SCF 27 | Commercial Syndication

 

Commercial syndication has its pros over multifamily. Listen to the co-founder of West Egg Real Estate, Ryan Stenberg, a 25-year-old commercial real estate syndicator who’s living in Los Angeles and operating across the country. After several years of slow progress in real estate, Ryan moved to Reno and left his job at Google. Since then, he and his partners have purchased $40MM of value-add multifamily and commercial property through partnerships and syndications. Join Dale Corpus as he talks to Ryan Stenberg on how he got into real estate. Discover why he values deal flow so much. Learn more about his structured deal models. And, find out the latest trends in real estate today!

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Structuring Deals In Commercial Syndication With Ryan Stenberg

Many of you may or may not know I’m part of a mastermind with other successful entrepreneurs and it’s called a GoBundance. It’s a group and they do focus on growing your business income and your net worth, but I like it because they also push you to raise other areas of your life like health, relationships, contribution and going on a bucket list-type of adventures around the world.

We had our Annual GoBundance Winter Mastermind, which was an in-person event in Park City, Utah. It was great out there. There was a lot of great networking and I was able to meet my guest through GoBundance in person over there. His name is Ryan Stenberg. What caught my attention about him was that he’s young, driven, focused and he already did a career change in his early twenties to leave his tech job at Google to go full-time in real estate.

I want you guys to know his story since many of you guys are already are in tech. Ryan is a commercial real estate syndicator living in Los Angeles and operating across the country. After several years of slow progress in real estate, Ryan moved to Reno and left his job at Google. Since then, he and his partners have purchased $40 million of value-add multifamily and commercial property through partnerships and syndications.

Ryan, welcome to the show. How are you?

I am doing great. Thanks for having me on, Dale. It’s great to connect with you out in Park City.

I’m looking forward to connecting you with more on this show as well. I know that you live out in LA now and when we chatted in person over at Park City. You’re from the Bay Area originally. Were you born and raised in the Bay Area?

Yes. I’m from South Bay. I grew up in San Jose and my parents moved over into Los Gatos, so I went to high school right on the border there in Leigh High School. Some of your audiences are familiar with that area and whatnot

When you were working at Google, you were working in Silicon Valley as well, right?

Yeah. I was living up in San Francisco and I was commuting down on the buses. This was back when the bus system was more active than it is right now. I’m commuting down about 1 hour to 2 hours a day and then back up to the city. I’m working in Sunnyvale, but I’m driving down every day.

When you went to college, what was your degree? Was it tech-related?

It started in Electrical Engineering and pivoted partway through to Computer Science when I realized every internship, job, side project and startup was all software-based. It made a lot more sense. The transfer was easy, so I switched over to Computer Science and that’s what I graduated in.

I graduated with Electrical Engineering Degree from Santa Clara and now I’m a realtor. Before I dig to my other questions because we connected through GoBundance, how did you hear about it and how long have you been in it?

I heard about GoBundance probably a few years ago through BiggerPockets. It was the first mention of it. Joining it never crossed my mind until several months ago. I joined back in May of 2021. It takes me back to where we launched off in real estate. My current roommate now is Will Brown. He’s also a member of GoBundance. He’s a young guy as well.

Early on, we were slower than we wanted to progress in real estate. I heard a podcast episode of him and gave him a call. He gave us a lot of advice that we can get into later and whatnot. That helped us accelerate our speed in real estate by a tremendous amount. About a few months after hearing this podcast, giving them that call, I called them back to say thank you. He said, “You got to come down to LA and visit. You got to join this group, GoBundance, and that’s how I landed there.

You haven’t been in for too long, but has it done anything for you? What have you noticed, if anything?

They say, “You’re the average of the five people you surround yourself with the most.” Joining the group and having people think about lots of different facets of life, trying to consciously plan those and move in the right direction towards those things, makes you realize what you might be lacking in or what you might be not focusing on enough, or what you’d like to put more effort towards.

You're the average of the five people you surround yourself with the most. Click To Tweet

For me, I joined because there are a lot of people in the group that do real estate and a lot of people who are on LinkedIn who are one of those pillars that you mentioned. There is also a huge focus on relationships and family. For me, the big pickup was gratitude that I recognized to joining in GoBundance that my gratitude was not where I wanted it to be and this was in the middle of the pandemic. A lot of us slipped into that dimension.

My readers, work in tech and you’re very relatable because you were at Google. What did you do at Google? What was your job?

I interned there as a software engineer and then I was a technical program manager in the cloud and platform. I was helping launch a lot of GPU, TPU-style hardware that would land in data centers to build all the way down the ASIC up to the cloud level software.

There’s no doubt you’re a sharp guy. You were in tech and had a great job. A lot of people would kill to work in Silicon Valley and in Google, but I find it interesting how in your twenties, you switched to real estate. Why the heck did you do that?

My answer a few months ago would’ve changed to what it is now. I started buying into real estate as a way of putting my money somewhere more useful than at the bars. I realized I needed to find an investment that I could get more excited about. I started looking at real estate and something that’s more tangible than stocks. I could not get excited enough about stocks to save money and then put anything there. I realized for the first time in my life, I’m making real money here. It’s non-negligible amounts and I should be putting that somewhere useful. I needed to find something I could get excited about. For me, early on, that was real estate because it was more tangible and it got me excited.

I started buying real estate. I started moving slower, but when I was doing the math and realizing, “This is a true predictable path to being able to one day leave your job and work on other things.” I have come from the startup world a little bit and I’ve tried out a few different startups and liked that. I would like to get back to it.

For me, this was the path to building some financial independence and horizontal income that would allow me to reenter that startup world with maybe slightly lower risk or less financial risk at least. That’s what got me into real estate early on. I went after that heavily. Looking back at it, I realized there were also a lot of things about not necessarily Google but about the common pay structure I was very dissatisfied with.

When you first got into real estate, did you already work with partners or do you do it yourself? I also wanted to get a sense of, what you started off with as your first investment.

I started buying with my best friend from high school. He was the same year as me. We’re both in the same boat. Starting in tech in Silicon Valley, we had some money coming in and we decided, “Let’s save up and every six months, let’s buy something out of state.” We would pick up a triplex or four-unit building every six months or so together. That’s what we did for a little bit.

To be honest, we only got about two buildings in before we realized, “This is slower than we want it to be.” It was this buy and then save for six months and you can’t take much action during that six-month period because you’re waiting for your funds to recuperate. It became a little bit slower than we wanted it to be, but that’s where we started.

Where out of state? Was it already in Reno?

We were buying in Cincinnati, Ohio, at the beginning. We picked it largely by saying, “In five days, research cities and let’s come back with a list.” That was the only one sitting on both of our lists, so that’s where we started buying.

You also picked up stuff over in Reno. What made you pick Reno?

This was when I had that realization that this was moving slower than I wanted it to. My business partner that I mentioned, Alex, and I were in a mastermind group. This was before I was in GoBundance. I was in a mastermind group with one other guy, my current business partner, Abe. We were talking a lot about real estate and how to accelerate this pace and move faster.

It all lined up with the beginning of the pandemic. Abe and Alex were all flying in. We will take a weekend in the Santa Cruz Mountains to plan out the year when it comes to real estate and other things. That’s when the pandemic started and all the emails went out saying, “You can’t work at the office anymore.”

SCF 27 | Commercial Syndication

Commercial Syndication: Investing in real estate is more exciting and tangible than stocks. You should be putting your money into something more useful. Real estate is the true predictable path to financial independence.

 

Instead, we took a flight to Hawaii. We stayed there for a week and thought about what we could do differently this year that we hadn’t done in the past. What will be enabled by this situation? One of those conclusions we came to is that we can move and live anywhere. We can pour a lot more time into real estate because we’re not commuting like two hours a day each way. I took all that time and energy.

A few months later, we ended up moving to Reno because we kept hearing about Reno from other investors. We realized we wanted to go faster. We need to find a way to do it without using all of our own money and the rate-limiting factor for us, working our jobs in tech and saving up. If other investors are extremely interested in Reno, then let’s move out to Reno and let’s be boots on the ground for those people who are interested in moving at the speed that we want to move. We ended up moving out to Reno and for the next months, we bought all of our assets there.

In Ohio, you were using your own money, but when you moved over to Reno, was that when you started bringing on other investors?

Yes. We didn’t intend to syndicate at the beginning. We landed in Reno with the intention of wholesaling to these investors that I was talking about, finding multifamily property or whatnot and wholesaling it to them. We failed at that. We weren’t able to wholesale these properties either they weren’t large enough or they weren’t what they were looking for. Now, we have them under contract and we’d done the due diligence and we knew we liked the projects. We took a right turn and pivoted and started raising funds instead.

What types of properties were you mainly focusing on when you were bringing on other investor capital?

We originally went there looking for multifamily in Reno because that’s what we knew. It was 8, 10, 5 units and things like that. Generally, a five-plus unit range for multifamily. We would get more, but Reno is not a very big city if we could get more. There are not a lot of large buildings here. That’s what we originally went there to pick up because that’s what we were comfortable with. At a certain point, we started seeing more commercial properties like office, retail, industrial, mobile home parks, and things like that. They started landing on our plate more. The opportunity seemed larger. We started to shift our focus towards that about halfway to Reno.

How are you finding the deals? Did you have systems where you went directly to find sellers yourself or you’re also working with brokers or was it a combination of both?

It started off as direct to seller and it ended up being both brokers and going direct to seller. The reason for that is realized we’re coming in here with very little experience and no money, “What do we have to offer in terms of value to anybody around us?” That includes brokers, investors and other things. Our thesis coming in was, “What’s controlled deal flow better than anyone else out there?”

Deals are the bottleneck and the shortage in the real estate industry right now. That’s what we kept hearing from every investor, broker and lender. We said, “Let’s be the best at sourcing deals and that’ll be our value-add. We went direct to the seller through SMS. We A/B tested almost everything out there, ringless voicemail, mailing campaigns, dropped off wine bottles at people’s houses, door knocking, and some funky other stuff.

Control the deal flow because that's the most desirable asset in real estate. Click To Tweet

We tried all of these things and reported our results like someone in Silicon Valley would. We found that SMS works the best. It was the most scalable and cheapest per acquisition. We ended up going direct to the seller, mostly through text messaging. From there, what we would do is we would bring these lists to brokers. We wanted someone who was a local expert who had been in Reno for several years, not a few months like us, who could help be the expert set of eyes and ears. We would bring our list or off-market deals to brokers and they would take a look at this list. They’re like, “How are you finding all of these off-market deals?” That would be our value-add to brokers.

Most people see the broker relationship as the broker brings me a deal and then I do the deal and that’s the relationship. We flipped it upside down and said, “We’re going to bring brokers a deal and you need to, one, keep our earnest money safe, two, provide all of the market data research in confidence and then connect us with all of our teams and systems like lenders, contractors and things like that.

The value proposition for us is going to be different with the broker, but what ended up happening is months later, after we had brought them 2, 3 off-market deals, we jumped to the top of their list. These are brokers that we would never have been able to jump to the top of their list early on with the track record that we had, but because we were providing some other value, they started sending us all the deals they would find. We would be the first on their list to see those. It ended up being a blend of direct to seller and brokering.

It’s genius because my question was going to be about you being so young. How did you get brokers to take you seriously? Did you ever see your age being a disadvantage to you? Is it a disadvantage to you even right now? What are your thoughts on that?

I would be lying if I said that I did not see my age as a blocker early on. Real estate is an older men’s game. Coming in at 25, you get a lot of weird looks when you show up at the property and you are not who they’re expecting. Psychologically, it wears on you a little bit, but what I found is the same thesis that we had of, “Let’s control the deal flow because that’s the most desirable asset.” It shadowed all of that. When you show up with a deal that’s strong enough, a broker doesn’t care what your age is but cares about how you found it because they want to replicate it. They don’t care about your age as much.

If the deal is strong enough, They’re like, “This is a solid deal. We should move forward with it.” We found that to be true from the broker side, lenders and investors as well. There’s this catch-22 that I see a lot of people get caught in where they say, “I don’t have a track record. Without a track record, I can’t do projects, raise funds or get into debt. Until I get debt or raise funds or do a project, I can’t get a track record.” If that loop is true, then you are stuck forever. You’ll never get anywhere. There are people who got in and that’s not true. That loop cannot be true, and something must break it.

Whatever psychological hurdle you need to step through, you got to find out what it is that you’re able to maybe even trick your subconscious or mind into. For me, it was this acknowledgment that my life has been my track record. It’s not in real estate. It’s where I’ve worked and what I’ve done. I’ve worked on and built companies or who I’ve been as a trustworthy person. That story is going to carry me with lenders and investors, even if it’s not a real estate-focused one.

It’s the meticulousness of how you work at your job and the people who know that. That might be your job and at that time, it was my tech job. That helped me get into real estate and overcome that age hurdle to the point where now I see the young age as a benefit. It gets people’s attention early. We have the track record as well as the deals to back that odd upfront look.

What jumps out at me is this controls the deal flow. That’s genius. How did you finesse your systems? How did you even know where to start creating these prospecting systems? Were you modeling other folks or did you figure it out yourself? How did that go about?

I mentioned my roommate right now, Will Brown. He’s in GoBundance. He had a podcast in BiggerPockets. He didn’t describe exactly what he does, but when I heard his podcast and the light bulb went off in my head, all these pieces started connecting together. His thesis was that deal flow is everything. He was starting a wholesaling business for single-family homes out in Virginia. That’s what he was working on at the time. He’s talking a lot about systems to catch every lead possible coming through Virginia. I said, “Why not the same for multifamily?”

SCF 27 | Commercial Syndication

Commercial Syndication: Reno is not a very big city, so 5 to 10-unit range multifamily properties weren’t so hot there. But commercial properties were booming there from office retail to mobile home parks.

 

My background was in tech. I started thinking like, “A lot of this is a numbers game. It’s just volume.” I hear all the time different investors or podcasts out there, people talking about, “How many deals did you analyze this week? How many offers did you make?” There’s this funnel that narrows down to what you get in escrow or contract on, what you end up buying and then how wide your funnel is one of the most relevant, if not the most relevant part.

I started putting that all together. When I heard Will’s podcasts and the system that he built in Virginia, I started saying, “What if we use our background in software or tech to do that same scale but even broader?” We wrote the original software ourselves. My business partner, Abe, was at Amazon and Alex at PayPal. We started putting together a system to message people. When we got to Reno, we could message every property owner in Reno for multifamily within three days. We’d follow up with them two weeks later and then two weeks later, so we would catch anyone looking to sell.

They say there’s a very small window of when they’re ready to sell, but we were going to be there. We’re going to be there for the entirety of the Reno market. That works for us in Reno. We got our heads down in the excitement of it all in trying to learn how to do real estate syndication and commercial assets and other things like that. We forgot that the system was built to scale broader than Reno. It focuses on that market for about a few years, which was maybe a good thing, and let us build our network and confidence in the deals we were doing in the asset classes and things like that.

You have your own preparatory system that you built yourself. Is that the same system that you’re still working off of right now?

No, it’s not. We originally built that because we had no money, no track record, and no reason to bet that this would work out and the silver bullet. Originally, we didn’t want to put $30,000 into a bet for something like that. We couldn’t do that, so we built our own software to keep the cost low. After a few years, we realized that we have to get in here and our code breaks every couple of days. Messages stop sending. We have to get in here and rewrite code, which is not ideal for doing a real estate business.

We’re not planning to sell the software or whatnot, so we looked up other software out there and we realized you could string together a lot of software that exists out in the market that you can pay for. We’ve been able to do that where we can pay for other people’s production-ready software instead of our own pact-together version. We can go into a new market for a very reasonable cost, get all the data ready, and message people in that market. We’re not using anything proprietary. We’ve closed all that off or shut all that down. It was a way of keeping costs to a minimum while we made a bet early on.

I remember you said that you tried even delivering wine bottles to people’s doors. Out of curiosity, did that ever turn into a lead? Why did you even think of that?

I don’t know if we ever did that cold, but we did deliver bottles to sellers that we had been talking to over text and seemed to like us, wanting to sell, but couldn’t pull the trigger. We’re like, “Let’s get something to push them over the edge, maybe. They seem to want to sell, but they’re emotionally attached.” We delivered to them. I don’t think any of those converted.

Where are you getting the data to put into the software? Did you target a specific list? Were you talking to an entire city? What did you do? Did you filter stuff out?

We would start with a list of pretty much the entire city. We would pull the list of all addresses for multifamily in Reno, which would be our starting point. A lot of that information is public about who owns the property, all you have to do is figure out how to get phone numbers out of it, which there is a slew of software out there. It’s also called skip tracing software.

We A/B tested the initial lists and the owner names that were on there. We then A/B tested across the different skip tracing software that was available to get phone numbers out of. We would send messages, so we A/B tested the different message sending platforms. Once, we switched off our proprietary stuff and went to paid versions. There is a bunch of different messaging software where you can send SMS at scale. We’re not sitting there on a cell phone and messaging people, which is how we originally did it. We created an app that we would all sit around in a circle and message people all day long.

When you show up with a deal that's strong enough, a broker doesn't really care what your age is. Click To Tweet

It would fire off initial messages and we’d get responses. When the response comes in, we will take it over from there. There are five of us. We’re like, “I got this one. No one talks to this person.” That would be it, but that had to go away. That was the string of software tools that we put together to make this happen.

How much do you spend on marketing or marketing budget in general now? Is it a big chunk of money spent out on there?

In Reno, we were there for about eighteen months. We probably did about ten projects and the marketing costs were less than $5,000. We bought $13 million of property out and made it worth $25 million or so. That costs us about $5,000. We can pick an MSA anywhere in other markets that we’ve gone to. We can get through at least one pass of messaging everybody in that market.

With MSA, let’s say the size of Raleigh-Durham, which is where we focus a lot now, falls somewhere between $5,000 and $10,000. The marketing costs will pay for themselves and then some within the first deal. Hopefully, we’ll get another 4 or 5 deals out of it after that. The marketing costs have been no problem in terms of being a bottleneck.

You mentioned North Carolina. Is the focus mainly there? Is Reno still in play or what’s going on with that?

We just purchased a property in Reno about a few weeks ago. We’re still buying in Reno. It slowed down because we have messaged a lot in the market. To be honest, Reno is a small market. We’ve ended up scooping up a lot of the value-add properties that were ready to sell at that point in time. It’s like a tree, those fruits will regrow and there’ll be more opportunities out there, but we’re going to at least let it cool off and give it some time.

I also think Reno has seen a ton of growth since we got there. There were rent increases of between 20% and 60% depending on the bedroom count for the eighteen months we were there. We were the benefactor of a lot of that growth and we’d focused on other markets now, where we believe they’re still on that steep part of the curve.

When you chose Raleigh, North Carolina, what metrics did you look at? What made you, for example, pick out of there? Was it the metrics? Was it the relationships? Did you have existing relationships that you leveraged on out of there? I’m trying to understand how people are picking the market.

What we did is we pulled every market that was larger than Reno, but smaller than these Tier 1 cities, Austin, San Francisco, or New York. We pulled all those then we looked at population growth, median income growth, crime rate reduction, and a couple of other metrics over the last twenty years. We pulled all these in, filtered, based on the ones that we’re seeing the best population, income growth, the most crime reduction, and most housing growth over the last twenty years and then we narrowed that list down. We had landed at about twenty cities and we ranked these cities as ones that we’d be interested in.

SCF 27 | Commercial Syndication

Commercial Syndication: Know that your life is your track record, not real estate. It’s where you’ve worked at and what you’ve done. That is what’s going to carry you throughout your life.

 

We’re interested in all of these cities. We would search these cities who we know in these different places. We went around asking for connections and saying, “We’re looking for an operator, someone who can be boots on the ground and can bring in contractors, tenants, negotiate with local people and understand the market rates there and stuff like that. Raleigh-Durham is one of the markets where we got connected with a broker that we’ve been doing a lot of business with and bringing him on as a GP in a lot of our syndications going forward. That was the deciding factor once we had a list of twenty. “These are all great markets, but who do we know in these markets?”

Did you also leverage the same systems you build to get that broker off-market types of deals? That how you got his attention?

This broker used to manage The Port of Everett up on the north side of Seattle. It’s a huge property up there. He had 1 million square feet of undermanagement out in Raleigh. It’s not someone we would typically be able to get in front of very easily, so what we did is we started our deal flow pipeline. It took us a few weeks and we ended up showing up saying, “I’d like a Zoom call. I need help assessing market rent for these properties.” We would share our screen and walk through a list of 200 off-market commercial properties where sellers have given us the price that they would sell for.

We’re like, “I don’t know any of these areas. I need help understanding market rent and the strongest deals are.” We would work our way through and there’d be about 20 through that list of 200 properties and say, “This is going to take forever. Can I send you the spreadsheet? Fill in the comments, notes and all this stuff and let’s see if we can do some business together. If it all goes well, I have another list of 500 more in a couple of weeks.”

We’re very transparent and open with that trust early on. We always keep in mind that we’re looking to bring future work as well. As long as we bring those two things, we don’t expect to get burned or we hope we don’t get burned and we don’t expect to. If they do, we lose our first couple hundred properties or those options, but we have more coming. That’s helped us get in front of brokers pretty fast.

What’s a typical deal that you guys go after? Can you describe that?

It used to be more multifamily. The workload of multifamily started becoming too overbearing. When you get a multifamily property, you’ll go in there and rehab all of the units or at least most of them and then you place tenants. There’s a cookie-cutter template for what you should rehab into and there are some variations. In the general sense, tenants are more predictable on the residential side. You build first and then the tenant shows up.

Now, we’ve started moving towards commercial. We’ve been looking mostly at industrial buildings, so industrial warehouses, manufacturing, cold storage and things like that. In that space, what you’ll do is you’ll market the building as a shell, the tenant will show up and they’ll tell you what improvements they need. A lot of the time, they’ll do those improvements for you.

Multifamily has a cookie-cutter template for what you should rehab into. Whereas in commercial, the tenants will do those improvements for you. Click To Tweet

We have a retail building out in Reno, Nevada, where we marketed the building. A tenant showed up and said, “I’d like to put a bar in here.” We said, “What improvements are you going to do to the building or what are you asking for?” They said, “We’re going to put $250,000 into the building to do our improvements to make this bar and we’re going to manage the rehab. We said, “Great.” They signed the lease saying that they would do all of that. Now, they will manage the rehab. They will work with the city and bear the risk of the ups and downs of the uncertainty on that rehab.

In the commercial space, we liked that a lot because it scales a lot better. We can do more deals in parallel as that work is offloaded to the tenants. The deals we’re looking at right now, we’ll pick up a vacant industrial building is the most common. We try to buy it at the cheapest price per square foot we can rent it out and we’re aiming to double or triple the building value. That’s our exit. A lot of our deals are either positioned to exit within 6 to 12 months or hold onto it for 10 years.

You’re looking at deals that are already in the triple net lease assets, correct?

A lot of it is triple-net assets, but a lot of the tenants carry the expenses for commercial assets.

Let me switch topics to raising money. How are you going about raising money? On the younger side, how do you track all these investors?

Raising money used to be five of us surrounding a whiteboard writing down every name of every person we knew and then calling or messaging them. Early on, that’s what it was. Everyone we could think of who might be accredited, sophisticated or whatnot, we would give them a call and say, “This project is good,” that’s how we would work. It gets easier over time. That’s how it starts. It’s extremely difficult until you’ve done a couple of projects and investors have seen the return out on the other end.

After we exited these investors, they said, “Roll it again into the next one.” We had our hard money lender. Our first project took us three months. He said, “I’m not making any money if you only hold for three months. I want to be the equity investor next time.” Our hard money lender came in. Our neighbor next door asked what we were doing and it turns out they had made a lot of money on crypto and was looking to move it out into real estate. He’s become an equity investor. We’ve been picking up people around us because they’ve been hearing the story and the progress and they’ve been looking to join in. A lot of it is still friends and family, actually almost exclusively.

Now, fundraising looks more like making a couple of phone calls to the investors that we like working with the best, the ones that are the easiest and smoothest who will make a decision in an hour. We can move forward and know the terms already. It’s been a lot smoother now, but it used to be days of staring at a whiteboard trying to think about, “Who else have I not call?”

How did you learn how to be a syndicator? I feel like your progression in real estate has gotten pretty quickly and whatnot. How did you figure out how to already be a syndicator so fast?

SCF 27 | Commercial Syndication

Commercial Syndication: Start with lists of the entire city then pull the list of all addresses for multifamily properties. Then you have to find a way to get phone numbers out of it and send SMS at scale.

 

As I said, we tried to wholesale at first. That was the plan. We went out to Reno. We put some property under contract. It’s an eight-unit. We tried to wholesale. It wasn’t big enough for the investors that we were trying to wholesale to, but we had done all the due diligence and the inspections. We’re looking at this project, drew out all the scenarios and we said, “There’s very little risk here and this is a pretty solid project. What if we tried to raise the funds? How much would we need?” We did some math and realized it’s a reasonable amount, something that we could go and ask friends and family. We went and ask friends and family. We stumbled into it that way.

We were able to raise half the money pretty easily and we were halfway there, “Let’s push to the rest away.” It’s this perpetual failing forward scenario. The first time it wasn’t meant to be syndication, we entered a contract and ended up being one. Later on, we intended to syndicate on the next projects. It was a lot more structured. We started figuring out, “How do we do this correctly?” We started working with SEC lawyers as well as more robust partners all around us. What was a failure at first transitioned into a happy success? We follow on from there.

You are moving away from multifamily to now your focus is industrial-commercial. Has that raised any issues with your investors? A lot of people understand multifamily, but industrial is more foreign to most people. Are the same investors interested in the industrial commercial space direction that you’re going towards?

Every investor that was originally in our own multifamily syndications has now transitioned over and they are in one of our commercial syndications. With that said, there was a barrier or hurdle to jump over there because there was a moment of uncomfortability. We had to learn this asset class and now we have to teach them this asset class.

One, I’m not comfortable taking money from anyone who doesn’t understand the asset and what the risks are. Two, they have to be willing to commit the time to understand and learn. We’re willing to provide that education, but they need their time and their energy committed. Eventually, we got them all in. Now, the first projects are starting to wrap up and we’re looking to exit those. It’s become very easy now. They’re very bought into industrial property and understand how its economics work. There was a hurdle associated with it.

What was the process? I’m sure everybody was new to the industrial space. How did you make them feel comfortable? What education did you give them?

Every time we step into a new asset class, we are extremely thorough and we only do homerun projects. For the first project we did, we’re looking to buy a huge discount and a ton of upside on the purchase. We focus all-in on safety. When we originally went into multifamily, we drew up every scenario that could happen.

We said, “What if COVID extends for two years and there’s a rent moratorium for the whole time? What if the rehab goes over budget by 3X? What if the operator that we have planned coming in goes out of business? If they all pile on top of each other, what does that decision tree look like? Where do we land? Are we okay with that worst-case financial scenario? What if interest rates and cap rates go up?”

In real estate, don't take money from anyone who doesn't understand the asset and what the risks are. Click To Tweet

We modeled all of that out and we had to walk her investors through, “These are all the things that could go wrong. If they all went wrong, here’s where we’d land. You’d pretty much get your money back.” As long as they’re okay with that downside scenario, that’s when we think this is a project worth moving forward on. The upside scenario is where that decision tree takes you down all the positive things and ends up looking a lot rosier, but we want to make sure people are comfortable with that worst-case scenario.

Early on, we were extremely thorough in pulling data and doing our research. In commercial buildings, we’ll put up a LoopNet listing while we’re in escrow. We’ll search for tenants while we’re in escrow. Oftentimes, we’ll sign leases while we’re in escrow. We try to remove as much variability and uncertainty as possible while we’re in escrow.

There have been projects where the day we closed, we filled the entire building. We went in contract vacant, but we filled the entire building. Now, we’re closing and all the values that have been added. That risk has been removed. For us, risk mitigation is the number one most important thing in all of these projects. Especially earlier on, convincing people to get onboard. We weren’t willing to take big bets. We had to wait for the right opportunity to jump into this space where there was a no-brainer project that we could take on and get people comfortable with it, one with a lot of room for error.

How do you structure deals with your investors, preferred return or profit-sharing? What’s that like?

We’ve only exclusively done these two structures. The first one is what we did the first ten or so of our deals with, which is we don’t take fees and we don’t do equity. We do profit sharing. There was no preferred equity either. The reason for that decision is a lot of syndications are structured in a way where there are fees taken out early on. Before the work has been done or the risk has been mitigated, there are fees extracted out and then there’s also equity that the sponsor will take on the day of closing.

A lot of times, on the day of closing, the sponsors already won a lot. It’s true that they’ve done a lot of the work and already acquired the property and that’s half the battle, but we wanted to defer everything that we take out of the deal until the end, so we only did profit splitting. If there’s no profit on this project, we’re getting nothing. We don’t want to take our reward out early. That was the main reason was aligning the incentives with investors so that we only take profit if we can generate upside.

The other part was it was simple. We were raising money from a lot of friends and family who weren’t super adept or knowledgeable about syndication structures and waterfalls and things like that. We wanted to keep things simple. We went in saying, “Depending on the project, sometimes it’s 75-25 split or 50-50 split on the profit.” It depends on how much upside there was and how much safety there was in the project. We would come in saying, “We’re going to total it up at the end and we’re going to split it down the middle, whatever the profits are.” People could get on board with that understanding. That’s model number one.

Over the last few months, we’ve transitioned and we’ve started doing some projects on a pref equity structure where we do preferred equity. That’s usually quite high but capped. That means investors will get the first 15% or 20% or whatever it is of all of the cashflow that’s coming in, but we’ll cap them at that number as well.

If there is more profit exceeding that, then that would be exclusively ours. This model was more predictable, safer on their side, but less share in the upside. Depending on the investor, that’s sometimes preferred. Sometimes people want to share the upside because they’re looking for a higher risk profile, so they want the profit splitting structure. We’ve done both of those.

SCF 27 | Commercial Syndication

Commercial Syndication: Raising money is difficult at first, but it gets easier the more you do it. Look at the people around you, friends or family, and ask if they want to join in. Call investors that you like working with best.

 

How long are the hold times in your deals?

Our favorite project is the one that you can hold for ten years, but you can also exit in six with the value-added. I typically think a lot of syndicators go after a five-year hold. I’ve pitched investors on 5-year holds, 3-year holds and 10-year hold. There is a big hurdle after 5 years when you are asked to tie people’s money up for 10 or to tie it up for 7.

There’s something psychological about it. It makes it a lot harder to raise money. A lot of syndicators will raise money on a five-year basis because it’s the easiest to digest. A five-year hold is one of the most dangerous timelines out there because you can predict where the economy is going to be six months from now or at least real estate won’t be able to react fast enough as an industry to a fast downturn.

You can usually predict where the market’s going to be in ten years or you can at least predict that it’s going to be better than where it is now, but you can’t predict where it’s going to be in five years. I’m not a fan of a five-year hold. I’m a fan of coming in saying, “This is going to be ten years, but we’re going to sell opportunistically if we get a good offer at some point.”

A lot of the times, we will come in saying, “Are you comfortable with the ten-year hold?” We’ll get investors to say yes and get on board with that scenario. We know our plan is to add the value in 6 months and exit to some off-market, 1031 buyer, 6 to 12 months in. That’s been our frequent pattern for a lot of our projects.

Now that you’re focusing on industrial now, what challenges are you either facing now or do you see potentially in the future in that?

There are a lot of variables in the industrial space. The most important overall is, “What are supply and demand?” This is true for all asset classes. “Have we overbuilt supply or is vacancy higher or lower?” In most of the cities we’re interested in, the vacancy rate for industrial is around 3%. What we’re seeing is that there is heavy demand for it. There are a lot of businesses that can’t find space. There’s a need for more supply, that industrial spike that we built out over the next year or so.

That’s why we liked playing in that 6 to 12-month window. We know everything that’s in progress and being built out there over the next 12 months. I can’t tell you what’s going to be built in the next 2 to 3 years. The demand right now is outpacing the supply for industrial space because of the growth of eCommerce, which has been a trend for the last ten years and has accelerated in COVID and the growth of data centers and things like that.

A lot of industrial supply has been eaten up and not a lot that’s been built in correspondence to that. That’s one of the macro trends we’ve been looking at very heavily. Another is always looking at more abstract is interest rates and cap rates, which we could see an increase for underwriting over the next year. We expect interest rates and cap rates to go up a little bit. We want to make sure that we’re comfortable with exiting at a cap rate of 1% or 2% higher than we would be typically purchasing. We want to make sure that that’s digestible as well in our model. Other than that, supply-demand holds true. I don’t expect any crashes in the industrial space until people start overbuilding. It’s far from that right now.

How big is your team right now in all the syndications that you’re doing? What roles does everybody play?

Our team in Reno is five. It’s myself, Alex, and Abe I’ve mentioned, and then it was my younger brother and Alex’s brother. Alex is my best friend from high school. It was a group of five guys who all went to the same high school. We had somewhat dynamic roles. Someone generally took over the rehabs, constructions and manage all the contractors, the bids and stuff like that.

The demand is drastically outpacing the supply for industrial spaces right now because of the growth of eCommerce. Click To Tweet

Someone was the primary lending contact. I did most of the fundraising and the underwriting. Someone would be on acquisition. Abe would lead the acquisition charge the whole time. He always had this dynamic and this persisted after we left Reno and we’re still doing projects out in Raleigh and other places. He was always trying to generate as much deal flow as possible, such that I could not handle all the escrows that were coming in.

I was trying to handle all the escrows and raise funds and say, “Abe, you need to give me more news.” We’re constantly at this battle, trying to break each other in this spirit of competition. There was often a handoff where he would find something to put in escrow and then it would be mine to take over from there.

Your younger brother, for that matter, is now working this full-time with you?

He’s been working full-time with us for the last two years. He moved back to college. He was taking a break, so he was deferring through the pandemic. It wasn’t the full experience he was looking for, so he deferred throughout that timeline of working on real estate with us. He’ll be going back to college and probably exiting real estate soon. He’s going to close the loop on all the projects that we have in escrow, but he has decided that it’s not worth the time and the trade-off anymore for him going forward.

Some final questions for you. What are you excited about in your business right now?

We started this all with a startup feel to it, which also meant that it was extremely chaotic. It was extremely unorganized. A lot of the lenders were out there working, they have checklist after checklist and people helping them process all of this information and data, and we’re like five guys waking up, and here’s everything that needs to get done and we all put our heads down and go at it. For a long time, that’s how it was and we’ve been building systems around us very slowly but surely. We’ve been putting a lot more time into those systems.

Our saving grace for syndications as we have been buying at extreme discounts. We’ll buy buildings at a 50% discount and we may not have the systems to squeeze every ounce of juice out of them, but someone else could. We got room for error here. That’s been our strategy, but now we’re building those systems so that we can do play both sides of that coin. That’s been exciting.

One is because it lets us do things more effectively per project and because it allows us to reclaim a lot of our time. Before this, it used to be an 80-hour week job for all of us. We’d wake up and eat, breathe and sleep real estate. Now, we’re able to create systems that will reclaim a lot of that free time and give us the freedom to focus on other things in life.

Now that you’re a real estate investor, what is real estate investing done for your life?

Sometimes it’s hard to recognize at the moment. I mentioned earlier joining GoBundance. One of the big adds for me or values for me was recognizing where my gratitudes were and where I wanted them to be. Every once in a while, I’ll be on a trip somewhere and be walking around with my business partner, talking about real estate.

I remember there’s a time in New York and we sat down around noon and grabbed a beer at this place and we were talking real estate. I was like, “We’re working right now.” This is what work looks like. We’re bouncing around the city, eating food and getting drinks and talking strategy. It’s an exciting realization. We can be anywhere as we work. We can leverage a lot of other people’s time and systems that we have and the tracker that we built to get a lot done financially in real estate without investing exorbitant amounts of our effort and energy. It has reclaimed a lot of freedom in our lives. That’s now translating into a lot of benefits of travel and life-shaping in general.

SCF 27 | Commercial Syndication

Commercial Syndication: A private equity structure is preferred equity that’s usually quite high but capped. This model is more predictable and safer on the investor’s side, but has less share in the upside.

 

Are there any big goals that you’re working on this year, personal or business?

The first one is getting this down to less than five hours a week. I’d like to keep everything moving and keep the system, the acquisition engine, as well as all the escrows, adding the value, placing tenants and all of that down to five hours a week or less and keep it running in the background. We’re looking to start a new business outside of real estate. I don’t know exactly where it’s going to be, but that’s a huge goal of the year as I transition to this automated and systematized a lot of this real estate pipeline.

What’s your superpower? What’s contributed to all your success in real estate so far?

To be honest, it’s the way I think which is derived from a combination of things. Studying Computer Science and taking complex systems and problems, abstracting it out, understanding what’s important, how to decouple things, breaking that big complex problem that looks hairy and untackable into lots of small little problems that can be solved independently.

A system can be set up and then you can never think about solving that problem. That way of thinking has been extremely valuable, not just for real estate but for life in general. Understanding what order should I go after things in life. That’s been a huge part. The other part is, to be honest, I’m very fortunate that I had a good upbringing and parents who love me a lot. That love has allowed me to move very quickly through the world without a lot of weight.

I don’t spend a lot of time dwelling on things. A lot of times, the anxiety towards worrying if I did the right thing or the wrong thing or if I should be worrying about the future that could come. It’s allowed me to assess upside and reward for what they are, move forward and make decisions. That has relinquished a lot of the decision fatigue.

Are there any deals that you’re raising funds for right now?

We have three deals in escrow right now, but we are full on all of those at the moment. I’m going to take a couple of week’s break and go travel and then come back and regenerate the pipeline. We’ll have some more coming up, but we’re not actively raising or anything at the moment.

How can somebody get ahold of you?

I don’t have any social media, except Facebook, which I just use for GoBundance pretty much. Other than via email or text. My personal email is RyanStenberg10@Gmail.com. If you want to reach out, that’s probably the best channel.

Thanks, Ryan, for joining me on this episode. I love your focus and drive. It’s so inspirational. To my readers, feel free to reach out to Ryan directly if you have any questions for him. Thank you for checking out this episode of the show. Remember to leave me a review on iTunes as it helps me attract even more great guests like Ryan, so until next time, live life abundantly.

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About Ryan Stenberg

SCF 27 | Commercial Syndication

Co-Founder at West Egg Real Estate. Ryan Stenberg is a 25 year-old commercial real estate syndicator living in Los Angeles and operating across the country.