Commercial Real Estate Investing: How to Profit From Undermanaged Properties | John Brackett

John Brackett (00:00)
You’re ultimately buying the the inefficiencies. That’s really what you’re buying. You’re buying an asset that’s being undermanaged or that’s operating less efficiently in theory than what you and I could

operate the asset at, and that’s what we look for. And in many cases, those inefficiencies may look marginally small, like hey, they may be operating at a 15% inefficiency on operating expenses, but when you compound that over five or seven years, it could be really significant.

Issa Hanna (02:01)
Welcome back to another episode of the Real Estate Pros Podcast. I’m your host, Issa Hanna, and today I have John Brackett with me from Fidelity. John, welcome to the show.

John Brackett (02:09)
Hey, glad to be here. Appreciate the invite.

Issa Hanna (02:10)
I appreciate having you. I think our investors are gonna get a lot of knowledge from you. A lot of our new guys are gonna love listening to you. You’ve been in the game since 2008 with this business, but even before that, in finance, and you’re into apartment buildings. So for our viewers at home, can you kind of give them a rundown of what you’re doing nowadays?

John Brackett (02:31)
Yeah, we own and operate apartment buildings in three primary markets: San Diego, Houston, and San Antonio, and then some secondary markets in between those MSAs. Been doing it since 2006. I was a commercial banker for about ten years before I started this business, doing mostly commercial real estate finance, what they call C&I business, which is commercial and industrial, and in treasury management, which we use actually, interestingly enough,

more now than I did when I was in banking. And then my wife is a co-founder. Her name is Deborah Brackett. She was a commercial real estate appraiser for about seven years prior to us starting this business in 2008. And at this point, she manages, you know, all of our assets with a really good team that she put in place. And it’s just a really fun and unique business.

Issa Hanna (03:14)
One hundred percent. And I mean, that’s kind of a dream team for an investment couple. You’ve got an appraiser that can comp everything on one side, you got a finance guy that knows all the products and knows how to crunch the numbers. I mean, with that, you guys’ underwriting must be spot on. I mean, unbelievable. And if you don’t mind sharing with our viewers, just because you are a heavy hitter and you are in some big markets, like,

how many—what’s a portfolio that you guys have under management?

John Brackett (03:44)
Right now, we’re managing about, let’s see, about eighty million dollars. A little bit over eighty million dollars. Of course, that kind of fluctuates when we’re, you know, buying and selling. And that’s spread out in the three markets that I just mentioned earlier. And building assets has its challenges, right? Especially when you’re operating in multiple markets. But I think we were really fortunate in that we started buying out of state

now over ten years ago. And so we were able to really learn from that. And once we spun off and started our own property management company, that’s when things really changed, and we really started to grow. But more importantly, grow a lot more profitably, because we just had more control over the outcomes of our assets. So that was a really unique opportunity for us.

Issa Hanna (04:29)
I love that. And then another thing we talked about, one of the strengths you have, is you’re able to identify maybe some undermanaged properties and get in there, buy them, and then probably add some value just by putting your own brand and your own touch on that. Can you kind of elaborate more on how you’re able to identify that weakness in some people’s games?

John Brackett (05:38)
Yeah, so I’ll tell you a really interesting story, right? I hear—a couple of folks reach out to me. I’m active on LinkedIn quite a bit, so I get a lot of folks that reach out to me and ask me questions that are more educational in nature. But one question I recall really well was, “How do you buy discounted properties?” Right? And my comment is,

in all reality, we’re not really buying assets at a discount. I know you hear that a lot in the market, and a lot of people use that I think more as a marketing conversation than anything else, right? “You’re buying an asset at a 30% discount to replacement value or replacement cost.” The reality is it’s all relative to the market, right? So a really good example of that would be a recent offering that was sent to me for consideration.

The way that they were proposing the offering was, “Hey, we’re buying this at a twenty or thirty percent discount to what the previous seller purchased it for three years ago.” Well, the reality was in that market, it probably made a lot of sense, right? But now in today’s market, you’re really paying market value for it. You’re not overpaying, you’re not underpaying, you’re paying for what the asset is worth today. And so I think that’s a really important distinction. But what really—

I think what really matters is, ultimately, what you’re buying is you’re buying the inefficiencies today that you can manage up over a two- or three-year period. And I think if you’re at least accounting for some uncertainty in your underwriting, it just allows you to do that, I think, with more control and with a better outcome. So that would be my way to answer that, just because I—

I hear this conversation so much over time about buying properties at a discount and this and that. And it’s all relative to the market cycle that you’re in.

Issa Hanna (07:23)
One hundred percent. You gotta have your process, you gotta have your basically buying philosophy, your underwriting philosophy. It’s gotta change, it’s gotta morph to the market you’re in. And if it makes dollars still at the end of the day, guess what, guys? It makes sense. So, hundred percent.

John Brackett (07:39)
Well, in commercial real estate, right, whether it be an apartment building, mixed-use asset, an industrial building, most of the time because you’re dealing with sellers that are just more involved, right,

you’re—

you’re ultimately buying the the inefficiencies. That’s really what you’re buying. You’re buying an asset that’s being undermanaged or that’s operating less efficiently in theory than what you and I could

operate the asset at, and that’s what we look for. And in many cases, those inefficiencies may look marginally small, like hey, they may be operating at a 15% inefficiency on operating expenses, but when you compound that over five or seven years, it could be really significant.

Issa Hanna (08:22)
Yeah, definitely. Like you said earlier, the money’s in the management, you know, the money’s in that long-term hold. And then almost, I mean, throughout time it’s proven real estate does nothing but appreciate after long periods of time. So you’re not only cash flowing, you’re building equity, you’re building future money, legacy wealth. Man, I love where our conversation is going already. Tons of knowledge oozing out of you,

John. So I’m getting a lot from you already for our viewers.

John Brackett (08:50)
Happy to help where I can.

Issa Hanna (08:51)
Yep. I do want to ask you now something we all have, something we’ve all experienced: the real estate nightmare, the investment nightmare, and times we’ve had to pivot, you know. It happens almost all the time, especially in the beginning, we go down like a pretty rough roller coaster sometimes. So can you give us one that kind of sticks out in your mind?

John Brackett (09:09)
Man, I have many. Name a category, literally.

Issa Hanna (09:14)
Yeah, literally. I mean, they’re everywhere. Especially when you’re in so many multiple—you’re all the way up there. But I mean, how about an apartment building?

John Brackett (09:22)
Okay. So let’s—I’ll speak to one that—

I’ll speak to one that we actually purchased in San Antonio. This one was actually a single-family residential property that we purchased with the intent to rent it out as a hospitality property, right, as a short-term rental. And so, property that we purchased got a great buy on it. More importantly, got amazing financing on it at five and a quarter, 30-year fixed. No—

two and a half percent 30-year fixed financing. That alone made it super valuable, right? And I think I only put about twenty percent down. But it was in an area in San Antonio, between Austin and San Antonio, very, very rare, meaning those properties in that area didn’t trade very much. Everything else around us for that same type of product was selling over a million—for over a million dollars, in many cases close to about two million.

And we bought this for 529.

Right. So we bought it right. And we ended up rebuilding the asset, rebuilding it, made it super custom. But when we were doing that, that’s when COVID hit. So we could not find materials. In fact, interesting story—and this was in Texas, right?—I couldn’t find people to hire that were skilled enough to help build this thing out. I mean, we recycled through a lot of people. The materials were constantly delayed.

Most of the time, we couldn’t find the materials, or we would pay for them and they would never show up. Or we would pay for them, they would show up, and the materials were completely different from what we purchased. So finally, I said, “Okay, this is not gonna work,” right? And we were probably four months into that cycle. So what we really had to do was we had to pause and say, “Okay, we can’t keep doing this because it’s not gonna work. How do we pivot? How do we change, considering what we’re going through right now, right?”

We’re running into supply chain issues. We can’t find the labor that we need because no one was working at the time, which we kind of understood because COVID was new and people were still trying to figure out what the impact was. So I ended up having to fly people out that I knew that were skilled folks that we worked with in California out to Texas. How’s that?

Issa Hanna (11:23)
My goodness. Yeah. I mean, hey.

John Brackett (11:25)
Some of them I flew out, some of them actually drove out, and I had to pay, I don’t know, I think like fifty percent more than what I would normally pay them to get them out there to finish this project. And we had to make some decisions, right? When we were buying our materials, we stopped

putting down payments down that were really significant, because in most cases, we’d put this down payment down, the material wouldn’t show up, or we’d get these elongated answers why the materials were behind. It was just kind of a mess. So the way that we started dealing with that was we started negotiating smaller deposits, and then deposits in sequences, right? So hey, look, we’re gonna start off with a small deposit here to keep things going.

We’re gonna start off with a smaller deposit. So instead of thirty percent down, it was five percent, right? Once we can confirm that the materials have been purchased, then we’d add another five percent. Once we can see that they’re en route, then we’d give you another five percent. And that worked out actually really well, because it mitigated our risk, it kept, you know, product coming in. It was super labor-intensive to manage, but it reduced our risk. It started getting materials delivered.

I wouldn’t say on time, but at least our orders were showing up with what we actually ordered, right, which is super important. And then we just had to make a decision for the things that we just could not find. We had to improvise. So I built a chimney—I built a chimney with that property out of clay materials and a bunch of other stuff. And eventually, we had to change that because it wasn’t compliant and we’d probably burn the house down, or one of the guests would. But we had to work through, I would say, about thirty percent of our materials. We just had to improvise and find comparable materials so that we could just finish the project, right? But the home ended up, for the average eye, I mean, it’s a beautiful place. But a lot of—

a lot of changes along the way, just because of all the material constraints. So I think that was a really challenging property, especially with the distance, the people turning over constantly, right, because of COVID. But we learned a lot.

Issa Hanna (13:35)
Yeah, definitely. We were talking about that earlier, right? You never lose, you always learn when you have to pivot and you have to move like that. COVID was tough. I mean, as somebody who was a Chicagoland broker at that time, just showing homes, just buying—the whole market had slowed down, everything had. So materials shot up like crazy. Supply and demand was nuts, you’d have to wait months. So I couldn’t even imagine

that type of project. But kudos to you, man. You flew your crew out there. You said, “No, I’m running through this wall. I’m not going to stop. I’m not going to put the project on hold. I’m getting this thing done.” And that’s what the successful people do. They don’t take no for an answer, and they find a way to maneuver around it and get the projects done and get to making their money off their investments. So I love that. I love that about you.

We were also talking earlier and you said you have some new markets in mind in the future. So five years down the line, you’re already in a few different states. How many states, how many cities am I gonna see you in?

John Brackett (14:31)
We’re just gonna stay at this point in three, maybe four. But our markets are San Diego, Houston, and San Antonio, and some secondary markets in between those MSAs, for a couple of different reasons. But, you know, one market that I really like actually right now is LA. I know that LA has a lot of political challenges right now, but I like it for that reason, right? I just think that

we’re seeing some opportunities that we believe just economically make a lot of sense for the risk. And my hope is that continues. I think if you can manage through some of the tenant risk there and the political risk, then some of those deals make a lot of sense. Especially the newer product is really what I’m speaking to, right? Buildings that were built five years ago or newer, hell, even ten years ago or newer. I think the values—

a lot of time.

Issa Hanna (15:20)
Definitely. I talk to a lot of people from LA. Have a lot of family based in LA. They do a lot of business out there. Over the last three years or so, you’ve seen the values go down, and it’s definitely a good time to get in. Something that was ten million a few years ago might be seven, seven and a half nowadays. So I—

John Brackett (15:39)
Yeah, and keep in mind, though, that the price decrease is warranted, right, just because of what’s going on in LA right now with rents, the political risks, the tenant laws. I don’t want to say they’re tricky, but they really do favor the tenants. And frankly, for good reason. LA’s such a big market that I think historically you just had a lot of slumlords in LA, man, and so consequently,

all the good landlords now in that region are feeling the effect of just a lot of properties that were not even poorly managed, that were just not cared for at all. That were neglected is a better word, right? And that’s really, I think, the foundation for what a lot of those changes—

a lot of the changes that were made up in LA and what LA is experiencing now foundationally was from slumlords. Right. So I can’t really, you know, I don’t—when I hear people complaining about that, I’m like, “Well, I mean, I think there’s a reason for that.” But I’ve learned to not complain about things, but rather ask, “Where’s the opportunity?” right? Because I am not going to individually, like, change

the political situation in LA. But what I can do is take a step back and say, “Okay, right, here’s what’s going on, here’s how it’s affecting the market, where’s the opportunity in all this?” And I think that’s the better approach for folks that want to take advantage of just chaos and turn that into opportunity.

Issa Hanna (17:04)
One hundred percent. You find the opportunity in that. Like I said, you can get in at a lower price, maybe pick up some of these mismanaged properties, these dilapidated former slumlord properties, fix it up, and guess what? You get enough of them and you get a lot of good landlords coming into LA like John, property values are gonna go right back up there. So I love that, man.

I wanna ask now for our younger guys, right? I have a lot of people that watch this show, that listen on Apple. They’re just getting into the game, and our business depends on relationships, depends on growing networks, the whole nine yards. So for people who are just starting out, struggling to establish that first relationship, what advice would you have for them on getting that ball rolling?

John Brackett (17:46)
Getting that ball rolling with respect to what specifically, then? What is it with respect to—

Issa Hanna (17:50)
Connecting with somebody that can help take your business, or just other business people that you would need to connect with. Like, you have business partners, you have people that you do business with, you don’t just run into them on Facebook or just sitting at home on the computer, you know, you’ve got to go out there and meet these people. So what are some ways that you found are good with meeting these people?

John Brackett (18:12)
I think that’s a really great question. My highest network value, or the networks that I have that have the highest value, are always from personal introductions. I mean, always. And usually it’s coming from the fact that we’re doing business with someone, we’re doing a really great job,

and we’re asking for an introduction into the target market that we want to work with the most, right? So everybody at some point gets really clear on who you want to work with and why, who you can bring the most value to and why. That network is where I spend a lot of my time getting referred into or building relationships into. I think online

can be a good way to create an introduction, but I think the reality is we live in a world today where everyone’s online, right? Almost to a fault, where things, I think, reality gets skewed. Reality is being skewed when you spend a lot of time online. And so people are really, from what I can see, searching for meaningful relationships, right?

And what I mean by that is with people that can help them grow, you know, that can help challenge where they are and can really give them a very different perspective. An example of that would be, I took one of our clients out to a restaurant that my wife and I absolutely love. And they’re big foodies, right? They do really well, they work with a lot of developers nationally, they own a company that does extraordinarily well, a design company. So we—

we took them out, and man, I was just amazed with, one, the conversation that we’re having, but their extended network, our extended network, how we were able to cross-reference, but then also a lot of the things that I’ve learned from them from that simple dinner that I could immediately go back and implement, right? Like, so one of those examples was X Money. Are you familiar with X Money, Elon Musk?

Issa Hanna (20:02)
I’ve heard, but I don’t know anything about it.

John Brackett (20:06)
For

the audience, I’m not gonna go into detail, but X Money was one of those conversations. A product that we’re already using now called Wise for a couple different things that we’re doing in that business, but how they were using it was very different. They were using it because they travel a lot internationally, and they’re using that card to be able to go back and forth between currencies, and it’s a way to mitigate their risk. So that’s something we started implementing. So little simple things like that, right? But if I had to—if I had to

add a value to what that meeting was after I left, like, “Hey, what was the value of that conversation? How much value did that bring to me, my wife, our company, our staff?” Easily $100,000. And that was maybe a two-hour dinner, right? So that’s what I mean. And obviously, you don’t go around looking at someone and saying, “Okay, this person is gonna bring me two hundred thousand dollars worth of value,” right? I mean, that’s not realistic. But the point there being is

what you can do, though, is identify networks where you spending more time there and building out those networks will enrich your life more than if you did not. That would be a great way to say it. I think another really easy way is where you work every day. There are times where I leave my office and I’ll go work out of hotels where, historically, you have a lot of business people show up there.

And you would be amazed with the conversations that I get into over the course of several months. I think that’s a really good way. And so for me, those are really the best ways, right? It’s getting referred into networks that are already really, really rich with information and expertise. That’s always going to be, I think, the number one way. And then identifying networks like that that you either have to pay your way into or usually get referred into.

So that would be my suggestion. Those are gonna always, I believe, be your highest value net.

Issa Hanna (21:48)
I love that, man. Definitely. You can learn a lot from just listening to people, that personal introduction. You see, you picked up a skill from that one dinner, like you said, that was worth a hundred thousand, just to learn that little trick that you’re like, “Man, I never thought of that.” So, yeah, I do.

John Brackett (22:04)
Simple things, right? And it was natural, it was fun. We had a great time. We know the people there at the restaurant. That was a great time, man. Great time.

Issa Hanna (22:12)
Definitely. Yeah, you did it all while having fun. You picked up a new trick, and that’s literally how you just get better and better over time. You never know everything. And the people that do think they know everything, those are the ones that don’t continue to grow. So if you’re at a dinner, there’s somebody that could teach you something, be quiet and listen, because you will learn a lot.

John Brackett (22:33)
I totally agree. I totally agree. Yeah.

Issa Hanna (22:35)
Hundred percent. So now I’m gonna give you the floor. I’m gonna give you time to plug yourself. If people wanna get a hold of you, they wanna maybe ask you a question, just look you up on LinkedIn, where can they find you?

John Brackett (23:28)
Yeah, you can find me on LinkedIn. I’m fairly active on LinkedIn. Connect with me there. It’s John L. Brackett on LinkedIn, and you’ll see my profile there along with Fidelity Business Partners. Feel free to link in with me there. You can also link into our business page, FidelityDPS.com or Fidelity Business Partners. And happy to connect.

Issa Hanna (23:48)
Definitely. So make sure, guys, if this episode interested you and you want to talk to John, connect with him. You know, who knows? Maybe we can do some business together. John, thank you so much for coming on the show. True honor to pick your brain. A lot of knowledge in this short amount of time. So, man, thank you so much for coming on. Yep.

John Brackett (24:08)
Yeah,

my pleasure. My pleasure.

Issa Hanna (24:09)
Thank you. And to my viewers at home, if you enjoyed this conversation with John and want to see more like it, make sure to hit like and subscribe. I talk to people every day that could bring us different knowledge on every aspect of the real estate industry. Until next time, the real estate pros are out.