Aileen: [00:00:00] Hello everyone and thank you for joining today’s episode of the How Did They Do It? Real Estate podcast. We are your hosts Seyla and Aileen and today’s guest, we have Dr. Thomas Black, co founder and managing partner of Napali capital as well as the author of “The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth,” and a board certified emergency medicine physician. He is experienced in both single family and multifamily assets.

Thomas is a 13 year veteran of the US armed forces. He earned his medical degree from the University of Texas medical branch in Galveston, Texas, where he was selected as a member of the Alpha Omega Alpha Medical Honor Society and graduated with honors. He then completed his residency at Indiana University Emergency Medicine Residency program in Indiana and he continues to practice emergency medicine in the North Texas region. Thomas is also featured in Forbes and is a University of North Texas Board of Advancement Member. Thank you so much for joining us today. How are you doing today?

Thomas: [00:00:58] Doing great. Thanks for having me on. Look forward to a chat.

Aileen: [00:01:01] Thank you.

So before we get started, can you tell our listeners a little bit more about your background and how did you get started in real estate?

Thomas: [00:01:08] Sure. So as you said, I trained up and did my postdoc in Indiana. And at that time, as I went through, that was ’06 to ’09 and so when I came out of residency, I had a house that I had purchased at the top of the market, and I started reading, knowing that this was going to be an issue for me.

And so I became really enamored with tax and depreciation and rentals. And so I found an incoming residents that was gonna be there for three years, so signed a three year lease. And so that way it kind of alleviated the fear of selling the house at a deep discount. Maybe it could get me over a couple of years until things start to do better.

And we moved back to Texas to start practicing and it turned out to be kind of a huge eye opening experience. And the more I started reading, the more I fell in love with it. And from there I started buying single family homes. I started doing some developments, just buying raw land and building apartment complexes.

And so that’s really where the basis of everything started was that one house.

Seyla: [00:02:03] So when you started at one house, how did you get into the multi-families and you mentioned about development land and all that?

Thomas: [00:02:11] Yeah, so I was buying houses, basically HUD foreclosures and REOs for probably 30 to 40 cents on the dollar in 2008 and 2009.

And actually the 2010 too. I had a portfolio of about 10 homes and I was driving about three hours doing a rehab and general contracting and myself and I never wanted to flip homes. But I always intended to use them as rentals to depreciate them. And so after I had, I think seven, and when I hit that 10 point management became such a larger issue for me and economies of scale became really a whole lot more evidence and my time became more and more precious.

So. So that’s when I got fed up and said, you know, what, if I can do this for 10, why can’t I, I do this for a bunch more that it was a lot closer. So I found some land right in the middle of the city and bought several acres and decided that we’d just try and build apartment complex itself. So built my first 20 units apartment complex ground up, started that in 20, late 2010, I’ll be finished late 2011.

And by the time we got leased up, it was already, you know, early 2012, right around that time period.

Aileen: [00:03:14] So, how did you figure out how to, how you were going to build upa 20 unit apartment with out too much background? Like how did that journey start?

Thomas: [00:03:25] Great question. So I’ve got a lot of determination and grit.

I look at things as you’re you either win or you’re going to learn, right? There were several issues that I didn’t realize about the lands, but we just adjusted and adapt. You know, there was a pipeline that ended up going right through the middle of it. And so I ended up developing to like 16 on one side and four on the other, to get it around the pipeline and doing things where that was never in my plan before, after we were well underway and framing, I learned that anything in that city, 5,000 square feet needed to be sprinkled as far as having a hard, hard line fire alarm and water.

So that was another $90,000 mistake that it was like, well, I wouldn’t have thought of these things, but I learned on the fly. I learned a lot about city code, learned a lot about developing and the pains that go along with that, you know, I found myself just kind of, I mean, not making it up. I was as well versed as I possibly could for doing that, but it was a smaller town.

And so I really knew the economics of the city. When we first moved there, I tried to find an apartment and something that would suit us in, in the caliber that we wanted. And, there was nothing that was built, probably until the mid or up after the late eighties. And so nothing had been rehabbed and this was 2009.

And so there was nowhere that we would have lived. And so we really started building this for people like us that were either, you know, moving in from out of States and needed a place and, and wanted something a little nicer. So that’s, that’s where the thought came from. And it was just lot of school of hearts, not hard knocks and you know, basically a master’s degree that I learned in those several years.

Aileen: [00:05:00] That’s a really great experience.

Thomas: [00:05:02] Yeah. It was.

Aileen: [00:05:06] So what was the outcome of that deal? Do you still hold it today?

Thomas: [00:05:09] No, no, no. I got at least up and sold it. No, we did very well. The way I wrote the performance, I didn’t put any money down hardly at all.

I think I used $4,000. And it was a $7 million deal and use the equity from the sweat equity base with building it for the, you know, the money and the down payment that would actually be so made a very good, good profit on it and sold it. And then 10 31 that into some industrial holdings into four industrial buildings and held those onto for several years because there was such great cashflow within place, triple net.

So yeah, no, it was, it was an experience, but I learned that device element was not going to be my forte for the rest of my life.

Seyla: [00:05:45] So at the time when you stopped building the 20 units, did you build everything by yourself or do you have a, another partner’s helping you? How did you pick the team?

Thomas: [00:05:55] I had one partner, so I had a partner that was a custom home builder in the town that I convinced that we would partner up.

And so he did the building and then I did all the other, you know, not only the other management, but all the construction loan, the proformas, the bank debt. Everything other than actually doing. And even for the most part, you’re tracking all the construction draws and managing some of the GCs. I would take part, but, and designing, but otherwise he was kind of handling the day to day operations of the actual construction on site.

I would leave there. I leave the hospital at 3:00 AM and go sit on the back of my truck and have a drink and watch it go vertical. I found it fascinating. And so I spent a lot of time on that property, knowing the ins and outs and really learning.

Aileen: [00:06:35] That’s great. That sounds like it would give you a really good foundation for anything you do in the future for any type of real estat investing.

Thomas: [00:06:43] It did. It did for sure.

Seyla: [00:06:45] So fast forward to today after then, after that 20 units apartment that you built from the ground up, what is your focus now?

Thomas: [00:06:52] Focus now is mainly B class multifamily housing. We don’t, we’re not a very large reposition company. We do. We’re vertically integrated. We had our own management company.

We have our own construction company. We really focus on off market deals that are owner owns and, or operationally wounded.  My other partners in the business are from very well known companies. They’re former executives. And so they’ve really made their career on large, large industries doing it really well.

And so they make great partners in that we are very tight operators and that’s where we find our margins. So we’re pretty conservative when we underwrite because we’re not taking into account huge repositions. We’re just looking at what can be done from a bare, basic management, really creating a better culture and better atmosphere for our residents.

Aileen: [00:07:40] Is this the criteria that you set for yourself from the beginning as you started multifamily? Or is this something developed along the way?

Thomas: [00:07:47] I think, I think it continued to mature. I would say, you know, when we started the business five years ago, we were in a lot of C-Class assets that, that did very, very well.

But I think as, as we matured and got to know the tenant profile and the sub market that we best had a synergy with those things tended to mature. So we, we shifted focus. Along with things as cap rates shifted that if there’s a smaller delta between a C and a B, that was really where we were going to be to take a lower cap rate and maybe a, a lower expense profile, as far as the labor reality of it, it was going to be better for us to operate.

And so, no, it definitely matured over the years, you know, any businesses. Is almost like a child, right? It’s it matures over time, things change and you have to adapt. And so staying strict is probably a pretty good recipe for failure over time. Cause if you’re not changing and growing, then you’re, you’re only one other thing.

Seyla: [00:08:46] Are you still practicing as a emergency doctor?

Thomas: [00:08:50] No, I haven’t seen a patient in two years and let’s see two years and 16 days now. So I stopped in September of 2018. I’m now the president of the medical group. So I do a lot of administration work and a lot of the financial backend of the group and dealing with that.

So I just found my time was better spent in other places, as far as the physician side then than treating patients. And it was something that I realized early on in my career that I was going to navigate towards still love seeing patients. But my love really kind of shifted into helping physicians more and the love for finance and really figuring out how to add a better their careers and career paths, not necessarily, you know, treating patients at the ground.

Seyla: [00:09:33] I want to go back and ask a little bit about your mindset in terms of the motivation that got you to, you know, try to drive to your 20 units building at a time at 3:00 AM in the morning. What drive you at that time?

Thomas: [00:09:48] Tax had a large thing to do with it being in a 37% tax bracket. There’s a lot of motivation there when you’re spending a good 25 days at the hospital when you’re working nights, weekends, holidays, when there’s a certain amount of stress that comes along with being not only a physician, but particularly an emergency medicine physician.

I think I was really motivated by the fact that I needed an outlet, something other than just being a doctor and having my whole sole identity like that. As I, as I started to realize very early on in my career, that healthcare is very, very challenging for many ways. And, and financially the landscape has changed just a massive amount in the last 10 to 15 years.

And as I look to the future of healthcare and my place in it, I started to realize that maybe my runway, it wasn’t as long as I initially thought when I started the trip 12 years prior. So as I made that realization, I knew that I was going to have to change something in order for myself to breathing room and to have the light right.

That I wanted it to be as I saw it. And so it was a mind shift that really said, It’s okay. And sometimes people think that medicine and money are taboo, which in some, some instances they are. But when I look at professional income and finance, personally, I think that you can really take a large load off your shoulders if you’re not constantly working for a dollar.

And ultimately that’s where healthcare is kind of going. And, you know, you’re no longer the owners of your groups. You’re no longer an owner in a hospital. A lot of laws preclude that now, which makes things a little harder for retiring.

Seyla: [00:11:21] So at what point that you started your company Napali capital.

And could you provide a little bit more detail on what your company does?

Thomas: [00:11:30] Yeah, so we started a company about five years ago. I had been doing this six years time and Tim, who I alluded to earlier was the chief operations officer of a company called Great Wolf. So you got one an Anaheim. That was his very last development that he did before he left he left the company. So he had been the COO for 12 years, and that was kind of his last hurrah as a development. And as you know, doing developments in California, I think that property took them eight years to build maybe even a little bit more. It was the culmination of knowing that we had something really special, had a lot of physicians that were intrigued and asking to take part in what I was doing, but yet the operations and the deep foundation of the company wasn’t there yet. So when I finally convinced him to come along on this journey, things really started becoming legitimized there. And he’s been absolutely instrumental in creating the foundation and the corporate, not only the culture, but the backend operations of everything in order to scale.

And so we’re now, you know, in assets, I think were 16 or 17 assets in five different States. We have investors in 40 different States in over a thousand different investors that are really active. We’ve done a little over 50 million in equity, and I’ve done the, since, since early on, I think I’ve transacted in a little over 300 million in real estate now.

So, you know, every day it’s growing, right. It’s just continuing to try and do better than you did yesterday.

Seyla: [00:12:53] Wow congratulations.

Thomas: [00:12:55] So no need to congratulate. It’s just, it’s a passion. It really is.

Seyla: [00:12:59] So in the last five years you scaled up your business pretty quickly. How have you been able to scale your business from that first apartment to what it is today?

Thomas: [00:13:08] What it is today, a lot of thanks to the operators. I mean, anybody who tells you that doing this multifamily and or any real estate, not only development, but management, it’s really imperative to put the time in. It’s very, very difficult to do, to do this while having a full time or even a part time job.

We have a staff of six. You know, now that we are vertically integrated and we have all of our management house too, we have, you know, twenty-something other employees on top of that. So it’s important to put the foundational steps in place because it is 100% operationally driven. And you have to watch the numbers.

You have to be very, very in tune. If you’re using third party management to everything that goes on on that property, the second you let your guard down and things can happen and then things tend to snowball. And so we learned that thankfully, we didn’t make any huge mistakes, but so legitimizing, the accounting and everything took years to be able to do and really, really do it well.

Seyla: [00:14:01] So you were able to grow to 18 assets pretty quickly. What was the acquisition strategy and how you find all those deals and put them all together?

Thomas: [00:14:10] Painstaking amounts of underwriting. We probably underwrite, I think we used to track it a little bit more tightly because we’ve got an actual sheet that we track every single deal that we underwrite and what stage we’re at.

And I think last time that we summed everything up the year of 2019, we did 200 and 207 underwriting of properties to get four. And so the odds aren’t great, but it’s all about spending time and really a lot of energy uncovering every single stone and every property. And then knowing where your best bang for your buck as far as the relationship.

So we don’t buy anything on market at all anymore. We’ve been very unsuccessful doing that because when we have tried, we get, so we think that it’s a fair price, but we ended up having other companies outbid us. By steep amounts. And so everything that we do now is hunting for owners or relationships of assets that we own now that we look for other assets that are owned by other things, people that we know.

And so it’s kind of a small world when you start to transact at that level, the few brokers that we have relationships with that are very good. We incentivize them to, you know, to be able to have first right on a lot of these. So they don’t get to the point where they’re being overbid. Got it.

Seyla: [00:15:21] And one of the things that you mentioned about the underwriting for the COVID time right now. what has changed with your underwriting strategy?

Thomas: [00:15:29] I think globally, the only thing that we’ve really done is year over year market rent increases. You know, we’re either at zero or very marginal inflation increases. You know, we may look at market rent. For example, we’re bringing on an asset first asset that we’ve put into the portfolio nine months, we bring it out tomorrow.

That asset is, is, has been owned by the same person for over 20 years. It’s had the same manager for over 20 years when we did the lease audit, there are people that go back to 2003 that have had no increase in rents and across the board and on every single asset. There’s not been any increase in the last 20 months.

When you look at the market data comparables they’re over 10 cents down per square foot, versus any of their comps. The manager closed a pool five years ago because she lives there and she did not want to interact. With any of the residents. So it was a staff only pool. So there’s things that when you talk about Covid, you know, globally, macroeconomically, I don’t think there’s a whole lot of change right now.

You know, there’s some underwriting exceptions with debt. I’m sure you’re aware of, of, you know, principal and interest payment that were escrowing. But when you look at the short versus the long term, the long term, you know, is still going to be very good. We’re creating more renters, unfortunately in the country, which arguably is, can be a good thing to invest, but ethically, is that a good thing for us to be there?

You know, that’s a, that’s a debate. When you look at interest rates, interest rates are going to be low for quite some time. When you look at the decisions the fed have recently decided to not to ignore inflation for now and keep up with jobs, that’s going to put a lot more. Capital into the system. If we know where our interest rates are going to be low.

So when you look at those two things, I don’t think we’re changing any major cap rates. I think you’re probably going to see more influx potentially in the multifamily. So the only thing we do really is looking at year over year. I mean, we’re being very cautious about rent bumps after an acquisition, but.

As far as the portfolio that we’ve seen, we’ve seen very little change. You know, we’ve seen a little bit more delinquency, but that’s just due to the people that aren’t available. You’re good right now. So they’re, their rents are going up. So occupancy is not necessarily changing, but delinquency is going up a little bit until those things start to start to materialize in a different way.

So not a whole lot of change. We watch it very, very close. Every month we were tracking all kinds of metrics to make sure that we’re on target.

Seyla: [00:17:47] Got it. And I just want to talk to a little bit about your new acquisitions. I know that your company just had a new acquisition happening recently, where you about, will you be able to tell us a little bit about it and how did you find a deal?

Thomas: [00:18:01] Sure. Yeah, so the deals we’ve been trying to get into Savannah. So we own in suburban Atlanta, that area, we own a Dallas Fort worth. We own in Charlotte. We own in Belmont, which is right around the Raleigh Durham area we own in. I think I said Charleston, and we’ve been trying to kind of get into the Savannah market for quite a while.

Savannah, we love the South Southeast area because the taxes are very predictable on some of these States with regard to property tax. We’ve transacted numerous times in Georgia. So we know the ins and outs. It’s a landlord friendly state. We know what we’re dealing with there. Savannah itself is the fourth largest port in the country, which kind of surprises a lot of people.

It’s actually undergoing a pretty large expansion right now. And it’s going to be the largest port in the United States that sits on the river up from the Atlantic ocean, about 30, 35 miles around in there. So love the sub market itself. I love how stable it’s been. Love that people are, unfortunately for you moving out of California to Texas and down to the Southeast, as well as from the Northeast and pushing down.

So we follow jobs. That’s the most important part. As for the acquisition itself, we found it from a relationship. We have been hunting around there and have been trying to get this owner to give us the opportunity. To sell it. And so it was brokered on a relationship of somebody that knew the person. And so we finally were successful and that’s typically how it’s, you know, some of these assets that we find are we’ve waited up to a year for people to make a decision on, on whether they’re going to sell or not.

So we just have to be there with our, our hands out, waiting for it eventually and being as, uh, as good a partner as we possibly can. So, so it’s going to be, it’s going to be good. We have a lot of upside on this. I think. Awesome.

Seyla: [00:19:40] What has been the most difficult challenge that you’ve faced when building up your business so far?

Thomas: [00:19:45] As always, I think it’s always labor. It’s people and human capital are always going to be the hardest part of every business. They’re the most unpredictable.  And I think that it takes, and that’s why I’m so thankful that I have some really great operators that we view not only our teams on the ground, our regionals, our construction partners, our managers, as one team.

And so there’s really no difference if you’re an executive in the company or you’re a partner all the way down to the managing, we try and keep a very good relaxed culture and realize that it’s always about people in the end of the day, always. And the second you lose focus about that, that’s where the wheels start to come off.

We love the people we work with, we celebrate them. And so I think that’s where we’ve had the most success that it’s not about money at the end of the day. You know, it’s about the investors, but at the end of the day, it’s also about the residents and treating them very nice as well as the staff that we have.

And we usually find that that produces. Ultimately, if you’re doing the right thing, then that’ll pay dividends.

Aileen: [00:20:45] So have you found during this time that either the investors or the residents have they brought up any other concerns or issues that you’ve had to deal with outside of COVID that you’ve never had to deal with before?

Thomas: [00:20:57] No. I mean, residents always, unfortunately will, there’s always going to be interesting. Just like, just like being a doctor, you’re always going to have interesting people walk into the emergency room with, with different things wrong, or, you know, various complaints. Tenants can have very different views on what’s their responsibility, or maybe not what their responsibility is.

I mean, I’ve had calls personally that have found myself by tenants and other areas. For example, complaining into the power’s not on, and they’ve gone around, they’ve called the power company. Why are we doing this? Why aren’t we doing that? Well, come to find out the 10 and everyone at the office and their breaker was off.

So, you know, it’s always, we do our best to find out what it is, but, you know, by and large, we try and take the experience, the resident experience and lift it up. So if there’s legitimate complaints, we absolutely want to hear them. I mean, I think, you know, as the operators myself always say if, if the time is when your company and your employees are not talking to you and you’re not getting feedback, that’s more scary to me, way more scary for people to stop talking than they are formed to be talking. Cause at least, you know, you’re moving in the right direction and you can change.

Aileen: [00:22:04] So Tom, how has real estate investing impacted your life?

Thomas: [00:22:08] Wow. It is. It’s made my life. I was probably in a very dark place. About eight years ago in emergency medicine where I was just tired, never seeing the family.

It really has given me an opportunity to find a passion and a, in a really a fun zest. I was just finding myself not wanting to do a lot of things. And it really created a life that I initially saw. I could not be any happier with my life right now. I mean, I really, really like life and it’s because I’ve got a great work life balance and I choose to work.

I don’t work because I have to.  I’m actually choosing to do this because I enjoy it. And so that’s been the biggest difference.

Aileen: [00:22:48] What is one thing that you know now about real estate that you wish you knew when you first started,

Thomas: [00:22:55] Do it more, do it earlier and hold onto the stuff, never sell it. I’m actually at the very first property that I bought in 2009 that I’ve had, and that I bought in Houston years ago.

And I’m, it’s a little hard, it’s been 11 years. And, you know, I bought it from a flipper that was under, in trouble with hard money loan. And so I bought it all cash and I’ve done well. I’ve had a renter in there for like seven years and I just kind of got to the point where I’ve got so many LLCs and so many different working parts that I just decided to let it go.

So it’s been a hard one, but you know, it’s tough. Letting real estate go is, is kind of difficult, especially when you have such a, such a passion and zest. And when you’re putting a lot of time and effort and money into them, it kind of begins to feel like a, feel like a possession.

Seyla: [00:23:42] What is one thing that says the successful people are part in real estate investing business ?

Thomas: [00:23:47] Determination would have to be one. There’s always a solution. There’s always a way around it. You may not see it at the time. And you may lose some money in the long term, you’re going to make money. They may not seem like that at the time, but patients and composure will really overcome a lot.

And then the second thing I would say is people you have to respect the people, whether your tenants, your employees, or anything, all the way to the top. And as long as you follow those few things, then you’re going to win on the end. I mean, it’s just time and patients will overcome a lot of things.

Seyla: [00:24:18] What tools are techniques have you used to improve the efficiency of your business or personal life?

Thomas: [00:24:24] Tools of efficiency techniques? Having an amazing staff helps a lot. I have an amazing director of investments relations that handles a lot of stuff. I’m sure she’s probably the one that I don’t know if she’s got this podcast up or not, but she makes the life for all of us really, really easy.

So again, it comes back to people that have those relationships and relying on the right partners, I think is the biggest difference. You cannot do this business alone. You have to have partners that you can trust. On that note, bad partners can absolutely wreck your world. So you’ve gotta be careful cause they’re worse than a divorce and I’ve been through them.

Aileen: [00:25:05] Thank you so much for sharing Tom. We really appreciate it. And if, and if our listeners want to learn a little bit more about you or get in touch, how can they do that? And where can they go?

Thomas: [00:25:15] Sure. You can just go into Napalicapital.com and it’s NAPALI cap or capital CAPITAL. We’re on Facebook, you know, Google us, we just made the inc 500 list this year.

We were number 21. And so I’m sure we’re probably all out there right now. I’m happy to help anyone if they’re just struggling, starting buying a first, you know, family home. A rental, anything, I truly live, breathe, or I’m sorry, eat and breathe. This stuff is really fun for me. So I’m happy to help just advance anybody and, you know, kind of put them in a different situation.

Aileen: [00:25:51] Thank you so much, Tom. We really appreciate it.

No problem. Happy to do it.