Ep #225 – Michael Episcope – $1 Billion in Multifamily and Commercial Real Estate Transactions

Here’s some of what you will learn:

The value of continuing education
Why to over communicate
Why funds vs syndications
Understanding capital commitment fees
Committed vs Invested equity
The most important parameter to consider for market selection
Specialist vs Generalist
The importance of risk management
The 3 most important rules of real estate
How to build good will for future deals

Book Recommendation: Principles by Ray Dalio

To learn more about our guest, click here

Join us at a Multifamily Bootcamp, visit MultifamilyBootcamp.com



Full Transcript Below:

Ep #225 – Michael Episcope – 1 Billion in Real Estate Transactions

Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif and I’m thrilled you’re here. We have a real powerhouse on the show today.

His name is Michael Episcope, and Michael is the co-CEO of Origin Investments. Michael’s done pushing a billion dollars worth of transactions, with a B.

Present portfolio’s valued over almost a half a billion dollars, or more than a half a billion. I’m not gonna do his bio or history any justice, so we’re gonna go right to you, Michael. Welcome to the show, buddy.

Michael Episcope: Thanks, Rod. Appreciate you having me on today.

Rod Khleif: Absolutely… You’ve done so much, maybe you could take us back a little bit and tell us how the story started. How you got to this incredible success that you’re at right now? Why real estate? Why the particular asset classes that you focused on. I know you do multifamily and office but obviously our focus is multifamily, but talk about how you get going.

Michael Episcope: Yeah. I’d be happy to. I’ll take you back a little bit farther maybe than you wanna go… Born and raised in the Chicago area. My first career was in commodities trading. I went to school in Chicago. I went to DePaul University as an undergrad. Between my freshman and sophomore year, I got a job on the floor of the Chicago Mercantile Exchange, and decided I loved it, and that was the start of a 16-year career there.

Of that 16 years, I traded for about 10 years. And that’s really where I built my wealth. It was a phenomenal time, a great experience. When I exited that area in 2005, it was really about taking the next stage, which is how do I protect and preserve, and grow my wealth, and beyond stocks and bonds.

My experience in real estate actually extends back to kinda when I was 11, 12, 13, working for my grandfather in the summers. He actually managed, and owned a lot of Class C workforce housing. I think Class C might be generous in some of that stuff.

Rod Khleif: [chuckles]

Michael Episcope: I used to spend my summers with him, and I really…

Rod Khleif: In Chicago?

Michael Episcope: In Chicago, yeah… It really afforded him a lifestyle… It was nice. I saw the impact that a good real estate… Proper real estate investing could make. It was in the late 90s, early 2000s that I began passive investing.

What I learned through that experience was that… A couple of things, number one, real estate, especially in the private market sometimes is not so friendly for the individual investor. It was very challenging to find good quality deals, good quality managers. There was this big gap between the large institutions, family office, those who had a lot of money, an investor looking to put in half a million, one million, five million, even $10 million, with a manager.

I has some okay experiences, I had some not so great experiences, as well.

Rod Khleif: As a passive investor in other deals.

Michael Episcope: As a passive investor, yes, it sort of getting my point. The other thing that I learned is that it’s a heck of a lot more complex than what people realize. I mean, these are… Rod, you’re really experienced in this area as well, but these are little mini companies that you have.

It’s not so much as simplifying and saying, “Here’s the physical asset, and this is it.” There’s a lot of ways that you can really get your face ripped off in this industries.

It was in 2007 that my partner and I got together, and we decided, and kinda came to the same conclusion that we can do this better with our own capital. We pulled our capital together, and we built a firm.

That was kinda the impetus of us starting together. We just wanted to build a firm around our capital that would represent us as individual investors, in a way where we could take advantage of the market and take advantage of real estate investing and realize it’s true benefits.

Rod Khleif: This was in 07?

Michael Episcope: Yes, we got together in 07, and in the beginning, in the first two years, it was all our own capital. When I transitioned out of commodities trading in 05, I went back and I went and got a Masters in real estate at DePaul University as well. Retooled from that sense and that was a great experience.

I was sort of the 35 years of age, I was the old guy in the class, which was kinda fun as well but… I just believe in continuing education, learning and things like that. It’s a big component of what we do today.

Origin is not only when you’re sitting there and you’re a principal, and you have so much of your money invested. The decisions you make around the investments, you select the team you select and put around you as well. It all is influenced by that notion of alignment, and where you sit.

I think being an investor at the firm, and a manager, and a principal, puts me and my partner, in a very unique position. Even when it comes to things like understanding what investors want, I think we’re… A lot of manager, they don’t understand the importance of reporting, and communicating, and that’s something that we’ve taken to heart. And we understand that that is just as important as generating returns and letting investors know how you’re doing it. Providing guidance with clear understanding of where they stand everyday.

Rod Khleif: Sure. No, it’s critical, anytime these relationships fail, it’s through a lack of communication, so that’s absolutely a great point. Those of you that are doing your own syndications, do not short-circuit that process. You have to over communicate to give your investors comfort.

You’ve done several funds. We started talking about that before we started recording. They’re fairly sophisticated but I’d like you to break down why you like a fund versus individual syndications for specific properties. ‘Cause you touched on it with me offline, I’d like my listeners to hear that.

Michael Episcope: Yeah. I’m happy to talk about that a little bit. I think when we create structures here; we create structures around how we want to invest our capital and that a fund has a couple of advantages over an individual deal syndication.

Number one, if you’re a passive investor, and you’re not a full time real estate investor in this market, it would be very challenging for you to ascertain one good deal from another good deal, from another. In this business, it’s really about selecting the right manager, the right people. If you get that right, then that’s who you really want to put your money with, whether it’s a syndicate or a fund.

The point is, in a fund, you make that one choice of who do you want to invest with, what’s their strategy, so you have one point of due diligence. And once you’ve made a commitment to the fund, what happens then is that as we buy assets, we call capital. If we make $100,000 commitment to fund, we don’t take it all upfront because we don’t have a portfolio of assets. You’re hiring us to build your portfolio.

Now, that money can be spread across 15 to 20 deals over asset class because we do multifamily and office by geography, ‘cause we’re in eight different cities around the United States. And also by vintage as well, which is important because we will be investing over a period of two to three year and building that portfolio.

We talked a little bit about the fee structure, and the importance of that. I think there’s a misnomer that funds are more expensive than individual deals, and that’s just not true. In any deal, first of all, there’s nothing more expensive than low cost real estate, so investors have to be careful about making determination based on fees alone.

I just wrote an article on this. It really, funders charge differently. An individual syndicator they charge acquisition fees where fund doesn’t. Fund will charge committed capital fees. There’s nuances behind here but what it comes down to is this notion of alignment.

With a fund manager, if we have 20 properties in the fund, in order for us to make a performance fee at the end of the day, and the performance fee is what happens at the end when things go well we get a percentage of the profits. All of our deals have to work well together and in order for us to get paid cumulatively, a fund has to generate more than a 9% return.

If we have two or three deals that don’t perform, and the fund only generates 8%, we don’t get paid a performance fee. That’s very different if you’re buying 20 individual deals. If 10 do well and 10 don’t do well, you’re paying a performance fee on the 10 that do well in that structure because your performance fees aren’t cross-collateralized at the fund level. That’s one of the distinct advantages but it comes down to creating structures that we want to invest in.

In whatever I do, even in my personal life, I only invest in with fund structures because maybe I know a little bit too much about that but if I was looking at individual deals, I would have no clue about how to ascertain one from the other ‘cause it’s not what I do full-time in any business. If I were outside of this business, I would invest in a fund.

Rod Khleif: Yeah, I mean that’s why the index funds are the largest on the planet. They’re truly a trillion dollar funds these days; in the stock market, that is.


Rod Khleif: Let’s talk a little bit more about fee structure because I just wanna make sure… So you don’t charge an acquisition fee, you charge a capital… What did you describe that as? ‘Cause this is, it’s a little new to me.

Michael Episcope: It’s a capital commitment fee.

Rod Khleif: Okay.

Michael Episcope: When an investor commits to a fund, they start paying fees on their entire commitment on the day they commit.

Rod Khleif: I see. Interesting.

Michael Episcope: That’s a little bit on the equity amount.

Rod Khleif: Okay.

Michael Episcope: In our fund, we charge a 1.5% annual management fee on committed capital that ultimately reverts to invested capital.

Rod Khleif: Okay.

Michael Episcope: On a syndicator deal, what they will do is that they don’t charge on committed capital, they charge on acquisition fee because for every deal that they do end up finding, there’s probably 20 deals that they didn’t find that they had to pay their expenses. It’s a different way of getting to the same place.

Now, there are funds out there that charge both a committed fee and acquisition fee. I would caution people. That can really eat-away the returns. But we have adopted an institutional fee structure.

Rod Khleif: What other fees? I assume there’s an asset management fee… What other sorts of fees can a person expect in a vehicle like yours?

Michael Episcope: Well, in our vehicle, what we do is we have a one time upfront fee that basically covers our technology, our funds syndication costs, our marketing, everything. That’s anywhere between 1.5% and 3% on one time. On-going then it’s 1.5% on the fund on an annual basis. It’s committed that ultimately reverts to invested equity and on the back end, we have a 20% performance fee.

We don’t have any debt placement fees. We don’t have any acquisition fees in our fund. And again, we feel that that is an institutional pricing standard in the business.

Rod Khleif: Okay. Very interesting. Very interesting. What are the eight markets that you’re in?

Michael Episcope: We’re in Chicago, Denver, Dallas, Austin, Houston, and then Charlotte, Raleigh, and Atlanta. We’re in those markets because in the strategy sense, the first thing we do is look at the macro view of the world and figure out where we want to invest. What markets are growing?

As you know, Rod, population centers, job growth, population growth, that’s where you wanna position yourself.

Rod Khleif: It’s the most important parameters.

Michael Episcope: Yeah, especially in assets because we’re more of a buy-fix-sell strategy where we’re buying underperforming assets and if we lose a tenant or we have to backfill a tenant, we need to do that. We know that.

We need to know that there’s robust job market growth in there. And then within those submarkets, we focus more on the high-income demographic areas. We’re looking more at the B, B-plus, A-minus quality assets within those submarkets.

It’s for our acquisition team who are in their markets. It’s a very defined parameter, so not only do they know exactly what they’re doing everyday and where they’re hunting, but the brokerage community and the ownership community, and the management community knows what we’re looking for as well. The more we’ve refined our strategy over the years, and actually narrow the focus, the more prolific and just more efficient we’ve become at finding deals.

Rod Khleif: Yeah. That’s a big clue guys. If you try to be a generalist, frankly in any business… In fact, I just preached about this in my live event, How to Think and Grow Rich… Napoleon Hill said, “The key to success is specialized knowledge.” You have to be a specialist. You need to shoot with a rifle, instead of a shotgun. There’s another great…

Michael Episcope: Advice. Yeah. Agree.

Rod Khleif: Another great tip on that.

Michael Episcope: Important. Mile deep.

Rod Khleif: So you’re a buy-fix-sell investor. You don’t hold properties for legacy or long-term cash flow.

Michael Episcope: No, we don’t. Although I will say that going into fund for, one, a thing we always do is from for each fund, we’re sort of iterating. We try to make it better and look at the things we do well, things that we can improve on and things, and things like that. As it stands today, we are buy-fix-sell, so typically the average hold-period is probably three and a half years.

Some assets we’ve sold in a year and a half, some assets we hold five or six years. But what we’ll do is we’ll forego cash flow in the first two years. A business plan generally takes anywhere from 18 to 36 months, and instead of generating 7%, a stabilized asset, maybe we’ll generate 12% in two years and we’ll get some level of appreciation. And also, once we’ve improved the asset and grown the top-line revenues, then we may hold it for a couple or more years to generate the cash flow, and increase the multiple on equity.

But going forward, we’re actually, as much as I love the strategy of that buy-fix-sell, it also has it’s limitations, which is real estate is incredibly tax efficient, but when you sell, you have to pay long term capital gains. So even if you’re reinvesting that capital, you’re only reinvesting 75% of that profit rather than 100%. If fund for, look for changes coming up in that strategy, and more of a hybrid evergreen to buy-fix-sell to more of a buy-fix-hold

Rod Khleif: Awesome. Now let me ask you this, what are your thoughts on the looming contraction? I’d love to get your insights and your thoughts on… Obviously, real estate goes though cycles. Everybody knows my $50 million seminar in 08, and I’ve been through other cycles as well that were equally impactful, negatively impactful. What are your thoughts about what’s coming up and on the horizon?

Michael Episcope: Yeah. I agree. I mean, no tree grows to the sky. Right?

Rod Khleif: Right

Michael Episcope: I think it’s not that we believe in timing the market. What we try to do here, risk management is a huge component of what we do. Again, I came from the commodities trading world where they say being a good trader was more about risk management than trying to make money.

Rod Khleif: It’s not how much you make, it’s how much you don’t lose.

Michael Episcope: Yeah. Exactly.

Rod Khleif: Right.

Michael Episcope: Some of the thing we do is we’re positioning ourselves in really high quality assets. I believe that value add is a way to protect yourself from future downturns. If you can build value and continue to build cash flow in the asset, we leverage two to one to equity. We do… [overlap talk]

Rod Khleif: Let me stop you there.

Michael Episcope: Yeah.

Rod Khleif: Guys, just so you heard that, he’s in at the third equity instead of the typical agency debt. This is anywhere from 20 to 25%. You’re coming in at 33%. Is that correct?

Michael Episcope: Yeah. And even more importantly to that, the debt has to match the business plan of the asset and making sure… If we’re buying an office building, there’s a risk that one of the larger tenants may vacate over the next two years, then our debt today has to be matched to the potential exit of that tenant.

Risk management is one of the things we do well, and it’s also… We talk about and we meet investors, it’s something we talk about incessantly, and something maybe we obsess about a little bit here; about what our growth rates gonna be? What is the proper cap rate? What is the proper debt to equity structure? Why is the asset underperforming? Is it just bad real estate? Can we actually improve it and get what we think?

The market’s been great for the last couple of years. It certainly will turn around at some point, and I believe that you buy good real estate, you add value to it, you appropriately capitalize it and you’ll have some dry powder on the side. So if things do happen, you’ll be able to ride the ship.

Rod Khleif: You can weather the storm.

Michael Episcope: Exactly.

Rod Khleif: Okay.

Michael Episcope: Rod, just to back your other point, we talked about fund advantage, one of the nice things, if you have an individual deal, and it goes bad, you can’t borrow from another transaction to ride the ship in that deal, cause chances are you have different investors across.

Rod Khleif: Sure.

Michael Episcope: While in a fund structure, if you have one deal that needs capital and the other deal is doing very well and spewing off cash flow, all of that cash flow rolls up to the fund. As a fund manager, we look at it more as a portfolio. We can borrow from one asset to fix another and shore up. And so you have even…[overlap talk]

Rod Khleif: Gives a diversification of risk, for sure.

Michael Episcope: Yeah, management of cash flow. I’ll never … One of my professors, early on, this was actually in 06, but he said, “The three most important rules of real estate are never run out of money, never run out of money, and never run out of money.”

Rod Khleif: [chuckles] No question.

Michael Episcope: It came to fruition in 08. You look at it but there was some people who had some great real estate out there who over-leveraged and ran out of money. They had to give it back to the bank, or they had to sell it. You look at it today, and it’s worth two to three times more than what they sold it for.

We’re very good at managing our contingent liabilities, looking at risk in individual asset level than the portfolio level as well.

Rod Khleif: Let me ask you this, you find an A-minus asset, or a B-plus asset, it’s not like the heavy reposition that you would do on a C-asset where you’re going in and completely redoing the interior and all that. Give us an idea of what sorts of things you might do to add value to a nicer asset like that. Give us some examples.

Michael Episcope: Yeah. We actually just acquired an asset. I can give you a couple of examples if you want. What we’re trying to do is really take, what we call, core plus risk and deliver value add returns. It’s certainly not as easy today as it was a couple of years ago when the capital had so much more leverage. The markets are a little bit frothier today. There are deals to be had but not as easy.

Back in 2015, this is a fund to asset…


Michael Episcope: I’ll take you through this, ‘cause it’s kinda right the fairway for us. We bought an asset in Naperville, Illinois. Naperville is the third largest city in Illinois. An affluent community…[overlap talk}

Rod Khleif: It’s a Chicago burb.

Michael Episcope: Yeah. Chicago suburb. Yeah, and it was our second asset in Naperville. Suburban multifamily has been sort of all out of favor and we saw the cranes that are happening downtown and everybody believes that every millennial is gonna live in the city.

We just don’t believe that so as we’ve seen this rent gap between urban and suburban just widen, one of our thesis is that we wanna be in suburban multifamily, so when this swings, and these Millennials start moving out there that we can position ourselves for that. This was consistent with the thesis.

Beautiful B-plus asset, early 80s vintage, owned by the same individual who built it, his children managed the property, which that’s something that’s unique and they… [overlap talk]

Rod Khleif: Okay. That can also be a big negative. I mean, for the quality of that management… [overlap talk]

Michael Episcope: Well it was a positive for us because to state that they didn’t understand best practices around property management would be an understatement.

Rod Khleif: Right.

Michael Episcope: You had an off-market deal in a great suburb, great physical quality asset. It also had a broken condo structure, and what was interesting about that is that the previous owner, because he was embarking on a condo structure, he actually upgraded all of, what we’ll call, the non-revenue generating components of the property. He put on a new roof. He paved the parking lot. He made sure the tennis courts were great. The HVC… all those things.

Rod Khleif: Just let me stop you for a second.

Michael Episcope: Yeah.

Rod Khleif: Those that don’t know what he’s talking about here, back when things were going fast and loose in 05, 06, 07, a lot of apartment owners were ‘condo-mizing’ those apartment complexes and selling them off one at a time. When it all crashed and burned, there were a lot of broken ones where some of the units have been sold. Which actually add some complexity because you’ve got a homeowner; you’ve got an association associated with those units so it’s kinda a complex thing to get into.

Of course, you’re absolutely fixing these units up to sell them as condos. Maybe you’re putting in washers and dryers. You’re doing things that… You’re certainly separating all the utilities, which can be a real asset to your bottom line if everything’s separately metered…

Anyway, I just want to explain that to my listeners that may not understand what a broken condo conversion is.

Michael Episcope: Yeah. No. No. Thank you. And he actually did. He did everything that you’re talking about. He had sold 19 out of 283 units so what we did is, we came in there and bought 264 apartment units with the idea that we were gonna buy the other 19 units, put Humpty-Dumpty back together again.

It’s really… It’s everything we look for but it’s a good quality asset. When we walked into these units, the 264 that we did acquire… It was like waking into a time warp. They had never been touched since the early 80s. And you look at all the low hanging fruit that the management team wasn’t charging for, and so I’ll take it.

But fast forward, to today, it was 76% occupied at the time of acquisition, we’re 96% today. We’re under contract for the very last unit, so it’s taken a while to buy the other 18, but I will say that the condo owners were really stuck as well because you can’t sell a condo in a broken structure.

Rod Khleif: Right. There’s no financing available.

Michael Episcope: No financing, nothing.

Rod Khleif: Right.

Michael Episcope: Nobody’s gonna buy it. So many, I would say 50% of them, we were able to buy back in the first three months and people were so thankful to us even to come there to provide them with an exit strategy…

Rod Khleif: Interesting.

Michael Episcope: Then we had nine that we bought out over time. So that’s been great. The investment’s been going very well on that side. Operationally, we’ve increased revenues about 50%.

Rod Khleif: Wow.

Michael Episcope: We have renovated 30 units.

Rod Khleif: That’s huge.

Michael Episcope: Well, we bought it at very low occupancy so… [overlap talk]

Rod Khleif: Oh, gotcha. It wasn’t rent raise, it was just your… Yeah. Got it. Top line.

Michael Episcope: Yeah. Well it’s a combination of renovating units, raising rents, tapping in some of the other ancillary revenues. Parking revenue was a big one there… Just fixing everything that we’ve identified from day one. But we’re excited about the asset so we’re actually putting that under longer term financing. We’ll have that for probably another four years. But we talked about the buy-fix-sell, that’s more of a buy-fix-hold and sell in about four years. It has a ton…

Rod Khleif: Let me ask you this, maybe it’s just because of the way the fund is structured but if it’s a quality asset like that, and you’ve raised the value obviously significantly, you could probably refinance and cash out… Well, I get it. It’s in a fund, so never mind. You’re pretty much locked in to that structure. Because sounds to me like that might be an asset that you’d wanna keep, if it weren’t in that scenario.

Michael Episcope: Potentially, yeah, if it were an individual asset that’s not the strategy. But when we refinance, we will return a large portion of the capital for that investment

Rod Khleif: You will. Okay.

Michael Episcope: Yeah… But again, when I talk about some of the things that we were tweaking to fund for, as we look at the world, this could potentially be an asset that we would hold much longer term. But because it’s in fund to, we have a specifically designed strategy where we are going to sell this asset but we’ll probably hold it, six-years versus our five-year business plan because it’s going well. We think we’re positioned for more growth in the future out in Naperville.

Rod Khleif: This has been a real high-level conversation and some of you guys’ heads are probably spinning from this but let’s go back to when you first… And I know you invested your own equity to get started. When you first started reaching out to investors and did either your first fund or your first syndication… I don’t know if you went straight to fund or you did a syndication or two.

What did you do to get out there and meet people, and get them excited about what you were doing? Can you just give some strategy to my listeners?

Michael Episcope: Yeah. It feels like yesterday that… See, it’s very different. We started out in a much different position as most managers, where we were investing our own capital.

Rod Khleif: Right. It’s very unusual. Sure.

Michael Episcope: Yeah. I think that the risk is exponential when you start managing other people’s money. When we went out, this was in 2010, and it was crazy times then and this was… We syndicated some smaller deals prior to that but we had a good network.

We both had a lot of good friends; high net worth. Market…

Rod Khleif: People from your trading background.

Michael Episcope: Trading, and other backgrounds as well.

Rod Khleif: Okay.

Michael Episcope: I was probably 40 years old then. We had a deal that we kind of … We ended up buying a distressed pool of debt from a bank and it was one of these crazy days when the market was down 800 point’s, and you know, everything was down. We got this thing for a song.

We sort of stopped and said, “Look, we can take this down with our own capital but what do we want to be when we grow up. And so the very first deal we took out to a group. We had to cut people back and limit the amount they could invest, because what we’re trying to do is build goodwill with a stable group of investors at that time.

In many ways, we found a deal that really spoke for itself, and we gave it a way, and it was a great market… [overlap talk]

Rod Khleif: Just to build goodwill for future deals.

Michael Episcope: That’s it. That’s it.

Rod Khleif: That’s brilliant, guys. I really wanna flag that for you, guys. If you got a homerun deal… And so you actually limited their investments so you could have more people in it, have more people that experience s fantastic return on that particular deal, because I’ll tell you guys, once you make someone some money, you’ve got them. I mean, they’re yours; they are your rabid fans. They will be clamoring to give you money, and to tell all their friends to give you money. That’s a brilliant strategy, Michael.

Sometimes it’s hard when you’ve got that screaming deal and you’ve got enough capital to do it yourself.

Michael Episcope: Yeah.

Rod Khleif: But you realize the long-term value of blowing these investors’ minds with these incredible returns. Awesome. Brilliant strategy.

Michael Episcope: Yeah. It was the right thing to do at the time.

Rod Khleif: Yeah.

Michael Episcope: And it’s definitely helped kind of launch, and propel the firm. A year later, we started our first fund, if you will, and all of those investors came onto that fund… [overlap talk]

Rod Khleif: Sure… And their friends, and their relatives.

Michael Episcope: Yeah.

Rod Khleif: Exactly. I love it. That’s a great strategy. Let me ask you this, you obviously have incredible success, is there a dark time in this real estate journey that you’d be willing to share with people? I mean, everybody thinks this journey to success is easy. How about some seminars, or times you got your nose bloodied, or learning experiences?

Michael Episcope: Yeah. It’s interesting. I’m glad you asked that too because in this business you learn a lot more from the deals that go wrong and the mistakes.

Rod Khleif: No question.

Michael Episcope: There’s probably a lot of investors out there who have invested passively, and done things wrong. I mentioned earlier in the podcast, I had done some passive investing even prior to Origin. Some went fine and some that didn’t go so well. The ones that didn’t go so well, I learned quite a bit. It really helped shape my philosophy, and also directed me to Origin, so I wouldn’t trade those for anything.

But one in particular that comes to mind is, I got pulled into a deal by a friend of mine, it was in Austin, Texas. I was a multifamily development, wasn’t the greatest time, it was in 06. But it was, I think, at that time when we were 60% leveraged.

A no big deal apartment building, but the individual who we’re investing with, he didn’t have a tremendous amount of experience.


Michael Episcope: I think what I fell for was the deal itself. I said, “Oh my god, this looks like a homerun.” And you don’t know what you don’t know, and at that time, I didn’t have a tremendous amount of real estate experience. When I look back, I could look at a deal, and I was trying to evaluate people, and he was vouched for by a good friend of mine, but you fast-forward a couple of years and we went into very bad times.

I don’t really think about this, right? I always look at the decision that was made—why did you get into the deal? What were the decisions?

So I’m a big boy, the markets went south, and I can handle losing money. That’s not what happened here; what happened here was that he was an individual syndicator without a lot of money of his own. He had five, six, seven deals that were all going south.

I started hearing things through my friend, and some of the projects that he was involved. I don’t remember why I did this or what happened, but I started doing some internet research. All of a sudden, I came across this website where it was a hard money lender where this sponsor’s name was involved, and what he had done is took our property which was fine, wasn’t underwater, it had plenty of equity, and he pledged it for a loan for another property.

You can imagine… I feel…

Rod Khleif: Wow.

Michael Episcope: I was just like, “Oh my god, now that’s just borderline fraud.

Rod Khleif: Sure. It’s not borderline at all. [chuckles]

Michael Episcope: Yeah. So I spent the next year, you’d think this would be a slam-dunk, but working between the lawyers and the courts, flying down to Austin and testifying, and trying to wrestle this away. You don’t really know how people are going to behave until their backs are against the wall.

Everybody’s gonna look great in an interview, and this and that. I would caution… Anyway, like find out what happened, when things went wrong, and find the references for the people who they aren’t giving you.

Rod Khleif: Sure.

Michael Episcope: That was a lesson. I’ll tell you though, I wouldn’t trade it for anything, even though I made a ton of mistakes, and I learned a ton, but it has really helped shape me as an investor and what I am today, and why I do what I do. If it wasn’t for that, I don’t think that I would have started Origin.

If that would have turned out great and I wouldn’t have founded it and maybe I would still be a passive investor today, but I just looked at it and said, “I can do better than this.” And my partner and I came to the same conclusion and said, “Let’s do this.”… [overlap talk]

Rod Khleif: The lesson was, you looked at the asset and the asset looked great. Of course, the timing was terrible, you couldn’t have timed it that worse than 06 but you didn’t look at the operator close enough, so that’s a lesson.

Michael Episcope: Right. Yeah.

Rod Khleif: Okay.

Michael Episcope: And I will tell you, Rod that is the common theme. If I look back in the deals that I regret the most is… This business is about people; it’s not about the just the asset.

Rod Khleif: Sure.

Michael Episcope: I think that’s where a lot of people make the mistake, it’s looking at, and comparing returns to one another. You shouldn’t be comparing returns. You should be comparing the people behind the returns.

I mean, with an Excel spreadsheet, you can make any deal look great.

Rod Khleif: Sure you can.

Michael Episcope: You know where the value [overlap talk]

Rod Khleif: Or you could get lucky on a deal and have a homerun, and you’re touting that success, and it was just luck, sometimes.

Michael Episcope: Right. And that’s what I was talking about. It’s the decision making that matters.

Rod Khleif: Right.

Michael Episcope: Where I kick myself, as I look back, is I can’t believe I didn’t do more due diligence, and invested with this guy. I’m not… If everything wouldn’t have gone well and I wouldn’t have lost money because of the crisis that’s under, you know… Okay, the big [bad audio]

Rod Khleif: Sure. .. Interesting. Yeah, I’m just reading Ray Dalio’s book, “Principles”, all about decision making. I don’t know if you’ve read it. It’s fantastic.

Michael Episcope: No, but I have it on my desk, my partner… [overlap talk]

Rod Khleif: It’s a fantastic book about an effective decision making process.

Michael Episcope: Yeah. Well, I heard somebody else bring this up. They had a matrix. It’s just about, there’s good decisions and there’s bad decisions, and then there’s good outcomes and bad outcomes. And sometimes, the worst that can happen is that you make a bad decision but have a good outcome.

Rod Khleif: Oh, yeah. No question.

Michael Episcope: Yeah, this idea that you actually think that you know what you’re doing… In the long run, the law of large numbers will prevail, and you’re gonna lose money.

Rod Khleif: Hey, my net worth went up $17 million in 06. I could barely get my head through a door ‘cause I thought I was a real estate god… and you know. And that’s exactly what we’re talking about here. You think you know what you’re doing so you get comfortable or lackadaisical, and you don’t keep your eye on the ball, and boom!

Michael Episcope: Well, you’re not alone.

Rod Khleif: Oh, yeah.

Michael Episcope: I mean a lot of people, I’m probably guilty of it as well, but a lot of people correlate, because they have money, they know more than the other person. I think that the smart investor is one who is humble and understands what he knows, and what he doesn’t.

Rod Khleif: And he keeps learning.

Michael Episcope: Yes.

Rod Khleif: You have to be continually learning

Michael Episcope: Yep.

Rod Khleif: That’s the key… Michael, you’ve added tremendous value today. I’m very grateful for your valuable time on the show. Guys, if you wanna reach out to Michael, he’s at OriginInvestments.com.

Very impressive, buddy, I really appreciate you taking the time to be on the show.

Michael Episcope: Well, thank you for having me on the show. This was fantastic.

Rod Khleif: Awesome. Take care. Talk to you soon.

Michael Episcope: You too. Bye-bye.


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