a team hiring a underwriter right now that's historically has been me one man show working with and partnered with an asset manager on our existing portfolio. And again, now working on hiring essentially an acquisitions team an individual. A person that's focused on broker relations ability to underwrite and bring and boil up the projects up to me where I can make the decision on a go, no good decision. Whereas that would leave me on the investor relation hyper focused on the building out the brand. Becoming more marketable and building out the relationships from an investor perspective, both on the retail as well as the institutional and family office side. But again, historically it's been me primarily focused on the upfront, the broker and acquisitions, as well as the investor relations and marketing.

Ciaara: 14:03

Perfect. So it sounds like. At this point you're looking to hire that helps some people usually will maybe partner with other people as business partners. So what has got you to do this more as like a hiring of an employee versus going that strategy?

Karl: 14:19

Sure. So I think the idea of the hiring as opposed to a kind of serial partnering as I phrase it is control and predictability. So with a higher. Sure you've got the volatility of having an employee having to regularly pay the employee. Do we have the money to pay the employee, et cetera? However, I think that with employees, as long as we're creating the desired and desirable team culture, we ultimately in the long run are going to have a scalable business. Where we've got more control, right? So the Holy grail of this is getting to a point where we have vertical integration as opposed to, again, the serial partnership, where in the deal, we're partnering with Joey and Sally. And then this next one, we're going to partner with Freddie and Joe making up these names, by the way, it's just, there's lack of control and there's lack of predictability. in the experiences that I've had so far, obviously I know there's other people who have still operate in this partnership model and are incredibly successful. All power to them and anybody that likes that model. It's one that really works, especially if you've got limited resources on the front end.

Ciaara: 15:31

Absolutely. Now that makes sense. Now, you said you've been investing in your backyard in Seattle. Now moving forward, are you looking to stay in that area? Are you looking to change and move into a different market?

Karl: 15:44

Sure. So opportunistic in Seattle and Washington, meaning I know the area really well. I know what units trade at on a per unit basis, and I know what makes a deal a good deal. I know the locations very well. And it's close by. So if I need to asset manage it locally, that's no problem. Now the issue and challenge and the rub that I have with Seattle, with the Puget Sound and with Washington in general, is the available inventory of class B and class C apartments. That allow for scalability, meaning there, there are no products that were built in the fifties, sixties, seventies, even eighties in that hundred plus unit complex. They just don't exist primarily because there was a lot of zoning restrictions back then prior to Microsoft and Amazon and a lot of the other big tech companies coming in and pushing up the population demand and thus the city and the municipalities having to. Lift those restrictions, those zoning restrictions. Now the only way to scale is to buy a 2000, 2010 product in the a hundred plus where you're buying'em for 370,000 to$425,000 of pro a unit. So we're talking the first few purchases have to be in the$35 million plus range. It's difficult to start scaling there. So looking in other parts of the country where the cost per unit basis is lower the population growth is higher, the employment growth is high and it's the right type of employment growth. And for right now, that, that area that I've been looking at and have really been building the relationships with and building the infrastructure. Is in the North Carolina markets of Charlotte, Greensboro, Burlington and the Raleigh Durham Carrie triangle.

Ciaara: 17:40

Perfect. And so what is it that you liked about that market or did you connect with certain people that are invested in that market that kind of attracted you to that area?

Karl: 17:48

All of the above. I grew up in Florida on the East coast and the place that we went to, to go visit the mountains, I saw snow for my first time when I was like in the sixth grade. And it was snow that had melted from three weeks prior to but it was snow. Was vacation up to Asheville frequently. And I was familiar with it. And my brother had lived in the Raleigh triangle for about six years before moving out to Seattle with me. And again, I was familiar with the markets from an arm's length distance. Lastly the corporate partners that I worked with back in my corporate job in healthcare. We had a lot of industry partners, a lot of technology partners who were based in Raleigh. So again, I was familiar with it. I had built some anecdotal relationships. And then as I got into the real estate space, more and more I found and made connections with people that were there. And so parlayed those kind of contextual items.

Ciaara: 18:45

Yeah.

Karl: 18:45

And Parlayed them with the population growth, the employment strength, the diversity of employers, et cetera. And it just seemed like a great place to essentially plant the flag.

Ciaara: 18:58

Perfect. All right. Well, I'd like to do a little bit of a deal walk through now where we can go into one of the deals you've done maybe that you're working on right now and just walk us through some challenges that you may have gone through that our listeners can learn from and take away some lessons.

Karl: 19:15

This one is in particular in downtown Seattle and it came up sometime last year and in late quarter three let's call it September and I'd went out tour of the property with one of the brokers and it was beautiful, super charming, really great neighborhood, but then it had some downfalls to it, which were. Steve slope in the backyard. And at the time, it just didn't pencil off from a price perspective. What I did like about the property was that it was a 12 unit apartment complex. They were originally asking 4 million dollars. It came with permitted townhome lots. In the backyard. Essentially I could have both the multifamily that I loved as well as the development that I loved and marry the two. Now the price a, the price wasn't right. And then B from a residential development standpoint, this was October of 2022 when everything was going down the pot really hard and really fast for the residential space. So it was a little less attractive than normal. So again, looked at it told the broker I'd pass about three, four months later in January of this year, got a call from the same broker saying, Hey we're taking this back to market. We're coming in substantially lower. Do you have any interest shared the price with me? It was three and a quarter, 3. 25. Down from 4 million to 3. 25. And I decided to take a look at it. Within the course of two days, got it underwritten really quickly. And it made sense. It made sense because what I wanted to do with it was keep the apartments and sell off the townhome lots, the same situation that I was talking about with the apartments that we own right now where again, I can reduce the cost basis substantially in the apartments. Cashflow on the apartments and have very little balance sheet risk because of the liquidation of those townhomes. So it went through due diligence, got really far. It was pretty close to the end of the feasibility period. When a couple of things had come up, which was that the project was not quite permit ready because there were about 200, 000 in fees that had not been paid by the seller and that the seller had. Quote, unquote, intended for the buyer to pay. So ran into some issues there. Moreover ran into some issues on the buy side of the townhome lots. The interested builders that we were, that I was working with lost interest because they had too much inventory in hand. So it was running into a sticky situation. At a point where, it was either retrade a substantial amount or walk away from the deal or get really really freaking creative. So we opted for the latter and had conversations with the seller, tried to figure out what would work best for them. What would work best for us. And it was really trying to figure out how do we make this win for everybody? So what we ended up settling with is the seller is keeping the townhome lots. He is a builder through and through this is what he does is build. He builds to sell and that's his business model. Whereas me, I'm on the other side of the spectrum. So we decided to let him keep the the townhome lots. I'm buying the apartments and I'm buying them for 2. 5 million dollars or one of the historically lowest cost basis in Seattle in almost the last decade. So we're at about 210, 000 a door in downtown Seattle.

Ciaara: 22:52

So that all worked out in the end then.

Karl: 22:54

Yeah, it's all about figuring out in my opinion, from a negotiation standpoint, what's the true motivation? What is the absolute root cause of the root cause motivation for everybody? For me, it was lowest cost basis. So I could cashflow quickly and easily for him, it was not losing money and for that to happen. He either, A, needed to sell it for what we had at that originally, or B, he needed to build the townhomes and get the profit and become profitable on the townhomes enough to a point where it offset the the loss of the initial sale.

Ciaara: 23:33

All right. Karl, what's next for you and your company?

Karl: 23:36

Continued growth both in I would say both in Seattle as well as North Carolina.

Ciaara: 23:40

Perfect. Thank you so much for being on the show today, Karl. Where can people find you online if they want to connect and learn more about you and your company?

Karl: 23:48

Sure. My preference. I love LinkedIn. You can follow me on LinkedIn direct message me on LinkedIn. It's a great way to stay connected with what we're doing, what I'm doing, and a really great way to communicate one on one.

Ciaara: 24:01

Perfect. Thanks everybody for tuning in. If you enjoyed today's episode, please write us a five star review on Apple podcasts or Spotify. Every review helps us to be able to reach more and more people looking to get involved in commercial real estate.

24:15

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