Ed Mathews 0:05

So the big question is this how are real estate investors who don't have a ton of free time, don't have access to off-market deals and didn't start life on third base, how do we grow a real estate business conservatively to support our families, finally leave the corporate rat race and build a legacy? That is the question, and this podcast will give you the answers. I'm Ed Matthews and this is Real Estate Underground.

Ed Mathews 0:31

This is the Real Estate Underground podcast, show number 86. Greetings and salutations, real estate undergrouders. This is Ed Matthews with the Real Estate Underground podcast. Thank you so much for joining us today. Today is a really cool interview. This is a gentleman who is doing it. I always ask the question of our guests if you had to do it over, what would you do? Mr Jim Lee from Formosa Investing is the prototypical answer that I typically give, which is I would start immediately in large multi-family. And so, jim, welcome to the show. I'm really excited to have this conversation and thank you for your time.

Jim Lee 1:12

Yeah, thanks for having me on the show, Ed.

Ed Mathews 1:14

Yeah, my pleasure. So I've been. You know I and a member of my team has been stalking you online for quite some time and, you know, really excited that you accepted our invitation to join. But for the folks out there that haven't met you or don't know your background, why don't you talk about you know your story and how you got here?

Jim Lee 1:34

Sure, so I obtained my economics degree at UCLA back in 2010. As many of you would know, back in 2008, that was the subprime mortgage crash and followed by the, you know, 2010 European debt crisis, so it was a tough time to find a job right out of college. So I was yeah, so I was jobless for a while and eventually it was fortunate enough to lend a job as an anti-sales rep working at LoopNet For those that aren't familiar with LoopNet, it's basically Zillow for commercial real estate so I was able to speak to real estate investors, lenders, you know, agents, property manager on a daily basis, and I learned the importance of having multiple stream of income. And that's when I started to have this idea of acquiring a real estate for additional passive income. And yeah, so from there, I started building my real estate portfolio and eventually pivot to become a syndicator, because I want to be able to help more people reach financial freedom.

Ed Mathews 2:41

Excellent, excellent. So when you became a syndicator, you were telling me you had a couple of deals that you've just recently have closed on. You want to tell me about those?

Jim Lee 2:51

Sure. So the first deal that I closed on was a 200 unit apartment building in Orlando Florida. It's a Valley Ad Class C apartment building built in 1970s, so it's in class A location, but the building is class C yeah.

Ed Mathews 3:12

Well-played.

Jim Lee 3:13

So it's a lot of potential. And the structure, the deal it's pretty straightforward. I'm pretty sure most of the audience know if they know they've seen the syndication deal. It's just 8% preff cash on cash return with a 70-30 split and 2x equity multiple hold period five years.

Ed Mathews 3:35

Yeah, very typical. So, in terms of looking at that, obviously you have an economics degree, so you have an affinity for numbers. What is the process when you're looking at a project? What is the process you go through to underwrite and really dig into a building? The fact that you bought a Class C building in a Class A area has a potential to be a home run, so congratulations on that. But what are you looking for and what are you looking to avoid? Actually, I have a friend of mine that checks our work here as an outside underwriter and I affectionately refer to him as Dr no, but because he never likes any deal and so it forces us to think about risk and what the process is that we're going to have to go through to bring this building back to life and get it to become a valuable asset. So I'm curious what your process is.

Jim Lee 4:40

Yeah. So full disclosure. As a syndicator, I'm currently just working on raising capital on the side of raising capital. So I'm not the least sponsored and I'm not the operator, but I do look at these deals and I do underwrite it as well. Look over the numbers, sure what.

Jim Lee 5:01

I realized that how I picked these markets, especially Orlando and Jacksonville, which is the deals where I'm located, where my deals located, I look at, since the number one thing is insurance right out there, and why, why insurance is so important? Because it can go up, it can shoot up really high, like the expense can add up, especially depending on the yeah, depending on the location. So that's something that I'm like more caught, more aware of that stuff. Just double checking that those that we're not going to be, you know, we're going to be fully covered in the certain areas that we pick in. So that's and I have boots on the ground to like the team, company managers, you know, vendors. I even have investors out there as well. A lot of California's end up moving to Florida, as you may know, after the lockdown. So I have a lot of people boots on the ground that can provide me information as well of which areas to avoid and which areas to invest in as well.

Ed Mathews 6:05

Awesome. Yeah, I mean, insurance has been a big issue, you know. It's interesting that you know you. Always I've heard story after story after story about investors who bought in Florida and then the hurricane the name of it escapes me the one that wiped out Fort Myers and Sanibel and Captiva.

Ed Mathews 6:26

And I was talking with an insurance broker who is down in the Southeast and what he was telling me was the insurance specifically for the Sunbelt area, but in a lot of different areas that are prone to cataclysmic natural events, that the insurance rates were, you know, 25, 30, 40, 50% increases year over year because of the you know the writing, the underwriting that the insurance companies were doing in terms of replacement costs, and it gets really expensive and if you know, it's really astute that you're paying attention to that.

Ed Mathews 7:07

It's much like in Texas, where or anywhere else for that matter when you go to acquire a you know a multifamily and you pay a premium over what the assessment is. You know, one of the things that I see a lot of investors get stuck on is hey, my taxes went up, well, it's because the value you're building went up right, and if you're not capturing that in the underwriting, you are missing a gigantic, you know amount of potentially gigantic amount of expenses that you need to account for, as you kind of understand what the risk is of acquiring that building right.

Jim Lee 7:43

Absolutely, absolutely. Yeah, just like you said, in Texas you have to be very aware of the property tax, because that's where it's the highest Right right.

Ed Mathews 7:53

Yeah, I mean, there's a lot of advantages to investing in some of those states, texas being one of them, but there are. You know, there are a lot of gotchas as well, and you need to have a comprehensive understanding of exactly what your risk portfolio, your risk envelope, looks like, so that you know two years from acquisition you're not having to make that capital call that some of the folks out there right now are having to do. So okay, so in terms of asset classes, you know, obviously you went to UCLA, you have an economics degree, so you're really smart and you know, I would imagine, you could probably do a lot of different things. So what drew you into real estate and then multifamily in particular?

Jim Lee 8:38

Yeah. So, like I said, my first job was working at Loopnet, yeah, and that kind of just helped me get into real estate. Eventually I acquired my first deal. It's a two bedroom, one bathroom condo, and I kind of did everything from A to Z by myself, you know. I found the tenant, run the background check, you know, did the maintenance, and I realized like I wanted to break away from being active because I want to be more passive. So I started to build the system, you know, automate things and also hire a property manager. And that's when I realized, if I'm doing all of this, why isn't there something bigger that I can do with automation, right? And so that's how I started to explore syndication. And once I study and learn syndication, everything just kind of makes sense. I don't know if you want me to explain what syndication is to your audience.

Ed Mathews 9:38

Yeah, by the way.

Jim Lee 9:39

Yeah, so a syndication is basically a partnership between investors who will pull their resources into a single investment. This allows you to invest in multi-million dollar deals like multifamily properties or any commercial buildings. Syndication eliminates much of that risk while sharing the upside, the property generates an income and it just will be split amongst all the investors, so it's a win-win for both the operator and the syndicator.

Jim Lee 10:07

Yeah so yeah, keep going, it's okay. Yeah. So once I realized about syndication and I started to realize, like, when you build this, when you build single family resident, right, if you acquire one, two, three, four, five venture, you're going to run out of your ability to borrow the loan. The Freddie Mac and Fannie Mae you can only borrow up to 10. The scalability is just not there, right? And so that's how I got into multifamily, because you can build a healthy real estate portfolio by buying single family resident and continue to acquire until you run out of time and money, but with multifamily you can scale into millions of dollars of wealth. And also, when you go after 100 plus units, you also attract higher caliber it's more sophisticated people higher caliber real estate agent, lender, property manager, so forth.

Ed Mathews 11:08

That's the NBA, right? I mean, you're not playing park and rec anymore, you're playing with the big dogs, and so much is expected of you. But if you understand that process, then you have the opportunity to create significant generational, even wealth, right, yeah, right on, okay, cool. So, in terms of the systems, that's one of the things that you mentioned and actually is part of my world I'm a former techie, right so I think, in terms of technology and processes, right, and so I'm curious about the processes you've put in place to enable you to manage your business, and what are some of the key things you pay attention to as you manage that business.

Jim Lee 12:00

Yeah, so something that, as an entrepreneur, that I've learned is that I need to be able to delegate task away, and I have this issue of that. I've done this for years and I don't think, if I was to delegate this task to someone else, that someone will not be able to, you know, do the things that I am I'm expecting them to do. So that's that's always been a Mindset that I had to overcome and that's something that I pay really close attention to, and now I actually do just delegate a lot of tasks away For people to manage, to automate things. You know, right, I'm only one person. At the end of the day, you have to. There's, there's someone for each Each put skill set, for each position that you need to you need help with. You just have to find people that compliment your skill set and and I think it's done it's done me wonders when I'm able to just, you know, allow people to help me instead of just doing everything on my own.

Ed Mathews 13:10

Yeah, so it's. You know it's interesting because you know the entrepreneur, sometimes and and I've been, you know, years and years ago I kind of fell into the trap of well, you know, just let me do it, I'll get out of my way, I'll, I'll get it done, because I know what I want right. And you know it's a trap because what it does is, you know, you're a human being, I'm a human being, we require sleep, right? So at some point the gas tank goes empty. And you know, there are, you know, hundreds of hours of work that needs to be done, dozens of hours at least, that need to be done. And you know, you, you are a Carbon being who consumes oxygen and requires six to eight hours of sleep. So that takes basically a third of the day off that you can be active. And you know, do you really want to spend 16 hours a day Working this, this deal?

Ed Mathews 14:04

You know we go through a process every quarter and we're about to go through it again, that In June where I, you know, I basically look at the processes and the systems that we have in place. And you know, it's a pretty easy scorecard, it's a simple scorecard and that's it's what's stressing me out right, and it's stressing me out because it's not working, because a human being has to intervene at some point in the process To make something happen and that, you know, slows it down, which stresses me out. So, you know, when working on the business, you know the focus is okay if, if a process or a system is stressing me out, we do one of you know a handful of things, we delegate it To somebody on the team, we hire somebody else to do it, we outsource it or we automate it. And then the last thing is we stop doing it right. What if we? If we can't, if we can't delegate it to either someone in-house or outside the company and we can't automate it, then it causes the question, you know, should we even be doing it right?

Ed Mathews 15:07

And you know what that does, is it trims down. You know the envelope of things that we have to manage on a day-to-day basis and it and it it makes our productivity. You know I can't say that I measure productivity at a. You know we're doing four widgets today and six widgets tomorrow level, but but the fact is, is that you know there is we're able to move a lot faster, right? Yeah, absolutely, systems and technology are force multipliers. They turn a team of seven people into a team of 20 people.

Jim Lee 15:40

Yeah, right, yeah, absolutely. And just to add on to that is that you know we're all in the real estate game to what to become financially free. So we can, you know, just Go after our passions.

Ed Mathews 15:54

Yeah, that's right.

Jim Lee 15:56

Right, right, exactly. So when you build a system and automate things and you continue to refine it and tune it and you know, let it run itself, eventually that's that's where you're getting. So it's financial, you know time freedom.

Ed Mathews 16:11

Yeah, and then you actually can go on vacation with your friends and family and or family, and you can be gone a week or two or longer, and when you get back, everything's still running right. You know some people will be like, well, I'm not needed. The answer is, well, you're not needed for this business, but is there something else you could be doing? Could you, you know, be donating your time? Could you be coaching? Could you start another business? Right, and you know, I think the, the. If I learned anything in my days in Silicon Valley, it was that systems, you know, at some point set you free, right, yeah, cool, all right. So so I'm curious, you know you've, obviously you you got an exceptional education and you know, obviously you've you've worked for really cool companies like loop net. I'm curious about your mentors, and the people in your life have given you advice, and so my question is this what is the best advice you ever got and who gave it to you?

Jim Lee 17:41

I would say the best advice I got was for during lockdown, because I used to be a realtor as well. I got my real estate license right after I quit pretty much my W2 jobs. One of my investors during lockdown he introduced me to this podcast show called the real estate guy radio show. I don't know if you know it.

Ed Mathews 18:06

I am, I'm very familiar with it.

Jim Lee 18:08

Okay, yeah, I'm a DOJ, yeah. So I listened to them religiously because I didn't have anything to do during lockdown I couldn't host an open house or anything and they always pitched about syndication, and that was how I started to get curious about it and started to learn about it.

Ed Mathews 18:29

Yeah, cool. So it's interesting I find myself. I find mentors in a lot of different places. You know somebody in the business that I happen to meet at a networking event or some sort of meetup. It's a coach that I hire, right. But a lot of the mentors that I have and actually I was on your website and you know two of them you're standing in between two of them that have been my mentors for a better part of more than a decade and that is, you know, robert Kiyosaki and Ken McElroy.

Ed Mathews 18:59

You know I've read those books and you know, I think, the way that you know, if you are shy or if you don't have access to meetups or anything like that, you know one of the best ways to learn how to do what guys like you and me do in this business is read or consume information in some way, shape or form, right. You know it doesn't have to be you know the regular tactile book, but it can be. You know something. It can be a podcast. It can be like you were talking about. It can be you know a YouTube video or a series of videos. It can be you know an audible book that you listen to. I mean, there's so many ways to learn these days, so I'm curious about your process in terms of how you do it. You know how do you consume information, you know when you're trying to learn something, and I'm curious who you're paying attention to in terms of authors or creators these days.

Jim Lee 19:57

Yeah, so I basically listened to Realist of the Guy Radio Show podcast and the Rich Dad Poor Dad podcast as well. Yeah, because I was a huge fan of his book, the Purple Bible, the Bible. It changed my mindset Absolutely In so many different ways, yeah, yeah. So so from there, that's why I started to attend the Realist of the Guy Radio Show event and I went to one of the biggest event called Investor Summit that's how I took that picture with Ken McRoy and Robert Kiyosaki, and so that group of people I follow that's why I pay attention to because they always talk about the economics. They're pretty much at the later stage of life. You know, they're pretty sure all of them are financially free and I think it's working out. Yeah, they're just worried about the dollar collapsing.

Ed Mathews 20:56

Right and you know not being the fiacor and of the world and all that right Right I've been hearing Robert talk about, you know, buy gold because the economy's about the head south. He's been doing it for a few years. At some point he's going to be right, but you know, hopefully not today. So you know, with regard to your business and how you're looking at it, you know if you had to start over, what would you do differently?

Jim Lee 21:25

I would say, change my attitude about trying new things. Okay, you know, when I was young I was pretty close minded. You know I'm an introvert and I keep everything to myself and I wasn't willing to put myself out there like I am today. After becoming a realtor and syndicator, I kind of learned that. You know that it doesn't help in any way. You know, if you don't put yourself out there, if you don't continue to Turns out it's a people business, right. Right, it's just a matter of getting comfortable, being uncomfortable and eventually, you know you're going to see results and I'm beginning to see that. You know.

Ed Mathews 22:02

Yeah, clearly.

Jim Lee 22:03

Yeah, yeah. So I think that's something that I think about. What was your question? I'm sorry.

Ed Mathews 22:11

No, I was just curious if you know, if you had to do it over, what would you do differently?

Jim Lee 22:15

So the one thing that you might have heard from Robert Kiyosaki is that there's three sites of the coin. There's the heads, the tails and the edge right. I try to stay on the edge by being open-minded. If you want me to give you an example, I can as well.

Ed Mathews 22:31

Yeah, that would be great.

Jim Lee 22:32

Yeah. So I was born and raised in Taiwan with a savers mentality. Right In Asian culture we've been taught if you can't pay for something, you can't afford it. And our mind dead is slavery and cash is freedom. So when I acquired my first condo, I actually bought it with all cash offer. It was a short sell, took me a year to close it. And after buying that condo that's when I got serious about real estate I realized that there's really there's a lot of things I don't know about real estate. So that's when I read Rich Sappored ad Change my mindset. And that's what I mean by staying on the edge, right, because now not only can I say do I know how to save money, but I also know how to use debt, because there's good debt and bad debt, right? So I think that's, I get the best of both worlds by staying on the edge.

Real Estate Investing and Financial Planning

Ed Mathews 23:25

Yeah, and that's brilliant. I mean, the fact is that if you can effectively so here's the balance act right, though, if you can effectively manage debt right and not over leverage. I always cringe at when I see, when I meet somebody or I see them online and they're like, yeah, I only put 3.5% down and it's not their primary residence. Um, I get nervous for them, because values don't always go up, rents don't always go up. Sometimes they stabilize, sometimes they go down, and you've got to have enough equity so that your monthly payment is far less than your cash flow so that you can actually put money in your pocket. And it doesn't, as Kiyosaki calls it, it doesn't become an alligator and start eating your money. But it's interesting, because one of the things that I'm seeing in the marketplace and I'm curious what your perspective is on it is there's a whole bunch of operators out there.

Ed Mathews 24:32

Arbor just took back, I think, a $230 million asset from a group because of, from what I heard, it was increase in taxes, as well as the fact that the rents didn't grow as fast as they had projected, and they lost it, and the investors lost about $20 million in equity, which that hurts.

Ed Mathews 24:57

But the fact is that a $230 million asset and, I hear, $20 million loss in equity. They only put 10% down and the fact is, like you were saying about buying that condo if you don't have debt, there's zero risk that the bank's going to come and take it right. There are other risks, but there's that. And on the other side, if you're only putting 3.5% down, you could be way over leveraged and find that when your adjustable rate mortgage reprices from 3.5% to 8.5%, oh boy, that's a much, much different monthly bill to pay, right, and so there's a balance there that you have to find Me. I look at maximum 70% and in fact, if I can raise more equity, I will in the deals that we do, just for that reason alone, right? I'm curious what you're seeing out there.

Jim Lee 25:53

Yeah, yeah, I can't agree more. I mean just to add on to what you just said. We raise more money, additional capital, more capital than we need for reserves, and that's in case of just like the environment we're put in right now. Winter's coming Exactly when interest rates rise. You better have some dry powder, and otherwise you're going to have to either raise more capital or have that capital call. So you just have to think ahead, way ahead.

Ed Mathews 26:30

So I tell people I think, by heritage I'm Irish right, which means I'm wired to think in worst case scenarios I would submit genetically. And so the fact is is that when I'm doing one of these types of projects, I imagine mushroom clouds on the horizon, and so I plan for that, and so when it doesn't happen, we're all pleasantly surprised and hopefully we make a little more money than we expected. But the fact is that you've got a plan for you. Covid was a valuable lesson here in California.

Ed Mathews 27:07

I'm in Connecticut two states that led the way in terms of state level eviction moratoriums. In terms of the I know you invest in Florida, but you live in California, still, right, yes, yeah, and the fact is is that a lot of residents took an eviction moratorium as licensed to not pay rent. If you, a didn't do a good job of vetting your new residents and B didn't have reserves to get through that period of time, you were in trouble, lots of trouble, right, and so you need to plan for that. Capital reserves are a huge piece of that. If you're living, rent check to rent, check on a building and you don't have any reserves, first off, call me because I would love to buy your building, and I'm sure Jim would as well, but the fact is that I refer to it as dead man walking right. I mean, you're already dead. You don't know yet, but you're already dead and you either need a partner to come in and provide those reserves or you got to figure out something else.

Ed Mathews 28:22

And.

Ed Mathews 28:23

Moody's had a. I've mentioned this on previous shows, but Moody's, in January, had a seminar that they gave out, that they provided, and one of the key things that I took away from it is that 23% of the adjustable rate mortgages that are going to mature over I think it said the future 12 months won't be refinanced because they were priced at 3.5%, 4% and now, because of the cash flow and the cap rates expanding, the best that they're going to come in at an 8.5%, 7.5% to 8.5% and those buildings won't cash flow anymore. They won't pass the DSCR test and that's a disaster. And the thing is, is that I look at historically, right? So I'm old, I'm 53 years old, right? So I think in historical terms, I've been through enough of these cycles to know that history repeats itself on a very regular, predictable basis, right?

Ed Mathews 29:27

And when you look at the mortgage rates in the 6% to 8% range, historically, it's normal. If you go back 50, 75 years, a 7% interest rate is fair and it's normal. I'm a child of the late 70s and 80s where my parents paid gosh I think it was 18% interest on the house that we lived in. It's crazy that people got, I think, a little fat and happy about that. The interest rates were always going to be at 2%, 3%, 4%. This is a bitter pill of reality that they're dealing with right now. So, anyway, I'll hop off my soapbox.

Jim Lee 30:15

Yeah, I mean thinking back. Maybe that's why my parents never wanted to borrow. They wanted to use cash. Yeah, because the interest is so high.

Ed Mathews 30:22

Right, and my parents are children of the depression, right. So my grandparents were depression era folks and they never put money in the bank. A funny story about my family when we cleared out my great-grandmother's apartment after she passed back in the mid-80s, my cousin found I think it was like $10,000 or $11,000 stuffed under the mattress of her bed. That was her bank. She was 86 years old and I think she was probably a teenager yeah, she was early 20s during the Depression and that's what that cycle taught her. And so the whole idea of frugality and saving money and credit cards are evil, and so are the banks and all that got transferred to my grandparents, who then taught my parents the same thing. And, as you said very astutely, there is good debt and bad debt. Good debt produces revenue and income. More specifically, bad debt consumes it. Our payments, your own residents, credit cards, you name it.

Jim Lee 31:49

Yeah, I'll say it.

Ed Mathews 31:50

Yeah, cool Thanks. So, Jim, I'm curious when you are not doing real estate, what do you enjoy doing? How do you spend your downtime?

Jim Lee 32:05

I like to travel. Yeah, I like to travel. I like to go snowboarding, go to concert with friends and hiking.

Real Estate Underground Podcast Conversation

Ed Mathews 32:13

Awesome, that's great. And, jim, if somebody wants to learn more about your business for most of the investing, or you and get in touch, what's the best way to get in touch with you?

Jim Lee 32:24

They can visit formosainvestingcom. It's a website I wrote a short 20-pager ebook. Talks about the struggle and mistakes I've learned, so you don't have to make them Excellent.

Ed Mathews 32:38

Well, that's very generous of you.

Jim Lee 32:40

Yeah, and you can also find me on social media Facebook, linkedin, instagram or at Formosa Investing.

Ed Mathews 32:46

Awesome, jim Lee, thank you so much for your time today. It was really good to see you, my friend, and I wish you continued success and I can't wait to hear about the next deal Congrats.

Jim Lee 32:58

Yeah, same to you, and thanks for having me, my pleasure.

Ed Mathews 33:02

Good to see you All right Take care. This has been the Real Estate Underground Podcast. A Clark Street capital presentation. Thanks for joining us. If you're enjoying the show, please remember to subscribe and share it with your friends.

Ed Mathews 33:20

If you'd like to learn more about Clark Street Capital and our upcoming projects, please join our investor club at clarkstcom. Slash join Until next time. Happy investing.