‘Real estate is an entrepreneurial business’ is a phrase I throw around a lot on this site. It’s true, but what does it even mean? It’s a combination of two things; first, many real estate professionals get into the business to ultimately become entrepreneurs. Secondly, success in real estate, whether on your own or within a larger organization, requires entrepreneurial thinking.

Blake Hansen, Managing Partner at Alturas Capital, is the quintessential ‘entrepreneur’ who stumbled upon investing at a young age. He started out at age 11 investing in stocks, growing his portfolio to $150K in value by the time he was in college. After losing everything, he began studying the likes of Buffet and other great value investors, learning the key to being a good investor isn’t winning, but rather not losing.

He started out real estate investing in single-family homes, learning the business literally from the ground-up through his own experience. In October 2009, he formed Alturas Capital which has grown into a $100M fund offering and Alturas Homes, a custom single-family home builder based in Boise, ID.

In this post, Blake shares his story, how he built Alturas, the challenges of raising a fund, and advice he has for young people just beginning their career in real estate.

Enter Blake:

Tell us a bit about the Alturas story and brand. What drove you to go off on your own?

Investing is in my blood. I started investing when I was a kid. At age 11, my father would match me dollar for dollar in the stock market, so I was eager to save money and invest it. I still remember my first investment. I purchased shares of a local publicly-traded technology company, for $11 per share, and sold out at just over $19 per share, nearly doubling my money twice (the first time with my dad’s match, and the second time when the share price soared).

I had to be a little entrepreneurial to find ways to make more money that I could invest. My mother would help me buy candy in bulk to sell to the neighborhood children. Like many kids, I made a living mowing lawns and doing yard work for neighbors – and I would take that money and invest in the stock market. By the time I was in high school, I had enough saved that I was trading actual shares in my economics class, when everyone else was playing with their mock portfolio.

By college, my stock market portfolio had grown. I was killing it. Everything I bought was going up fast. My net worth as a freshman in college was over $150,000.

Then it all came crashing down with the dot.com bust. I lost almost all of my money by trading options on margin. In fact, I recall having a margin call, where I had to borrow money from my twin sister to cover, because most of my money had been wiped away. It was sobering to realize that I did not really know how to invest. I was humiliated.

So I set out to find investors to emulate, who had proved to be good investors over long periods of time. I went to the library and started reading all of the investment books I could. Soon I came across Warren Buffett and his value investment philosophies. I could not get enough of his wisdom.

At the same time, a good friend of mine started investing in real estate. He had learned how to invest in real estate using no money down – which seemed almost too good to be true, but I found direct application for the value investing principles I was learning about from Warren Buffet’s philosophies. I realized that I could buy with a margin of safety by looking at the underlying fundamentals of the business/property, instead of focusing on price appreciation.

I decided to go to work, to find motivated sellers who would be willing to let me buy their homes. Within months, I had tied up a handful of properties, using options, lease-options and seller-carries. I could not qualify for traditional bank financing (remember, I was a poor college student with only about $5,000 left from my stock portfolio). Instead, I had to put deals together very creatively – and I focused on ensuring that each of my properties had positive cash flow out of the gate. I realized that cash flow was key to long-term viability and that the value of my investments was directly linked to the cash flows these assets could generate.

Over the next year, I purchased almost 15 properties, dropped out of college to become a real estate magnate. Unfortunately, my dreams were short-lived, as the market began getting over-heated, and I could no longer find property that met my criteria for cash flows and risk-adjusted returns. I recognized that we were heading into a part of the real estate cycle where buying would be more difficult.

So I went back to college to finish my degree (I had dropped out the end of my junior year, so I had only a couple more semesters left to graduate). I completed my degree in accounting, took a job with a public accounting firm, and worked there for almost three years, as a financial auditor. In October 2009, when the real estate market had taken a beating, I decided to quit my job, and start investing full time in real estate. I looked at previous real estate market downturns (which had been on a local level, and never at a national level like this) and predicted that the market would take until 2015-2016 to recover. I saw this as an opportunity of a lifetime to purchase property at a discount to intrinsic value.

I started what would later become Alturas Capital, and began buying distressed residential real estate. Over the next few years, we purchased tens of millions of dollars of residential property, began buying distressed commercial real estate assets, founded a new home building company (when we recognized that the distress in the residential home market would not last forever, and that distressed residential inventories were starting to fall), and made asset-based loans against real estate assets.

What are some of the investment principles and strategies that you use in your firm?

If you look at our investing track record over a long period of time, we have generated solid returns in both good and bad markets – by using a simple, diversified strategy and a conservative investment philosophy.

Here are the fundamentals of our investment philosophy.

1. We believe that speculating is not investing: Speculation involves luck and emotion while investing requires discipline, analysis, and research. Speculation leads to eventual disaster when market conditions change. We base our investment decisions on cash flows and real value creation.
2. We believe that markets are cyclical: We expect downturns and plan for cycles. We like cycles because they create investment opportunities. Although market changes are feared by speculators, they are welcomed by investors who are prepared and ready to take advantage.
3. We believe that markets are inefficient: We capitalize on discrepancies that exist in the market, especially when we can act quickly. Inefficient real estate markets allow us to find and create great value for our investors and achieve the best possible returns.
4. We believe that knowledge mitigates risk: We are analytical and we dig into details. We analyze trends across the country and trends in our markets, and compare these trends to the past, to give us context to where we might be in a market cycle. We are thorough in our underwriting of each individual investment we make, to ensure we are experts on the properties we own – to lower our risk.

A key to our success is our simple strategy: buy it, improve it, then sell or hold the property.

• First, we buy, or build real estate at a discount to replacement cost;
• Next, we create value, by improving the property or fixing whatever is broken;
• Finally, we sell the property, or we hold it in our portfolio to collect consistent cash flows.

We employ a diversified strategy and achieve consistent returns, with lower risk, by owning a diverse set of assets. We invest in the core commercial asset classes and in residential real estate.

First, we invest in commercial real estate. These are value-add investments, meaning that we create value through our efforts to reposition, develop, or improve the properties. The fund owns office, industrial, multi-family and retail value-add properties.

In addition to commercial real estate investments, we also invest in residential real estate.

We have made hundreds of distressed residential investments. However, we have not yet purchased this type of residential value-add property in the fund because of current market conditions and general lack of distress in our core markets. We are always on the lookout for market changes which may bring back this opportunity. Today our residential investments come through our affiliated company, Alturas Homes, which builds quality new homes in our market.

Our diversified strategy gives us a competitive advantage. It allows to know our true opportunity costs, so we can make the best decisions with our investment dollars and generate the highest possible risk-adjusted returns.

What are some of the things that make Alturas unique? What’s your competitive advantage?

Our competitive advantage is our people. At Alturas, we have an amazing team – a team we select just as carefully as our investments. We take care of our people, and in turn, they take care of our partners and our clients. This allows us to establish the right long-term relationships that ensure our continued success.

Our quality deal flow is another key competitive advantages we have as a firm. Due to the way we do business and the way we treat people, most of our deal flow comes to us. We have been able to produce very attractive returns, over a long period of time, because of these quality investments – which in many cases are off-market.

We focus on taking care of our investors. This means that we are extremely selective about which properties we add to our portfolio, passing on hundreds of opportunities each year that come our way. We could have chosen a different growth trajectory – but we deliberately decided to have fewer, better assets, with higher returns for us and our partners. We felt that if we take care of them, we will always have the ability to perform – as our lending partners and investing partners have a comfort level and confidence in the assets we buy and the returns we generate.

Alturas recently launched a fund. What are some of the challenges of offering a fund?

The first major challenge is making sure the timing is right for you, as the fund manager, or real estate entrepreneur. Do you have a sufficient track record doing what it is that you intend to do? Have you taken investor money before? What were the results? Do you have sufficient deal flow to justify having more money, or do you think the deal flow will come once you have money lined up?

We had been contemplating the fund model for a few years before actually making it happen. We built up a team, established deal flow channels, built our track record with a small group of investors and with our banks. With this foundation, we were able to launch the fund with millions of dollars out of the gate.

Many real estate entrepreneurs get stuck in the syndication phase, where they have to raise equity for each and every deal individually. They have sufficient deal flow, but they must get the approval of their investors for each deal. Raising money in a blind-pooled, open-ended real estate fund, like we did, allows for much more flexibility, but your investors have less control than in the syndication model. For this reason, it’s difficult to launch this type of fund. We were fortunate to have the track record we had, and a handful of key investors who lined up out of the gate to give us money. This provided us with the credibility to succeed and attract more and more investors to our fund.

It is also imperative to have the right fund structure. We struggled to find real-world expertise on how to structure our fund. We consulted with attorney after attorney who said they could create whatever we wanted. What we wanted to create was a fund that would be attractive to investors, with the proper protections for us as fund managers and for our investors. We were adamant that the structure needed to be time-tested and proven, having been tried during multiple real estate cycles.

Fortunately, we came across Matt Burk and his team at Fairway America, and hired them out of the gate to help us set up our fund. They have decades of experience as real estate fund managers and had the real world expertise to guide us as we created our fund. This was the best money we spent as fund managers and has been a crucial piece as we continue to grow. We are confident that our fund is set up the right way, and is tailored to our style, and will be able to last through real estate cycles in a way that is most advantageous for our investors and partners.

You raise money exclusively from HNW investors. How were you able to raise capital early on and how have you grown the investor base?

We were successful in raising capital out of the gate for the following reasons:

• We had a proven track record of successfully generating great returns for a small group of investors and were at a logical next step in our evolution to become fund managers. We had a proven investment strategy and we’re executing – we just wanted to raise more money to help accelerate our growth.
• We had already brought together a great team around us in our company, and with our partners. We weren’t just two guys, with a good idea.
• We put money into our fund, from day 1, and have continued to invest alongside our investors. As part of our fund documents, we required ourselves to put in at least 5% of the first $10 million we raise. Our investors love this alignment of interests.
• We set up our fund correctly as I described above. We were deliberate about how we structured the fund and decided to be very investor friendly out of the gate. We hired Fairway America to help us structure our fund correctly, and leaned on their expertise. Here are some of the things we did in our fund to structure it right:
  • We do not take transaction fees like acquisition or disposition fees, so we do not get paid for just buying and selling property. Many fund managers are incentivized to churn assets in the portfolio, because they get paid on the front end and back end, regardless of how their investors do.
  • We set up the fund to get paid only when our investors are paid, so we have an incentive to do the best deals possible.
  • We pay a healthy preferred return and have a very investor friendly split. We took the approach that we would never lack for capital if we took care of our investors, and this has proven to be very true for us.
• We found industry experts who believed in us and were willing to invest with us. This helped us gain quick traction and provided us with instant credibility.

What’s one piece of advice you’d give to someone just starting their real estate career?

Be patient and take it one step at a time. My real estate education has come through experience, one deal at a time, in incremental steps along the way. I have been more concerned about learning from each transaction, and deliberately taking the next-step in my own career, instead of focusing on getting rich quick, or how much money I can make in each deal.

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I love hearing classic real estate entrepreneurial success stories like Blake’s. While many real estate entrepreneur’s today start out working for a big institutional firm, prior to venturing off on their own, it’s not the only way.