In this episode, I talk with DL Campbell. DL is a commercial real estate investor and developer with 19 years of experience.
We discuss how she got into commercial real estate and land development.
We also talked about the benefits of land development over value-add deals and risk mitigation.
We will also share what passive investors should consider before investing in their next deal.
Whether you’re a seasoned real estate investor or just starting out, this episode is packed with valuable insights that you won’t want to miss.
Don’t forget to like, share, and subscribe to our channel for more inspiring stories and informative content.
Transcript:
DL Campbell 00:00
Over the last three years, there are so many deals that should not have been underwritten. I know they have pain of lipstick on that pig. And they’re projecting blue skies on everything. So Buyer beware.
Chris Bounds 00:14
In this episode, I talk with Dr. Campbell deal as a commercial real estate investor and developer with 19 years of experience. We discussed how she got into land development and commercial real estate, the benefits of Lean development over value add projects, risk mitigation, the market, and things that passive investors should consider before making your next investment. I hope you enjoy the show. How are you doing?
DL Campbell 00:42
I’m great, Chris, how about yourself?
Chris Bounds 00:44
Good, good. Appreciate you coming on the show I really like to have folks, I really enjoy talking with folks who have been in the industry for an extended period of time. And by extended I mean more than like the last three to five years because real estate’s been really hot for the last three years or so. But if you want to even look at the last 10 to 12 years, it’s been really strong, ever since like the two dozen 10 to 12. For the most part, we haven’t really seen a rainy day, people have been in business much longer than that. We’ve been through a couple of things been through a couple of cycles. And
DL Campbell 01:26
that’s why here doesn’t come from nothing.
Chris Bounds 01:29
I’m gonna do those myself. Um, how did you get into commercial real estate and development?
DL Campbell 01:39
Sure, absolutely. In 2005, I started to see the writing was on the wall. I was working as an engineer, corporate America, and I saw a lot of third parties coming in. So I thought, hey, I need to diversify. While my career is awesome, I need to diversify. And so I started taking all kinds of courses to see where I wanted to fit in. And commercial real estate is very logical. So it’s how I’m wired. It’s very logic driven. And so it was a good fit for me. 2009, I picked up my first commercial property, it’s a was a small apartment complex, in East Dallas, and I forced 80% vacancy, because I still had my job.
And I did the rehab, and I returned fitted. And I doubled the property value in a year. So that’s where I started, I’ve done Value Engineering, acquisition services, all kinds of logical things in the commercial realm. But for people who are more people oriented, there’s also a lot of options in the commercial world where you can get into the leasing part or the design part and the creative part as well. So I like that.
Chris Bounds 03:08
Nice, nice. And so for commercial because that can mean a lot of different things. Um, you mentioned multifamily start now. Is it when you talk commercial is that primarily what you’re what you’re investing in?
DL Campbell 03:23
Right. So that’s a great question. And there’s a couple of really good sources that have good training right now, not how to syndicate but in a iop.org in a iop.org. And also uli.org uli.org. I’m leading people to those websites if they want good commercial training. So commercial can be office which you never want to be in Legend, tesoro. No, no, well, it’s, you know, if we look at it office up in salt for the last couple of decades, so it’s never really been a great investment opportunity. And also people who have lost money unfortunately, in waiting for an office built and that’s, you know, they’re trying something different other than Class C or class B, multifamily conversion.
They’re trying a different asset class, so I take my hat off to them, but not office, never office. Okay. light industrial storage. Retail. And so when we’re talking about these different asset classes, we want to make sure that we’re keying into a good asset class that is recession proof. And not that multifamily is my favorite, but I get to be on the build side and that’s logical. And everybody Chris needs A place to live. So it’s secure. We’re we’re sticking with class, a luxury garden style multifamily. And our tenant type is the single young professional basically in their 30s, building their career. So that asset type is a recession proof like we’ve seen in through the pandemic.
Chris Bounds 05:25
So, you turn that one multifamily around and how large would that how large would that one year
DL Campbell 05:31
was not good? It was it was a bite size, it was about half a million dollar property.
Chris Bounds 05:38
Okay, well, depending on where it is, half a million could be. You know, that could be a four Plex. Or it could be a maybe
DL Campbell 05:49
you really can’t Yeah, you’re right, you really can’t depend on values. I actually ended up falling in love with the tenants there. And I didn’t expect that I was going to flip it after the first year. And the Lord had a different idea. So I stayed and I got involved with anti trafficking and anti abuse. And we had, we had helped some people to stay on the property to get out of those situations was a different term for me, but and then I have worked on other acquisitions for retail centers. On our website, we have a Starbucks we worked on and face value engineering to take a lot and get more units on it for retail centers. So all of that scope as well. Right now we’re building a 450 class, a luxury, multifamily units, a garden style. And we’re in the hottest market, of course, Dallas.
Chris Bounds 06:56
Yeah. So how do you go from multifamily to development of a 400 unit? Like, how does that transition go? I mean, it probably didn’t happen overnight. I know a lot of folks that they like to stay away from development. There’s no cashflow. But there definitely could be some, it can be very rewarding. On the back end, but a lot of investors, when they say, Hey, I’m in multifamily, they’re probably talking about value add, for Core Plus, which is more of a cash flow play, these are performing assets that they’re already leased up, and they’ll go on and maybe update rents and management, whatnot, but you’re doing new development. How did you make that transition?
DL Campbell 07:42
That’s yeah, that’s a great question. Because what we’re doing is we’re forcing value on the land on the land development play, you’re forcing value on the land. So we’re some of the construct for finding a great deal is the same. Like I found an off market property in the middle of Dallas, that is unheard of people are going to Houston, which is a marginal market or other places, because they can’t find an excellent deal. And in Dallas, so the Lord led me to a great deal. There are certain aspects where you need to be careful and and learn what to look for, like you need to have your zoning in place, and 12 utilities on the lot. But rather than going in and forcing value on an as built conversion, see, the issue with all of these properties in the last three to five years is that they’re doubly appreciate it. And we don’t buy commercial property like that we buy for the cash flow.
On one hand, we buy for the cash flow, and on the other hand, we buy for their appreciation. And while there has been some margin and cash flow, there has been no room for value add appreciation, and we’re starting to see it and unfortunately, it’s tanking the market because a lot of the people who came in in the last 35 years they think or 2% interest rate is normal. And, you know, we we knew that the interest rates needed to normalize. And so we have lots and lots of buffers built into our formula. So we’re, we never buy on just cashflow or appreciation. And that’s one of the problems that I’ve seen in the market with people learning is they’re buying with absolutely no appreciation. The only place for that appreciation to go is down depreciation and then they’re losing their value, then they have a loan that they can’t pay. And then if it’s a Class B or C, there’s only so much margin that you can force those rents out on where to go. So when those rents go down a little bit, the only play that they have really is in those rents and their profit margins are diminishing. Yeah, cuz
Chris Bounds 10:14
commercial real estate, or especially, is more of the commercial loan products you have. So say you were talking about only buying on appreciation or only buying on cashflow. Both is obviously what you really want. Cash Flow definitely pays the bills. But you need appreciation because it’s your buffer. But at the end of the day, unlike single family where you can get a 30 year fixed, 15 year fixed or whatever, the bank doesn’t care what your debt coverage ratio is. But in most markets, when you buy and you’ve got your spread your cash flow, it’s probably not going to change a lot over the years, not so much with multifamily.
Because even if you were to get fixed rate, which is uncommon, with commercial finance, it’s typically fixed for a three, five, maybe 10 years, it’s very uncommon to get like 30 year fixed. Even in those situations where you have it fixed. When that fixed turns variable, or due to market circumstances, like excess inventory coming on pushing rents down, or whatever, the bank or or operating expenses skyrocketing, like taxes, insurance, material costs, because that’s happening. The bank wants to see hey, what’s your debt coverage looking like now, and once it falls below a certain certain threshold, then they’re gonna start they’re gonna start bugging you a lot more. And worst case, pushing some buttons to, to get you to perform or worst case, take over your project. It’s very different. You’re looking for both you’re looking for.
DL Campbell 12:05
And people aren’t teaching like teaching that. Unfortunately, the gurus were owner operators, we’re not syndicators, but the gurus are teaching, you know, buy on either. And we we never do that we buy on both. And where are we going to find those deals, probate offense, all the things that we know. But we have to think about talking to a probate attorney, somebody tried to get out, maybe a second generation trying to get out of properties that their parents worked so hard for, they usually will sell divorce court, divorce attorney is good for finding deals on the courthouse steps. And it’s not all about sitting behind the computer. And looking although I did do that to find our deal. The way that I found this off market property is I was analyzing properties to the north of town into the south of town driving back and forth, I was driving everywhere, as well as doing the online research driving for dollars. And I saw this little sign and it is a seller sign.
So we ended up in a seller’s market, tough, tough market that we’re coming out of in the next year, and ended up with an off market property, we’ve been able to nearly double the value in a year. And that’s the goal that you want. Same thing with those apartments, I doubled the value in a year. And we’re forcing value on the land by working with the city working with the county and getting our entitlements we’re we’re 90% entitled. So our property right now is it’s worth at least double. And then when we get entitled we’ll take that equity in the property and we’ll take it into construction loan, it’ll it’ll be three times the value at that point.
So we’re just forcing value on the land on a development deal. Just like any other off market deal that you can find you’re really in order to get a good deal. Over the last couple of years you should have gotten an off market property and use those other tools that we’ve been taught before to get that smokin deal. Yeah, because ultimately
Chris Bounds 14:27
the best deals that you get are when they’re calling you or when you’re the only one calling them, which in that case is usually off market direct owner. But it’s a little bit more challenge. I mean with single family very common. Like I’d say 90% of all my deals are direct to homeowner, there were a couple through a wholesaler and very maybe two or three were on MLS and just never really did that and then a couple referrals from Realtors with commercial, especially large commercial, or large multifamily, you know, a lot of them are almost probably exclusively are through brokers. But there are direct to owner transactions. And it’s probably, you know, the good old boys club where they just they just really know each other, and they know you’ll perform. Any thoughts there?
DL Campbell 15:27
Yes, absolutely. You’re right on that, Chris, because a broker is not going to call you back, unless they think you’re at the top of the list to close, and they have their buyers that they know will close sufficiently quickly. And so that’s where those pocket deals are going to go. So what I did 1000 years ago, 19 years ago, is when I was talking to brokers, I would email them first. And then I would have a chance to think about what I was going to say.
And because otherwise, you know, they asked me something, I don’t know. And I’d be like, thinking that, I’d be found out. So you have to, you have to work your way into it. That’s why I did a lot of training a few years of training before I took on my first property. And also, you know, if you have a deficiency, or a disadvantage, I would say just advantage. I changed my name to Dr. Campbell, a long time ago when I was working as an engineer, because it just levels the playing field. They get an email from DL Campbell, and they’ll reply, Mr. Dear Mr. Campbell, I’m like, Alright, good. I just have to work it out.
Chris Bounds 16:45
There was a there was a guest on a previous podcast, he shared a good ninja trick on how he worked with brokers. And that was being very new in the industry, not knowing really what to do what to ask not knowing anyone in the market that he was wanting to work in. He called brokers in a completely different state and different market, because he wanted to ask them all questions. And then he realized what they wanted to hear after screwing up five or 10 or 15 of them. Have a conversation. Eventually, he realized, like, how do we engage in that conversation and the way he needs to approach them? And how to answer their questions. So he could go into the actual market that he was interested in and not blow his opportunity. I thought that was a I thought that was a really creative way of practicing when the stakes are low. So that way, when the stakes are higher, you’ve got some reps in.
DL Campbell 17:46
Oh, yeah, that’s excellent. Chris, it’s because you don’t want to blow away those brokers. It’s a very small group. And there it is, it has been really hard to get sellers brokers to return calls or emails or anything for the past couple of years. So I just had to double down and drive I was looking on the MLS, I was looking on realtor.com I was looking on even the trash of, of loop net costar. And I was doing a lot of research online, but I was also driving the miles and it was really tough for even a seasoned person to be getting responses back from brokers over the last couple years. We were just blessed to be led to this property really? Yeah.
Chris Bounds 18:36
Market balance is coming back. So sellers brokers are a little bit more eager to have conversations now than they were last year. What are your thoughts on the current current market?
DL Campbell 18:45
Well, you know, there’s a lot going on, and I’m trying to stay out of it as much as possible. I’m going to uli.org to find the market trends and we just had a really good update on the market yesterday that was very pretty positive. Very positive on the multifamily side. Retail is is okay, it’s gonna be okay. Industrial is going to have a challenge because it’s over built and office has been soft for decades. So we really had a good market update in terms of unemployment, and also in NA I O P has good training. CBRE has some good trending. So what I’ve done is I’ve been staying away from the syndication seminars that are telling people to buy anything, you know, no matter what. And going with more of the industry standard, professional organizations where I know that like I have all the knowledge but I’ve Put my guys through the ULI the Urban Land Institute training, because they have good foundations of commercial real estate that a lot of these syndicators are not teaching.
So I think that’s that’s the biggest problem is knowledge base, there’s a skill set gap over the last three to five years and it’s causing, it’s causing a lot of uncertainty and havoc in in the market. On the flip side, you know, what is doing for our deal is the lenders are saying, seeing our ultra conservative underwriting, and it’s shining so brightly. So even with interest rates rising and banks closing, and that uncertainty, investors have pushed the pause button, in some cases, our investors because our deal is conservatively underwritten and profitable from their standpoint, they are actually coming back in to strengthen their positions, and increase their positions. So there’s both sides, there’s a lot of stuff going on long volatility, but it makes our deal or any of your off market deals. It makes them shine because they’re much, much better.
Chris Bounds 21:20
Yeah, in market volatility, there’s a flight to quality. I mean, some may pull back and panic and just kind of hold off. And then others though. They want quality. Your blue chips, if you will. Class A, as far as real estate is concerned. So it seems like that’s what you’re seeing.
DL Campbell 21:39
Yes. So what are you all working on right now?
Chris Bounds 21:46
We’re primarily for at least our fund is primarily focused on workforce housing, cash flowing assets and strong markets that have long term projection growth with and this is the biggest paramount, very experienced operators. So yes, and these are operators who have been in business for much longer than the last three years. I like what we’re doing right now. San Antonio, where they’ve had 40 years of experience, three billions of transactions. And there’s institutional backing in that in the billions. So in its class A, so those kinds of assets are, what we’re focused on. And ultimately, what I encourage investors, passive investors or operators, that, if you’re going to work with someone, definitely really underwrite the operator, because anyone who’s started real estate in the last 10 years, for the most part, they have not experienced cloudy skies, or turbulence.
There’s been some hiccups here and there and local. I mean, hurricanes could you know, you may have storms, and then there was a pandemic, those things are real, but by and large, has been a pretty strong macro market. It’s not the case anymore. Clouds are brewing recession hence or seem like they’re, they’re always being whispered and getting stronger. We just don’t know. I personally am very bullish long term on residential real estate. But there are short term challenges that operators are going to have to overcome costs just skyrocketing across like in double digits, year over year, like taxes and insurance and materials and labor, utilities, then you have debt.
I mean, that’s that’s the biggest probably one of the biggest challenges, how are you financing it? You’re doing bridge? Is it? Is it floating rate? What can I catch you buying and how much of that has kept costing you? And then of course, you have the local market and the demographics and whatnot. So we focus on really strong operators,
DL Campbell 24:05
great markets, strong assets. And ultimately, everyone
Chris Bounds 24:11
under right, I think and because we offline, we talked about a deal that went bust. It was a portfolio in Houston. Very unfortunate. And I didn’t know that operator, I don’t know them. I kind of heard some of the rumors after the fact. At the end of the day. What I hope comes out of that is invest the passive investors, the LPs, that they take on themselves, more personal responsibility to underwrite the operator and not chase IRR. It’s a lot of operators, investors out there, they’ll look at three or four deals and be like 1516 Ooh, 2020 an hour and you don’t want that one. And it’s it’s not that Simple, and it’s really dangerous.
DL Campbell 25:02
It is. And the limited partners or the passive investors don’t have the underwriting experience. And if it’s a syndication, the, the deal sponsor doesn’t have the experience either they haven’t been through a couple decades of market cycle. So there’s a couple of really good key points that you mentioned. And we like to say, you underwrite the horse and you underwrite the rider. That’s the team. And if a property doesn’t have an excellent team, you got to, you got to team up with people who do, even if you have to give away a larger portion of the deal. You want to be able to sleep at night, because your investors are getting paid well. And they are also safe, and they’re secured by the collateral of the property. So we want to do that risk litigation in a number of ways, so that the investors are safe. With Can I add
Chris Bounds 26:10
something to that, too? Yeah, absolutely. When investors are looking at a business plan or an opportunity, and they’ll see the management team, the sponsor team, on the business, plan, the PowerPoint, and it’ll have some probably well known faces. And there’s usually a couple of faces on there that they’ll tell their experience, they should have that, but ask their level of involvement in the deal, because there are some organizations, coaching groups and all that that will lend the primary coaches or mentor lend their credibility to help close a deal, but their involvement is very little, and maybe even none outside of helping get it closed.
So the last thing that you want is thinking, hey, there’s someone on here who’s got 20 years of experience, and they you know, they have 3000 units under management, while they must be a good operator, but they’re not the one one doing it. It’s the other guy, or the other gal who they just started a year and a half ago, and they’re really, really green. So it’s not that that deal couldn’t be good. But bad operators can ruin a good deal.
DL Campbell 27:35
So or no, we’re not a good deal. Or it’s just not a good deal. And it shouldn’t be done. Yeah, I agree with everything that you’ve said, because there are very inexperienced people who are ruining the investment market. And it’s concerning for the investors. So, you know, listening to what you’re saying is so important, is to drill down in there. And it’s not about familiarity and recognizing somebody at all, I think that the bottom line is that over the last three years, there are so many deals that should not have been underwritten. The interest rate hasn’t been at 2% or 3% for a very long time, and it stayed too low too long. So anybody new in the markets and other we can anybody can do real estate, this is easy. But what about when that interest rate normalizes at 5%, or whatever.
So we have to be underwriting our interest rate, when it’s not 5% We have to underwrite it too high, we have to adjust our gross operating expenses too high as a buffer, we have to have our inflation rate at 3% or 5%, not six or eight or 20%. Because that over valuates Our property, what the way that we underwrite our deal, and we have underwritten the prestige is we have five or six places where we’ve mitigated risk. And we said okay, what if everything goes wrong? How will the property operate? And as a former engineer, I have to give the property a little bit of credit, and go okay, on the rents, we’re gonna go medium to medium low, we’re not gonna go, you know, we’re not going to project high rents. And so based on those numbers, that’s where we get our IRR. But any other deal, I know they have pain of the stick on that pig, and they’re projecting blue skies on everything. So, buyer beware.
Chris Bounds 29:53
Yeah, no, unfortunately, some of those will come back. Um, I think banks will probably be a little bit more I’m willing to do what they can to negotiate before just taking back in mass haven’t learned those names. Yeah, but they’ll take them back if they need to. Or if they have to. Now, for newer operators, this doesn’t mean you can’t do deals, it’s just means like, if I’m gonna go do a new development deal, especially class, a new development primaria, I’m just not going to go try to do that do myself, I’m going to, I’m going to call you a deal or someone that I know that knows that market, and that that type of exit strategy, and we’re going to work on that from a JV perspective.
And I’m gonna take a back seat a little bit, and learn while swinging a hammer, learn, learn, learn while operating. And as you go along and get a few of those under your belt, then, even though you still might be green, because you’re only three years in or four years in, that’s experienced, but it’s also experienced enough, where could be dangerous, that’s when you can start hiring. You can hire not the entrepreneurs like like us, you go hire someone who has an incredible experience in asset management, project management, property management, capital raising, you can hire those a level players to join your team. And then that helps solve some of those credibility gaps. And then you can start exactly
DL Campbell 31:19
right longing. That’s, you’re exactly right. And that’s what we’ve done. At the prestigous. We have 402 years of commercial and construction experience. And these people are sharp, they have industry experience. It’s that credibility gap for somebody who doesn’t have the 20 years of commercial, but it’s also that knowledge gap, because my morning was spent with our civil engineer, our general contractor, and our CO developer. And we all had our certified arborist to solve this issue. And it is so fun to be in that kind of room where iron sharpens iron. So just like you said, we’re we’re solving that credibility gap. But we’re also solving that skill set gap. And the skill set is what has been missing in this market for a couple of years. Definitely, definitely.
Chris Bounds 32:20
Well, I think we unpacked a lot of a lot of notes there. I had several questions, but they actually all came out. In that back and forth conversation we did really well there. In closing, I asked the same four questions to to everyone. And just to kind of start off here. If you could give advice to your 20 year old self, what would that be?
DL Campbell 32:43
Don’t worry be happy.
Chris Bounds 32:46
It’s a good one. Yeah.
DL Campbell 32:50
Logic Dre and people, we’re good at seeing gaps. And that’s our skill set. But also we need to schedule in some fun. And so I have to correct myself and schedule that fun time in with family and with friends.
Chris Bounds 33:04
Mother, what book or books have greatly influenced your life? Oh, my
DL Campbell 33:09
gosh, great question. And so many books. You know, you have from thinking Grow Rich by Napoleon Hill, to the Speed of Trust, the sequel from Stephen Covey. And I liked that book, because I’m like, this my personal personality type, it’s like this, get this, get it done. But he talks about slowing down to speed up and work because we’re dealing with people, not machines. So it’s the Speed of Trust is that if we slow down a bit, we can gel and move forward together more efficiently. So I’ve learned a lot from that methodology.
Chris Bounds 33:54
In the last five years, what new belief behavior or habit has most improved your life,
DL Campbell 34:00
you try to do a really good job at being the best that I can be. And it’s kind of a game. It’s not a competition with other people. So I tried to do all that self work, self work and education. But I would say prayer has been the most helpful and especially in recent weeks, when some days are very tension filled. And they’re not very peace filled, Chris and so if I give space for God to do his make his move, and sit at his feet, you know, good ideas come and sometimes all you need is a good idea. It’s like, oh, that that’s what I need. This is the person I need to call. This is my next action. And it really is great for stress relief as well. I’m Such a doer that it takes effort for me to sit, you know, for 10 minutes and read some scripture or something, so I have to work on it.
Chris Bounds 35:14
Love it. How can people reach out to you?
DL Campbell 35:17
i Yes, you know, our website is honors way group.com We also have educational videos at our YouTube channel honors way group. And our current project we’re very excited about is the prestige me hill.com. So I appreciate your carving out time in your busy day, Chris and let us know how we can be of help.
Chris Bounds 35:40
This was fun. Thank you so much for coming on. Thanks for tuning in. If you got any value out of this at all, please like comment, subscribe, follow and love to hear from you. And for more real estate related content, market observations, upcoming events, you can go to invested x.com And subscribe to our weekly newsletter. I promise you won’t regret it. Thanks again.