Don’t Over Leverage: The Real Estate Syndication Mistake That Can Collapse Your Portfolio

James Knull (00:00)
there’s just so many more points of failure that happen when you over leverage because all it takes is the rent going down a little bit, a project renovation going over time. And those payments just stack up so quick. Borrowing more money equals paying more payments. And, you know, I think there’s a very early temptation ⁓ early on in people’s career to try to invest less money, to increase the return on investment numbers, to really wow investors. But

In my experience, investors are happy with double digit returns. you don’t have to, you don’t have to chop your investment in half to push that return on investment sky high. If it means taking on proportionately way, way, way more risk, because if you have one project go wrong, it’ll stunt your portfolio growth for years to come.

Scott Bursey (02:22)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host Scott Bursey. Today’s guest is someone who doesn’t just play the game, he’s ridden the playbook. He’s the founder of Mogul Realty Group, a master of scaling investments, and he is bringing a tanker truck full of high octane fuel for your entire portfolio. Get ready to level up your strategy because you’re about to receive

Pure fire from James Knull Let’s start our engines. Everyone buckle up. James, welcome to the show.

James Knull (02:57)
Hey Scott, thanks so much for having me. I’m really looking forward to talking investing with you.

Scott Bursey (03:01)
Absolutely. And what really caught my attention about you was the way you’ve been able to scale your real estate investing through strategic syndication, allowing your partners to create passive wealth and execute multifamily deals far bigger than they could alone.

James Knull (03:20)
Well, yeah, thanks for mentioning that. If you want to get into the bigger size deals in the commercial space, of course, some people have access to tons of capital through their family situations. But for the average person, if you want to buy a $5, $10, $15 million building, well, you need to partner up. You need to create a collective group. And everybody contributes to the partnership in order to make that deal come together.

Scott Bursey (03:44)
100 % and James for our listeners who may not be familiar with your journey. Tell us how did your career begin and what is your main focus now?

James Knull (03:54)
Well, you know, my career started when I was quite young. I was just graduating university and I was thinking about buying a home. The hometown that I’m in houses were very inexpensive and that was in the early 2000s when it was a heck of a lot easier to get a mortgage. So I said, you know what, instead of renting with a group of buddies and paying somebody else’s mortgage, why the heck not? Wouldn’t I get a house and have that same group of buddies paying my mortgage? And that’s, that’s how we started the journey.

Since then, I’ve bought all kinds of houses, developed houses, flipped houses. I’ve bought over a dozen multifamily apartment buildings. And right now, the most lucrative thing in our marketplace is developing small multifamily. So two, four, six, eight unit buildings. And so that’s what I’ve been focusing on. The government of Canada has a very, very impressive financing package for these types of buildings. And the municipality has permitting

permitting laws that make it very, very easy to start these sort of developments right now.

Scott Bursey (04:55)
that is a fantastic journey. James, let’s inject some high octane focus into this conversation and start off with a deep dive. What core strength does Mogul Realty Group present in the unique market to gain an edge?

James Knull (06:00)
Well, I would say one of the things that we do very, well is attract and retain really good people. If you are doing real estate at a high level, there’s no such thing as a solopreneur. You are playing a team sport, whether you have actual employees or you’re working with sub-trades, sub-contractors, you you’ve got your property managers, your lawyers, your contractors, et cetera, et cetera. And, you know, a lot of people think

When they get into real estate, it’s about the houses, it’s about the properties, it’s about the land, it’s about the numbers. But none of those pieces work if you don’t have the right people in place. And I would say one of my biggest strengths as an entrepreneur is being able to identify good people, surround myself with good people and inspire those good people to all work together to make these great projects happen.

Scott Bursey (06:46)
That’s really a huge distinction and that specialized focus is exactly what separates the amateurs in this game from the pros that are having a huge impact.

and let’s shift gears.

James Knull (07:01)
I would say so, you know, a lot of people,

a lot of people, especially when they’re getting started in their career, there’s a lot of opportunities to make price point the deciding factor. But you know, whether it, whether it’s contractors, building materials, or even pieces of real estate, the lowest possible price point typically corresponds with ⁓ a declining quality that makes the project not go very well.

Scott Bursey (07:30)
Absolutely, absolutely. If somebody’s listening to this and they’re thinking to themselves, hey, this is somebody that I like to partner with. What would you like them to know first about your business, James?

James Knull (07:43)
Well, you know, we were choosing. We don’t really do a lot of volume of deals. We we’ve got a really, really stable portfolio of really well performing assets. There aren’t really any, you know, as some people say, any dogs in the portfolio. It’s all really good buildings and really good locations that attract really good tenants. So it’s it’s slow and steady growth. We also don’t we also don’t shoot for the moon with risk.

So, you know, some people want to go super high leverage, put way less money down to try to really juice up the ROI on paper. That’s not us. We, we usually outperform the returns that we project, but the returns that we project might not be as sky high as someone who’s a little more aggressive or a little more optimistic. So, you know, we’re, very much slow and steady wins the race. We like to keep it clean. We like to keep it safe. We like to keep it low risk and ⁓

You know that really resonates with some people, other people, know, if you want to shoot for the moon, we might not be for you.

Scott Bursey (08:45)
love that framing. And let’s go underneath the hood. I’m real curious, James, what is the biggest challenge in acquiring quality assets today in your view?

James Knull (08:57)
Honestly, one of the toughest things that I think myself, I’ve been guilty of this earlier in my career and a lot of people are is it’s tough to say no to a great deal when you’re waiting for an amazing deal. And I see lots of great deals. And sometimes you start to get a little bit nervous. You’ve got several capital partners who are pushing you to pull the trigger and money’s been deployed, cash is sitting on the sidelines, that cash is looking for a deal and a pretty darn good deal comes along.

It’s tough to say no to that deal when you just want to keep the machine moving. so that’s something that has been a big part of my professional development is setting really, really strict parameters for what a yes deal is. And then if I see something that’s close, having the courage to say no, because I know that if I say no to a great deal, the amazing one will come.

Scott Bursey (09:49)
That’s really great insight. And I’ve got to ask, what specific asset class is attracting your attention right now?

James Knull (10:31)
Well, I really do like developing these smaller multifamily units. know, I mean, of course it’s, it’s can be appealing to go bigger, but building several buildings that make a lot of sense, you add up the equity in those buildings. It still adds up to one big building. And there is a lot of really good pieces of residential land in our home market that makes sense to develop these small multifamily buildings on. And so we’ve got a really, really good runway. There’s a blue ocean of available property.

And there’s an atmosphere politically that is very, very friendly towards this type of development. So, you know, when it’s all green lights, you just got to go.

Scott Bursey (11:12)
There you go, absolutely. Start the engines and take off. Let’s rub them up here a little bit and what do you feel is the biggest opportunity right now in that regard?

James Knull (11:23)
Well, I think one of the biggest opportunities that we’re seeing in our marketplace is, you know, I so to add a little more character to that, we’re from, I’m from, we’re from Edmonton, Alberta, here in Canada. And right now the recording of this podcast, the global oil market is in a very interesting place because of what’s happening in the middle East oil prices are jumping. That’s causing inflation. That’s hurting a lot of major market centers where we’re from.

is an energy producing municipality and energy producing province here in Canada. So while everywhere else is dealing with inflation and economic trouble, we’re seeing the price of our primary export jump and jump and jump. So we’re in a really interesting opportunity phase right now because we’re going to see people moving from other places in Canada to where we are for resource extraction. We’re going to see our economy operating in a very strong way, but

From a Canadian perspective, what we’re going to see is interest rates going down to combat an economic recession, but low interest rates make it real easy to do real estate deals. So we’re going to have a window of opportunity as long as this oil crisis is going on, that’s going to be really good for our micro market, even though it’s going to be not so good for most of the rest of Canada.

Scott Bursey (12:43)
And James, on that note, what unique challenges does that present for your organization and for the way that your strategy is employed?

James Knull (12:54)
Well, you know, one of the unique challenges that it presents is we’ve got to be very, very careful to not go too fast and to not get too, you know, for lack of a better term, get too greedy. Like I said earlier, there’s a lot of green lights. There’s a lot. There’s not a lot of friction to doing these deals. And so it really is about being choosy because the market is cyclical. What goes up does come down. There’s fast points, there’s slow points, and it’s very, very easy to compromise on certain criteria.

When the market’s good, when the market’s good, everything rents out. When the market’s good, there’s plenty of tenants. But, you five years from now, it could be a different market. And as a good example, buying a property in a marginal location. Well, hey, people want to rent there when there’s a scarcity of rental supply. But when things open back up and there’s a higher vacancy rate, well, those are going to be some of the first properties to become vacant. So we really have to stay choosy on location, stay choosy on property type and keep the quality high.

because we’re playing a long game here. We’re hoping to hold these properties for 10, 15, 20 years. And over the course of that timeframe, there are going to be periods of time where tenants are going to have more choice and you need to have a product that stands out from the crowd.

Scott Bursey (14:09)
And along those lines, what market risk poses the most significant threat to capital preservation for investors today?

James Knull (14:18)
You know, I would say one of the biggest risks for capital preservation is just the volatility of interest rates right now. ⁓ You know, what’s happening in the global economy is really creating interesting fits and spurts of inflation and you know, like capital just isn’t worth as much as it used to be. holding property while prices potentially inflate is one thing, but on the flip side of the coin, the availability of capital and the ease of deploying capital is

it rapidly shifts. So a good example of that is if you if we’re here in our market starting a development that has a, you know, 12 16 month construction timeline, well, you might have an idea of what your refinance at the end of that construction timeline might be. But 16 months from now, the lending rules might change. And so what you plan for what you’ve pro form it for might be completely different. And all of a sudden, a large a large amount of cash is required to close because

the loan to value has changed or the valuation has changed or the interest rates have changed, the debt to credit ratio. So you really have to build buffers into the business plan right now because things are changing rapidly and by dramatic amounts. And so that variability means you really do have to plan for the worst and hope for the best in a much more significant way than I think we had to five years ago.

Scott Bursey (16:21)
Mitigating that risk is always paramount. know, focusing on strong asset management protects the downside for sure.

And you talked about the long game, James, if you could elaborate just a little bit on your long-term strategy as it pertains to the market risks and such.

James Knull (16:44)
Yeah, you know, I would say my approach to the long term outlook of our portfolio is one that I might refer to as almost a little bit old school, in the sense that I’m on a fast track to paying down my mortgages. A lot of people, you know, as soon as they get a bit of equity, they want to refinance and go to the next deal and refinance and go to the next deal. But we’re you know, we treat each project like, like we’re planting a tree. And the whole point is that tree is going to grow, it’s going to be strong, and it’s going to provide shade, and it’s going to yield fruit.

And if you keep hacking off branches of that tree to plant new trees, you’re never going to have that quality of finished products. instead of trying to refinance, take on too much debt and roll that into the next project, I treat every project like its own silo. And once we set it up, the mission of every single property I own is to pay down the mortgage as quickly as possible.

Scott Bursey (17:37)
That’s a game changer for our listeners right there. And James, now it’s time to supply that high octane fuel. Let’s talk money. If you had to distill your years of ⁓ experience, all your years, acumatively into one single piece of advice, the piece of advice that guarantees a pro will successfully complete their first large scale syndication deal. What is that high octane deep dive nugget of wisdom?

James Knull (17:48)
Let’s do it.

I would say don’t over leverage. have watched so many colleagues and contacts think that they need to increase the loan to value, put less money down, borrow more money, do fancy mezzanine debt, use vendor financing. you know, it looks good on paper because we’re calculating return on investment. The less you invest, the higher your return on investment is relative to the amount that you get returned. But

there’s just so many more points of failure that happen when you over leverage because all it takes is the rent going down a little bit, a project renovation going over time. And those payments just stack up so quick. Borrowing more money equals paying more payments. And, you know, I think there’s a very early temptation ⁓ early on in people’s career to try to invest less money, to increase the return on investment numbers, to really wow investors. But

In my experience, investors are happy with double digit returns. you don’t have to, you don’t have to chop your investment in half to push that return on investment sky high. If it means taking on proportionately way, way, way more risk, because if you have one project go wrong, it’ll stunt your portfolio growth for years to come.

And so it’s, it’s better to be safe, be smart.

not over leverage and make sure that every deal is not going to fall apart, then it is to just constantly be pushing it to the limit because all it takes is one bad deal to collapse the entire portfolio.

Scott Bursey (19:45)
Being consistent, being steady, that long range vision is what I’m hearing from you.

James Knull (19:53)
Yeah, it is. It is all about the long term. mean, real estate value accumulates, you know, it feels slow because you don’t get to check it on your phone every day like a stock. But, you know, life life happens and you you blink and five years has gone by and all of a sudden there’s hundreds of thousands of dollars of equity between the mortgage pay down and a bit of market appreciation. So, you know, really pushing it pushing it into a high risk scenario for an extra few percentages of an ROI really misses the point that

If you’re patient in real estate, the amount of equity that accumulates over time is just unbelievable.

Scott Bursey (20:30)
Absolutely, that’s some pure gold for our listeners. And James, on that note, you’ve already given our listeners so much valuable wisdom today, but what golden nugget or piece of advice, additional piece of advice, could you leave with our listeners today?

James Knull (20:45)
You know, if the listener that we’re talking to is someone that’s looking at doing these syndication deals and raising capital, then my advice is really confidently own your identity as a real estate investor. If nobody knows that you’re into real estate, if nobody knows you’re into real estate investing, how are you ever going to attract a potential partner? Not everybody’s going to want to do a real estate deal with you, but the select few that might be interested are never going to be able to strike up a conversation with you about

doing a real estate deal if they have absolutely no idea that’s what you do. So be proud of what you do. Make every conversation have at least a little bit of real estate in it. And, you know, if you own your identity as a real estate investor, you’re going to attract people who are interested in talking to you about real estate investing.

Scott Bursey (21:32)
James, this has been an incredible education. Thank you for your insights and for sharing your knowledge with the Real Estate Pros community here today.

James Knull (21:41)
Hey Scott, it’s been my pleasure. Thanks for having me on the show and I really look forward to chatting with anybody who wants to get in touch with me.

Scott Bursey (21:48)
Absolutely, and we can’t let you go just yet. For those of our listeners that want to follow your journey or collaborate with you, what is the best way for them to reach you?

James Knull (21:58)
You know what? would say if you email me, I will get back to you. I love email. Call me old school, but that is my preferred method of communication. So Scott, if you’d be so kind as to share my email with our listeners, if you want to email me to chat more about real estate, happy to email you back and set up a time to chit chat.

Scott Bursey (22:16)
James, thank you so much for being on the show today.

James Knull (22:21)
Hey, it’s been my pleasure, Scott. Thank you.

Scott Bursey (22:23)
And to our listeners, thank you for listening. We appreciate each and every one of you. If you got value from today’s episode, please subscribe. We have a lineup of exceptional guests, just like James, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you on the next episode, everyone.