WS1867 Growing From 1 Full Time Employee to 10 in One Year | David Lilley

In this episode  Whitney Sewell sits down with David Lilley, the founder and CEO of REAP Capital. With a portfolio of over 785 units and assets valued at over 100 million, David shares his expertise on real estate syndication and how he scaled his business. As a military veteran and former firefighter, David's unique background adds depth to the conversation.

One of the key topics discussed is the decision to sell a project in the current market. David explains that while their average internal rate of return (IRR) is over 40% for their exits, the particular project they are selling will have a lower IRR of around 10-12%. However, David emphasizes that in the current market, making any profit within two years of ownership is a significant win. He believes in hedging risk and taking advantage of opportunities when they arise.

Throughout the episode, David shares valuable insights for both active and passive investors. He highlights the importance of evaluating the sponsor and building trust before investing. David also discusses the challenges of hiring, particularly in the property management sector. He emphasizes the need to find individuals with the right character and work ethic, even if they may lack experience.


This episode offers valuable insights into real estate syndication, scaling a business, and making strategic decisions in the current market. Whether you're an active investor looking to grow your portfolio or a passive investor seeking opportunities, this episode provides valuable information to help you navigate the world of real estate syndication.

If you want to learn more about David Lilley  and connect with him on LinkedIn, visit his website at reapcap.com. You can schedule a call with him or fill out the contact form. Don't miss out on the opportunity to connect with David and explore potential real estate opportunities.

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Transcript

David Lilley : Our average IRR is over 40% right now for our exits. And this one will be 10, 12% IRR. So it hurts the average, but in this market owning less than two years, making any money I feel is a huge win. So let's, let's take what we can get. Let's hedge our risk. You know, that's what it's all about. Hedging risk, put a small win on the board and move on.

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, our guest is David Lilley, the founder and CEO of REAP Capital. They have 785 units under management, over 100 million in those assets of value. It's grown to include REAP Management and REAP Construction, which you're going to hear him talk about bringing in-house in the show. It began in real estate in 2013. But purchased their first multifamily property, a six unit, in 2018, and then started to scale quickly since then. He's a military guy, which you'll hear me reference as well, infantryman in the Marines. He's been deployed numerous times. Uh, and, uh, yeah, Baghdad, uh, and even, uh, the Philippines and doing, uh, he was a firefighter. So, uh, first responder as well, which I can relate to. So, uh, I love having these, uh, guys and gals on who have served and are now, you know, doing big things, uh, as business owners, uh, also. So you're going to learn a lot from David today, uh, including. why he's selling a project right now. And some people say, oh, he shouldn't be selling right now. Well, you're going to hear why I think he's making the right decision to sell right now. And he's going to talk through that process. So whether you're active or passive, I hope you will listen and especially hear that part of the show. David, welcome to the show. Honored to have you on. First and foremost, thank you for your service to our country. I just always want to honor our veterans, and I'm grateful for the sacrifice made. So thank you for that, just first and foremost. Second, and I'm looking forward to diving into the growth that you all have had. You've built a real estate, really private equity firm, and hired the right people, and you've moved fast. And that's what everybody wants to know. I get questions all the time, how did you all scale so fast? You know, what was the key things that you did? And I want to dive in to some of those same things with you. I know many of the listeners, I want to know how you have done that. And we're going to talk about some specific projects also, and maybe something that's happening soon within their portfolio. So David, welcome to the show.

David Lilley : Thanks for having me on, Whitney.

Whitney Sewell: Yeah, glad to be here. Awesome. Well, let's do that. Let's jump into, I know you started transacting real estate, what, in 2013 or so, but really the first syndication was 2018. Let's talk about that process from 13 to 18. why start syndicating? And maybe you had mentioned even before recording, it took a while to get off the ground. Maybe highlight some things there, you know, the struggle maybe to get it, you know, pushed off the ground, like you mentioned, and then we'll go from there.

David Lilley : Yeah. So 2013, bought a single family home, leveraged a VA loan. So lived in it, you know, for the first year or two, and then bought the second home and started renting the first one out. So I was a firefighter at the time. you know, making, making a decent wage, but, you know, I was using that kind of the hack to start a real estate portfolio and slowly grow. And, you know, prior to that, I had always been drawn to real estate. You know, um, I had the very simple kind of view in mind that, you know, why, why pay down someone else's mortgage? You know, why not pay down my own, you know, I felt like rent was just throwing away money. maybe a different story these days, but that's what got me into it. After the first couple of years went well, I was getting a couple hundred dollars a month. The next decision was, okay, how do I scale, continue to do this, or jump into something with a little more economy of scale, multifamily? And I had the opportunity to take, take a job working overseas, making really good money, which enabled me to jump into that first six unit property in Tampa in 2018. So founded the firm in 2017 based in Dallas. So Dallas was very hot market back in those days. Hard earnest money was, uh, the name of the game really couldn't win a deal without it. So at the time, you know, none of my offers included that I offered a bunch in Dallas, you know, so. It took me six months or so to land that first deal. And that was because I chose to look into another market with the same kind of fundamentals and growth metrics, but lower barrier to entry, no hard earnest money. And so that led me to Tampa and Phoenix, first and second acquisitions.

Whitney Sewell: Awesome. Well, you know, it sounds like you took action there to, or even took a different job, right? Higher income. And then you're purposeful with that income buying the six unit. You know, how did you get to the, you know, the deal in 2018, that first syndication, what was that? Maybe give us a D you know, some details of that project and just how you pulled that together.

David Lilley : Yeah. So at that point I had kind of identified my large markets where I was focused really kind of pivoted away from Dallas because, you know, I just couldn't get any offers accepted. So I was really looking in, in Phoenix and, and Tampa metros kind of really Florida, Florida as a whole, you know, just scour all the broker websites, uh, also loop net. And then, you know, I'd, I'd find a deal, you know, underwrite it. And if it made sense, you know, I'd, I'd do some more kind of due diligence on the whatever sub market it was in. And so that Tampa deal just happened to work, you know, the, the numbers looked great. caught it when it first came on the market and, you know, made an offer immediately and worked out.

Whitney Sewell: Tell me about your team then, you know, to get that first deal done.

David Lilley : It was really just me, me and the business and, you know, a couple, really it was a friend of mine, was one of the investors, a colleague of his and my parents. So that one, That one, not a true syndication. It was really a JV. You know, we all, we all had voter interest, you know, titles, titles in the company. Yeah. That was really the first time we had pulled money together to execute an acquisition.

Whitney Sewell: You did it. That's, that's incredible. Uh, you know, what was the timeline from the first one to the second one?

David Lilley : A couple months. Yeah. So the second one we bought, I want to say it was August. I think we closed in November of that same year. So yeah, I mean, the next one landed in our lap a couple of weeks after closing, I think, if I recall.

Whitney Sewell: I hear that so often. It's so interesting. Like, it's such a grind to get to the first one, right? We're like scrambling and pulling people together you never imagined, you know, I mean, just making calls you never thought and going places. And then all of a sudden,

David Lilley : Yeah, that's, that's a fun story. I mean, we had, we had so much interest from our friends and family, our networks after we bought that first one, you know, no one, no one had heard about that kind of investing. And so the next one fell on our lap. We were like, Oh, this will be super easy to raise 450,000. You know, we'll, we'll do that easy. I mean, we, we barely got that thing closed.

Whitney Sewell: So, you know, speak to, I mean, so just so the listeners are reminded again, like you all, I mean, you've grown fast, you know, right. You know, since then. And, you know, what was it? A hundred million in assets, 785 units. That's what's in your bio anyway, but speak to some of the critical things that allowed you to scale or maybe the things you, let's start there. Critical things that allowed you to scale quickly.

David Lilley : I mean, it's definitely doing. Doing all the little things. Um, well, you know, all, all the little things matter, you know, they add up to, to big results. I think I'm fortunate in that. I do most things pretty well, you know, so I was able really, it was a one man show until beginning of 2022. Uh, when I brought on my first full-time full-time guy. So prior to that, you know, I had partnered with, with other kind of other sponsors on deals. Um, no one haven't been a partner with anyone in the actual business, but, you know, kind of partnered on deals, but really, you know, all the, all the grunt work was, you know, my burden to bear. And so getting to 2022 and bringing on that first full-time hire, it was a long road.

Whitney Sewell: So your, your first full-time hire was in 2022 and who, and what position was that?

David Lilley : That was, so he wore a couple of hats, uh, acquisitions and, um, investor relations. Okay. And so now, now he's really more full-time, just, just investor relations that we have. We've got, you know, a full-time acquisitions guy, 10 full-time people on the corporate side.

Whitney Sewell: So within the last year, then you've hired 10 people or nine or 10 people.

David Lilley : Yeah. This last year has been, been a big year, uh, in terms of hiring. So, but we also, that includes property management staff and construction. So, you know, we vertically integrated with property management last year and construction beginning of this year. So that includes some of those team members as well.

Whitney Sewell: So last year was major. Yeah. Right. What, uh, you know, what was some of the biggest challenges, uh, say last year or this year, I mean, bringing management in house and, and construction. I mean, that's some big, um, you know, things to vertically integrate, especially even at a hundred million, right. It sounds like a lot, but to bring that in house, that's difficult, uh, you know, until you even have a lot more scale.

David Lilley : It is. Yeah. Property management has been probably the, we've had the most growing pains. Construction, fortunately, the first guy I hired was just fantastic, still is. And he's just taking it and running with it. Property management has been a little more challenging. And frankly, I think it's just a tougher job. It's really make it or break it in any investment. So growing that company, has been difficult, but it's been good for us. It's made us much better on the operator side because we're way more in the weeds on property management than we would have been had we outsourced it to a third party.

Whitney Sewell: And maybe it's too early to know this, but I just wonder, bringing property management in-house, it can be a major distraction, too. We've experienced it firsthand, right? Yeah, I mean, we have. And part of me says, you know what? We probably could have done more deals if we didn't bring property management in-house. Would you feel that way?

David Lilley : I don't know if that would necessarily be the case. We've kind of we've had our foot on the gas pretty well. But I mean, it has it has taken some of my focus, you know, so maybe maybe we'd have more investors or would have networked more or whatever, you know, those type of functions. Had I not been spending a lot of my time dealing with property management issues, you know, and building out that company that I mean, that's certainly true.

Whitney Sewell: What about some of the maybe crucial hires over the last two years, maybe outside of property management, you know, in construction, anybody else, you know, that that was like, man, this really helped us this position, or maybe this person's skill sets, you know, helped us to move quickly.

David Lilley : Yeah, so the first critical hire for the property management company was a vice president of operations. She got us through this really challenging year. And I guess it's been about three months ago, we brought on our first regional manager under her to just share some of the workload. And she's been a real critical hire because now the VP can focus on regional type duties, you know, so that's been a critical hire. And then just, you know, the construction staff, I mean, having, having that in house, um, and, uh, the suit, one of our superintendents, probably the most critical hire, cause he's the guy, uh, assembling all the crews on site and, you know, he's just been fantastic. So, you know, all really all the construction team, but those, those couple of positions certainly, um, very important.

Whitney Sewell: Any unique ways you approach hiring? We've talked about the hiring process many times on the show. I've gone through our hiring process and it's probably even changed since then. But any unique ways that you approach hiring so you're hiring top talent?

David Lilley : Yeah, I try to hire from my network, people that I've known for a long time, people that I know to be talented, and the most important thing is people that I can trust. I mean, you can you can find people with great resumes all day and then they get on board and there's no telling what's going on behind the scenes. And it takes I mean, for me, I don't really trust anyone to take years until I truly trust someone. So I've been fortunate to be able to hire people that I like knew internally, like my internal network prior to bringing them on. So that trust is already there. So most of the guys on the Reap Capital team, they had no experience or they were very entry level. But I've taken the time to train them up and teach them. And I'm a firm believer in hire the character and then build them to who you want them to be, essentially.

Whitney Sewell: Yeah, you can't You can't teach character often, especially on the job. You need them to come with that for sure. I think it's a missed opportunity often that people don't search their own network. right, for key hires. And often, and I would say it hasn't worked for me every time or too often, but when you can get referrals, you know, it just pushes you a lot further down the road, right? Or people, like you said, the way you've done it where you already knew them. You know, you've already had a relationship for a number of years, in one way or another, that, you know, there's already this major trust component, right? And that's, you know, oftentimes, and I know in our interview processes, I can ask somebody about job-specific things, and they may know that, right, like the back of their hand, but, well, it's hard to judge character, right? Through, you know, even a few hours, you know, right of an interview, or even numerous interviews, it's hard to really know you know, that you can trust somebody and it's a risk obviously you take, you have to take sometimes, but you're way down the road if it's somebody you've already spent time with for a long time. Absolutely, yeah. So what about, I know there's a project you and I discussed, you all have had a number of exits as well, you know, in, in the last few years, but you got another one coming up. And I wanted to, cause this has been a question as well from, from listeners and from other people. It's like, you know, should we still consider selling right now, you know, depending on the market or what. And so, you know, my question to some guests have been like, okay, what are some of the reasons, you know, that you are selling or that you would consider to sell or, and actually you all are selling something. So maybe you can walk through, that project a little bit and, you know, you know, why you would consider selling right now?

David Lilley : Yeah, yeah. So we've, we've exited our first five deals. This is deal number six that we acquired exiting. Um, and coming up February will be two years of ownership. So pretty quick turnaround two years is also, um, coincidentally, you know, typically how long you buy that first rate cap for. So our, our rate caps come and do February. We've we've got the money escrowed with lender already to purchase a replacement. But, you know, that gives us one year. There's no telling. I mean, money's on the Fed lowering rates considerably next year, but I'm not comfortable taking that chance with a one year extension. You know, we could be back in the same boat here from February, which I don't want to be. So the other consideration was refinance. We had an unexpected, a couple of unexpected events for this property. A dozen units were taken down from a hundred year flood. And so that affected occupancy. And then we had to replace the entire gas line system of the whole property, which resulted in more vacancy. So, you know, we weren't at a point where the property had seasoned long enough for us agency debt. And on top of that, you know, treasuries have skyrocketed over the past couple of months coming down lately. Fortunately, but it just now was not the time to refinance. And then who knows where we're going to be in February? You know, it's still too volatile. We had the opportunity. We had an offer come in decent. I mean, our, our average IRR is over 40% right now for our exits. And this one will be 10, 12% IRR. So it hurts the average, it hurts the average, but in this market owning less than two years, making any money I feel is a huge win. So really all those things were kind of came into play when making the decision, you know, to, Let's take what we can get. Let's hedge our risk. That's what it's all about, hedging risk. So put a small win on the board and move on.

Whitney Sewell: Yeah. Anuol, I appreciate your transparency because I think it's helpful for everyone listening. And I think there's probably many that should listen closely to what you just said. that have properties right now, right? They have that rate cap that's coming due or whatever it may be, and they need to minimize risk, right? Man, we hate to see maybe a lower IRR return metric actual to investors than we projected, of course, right? But I think you're wise, right, to minimize the risk.

David Lilley : Now's the time to act, especially if you're thinking capital calls or anything like that. you better do it now because, you know, if, if we're in a major recession next year, which I think we probably will be, investors are going to be much less likely to pony up any, any capital at that point. So yeah, if you're in a position, you need to do it. You better do it now.

Whitney Sewell: I think there's going to be, there'll be more projects too, or more operators, right. That are having to sale. And so there's, Yeah, there's going to be a lot or be more on the market to pick from to some extent, you know, in a negative way for a number of operators. And it'd be better to sell before there's a ton of blood in the street, including your own. Right. You know, to minimize the risk. One thing you mentioned, you said 12 units were taken down from 100 year flood. I wanted to learn from that a little bit. Speak to that. what happened there a little bit so the listeners and I can be aware.

David Lilley : Fortunately, um, you know, I think five buildings are kind of barely touched the flood plain. So we had flood insurance on them. You know, we ended up, it was a net positive for us, you know, for the proceeds we got. Um, and it was actually 13 units. So, you know, it was just a major flood in the area. Uh, 13 units had water damage to varying degrees, you know, some worse than others, but you know, it just, We had, right before that happened, we had kind of already turned the property around, retented it, got it to a stable occupancy and then, you know, had 13 units go down. So we, it was this kind of back and forth for a little while. So, um, but that's, I mean, yeah, that's pretty much it.

Whitney Sewell: Yeah. No, it's just, uh, yeah. Interesting. What, what would you do different from that experience say on properties moving forward?

David Lilley : Um, not buying a floodplain. Yeah.

Whitney Sewell: Interesting, and are unfortunate, right, to own it during that time, I guess. But man, lesson learned. Well, I'm thankful you all have it under contract, and I think you're making the right move just to minimize the risk for you and your investors, no doubt about it. David, what would you say is, you know, other than maybe deal flow, what's the big challenge right now for you all?

David Lilley : It's hiring. especially on the property management side of the business. I mean, that's, that's the main, the main growing pain for us. We've had a lot of turnover just because it's been difficult to find surprisingly people, you know, entry level property managers that are okay getting paid 60, $70,000 a year, which sounds crazy to me, but it's, yeah, it's tough to find people that, that want to work hard for that wage. So, it's, it's been a challenge for us to staff those positions.

Whitney Sewell: Surprisingly.

David Lilley : Is there a way you're finding people or, uh, that you all see being able to do a lot of, you know, a lot of referrals, like you said, you know, we've got, we have people that have come from other companies and they've worked with a lot of people and, you know, they, they'll, you know, people that they enjoyed working with in the past, you know, approach them, see if they're looking to make a job, you know, that, that sort of thing. Or, you know, LinkedIn, we rely on LinkedIn job postings a lot, indeed. Those, you know, those platforms.

Whitney Sewell: All right, David, a few final questions as we come towards the end of our time here. But what's your best source for meeting new investors right now?

David Lilley : Word of mouth, really, it's always been word of mouth. We've been doing, we've been stepping up our marketing this year. So ads in various newsletters, making podcasts, things like this a priority. We've done a cold email campaign, which has been effective, really, for the cost. So that's one thing that's probably not on a lot of people's radar. But if you're doing 506c, then just make sure you're not violating any securities laws. But it's been pretty good for us. It's interesting, emailing 10,000, 20,000 people a month kind of thing.

Whitney Sewell: So you'd be like, buy a list and blast an email?

David Lilley : Essentially. Yeah, essentially.

Whitney Sewell: Wow. No, that's interesting. Worth a try, I would think. Exactly.

David Lilley : Yeah. Yeah. I didn't know what the results would be, but it's too early to tell how cost effective it'll be versus another avenue. But yeah, we're stepping up the marketing across the board.

Whitney Sewell: What's your best advice for passive investors right now?

David Lilley : I mean, evaluate the sponsor for sure. Like you said, character is really hard to really get a grasp on. One of my pitches is, you know, I've I've spent a lot of my adult life in high stress environments from. Firefighter to diplomatic security to, you know, Marine Corps and each each one of those roles. I was I was vetted. You know, I held a secret clearance with Department of State and DOD, so Maybe there's security for people in that. That's the main thing, you know, know, know who you're investing with, know who the principal is and do as much due diligence on that person as you can.

Whitney Sewell: What would you say is the number one thing that's contributed to your success?

David Lilley : Tenacity, I suppose, or just You know, I, I decided, you know, back in 2016, when I was a full-time firefighter, I decided that, you know, I wanted something more, I wanted to do something different. And so I just made it a reality. You know, I just have made a plan and acted on it and take an action. I suppose maybe that's it. Not afraid to take action.

Whitney Sewell: Yeah. And then, uh, how do you like to give back?

David Lilley : We've worked with various various groups. St. Jude's one of one of the ones that are, you know, the top places that we like to donate to as an organization. You know, after I've got a two and four year old now. So just after having kids, I can't really think of any any group demographic group that's more deserving than, you know, innocent kids. So pretty near and dear to my heart.

Whitney Sewell: Yeah, that's awesome. David, grateful for your time and giving back to us for sure. Grateful for your transparency, just walking through this exit as well with us. I think that's helpful for everybody listening, whether they're active or passive. I think I don't want the passive investors to discount that. I think you're minimizing risk for everybody involved there. But even walking through, you know, some of your key hires, how you all brought construction and property management in-house, you know, and the things that helped you all to scale quickly. I get questions about it all the time, about scaling, right? Everybody wants to get there fast, you know, as fast as possible, right? I want to know those key things. And so I appreciate your willingness to to share some of those things that helped you also. David, how can the listeners get in touch with you and learn more about you?

David Lilley : Visit our website. There's a link to my calendar on there. You can schedule a call with me or fill out the contact form. It's reapcap.com, R-E-A-P-C-A-P.com. And yeah, I'm always happy to help, be a resource to anyone. So please reach out.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.